Daily News: June 3, 2014

Private Equity — Holding Steady, Readying a Growth Stage

In a podcast, Philip Bass, global private equity markets leader at Ernst & Young and Stephen M. Sammut, a senior fellow and lecturer at Wharton, provide insights into how private equity will fare over the next several quarters.

In a Q&A, the pair note, for example, that after a lackluster first half, private equity broke out stronger in the third quarter, fueled largely by corporate America’s shedding of some large, non-core assets. They said we should expect this trend to continue in the months ahead, with most deals in the middle market range of $50 million to $500 million.

When asked to provide an outlook over the next year or two, Bass said, “Well, I think we’re optimistic on private equity. Again private equity does have capital. Fund raising, while taking longer, is happening. So the funds with the better history and the performance are able to raise funds, and are able to raise funds of size. We do think that the capital will be there and overall we think the financing market will continue to be there. What used to be an LBO-type market — or a leveraged loan market — really has transitioned to a high yield bond market, which continues to be a big part. We’re optimistic on the role of private equity. We’re optimistic globally as more and more of the PE firms diversify around the world to take advantage of some of the higher GDP growth markets.”

Sammut is quoted as saying, “I’m generally very positive as well. You know the old saying — it’s difficult to make predictions, especially about the future — holds true here. But certainly the conditions line up for a very promising situation. There’s still a capital overhang. But it is diminishing. There’s a large inventory of portfolio companies, which need to be divested. So there does need to be an infusion of liquidity into this asset class. It’s not likely to come from IPOs. But there may be more trade sales and acquisitions by strategies going forward. If that happens in combination with the other factors, I think we are going to, at least in the U.S., be looking at a very promising future. Just another comment — capital is being raised. There was a very interesting article in the Wall Street Journal just last week dividing the universe of private equity funds into the haves and have nots — those funds, basically with strong histories, being able to raise capital and those funds with less attractive returns — struggling. In fact, many of them [are] delaying going to market formally to raise capital just to avoid the impression that they’re over-shopping themselves.

To read the podcast transcript, click here.