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Themes from Q4 2016 PE earnings calls

PE firms optimistic while acknowledging increased uncertainty

A strong macro backdrop and rising global equities markets provided significant tailwinds for PE firms in the fourth quarter.

The Q4 calls provided one of the first opportunities since the US election for firms to air their perspectives on the operating environment for PE in light of the new administration. While firms stressed repeatedly that it was too early to comment on specific policy proposals, many expressed optimism. Read below to learn the six key themes from these calls.

Amid an environment of continued high valuations, increased competition and regulatory uncertainty, PE firms are looking to strike the right balance between prudent deployment of capital and keeping powder dry for future market dislocations.

A challenging environment for deployment

  • High valuations are making putting to work the industry’s record US$525b in buyout dry powder more difficult.
  • Increased competition for deals is posing additional challenges.
  • Firms are seeking to be creative in deployment looking for signs of market dislocations or windows of opportunity where they can deploy aggressively.
  • Non-financial factors, like speed, agility, and certainty of close, are also becoming increasingly important.

Q4 firms’ first opportunity to share policy outlook and impact

  • Firms expressed a range of views on the incoming administration, ranging from high levels of optimism and enthusiasm for the administration’s pro-growth, pro-business rhetoric, to significant levels of caution in light of the increased uncertainty.
  • Tax reform is top of mind for most PE firms. Carried interest changes could precipitate structural changes to public Pes, potentially broadening their investor base.
  • Deductibility of interest could be offset by immediate expensing of capital expenditures.
  • PE firms are seeking to understand the cumulative totality of the changes

Looking for future dislocations

  • Firms noted the importance of staying active while maintaining optionality for future opportunities.
  • Firms are well aware of the likelihood of having to hold current acquisitions through an economic downturn.
  • Few firms are pricing in multiple expansion, instead looking to operational value creation as a primary driver of returns.
  • PE firms are seeking to understand the cumulative totality of the changes

2016 a strong year for fundraising for most firms, but outlook is mixed

  • 2016 was a strong fundraising year for most firms.
  • LP demand for new funds remains high, driven by low expected returns in the public markets
  • The outlook for fundraising could be mixed. Some large firms have limited need to return to market with large new funds.
  • In aggregate, PE firms are well positioned with the capital they need, and are able to increasingly focus on deployment.

Assets coming from new sources

  • The industry continues to see significant interest from relatively new classes of investor – family offices, SWFs and high net worth and retail investors in particular.
  • New vehicles are being introduced, and some firms are seeing significant inflows from these investor classes.
  • Firms are experimenting with a range of creative structures and vehicles in order to appeal to plan sponsors and the retail channel.

Increased interest in infrastructure

  • PE firms have been increasing their in response to investor demand for putting large amounts of capital to work for longer timeframes.
  • The new administration’s plans to spend more than US$1t on infrastructure over the next decade has accelerated interest.
  • Firms including Carlyle and Blackstone are raising, or planning to raise, capital for the space.