Investors increasingly opting for private equity investment
To say that popularity of private equity as a form of alternative investment has grown steadily in recent years would, in reality, do a disservice to just how much activity this market has seen of late.
According to PwC, the global private equity market stood at $3.6 trillion in 2013 – by 2020 it is predicted to expand to double that size and clock in at $7 trillion. For investors seeking alternatives to traditional money-making options – such as stocks and bonds – investing in private equity is clearly an attractive prospect.
Mike Greenstein, PwC’s global alternatives leader, explained why this alternative investment has witnessed such a surge over the past two years. “It’s really about broadening the client base,” he said. “That’s in large part fuelled by the growth of the sovereign investors and the emerging markets in alternative assets, as well as the retail channel.”
The growth of the private equity market is not exclusive to one continent or region either. Take India, for example: private equity investors in the rapidly developing country invested 22 per cent more between April and June of 2015 than they did over the same three-month period the year before.
Meanwhile, Japan’s Sumitomo Mitsui Banking Corp announced on 30 June that it had paid $2.2 billion for General Electric’s European private equity finance business. This is a further indication that private equity investments are an increasingly popular option among those who have large amounts of capital to invest and want potentially far more lucrative returns than things like stocks and bonds can offer.
More lucrative investments
Fears have circulated as to the health of the market, with private equity exits – the selling off of investments in private companies – coming through at a faster rate in the first half of 2015 than was seen in 2007, just before the global financial crisis set in.
However, as Forbes states, private equity sales to other private equity buyers were up 15 per cent last year, and by value, they increased a solid 18 per cent over the previous year. This illustrates that the private equity firm is self-fulfilling; investors are selling to new buyers, not simply exiting in the form of an initial public offering (IPO) or management buy-out (MBO).
This is because the market is there for sellers – demand is strong for private investments that can offer faster and more lucrative returns. So even though private equity exits are on the rise, the fact that the volume and value of investments in the market is continuing to grow shows the health of the market is steady and that the opportunities are there for both buyers and sellers.
Forcing the hand of the middleman
A separate study by SunGard found that as low returns from traditional investments drive people towards private equity, there is, in turn, greater demand being placed on investment managers to lower their fees.
Private equity involves investing in companies that are not publicly traded on a stock exchange. As such, in order to funnel money into these companies, an individual will need to go through a private equity firm, a venture capital firm or an angel investor – and this person or business will charge a fee for their work as the investment manager.
A global survey of 151 investment managers conducted by SunGard found that 78 per cent believe private equity fees will fall over the next two years. The study also uncovered that 42 per cent of investment managers – otherwise known at limited partners or general partners – are of the opinion that investors have become more demanding in terms of the information they seek.
As stated, because of the fact they are not publicly traded companies, the information is not always readily available for investors. This is, again, why investment managers play such an important role in not only making the investment possible, but also in educating investors about the possibilities that are currently available.
Of course, it is the private aspect of the investments that make them so attractive – investors are attracted by the lack of outside public influence, as would be the case with share prices. So while building investment portfolios through private equity might not be as straightforward as other forms of traditional or alternative investment, the potential for high returns private equity offers in the current climate is evidently fuelling impressive growth in the market.