Day two of the SuperInvestor Conference in Amsterdam and the private equity mid-market came under close scrutiny in the morning sessions. At a time when mid-market purchase multiples are at an 18-month high, coupled with large amounts of dry-powder and the availability of debt, the panel considered and shared their insights into the current macroeconomic conditions and what may lie ahead for the sector. With market prices at such levels and interest rates remaining at historical lows, key market indicators point towards a sellers’ market.
Manjit Dale, Founding Partner of TDR Capital, shared with us where he sees acquisition and growth opportunities lying ahead given the current macroeconomic market conditions. Despite operating in a high price environment, many still see a healthy pipeline of deals coming through on their books, particularly where a strong business plan – seeking a global strategy coupled with growth opportunities where possible – can help a team take a portfolio company to its next level. With EBITDA and leverage multiples as high as they presently are on asset sales, the focus needs to shift away from further expansions of these multiples as a reversion to the mean is to be expected. And of course, if exit multiples were to contract and revert to their mean (as they are anticipated to do so) at a faster rate than a portfolio manager can implement a successful global and growth strategy for example, then this will pose significant problems for fund managers.
In such a high price environment that the mid-market is currently experiencing, it’s easier to see where the opportunity lies for those companies that are not already top quartile. A third quartile company still has a natural opportunity to target becoming top quartile. Where then for an already top quartile company? ‘Internationalisation’ was flagged by the panel as the natural route for such a company given current market conditions.
Fees, carry, expenses and other fund terms were all on the agenda in the afternoon sessions. Particular consideration was given to limited partners’ sentiment towards what are perceived as the industry’s aggressive economic terms in the current climate. For large private equity firms with multi-strategy platforms, is it still justifiable to be anchored to the historically accepted ‘two and twenty’ model that the private equity industry has become so accustomed to, particularly where synergies across platforms exist and where funds that do operate numerous platforms simultaneously are able to collect many management fees at the same time? Kelly De Ponte, Managing Director at Probitas Partners doesn’t think so, and indicated that in some cases, as part of the overall allocation considerations, limited partners are being turned off and not prepared to consider those fund managers with larger management fees, particularly where they’re being collected as part of a multi strategy platform with numerous funds in operation at the same time.
One of the late afternoon sessions considered fund expenses and the sentiment of limited partners to these. Of course, given the continued pressure being applied in the United States by the SEC under the Dodd-Frank Act, it’s not only limited partners that fund managers need to contend with. Expenses continue to come under close scrutiny not only by the regulators but also by investors. A mater that often used to be addressed in a limited partnership agreement in a short paragraph can now expect to run to many pages in length. Disclosure is key for fund managers but is not, in and of itself, sufficient to avoid SEC investigation. Fund managers must not only seek to manage investor expectations through full disclosure, they must not forget their fiduciary duties to their investors either.