Private equity – Feature
Private equity is leaving its mark on household names. The take- overs of Asda by TDR Capital in April and the $7bn (£5.7bn) acquisition of Morrisons by Clayton Dublier & Rice a month later illustrate the point. While the number of listed firms are in de- cline, private equity has become increasingly popular among in- vestors battling low yields, inflation and bumpy stock markets. Indeed, between January and October 2021, close to 6,000 pri- vate equity-backed deals worth an aggregate $603bn (£494bn) were completed globally. This is 28% higher than in the previ- ous year, according to Preqin. The alternatives data provider predicts that the market is on track to be managing more than £12trn in assets by 2026. For example, the AUD260bn (£147bn) AustralianSuper has al- located AUD50bn (£28bn), or 7% of its portfolio, to private eq- uity, which will be invested during the next five years. Similar- ly, US pension funds have, on average, close to 9% of their assets invested, while German and Italian funds have 4.5% and 3.6%, respectively, according to Mercer.
The government would like British pension funds to play a big- ger role in unlisted markets, too. It announced at the end of last year plans to review the performance cap for defined con- tribution funds in an attempt to bolster institutional alloca- tions to private markets to back up its Build Back Better agenda and the transition towards a carbon neutral economy. UK investors have historically been cautious, DB schemes allo- cated less than 1% to the asset class as of 2020, according to Mercer. But this is changing. Almost half (48%) of DB schemes plan to allocate more to private equity over the next five years, according to a survey conducted by Create Research and Amundi of 152 final salary schemes in 17 pension markets. And UK investors are increasingly taking part, several large DB schemes, including LGPS pools and even master trusts, have announced commitments earlier this year.
It is easy to see the appeal of private markets. In a world of real-term negative interest rates and volatile stocks, private equity has historically offered double-digit returns. Over the past five years, the internal rate of return (IRR) for private equity has been 18.8%, according to Preqin. Moreover, it is seen, rightly or wrongly, as uncorrelated to listed stocks and relatively less vulnerable to inflation risks.
Scorcher But the flipside of this surge in demand is that the industry sat on a record $1.3trn (£1trn) of dry powder at the end of 2021, according to Preqin, other estimates put it as high as $1.8trn (£1.48trn), a quarter of which is held by the 25 largest firms. Simultaneously, the fundraising cycle has become much shorter, it fell by 10 months between 2013 and 2018, according to Preqin, adding to the pressure on general partners to deploy their capital effectively.
Issue 114 | June 2022 | portfolio institutional | 47
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