Leon Black, the CEO of private equity Apollo Global Management noted at an industry conference held at Milken Institute in April 2013 that his firm is selling everything that is not tied down on the belief that the market is pricey. It turns out that he was not alone as private equities across the board pressed the sell button at a frantic pace in 2013 exiting a total of 1,348 investments during the year for $303 billion according to data published by market tracker Preqin. It was the second year in a row that private equities aggressively sold off investments. In 2012, private equities raised $285 billion from 1,299 exits.
The aggressive selling by the so called smart money investors brings to focus the nervousness of many fund managers with the current valuation of most assets. In the same conference that Black spoke, another buyout specialist Scott Sperling who is the co-president of private equity Thomas H. Lee Partners LP noted that it has become more difficult to find transactions at attractive levels. To put in perspective, between the years 2006 and 2010, there was only one year when the number of exits crossed 1,000.
It also needs to be noted that the easy availability of cash due to Federal Reserve’s quantitative easing policies have flooded stock markets and have pushed valuation since April to even more expensive levels as the widely followed S&P 500 index climbed 30 percent in 2013 for its best year since 1997.
Buyout Activity Muted
Private equity buyout activity was muted in 2013 with the number of buyouts declining nearly 10 percent to 2,830 from 3,185 from 2012. However, a few big ticket deals such as the $28 billion buyout of H.J. Heinz Company, and the $25 billion buyout of Dell pushed the overall buyout value for the year to $274 billion for the year compared to $265 billion in 2012. In a sign that private equities are reluctant to make large bets due to past experience of failed megadeals, three-fourths of all buyout deals in 2013 were small cap investments amounting to less than $250 million in deal size.
Investors Seek Safety
Data from Preqin also shows that private equity funds focused on North America raised a total of $266 billion in 2013, an increase of 33 percent over the $200 billion raised in 2012. On the other hand, funds targeting regions outside of Europe and North America could raise only $61 billion during the year, sharply lower from $86 billion in 2012.
Ignatius Fogarty, head of Private Equity Products at Preqin says that the investor preference for developed markets is a reflection of the perception that developed markets are safer investment bets compared to large emerging economies. The Preqin survey also found that investor appetite for Europe has grown significantly among private equity investors with nearly 60 percent picking Europe as currently offering the best investment opportunities.
Impact On Job Market
Most private equity fund managers are struggling to justify the astonishing rise in market valuation in the last few years. But with the market showing no signs of retracing, some could be tempted to jump in and join the ride. Some may rework their strategy based on the changed financial market environment in which central banks may continue to influence market movements for an extended period of time. In this uncertain environment, broad based hiring across the private equity industry is unlikely and active hiring is likely to be restricted to the few funds that have gained investor confidence over the years and have had strong success in raising capital.
