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July 19, 2017

What's Rocking the Private Equity Industry Today?

Everyone knows how quickly the finance industry can change, but in relation to the private equity sector this has developed even quicker than many ever envisaged.

The trends we are seeing now weren't necessarily expected, but they are coming thick and fast. It's one of the reasons risk management consultants like JCRA are now very much in-demand - the finance industry is changing and precautions have to be put into place.

Following on from the above, we’ll now take a look at some of the biggest trends that are donning the private equity industry, and what this means for the savvy investor.

Unfashionable strategies are now completely fashionable

If we were to turn back the clock several years, there would be certain industries which were hugely dominant when it came to private equity. These were namely consumer goods and finance.

Now, things are moving somewhat. Technology is now absolutely huge, as one may probably expect, while healthcare has advanced hugely in this regard as well. It means there has been a much greater shift in investment areas.

It's more competitive than ever before

Once upon a time there may have been question marks over private equity. Now, this is seldom the case.

In other words, this is a financial term that rolls off the tip of most tongues. It has gone from something which was quite unknown, to something that is utterly competitive.

Let's take a look at the numbers to highlight our point. Back in 2000, the amount of assets under this form of management stood at around $600 billion. The figure now is almost $2,500 billion which, suffice to say, is a huge increase even for a period of sixteen years.

Valuations have rocketed

Following on from the last point, it won't be surprising in the slightest to hear that valuations have been impacted as well.

While we don't have any historic figures to hand, one only has to scrutinize the current global and U.S. median purchase prices to assess the situation. In relation to the former, the current price is 9.2 times EBITDA, while this is now 10.9 for the U.S.

Suffice to say, the implications are obvious. Added competition means that it is now harder than ever before for private equity investors to find suitable deals – and this is perhaps another reason why the demand for professionals is becoming much higher, as we mentioned in the opening to this topic.

Outsourcing is more common than ever

Once, it might have been common for investors to keep everything in-house. Now, this isn't necessarily the case.

For example, in the case of tax compliance, almost 90% of investors believe that this is something that should be outsourced to third parties. Then, when it moves to fund accounting, more than 7/10 investors think that it should be outsourced.

All of these views are made based on efficiency - meaning that outsourcing is becoming a common weapon for the private equity investor.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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