The winds of private equity can shift quickly, as can just about everything in business, and it’s an important area to keep your eye on.
Many investors and private equity experts were trying to predict how 2017 would shape up at the end of 2016, on the tail end of the election of Donald Trump. During 2016 there were some declines in dealmaking activity, which most people chalk up to the uncertainty that comes with a presidential election year, particularly one that’s as unusual in many ways as 2016 was.
With that being said, 2017 is now in full swing and predictions are coming to fruition in many cases, and we’re now able to see a definite direction the political and economic environments are taking, which impact private equity.
The following are some key things to know about the private equity market this year if you’re a business leader or investor.
Excess of Dry Powder
According to Firmex in their recent 2017 Mid-Market Report, there is an abundance of dry powder sitting on the sidelines, and that’s going to be an important dynamic throughout this year. Their estimates show there was more than $800 billion in private equity capital sitting to the side, and this is likely the year that gets put to work according to the Firmex report.
This may be even truer if the deregulation commitments from the new administration continue.
ValueWalk.com published an article at the end of 2016 entitled “What’s in Store For Private Equity in 2017.” The article was based on information from surveys of private equity professionals as well as PitchBook data sets, and Donnelly Financial Solutions then sponsored the 2017 Crystal Ball Report.
One of the big highlights of this report was the increasing level of competition that’s being seen. According to Valuewalk, some financial buyers are seeing extensive competition from what they call “strategic acquirers.” These acquirers have plenty of cash, and they want to grow externally, and this means buyers have to give more equity to secure these high-priced deals.
Also important from the survey was the fact that the participants named the state of the economy as a primary driver of private equity deal flow this year, in front of PE-backed portfolio companies coming to market and sector-specific trends.
The Impact of Rising Interest Rates
In a Forbes piece on the trends for private equity in 2017, contributing writer Antoine Drean reports that after speaking to more than one thousand global investors, many are looking toward allocating more to their private equity compared to their other asset categories.
Even with the pending interest rate hikes likely throughout the year, he says they’ll still stay well below pre-recession levels, and when that’s paired with the volatility of the stock market, investors are more comfortable with the concept of private equity for double-digit long-term returns.
Of course, these are still just predictions in many ways, as it’s still the beginning of 2017 and the world is adjusting to a new U.S. administration, but these appear to the be the key directions of private equity that will continue to play out through the year.