After going through a tough and critical post-2012 election spotlight, the private equity industry has much to look forward to in 2014. More capital is coming in, strong deals are coming to fruition, and there are some interesting deal transitions that the industry are focused on. Here are 5 outlooks for what appears to be a much-heralded return to a strong year of deal-making for the leveraged buyout artists.
1. Mega Firms Return…
According to private equity data provider Prequin, $169 billion was raised by 145 buyout funds in 2013. $85 billion of that went to megafunds (defined as having more than $4.5 billion in total assets). This literally counts for half of all buyout capital raised and is a stark contrast to 2012, where megafunds counted for $30 billion (30%) of $95 billion raised. On top of the big megafund news raised in 2013 was Apollo Global Management, which raised a whopping $18.4 billion for their latest fund, with only $900,000 raised internally. When 2014 is a year of expiration for many large funds, it’s powerful to see buyout shops reloading quite heavily. Expect them to get to work immediately.
2. …To Shape the World
While these large private equity shops are returning to center stage in the buyout world, many of them are focusing their deal activity outside of the United States, especially in Africa and the Middle East. According to Grant Thornton’s 2013/2014 Global Private Equity Report, 73% of respondents in the industry expect deal flow to increase by 73% in the Middle East and Africa. Asia Pacific also got a 43% increase in the report. On top of that data, 43% of foreign PE firms are interested in sending dealflow activity to the Asia Pacific region (versus 57% of local shops). There are even private equity funds dedicated to Africa, so expect this trend to rise even more.
3. Entering the Startup Realm?
Another interesting trend to emerge is established private equity firms sending money into Series A and B rounds for some rising startups. AEA Investors, known more for its labor-intensive company investments, backed a digital marketing and social media strategy firm Brand Networks. AEA sent $68 million after the firm has bootstrapped itself for several years. I wrote some key takeaways about the deal, but what was impressive to me was then learning two strong startups, Refinery29 and RebelMouse, got private equity backing from Stripes Group and Oak Investment Partners.
I recently learned that part of another rising startup, streaming music service Songza, took private equity backing within its latest round, and another popular startup, car-sharing service Uber, got backing from megafirm TPG through its TPG Growth division (which focuses on growth equity). Many middle market and smaller buyout shops are still struggling with a lot of unused money, so if the right relationships happen, expect more smaller shops to go into the VC backing world.
4. Regulation Will Still be a Hot Button…But Will Help PE in the End
Near the end of 2013, the House of Representatives passed a bill that would exempt private equity firms from SEC registration. There is no question that the biggest losers in SEC registration will be the smaller PE shops, like family offices and even fundless sponsors. And while admittedly it will be shocking if the bill makes it to the Senate (President Obama has already said he will veto the bill), it in the end won’t matter. What the PE industry needs to do is turn this regulation into an opportunity for public relations. Publicly-available information about the way funds work can only help firms, provided they use what data they can share to their advantage.
5. The Next Top PE Executive on the Political Pedestal?
Mitt Romney failed to win the Presidency in 2012 but there are two established private equity executives that are set to compete for top political positions: Scott Honour (formerly of Gores Group) for Governor of Minnesota, and Bruce Rauner (formerly of GTCR) for Governor of Illinois. Honour is already getting the “Minnesota’s Mitt Romney” calls and while Gores Group has invested heavily in the Midwest, it will be interesting to see how Scott does.
The more interesting race though is with Bruce Rauner, who has long been an advocate for educating the general public about private equity. From countless conference appearances to multiple interviews, Rauner has called many times for a better initiative to give a full understanding to a notoriously complex and private industry. What is also important to watch is that Rauner, a Republican, has ties to former Obama Chief of Staff and current Mayor of Chicago Rahm Emmanuel, a Democrat. While Rauner has a mutual respect for Emmanuel, Democrats in general, and even for Chicago Teacher’s Union President Karen Lewis (who he battled a bit during reforming education for Chicago as an advisor to Emmanuel), his main original opposition, Bill Daley, pulled out of the race, opening up a massive opportunity for Rauner to take his ability to teach to another level.
I’m looking forward to seeing more established brands get more into the private equity spectrum; as they grow, the industry has pulled away from being financial engineers to more operations-focused strategists with a larger care for management. It’s a positive sign as the industry reloads for 2014.
