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Sun 24 Dec 2017 01:39 PM

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2018 Predictions: William Charlton, Pavilion Alternatives

Finance and investment: Growing economies and growth expectations

2018 Predictions: William Charlton, Pavilion Alternatives
William Charlton, managing director, Pavilion Alternatives

Common themes contrast major divergences across geographies and sub-sectors in the private equity markets. In the US buyout market, median EBITDA multiples remain high even though there has been a notable decrease in deal flow.

Despite this, institutional investors remain interested in private equity, and fundraising remains strong. A major challenge for US buyout fund managers in 2018 will be deploying the abundant capital they have raised over the past several years without putting additional upward pressure on purchase multiples.

Venture capital fundraising has been moderating. Perhaps the biggest challenge facing the US venture catpital market is the IPO environment. Despite signs of recovery in early 2017, several IPOs were not well received and it remains difficult to successfully navigate the intricacies of taking a company public.

On a more positive note, the anticipated repatriation of capital held off-shore by public companies due to proposed US corporate tax code changes could impact positively on the acquisition market.

In Europe, both deal flows and exits have been declining. Lower fundraising relative to last year may be due to a high-water mark established after many of the pan-European fund managers raised large funds last year.

Although it has yet to be reflected in the statistics, fundraising activity has increased. Despite the decrease in deal flow, EBITDA multiples are up significantly over recent years and are approaching the lofty levels already seen in the United States.

If prices remain high and expected economic growth remains bounded, European fund managers will be challenged in 2018 to generate historically attractive private equity returns commensurate with their risk profiles. Furthermore, the uncertainly induced by Brexit adds to the complexity of accurately assessing risk-return exposures across the region.

In contrast to both the US and European markets, all measures are up in the Asia-Pacific private equity markets, including deal flow, exits and fundraising. While these trends are positive, many of the Asian-Pacific economies are substantially dependent on exports, which makes them very sensitive to economic performance in other regions of the world.

As far as oil is concerned, prices have enjoyed a steady recovery from their lows and are a level where there are attractive investment opportunities in the private equity energy market. Even more promising is the evidence of increasing demand for oil. If the economic recovery continues and further increases demand, energy prices may well experience additional improvement.

A challenge in 2018 for energy markets is identifying quality private equity fund managers that can consistently generate attractive returns when the underlying value of their assets are highly dependent on a decidedly volatile commodity.

If the recent economy recovery does not sustain, we could be seeing the initiation phases of a perfect storm in global credit markets. If so, distressed fund managers may be well-positioned to take advantage of currently overly lenient terms. The challenge in credit markets in 2018 will be finding fund managers that are able to issue loans with terms that provide some protection in the event of an economic decline.