Luxembourg Private Equity & Venture Capital Association, April 2014

Private Equity, what about 2014?

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Looking back at 2013…

Like every year, 2013 was a year which produced both positive and negative surprises for the private equity industry. While successful reforms over the coming years are undoubtedly a must to get economies across the globe back on the growth track, 2013 has already shown some positive and encouraging signs. In Europe, countries such as Ireland and Spain have reached fundamental milestones by leaving the European bailout program. The positive development of the European stock markets is a further major sign of improvement, providing for increased confidence.

…and anticipating 2014

But what about 2014? The new waves of regulation and tax reforms are obvious challenges that the industry has to deal with. However, somehow, these remain rather a sideline compared to the continuous challenge of Private Equity houses to raise money from investors and to invest in the right companies to generate solid returns.

Exit market driven by IPOs

The strength of the IPO market was one of the most important stories for Private Equity (“PE”) in 2013. PE firms took 187 companies public, raising USD 58.5bn, up 70% by volume and 166% by value versus 2012. While exits via IPOs increased dramatically, exits via M&A remained relatively steady versus 2012, down 2% by value and down 1% by volume. The health of the IPO market will be a key factor for PE firms in 2014. Ignoring unforeseeable exogenous events, it should continue to be an active source of liquidity for investors. Currently, there are more than 60 companies in the IPO pipeline with a potential of raising more than USD 14.7bn in aggregate.  However, while IPOs are likely to play an increasing role in PE liquidity in the current year, ultimately, an uptick in M&A will be required to fully liquidate the current PE portfolios. A significant backlog of PE exits remains – being one of the most pressing issues that PE firms face in 2014. In Luxembourg, this high level of expected exits, together with the continuous refinancing activities initiated to benefit from current good conditions, should bring a lot of movements at the level of acquisitions structures.

2013, a vintage year for fundraising

2013 was the best year for PE fundraising since 2008: PE firms raised a collective USD 401bn in new commitments, well above the USD 341bn they raised in 2012. Fundraising was driven by the larger funds returning to the market. The outlook for continued improvement in the fundraising market in 2014 is strong: Traditional sources such as pensions and endowments will continue to fund Private Equity, while new sources of capital, including emerging market and retail investors, will become increasingly important. Finally, and as a result of a robust market for exits, investors are expected to see approximately USD 120bn in distributions from PE funds in 2013, up from USD 115bn received in 2012. This should also have a knock-on effect in the fundraising markets, as investors are increasingly able to “recycle” distributions back into the asset class. Positioning Luxembourg towards these new sources of funds might be a good opportunity for the market and might result in an increasing number of feeder structures.

2014, a promising year

Overall, 2014 offers good perspectives to PE firms. Capital and financing are available. The economic conditions show signs of improvement and offer opportunities for exit. However, market conditions alone are not sufficient for PE firms to be successful: in order to satisfy investors, PE firms will need to strive for excellence, distinguish themselves from their competitors and relentlessly focus on being best-in-class in their chosen strategy. In turn, Luxembourg should benefit from this positive outlook and see major transactions and refinancing flowing through its structures. The Luxembourg government has clearly expressed its ambition to develop Luxembourg as an attractive place for Private Equity and is expected to implement further measures in this respect.

 

Olivier Coekelbergs, Private Equity Leader, EY Luxembourg

 

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