The Outlook for Private Equity Market Activity By Goldman Sachs

With record levels of cash, private equity firms appear poised for another solid year. We recently sat down with Goldman Sachs’ Pete Lyon, who runs the firm’s global sponsors franchise, to discuss his outlook for the private equity industry this year.

Pete, you recently rejoined the Financial and Strategic Investors Group, which works with large private equity firms and an increasingly diverse set of investors (also known as financial sponsors) looking to invest in the private markets. How would you describe the state of the private equity industry today?

Pete Lyon: Investors are continuing to allocate money into the private equity and credit markets and broader alternative asset classes as they seek out returns that can outpace those in the public markets on a risk adjusted basis. Buyout fundraising both globally and in North America hit record highs in 2019 at $371 billion and $263 billion, respectively, according to PitchBook. While valuations are elevated, sponsor-related M&A activity is still strong—though down in 2019 from record 2018 levels—as buyers compete for high-quality assets in a competitive market. In particular, large deals are dominating global activity while sponsors are turning to the public markets to source investment opportunities. The number of take-privates, for example, was up 25% in 2019 versus 2018.

What’s driving the growth in the industry?

Pete Lyon: There are a number of secular tailwinds that are fueling the importance of private markets. For one, companies are staying private longer, given the access to capital and the ability to grow their business out of the public spotlight. At the same time, more regions and other asset classes, such as credit, are opening up to private capital flow. We’re also seeing emerging buyers—such as sovereign wealth funds, pension funds, family offices, and energy funds, among others—investing in the private markets for higher returns.

What are some of the top client concerns?

Pete Lyon: After last year’s fundraising records, financial sponsors are sitting on a record amount of uninvested capital. As a result, many are facing pressure by their capital sources to deploy that capital. The dichotomy we are paying close attention to this year is that pressure in context of the upcoming U.S. presidential election and concerns of a possible slowing in global economic activity. On balance, most investors want to be in and out of the market before the start of the Democratic and Republican conventions this summer, as they weigh the risk of political uncertainty and volatility later in the year. And while “late cycle” concerns seem to have subsided as the risk of a 2020 recession remains low, many sponsors are working with their management teams to lay the groundwork preparation in their portfolios for an eventual global recession.

What does 2020 bring for the private equity industry?

Pete Lyon: So far we are seeing healthy deal flow, and early data shows no signs of a slowdown in fundraising. We saw a lot of pitch activity in January and toward the end of 2019, which is fueling the M&A pipeline at a time when conditions for the financing markets are more attractive now than late last year. We expect to see continued competition for high-quality companies, and the IPO market is open for private companies with proven business models that can generate sustainable, profitable growth. For our part, we’re working with financial sponsors to find more ways to generate returns and provide liquidity through, for example, the sale of a minority stake or by rolling over assets into a new (“continuation”) fund. Additionally, sponsors are evaluating ways to improve their investments, whether it is through add-on deals or “buy-and-build” acquisitions—a strategy used by firms to synergistically merge companies in the same sector before selling the larger company at a later date. We continue to leverage our expertise across products, markets, sectors, and disciplines to deliver the firm to this important and growing client base.


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