Navigating Private Equity through the next recession: How GPs are preparing and what LPs should be thinking about – September 2019
In the last eight years, investors have ploughed considerable sums of money into private markets, in particular in Private Equity (“PE”), where assets, in terms of fundraising globally, have surged from a low of $178.3billion in 2010 to $591.8billion in 20181; in terms of assets under management, the PE market has doubled over the same period reaching $4.2 trillion in 20181. PE has risen in popularity with institutional investors, who appear unfettered by the inherent liquidity risks of a strategy where it can take in excess of ten years to make and realise investments; in fact, many institutional investors like the long-term nature of the asset class.
However, the number of good deals available at any given time is finite and, therefore, an increase in the capital available tends to drive up valuations and reduce returns, as has been observed in recent years. This, coupled with market perception that we are nearing the end of the cycle, means that any PE fund being raised now or any which is early through its investment period, will likely be subjected to the next economic downturn, posing both a threat and an opportunity. As such, there are some areas where we have observed a change in approach or shift in focus by General Partners (GPs) and therefore there are a number of considerations that investors or Limited Partners (LPs) need to pay greater attention to, in order to ensure they are prepared to navigate a substantially less favourable market environment.