Why is private equity surviving the storm?
First came Brexit, then came Trump and with several other European elections in the pipeline, who knows what’s next?
For institutional investors looking to ply their trade in the face of such volatility and uncertainty, sentiment towards various asset classes is likely to chop and change.
However, private equity is one asset class about which investors remain steadfastly bullish. We know this from the recently released Rede Liquidity Index, which showed investors are planning to deploy more capital to private equity in 2017 than they did in 2016, which in itself was a record year.
But why is this? What is it about private equity that is proving so attractive to investors in these more turbulent times?
Four key reasons:
Privacy
Firstly, it is private. This insulates investors from day to day market fluctuations and allows private equity firms to manage through one-off shocks, avoiding counterproductive short-term reactions to events.
Nimble
Secondly, private equity is nimble. It is the ultimate form of stock picking, allowing managers to take advantage of dislocation where it arises and rapidly change tack if the situation requires.
Long-term
Thirdly, it is long term. This allows private equity funds to execute strategies taking advantage of thematic macro-structural changes which, while there may be bumps along the road, will deliver growth over a multi-year horizon. Trends such as the growth of technology, our aging population or the continual need to use our planet’s resources more efficiently, are good examples of such themes.
For investors seeking long-term returns with the ability to lock up their money, private equity is therefore providing the solution. With this in mind it’s unsurprising that the private equity industry has matured significantly over the last 5-10 years and is increasingly seen as an attractive option by an increasing pool of investors.
At the same time, private equity firms have become much more sophisticated in the way that they engage and work with their investors. From reporting to fundraising to co-investing, private equity firms are becoming more transparent and professional – characteristics that investors value highly.
Evolution
Finally, the private equity industry is continuing to evolve in ways that provide investors with more opportunities to invest. One only needs to look at the explosive growth in private debt funds, or the expansion of the secondaries market and the innovation taking place within it, to see how private equity’s evolution is providing investors with an ever increasing number of avenues through which they can put their capital to work, catering to different risk appetites.
Yet despite investors' strong appetite for the asset class they will remain very particular about who they invest with. The manager landscape is becoming even more competitive and private equity firms looking to capitalise on LP’s positive sentiment this year will need to work hard to articulate their points of differentiation and key strengths, in order to attract investment.
While 2017 looks uncertain for many, the outlook for private equity remains positive and its fundamentals as an asset class means it is well placed to withstand even the most turbulent economic headwinds.