Investing in Private Equity in 2016: selectivity is increasingly an essential factor

Analysis - 4/12/2016

Everything seems to indicate that 2016 will be an excellent year for Private Equity. This year, according to Preqin, Europe-centred fund collection could exceed the $71 billion figure recorded in 2015. Emmanuel Courant, General Secretary – Edmond de Rothschild Private Equity, analyses this renewed interest on the part of investors.

2016 promises to be a record year for Private Equity. How do you explain this?

EC: Assets managed in private equity funds now exceed $2.4tn (source: Preqin) with $468bn in new assets being raised in 2015 (source: Triago) by nearly 700 funds worldwide.

The optimism which prevails in relation to private equity can be explained by the level of performance (net accumulated return over 10 years of 13% according to Bain&Co, i.e., an outperformance of 3.7% with respect to the S&P500, and a net accumulated return over 5 years of 17% in Europe and 13% in the USA according to Cambridge Associates) and by high distribution levels, the significant flow of capital returned to investors making it possible to maintain investors' appetite for this asset class.

In a context of historically low interest rates, abundant liquidity and volatility on the stock markets, investors are looking for a good return on investment as well as diversification with regard to the "traditional" asset classes.

According to various studies, nearly two-thirds of the world's institutional investors want to increase their allocations to private equity in the coming years. This trend is reflected in the area of private investment.


Will investors benefit from this new boom in Private Equity?

EC: The drawback of this strong growth is that the raising of new funds will become more competitive (according to Preqin, 1630 private equity funds are currently being raised across the world, with an objective of $480bn). It is accompanied by an increase in uncalled fund commitments (dry powder) and consequently increases the pressure on asset valuations and makes it harder to sustain a quality deal flow.

This situation forces investors to be highly selective, compelling them to rely on experienced teams with a proven track record and qualified deal flow. In this environment, managers with differentiating, value-added strategies will come out on top.

The Edmond de Rothschild Group is one of the rare independent financial groups to have maintained an internal Private Equity division. What is your value proposition for institutional investors?

EC: The Edmond de Rothschild Group has just successfully closed several private equity funds : 3rd year of its global minority co-investment fund (1st closing at €200 million); 2nd year of its fund specialised in soil decontamination /industrial wasteland rehabilitation (1st closing with secure commitments at €90 million); 1st year of its luxury hotel fund (final closing at €153 million); finally, 1st year of an internal Group fund of funds (1st closing at €30 million).

These successes validate the private equity strategy of the Group which concentrates on the search for differentiation and diversification based on themes with high added value.

In 2016, the Group will concentrate on small and medium-sized infrastructures in Europe, with a €300-million fund, emerging markets, with a focus on Africa through the launch of a second fund dedicated to the African continent, and the Andean zone with the launch of a first fund devoted to Colombia, Chile and Peru, the health sector, with the fifth year of our fund devoted to biotechnology/life science, and finally, support for small and medium-sized enterprises in France through the second year of a capital development fund.