Competitive transaction landscape may precipitate a peak in capital vehicles
The value of permanent capital has never been clearer. Soaring transaction valuations create a narrower path for private equity to achieve desired returns. This increasingly competitive transaction environment could be the push needed to send capital vehicles into the mainstream.
Mid-market private equity firm 3i largely invests own capital rather than raising funds from limited partners, an approach that offers an option on recent transactions, co-head of private equity in North America André Olinick tell Mergers and Acquisitions. The private equity firm invested in discount store action in 2011, for example, but chose not to dispose assets over a normal fund cycle to reap other benefits. Action’s operating profit before interest, depreciation and amortization more than doubled in the five years to 2019 to reach € 541 million.
Few private equity firms play in the permanent capital space because of investor demands for liquidity, Olinick says. Limited partners want either a time-limited investment horizon or an issue of shares in a company. This explains the rise of perpetual vehicles mainly among large, publicly traded private equity firms such as KKR and black stone.
As more middle market PE firms go public, they may be released from certain LP demands for short term exits and other constraints. Financial sponsor of the middle market Bridge point ad IPO plans last month. The use of the product includes boilerplate language about debt repayment and funding growth, but it could also pave the way for other mid-market funds to provide investors with the liquidity needed to launch debt vehicles. permanent capitals.
The industry is already embracing the concept of fundraising for deployment in “open-ended” acquisitions: funds save on the costs of raising, closing and disposing of assets in their portfolios, while also earning fees ( possible) higher on the commitments they hold longer. horizons.
The idea is not new, but the adoption rate is. And Swiss credit analysts say it is accelerating. We are approaching a tipping point when the composition of the fee income (FRE) of the largest private equity players from perpetual capital vehicles is so large that it can compensate for periodic drops in FRE between fundraising. flagship funds. Analysts noted after the first quarter results that Blackstone’s growing share of standing capital-derivative fee income has several advantages: “high management fees (which also add to appreciation), low operating margins. ” higher additional operations, no risk of net redemption and strong customer demand given [Blackstone]the brand / strong track record of.
Perpetual capital also offers a strategic advantage in auctions. All other things being equal, the founders prefer to sell to a long-term investor who might be less motivated by short-term exit considerations, Olinick explains.
As private equity competes in a more crowded market for transactions, the extra time and founder-centric sales pitch provided by perpetual capital vehicles could drive wider adoption.