Private equity in Guernsey
05 January 2017
Adam Moorshead, Managing Director of JTC Fund Solutions (Guernsey), examines the trends being seen across the private equity sector, both in Guernsey and globally, over the past 12 months.
How would you characterise private equity dealmaking in your region over the last 12-18 months? What kinds of transaction values are apparent and is there strong competition for deals?
Moorshead: We have seen encouraging levels of transactions over the last 12-18 months; however, YTD 2016 is trailing its corresponding period from 2015. The short term economic and political uncertainty means a mismatch in the valuation expectations, so depressing deal activity. This is understandable given this has been a year of surprises, with the UK referendum and the US election producing unexpected results. There remains a lot of competition at the deal level, with managers holding onto assets for longer and an increasing amount of dry powder in the market as PE firms wait patiently for investment opportunities. Infrastructure, real estate and debt are still proving to be popular. The overall volume of deal flow in 2016 has slowed considerably but showing a corresponding increase in the deal size. Locally, the market has been busy with a number of consolidators of funds and fiduciary businesses active in the period and multiples of 12 times achievable for businesses of scale. I am sure there is more to come over the next 24 months.
To what extent are banks eager to provide financing for leveraged buyouts? Are ‘non-traditional’ lenders also visible in the market?
Moorshead: Obtaining traditional bank finance is a significant challenge for financing leveraged buyouts. This is a twofold matter with regulatory scrutiny on how much leverage should apply to PE transactions and concerns over the syndication of buyout loans resulting in banks moving away from financing. Financing has proved increasingly difficult to obtain for PE transactions, even for some big name firms. KKR, for example, underwrote a significant portion of an acquisition in November 2015, however most PE firms are unable to do this on their own book. Alternative lenders are filling the gap at both senior and mezzanine levels.
Could you outline the most significant legal and regulatory developments facing the private equity industry? In your opinion, how will they shape the asset class in the long term?
Moorshead: There have been a vast number of regulatory changes that have impacted, and will continue to impact on, the industry, with regulatory initiatives such as AIFMD, BEPS and Dodd-Frank requiring a huge change in the focus for firms. What was historically a business model focusing on performance has transformed into a model that must cope with regulatory reporting on risk, operations, performance and remuneration, all while controlling costs. Additionally, there is a focus on cross-border tax matters and taxation to be dealt with as jurisdictions try to improve revenue collection. All these additional reporting requirements come at a cost, and it is a significant challenge for GPs to manage.
How are private equity firms actively reducing risk and improving returns across their portfolio?
Moorshead: Nothing has fundamentally changed in terms of reducing risk and improving returns across portfolios. PE firms have always sought to achieve risk adjusted returns and are continuing to follow the traditional model of improving and strengthening management, capital expenditure and growth into new markets, with the added upside of embracing technology opportunities, which, of course, are advancing at an incredible rate. Reporting requirements have increased though, with both regulators and investors demanding greater transparency.
How are private equity exits playing out in your region? Is there an emphasis toward trade sales, IPOs or secondary buyouts, for example?
Moorshead: Looking at Europe, exits in the region are slow, clearly being impacted by economic and political matters, but this is in tune with a global market which remains cautious. Uncertainly over Brexit, the eurozone and now the US election results means we are seeing more managers taking a ‘wait and see’ approach. IPOs are reduced in both value and volume, again reflecting the global IPO trend – with the exception of Asia. Secondary buyouts had a flurry of activity in 2015, but this has not continued throughout 2016. Looking back over the last decade, however, the trend in the secondary buyout space is increasing to levels seen prior to the financial crisis, so the longer term trend for PE exits seems very positive. Locally, there has been an emphasis on PE-backed trade sales with a notable IPO earlier in the year.
Could you provide an insight into the major issues shaping the relationship between general partners (GPs) and limited partners (LPs)?
Moorshead: GPs continue to be under pressure on fees, so we see a trend of higher hurdle rates compared to previous years, as managers attempt to appease investors. LPs are also finding increasingly alternative ways of deploying capital by ways of co-investment, joint ventures and even direct investing, competing for the very same assets as the PE funds themselves. Larger GPs have remained successful in being able to raise funds, and LPs are still keen on seeing the GPs have some ‘skin in the game’. In terms of due diligence, given the growing impact of regulatory reporting, LPs are demanding more transparency on the same issues, such as risk reporting, operations, performance and valuations.
Looking ahead, what are your predictions for private equity fundraising in the coming months?
Moorshead: In the short-term, the outlook is excellent. We have already seen some considerable funds raised in 2016, such as Macquarie’s European Infrastructure fund raising €4bn, Park Square’s €1.2bn fund and Cinven raising €7bn. Opportunities should be presented by a transitional Brexit that should prove positive, the reduced value of the pound making UK valuations more attractive, together with deals that were impacted in the run-up to Brexit and the US election that are likely to restart. In the longer term, the impact for the UK depends on its
negotiations with the EU, as nobody knows how this will impact on UK funds’ rights to market to European investors. Guernsey, on the other hand, has a proven track record with an established route into Europe using national private placement regimes, as well as a new private investment fund regime, so is well placed to continue its role serving the PE industry.
First published in the Financier Worldwide 2016 Private Equity Annual Review.
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