Q WHAT TRENDS HAVE YOU SEEN IN PRIVATE EQUITY DEAL-MAKING IN GUERNSEY OVER THE LAST 12-18 MONTHS? HOW WOULD YOU DESCRIBE ACTIVITY
LEVELS?
FULLER : We have seen a high level of dealmaking activity over the last 12 to 18 months and strong competition for the most attractive assets. Virtually all PE deals have competition putting the vendor in a strong position and making it a challenge for some PE managers to deploy capital. Managers are making every effort to source off-market transactions to ensure acquisitions at low multiples or looking for other methods to create value rather than pure buy and hold . GPs have been focused on returning cash to investors when there are favourable valuations and there has been significant activity around exiting historical portfolios . Importantly, these exits have been achieved through a range of avenues, trade sales, secondaries and public listings.
FULLER : The Guernsey funds industry supports PE firms operating on Q WHICH KEY SECTORS both a regional and a global basis and across a broad range of sectors. DO PE FIRMS SEEM TO BE Sector focus is therefore dependent on the firm but there are a number TARGETING IN GUERNSEY, of interesting themes - in technology, for example, with companies AND WHY? addressing the big data challenge and cloud based technologies .There
has been further PE investment and interest into the financial services space and clearly as a leading global centre for financial services that 's a particularly interesting trend for the island .
ANNUAL REVIEW • PRIVATE EQUITY
GUERNSEY • ROBIN FULLER • GUERNSEY INVESTMENT FUND ASSOCIATION
Q ARE BANKS DEMONSTRATING AN APPETITE TO PROVIDE FINANCING FOR LEVERAGED BUYOUTS? WHAT EQUITY CONTRIBUTIONS ARE PE FIRMS GENERALLY REQUIRED
TO MAKE TOWARDS TRANSACTION VALUES?
FULLER: Financing is readily available in this market, from banks and also from non-traditional debt providers . Equity contributions can vary significantly but 30 to 50 percent equity is not unusual. Managers often look to use vendor financing or some form of deferred consideration on top to improve returns.
FULLER: Regulation is continuing to become more complex, with new Q COULD YOU OUTLINE legislation and regulation being implemented in the EU, the US and THE MOST SIGNIFICANT internationally. Significant regulatory initiatives like AIFMD, BEPS and LEGAL AND REGULATORY Dodd-Frank will continue to have a considerable impact over the long
DEVELOPMENTS FACING THE term and one of the key challenges now is to address and manage the
PRIVATE EQUITY INDUSTRY? impact of these changes from an operational standpoint. At the same IN YOUR OPINION, HOW time, measures which are perhaps less directed at the industry, such as WILL THEY SHAPE THE ASSET those focusing on cross-border ownership and taxation, are converging CLASS IN THE LONG TERM? to create an ever greater administrative burden. The impact of these
developments will be an increase in operating costs for firms, from
an increase in the number of non-investment professionals needed to address the increasing requirements or an increase in fees paid to external advisers and consultants.
GUERNSEY • ROBIN FULLER • GUERNSEY INVESTMENT FUND ASSOCIATION
Q WHAT METHODS HAVE YOU SEEN PE FIRMS USING TO BUILD VALUE ACROSS THEIR PORTFOLIOS, REDUCE RISKS AND IMPROVE
RETURNS?
Q HOW HAS THE RELATIONSHIP BETWEEN GENERAL PARTNERS (GPS) AND LIMITED PARTNERS (LPS) EVOLVED IN RECENT YEARS,ANDWHAT EFFECT IS THIS HAVING ON THE FUNDRAISING PROCESS?
FULLER: PE firms continue to use a broad range of value creation levers to build value across their portfolios . Some firms may focus on growth opportunities while others may take a more specialised approach to generating alpha returns. Strategies include strengthening management, developing through capital expenditure, building through mergers and acquisitions, and lowering the cost of capital to create extra upside . Portfolio businesses in PE firms have also been trying to reduce risk and volatility of returns through pursuing longer-dated contracts .
FULLER: The traditional blind pool private equity fund remains the main product of the industry but LPs are increasingly exploring additional or alternative ways of deploying capital.This includes putting more money into separate accounts, co-investments, joint ventures and directs. In addition, there is an imbalance between the GP-LP relationship as the number of GPs raising new funds exceeds LPs' ability to commit. With this, GPs need to focus on what LPs seek- returns, investment ideas and alignment of incentives on investments . Large GPs have remained attractive to LPs because of their ability to take large capital and provide consistent returns. Smaller GPs have, in many cases, become more specialised with a smaller number of close LP relationships . In both cases GPs need to demonstrate flexibility, transparency and 'skin in the game'.
f,
AN N U A L R E VI E W • P R IVATE E Q U IT Y \S'
GUERNSEY • ROBIN FULLER • GUERNSEY INVESTMENT FUND ASSOCIATION
"The challenge for firms will be to continue to deliver premium returns throughout the cycle while maintaining discipline around price and investment focus."
Q LOOKING AHEAD, WHAT ARE YOUR PREDICTIONS FOR THE KEY OPPORTUNITIES AND CHALLENGES THAT
ARE LIKELY TO FACE PRIVATE EQUITY FIRMS OVER THE COMING MONTHS?
FULLER: Looking ahead, PE firms face challenges from both economic and geopolitical factors .The tapering of quantitative easing programmes and the raising of interest rates will lead to reduced liquidity in the equity markets, lower exit valuations and beta returns, together with an increase in the cost of capital. Geopolitical challenges include the prospects of 'Brexit' and elections across Europe. However, the industry has demonstrated that, even in challenging economic cycles it can produce a strong return for investors . The challenge for firms will be to continue to deliver premium returns throughout the cycle while maintaining discipline around price and investment focus .
Guernsey
International Finance Centre
Robin Fuller
Consultant
Guernsey Investment Fund Association
+44 {0)1481 232 861