Overall a strong year – although not trouble-free. There was record fundraising in Europe – the problem was spending it with quoted targets so pricey. As such, a lot of the best work was in secondaries transactions or variants of them. Dyal Capital Partners and Goldman Sachs launched funds targeting $ 5 billion and $ 1.5 billion, respectively, to buy minority stakes in private equity firms rather than second-hand stakes in funds, and tap their underlying fee streams.
Some firms impressed by using their ingenuity to deploy capital and the industry put $ 59 billion to work in the first nine months – but this was still 23% below the same period of 2015 as high asset prices, stock market volatility and uncertainty over the EU referendum paralysed the sponsor-backed M&A market.
The industry showed strong problem-solving skills. Syndicated deals were one way that they were able to cope with high asset prices along with add-on acquisitions, which rose 30% in the first half of 2016, as the sluggish economy forced firms to find ways to achieve growth.
Two areas where firms’ behaviour let the industry down, however, were gender balance and fees. A study by Private Equity Recruitment in October found women comprised just 4% of senior employees at large-cap firms in Europe. Buyout giant CVC settled with a female US-based managing director in November who brought a discrimination lawsuit, saying she had to endure a “hostile” working environment and noting that none of the firm’s 54 senior executives were women.
On fees, in August, the Securities and Exchange Commission reached its largest settlement with a private equity firm to date – Apollo Global Management reached a settlement after the SEC said it had misled investors on fees it was charging. The UK Financial Conduct Authority, which had been accused of a lack of bite on such matters, said in November that it would consider ways to crack down on the lack of transparency on fees, such as introducing a compulsory template for cost disclosures.
Areas to work on
The biggest task for coming terms is finding innovative ways of putting money to work. Without this future exams results will start to disappoint. Teamwork or add-on purchases will still be needed. All firms will have to become more inventive and proactive in 2017, and for some this will mean a bigger emphasis on approaching sellers directly to avoid price competition.