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September 20, 2011
Private Equity Market Outlook: September 2011
Conditions in the private equity markets remained strong through the second quarter of 2011, and have continued on solid footing through the past couple of months since quarter end. This relative stability has been especially noticeable against the new backdrop of severe volatility across the public markets that has emerged since mid-summer. Through this period, we have continued to see a steady flow of new investment activity in Canadian and US private equity markets, including several prospective new investments we are currently evaluating for our Kensington funds.
The strong flow of M&A exits that began late last year has remained on track, and has not been noticeably impacted by public market volatility. Across our various Kensington funds, we continue to see a steady flow of portfolio company sales, primarily to strategic corporate buyers. Private equity firms are also buyers in the M&A market, as companies reach new levels of size and opportunity, and “graduate” to larger funds with next stage growth strategies. We are aware of several exit transactions within our existing portfolios that are pending at various stages of development. While none of these can be guaranteed until it has closed, we remain optimistic for continued growth in valuations arising from additional exits in the weeks and months ahead. For private equity investors, the M&A market continues to represent the preferred exit path - volatility in the public markets has closed the IPO window for the time being.
The steady flow of new investment opportunities and M&A exit transactions in the private markets is being sustained by a number of factors, including the continued availability of low cost financing for established buyers, large cash balances on corporate balance sheets and the pressures on corporate management to create earnings growth in a slow-growth (or no-growth) economy. Technology is also emerging as another driving force in many transactions, as the relentless growth in mobile connectivity continues to spread across industry sectors.
On balance, we see the current conditions as favourable for private equity investors with very good opportunities for new investments and a steady flow of available exits. The risk of a new recession remains, as well as the risk of market disruption from sovereign debt challenges in Europe. To date, these risks have not resulted in any direct impact on our portfolios, and we remain optimistic that the North American economy will continue to move slowly forward. We continue to avoid any new investment in European opportunities, where we see too great a risk in the economic and currency environments for our investors.
Private equity can represent a stabilizing force in your investment portfolio, particularly during this period of public market volatility and economic uncertainty. Large institutional investors continue to increase their allocations to the asset class, with many now committing substantially more than 10% of their assets to the sector. These increased allocations are being driven by experience, which continues to demonstrate substantial outperformance above public equity markets over the long term, through capital gains when portfolio companies are sold. At Kensington, we believe that a diversified portfolio of private equity investments is important for all investors, providing stability and growth through a consistent program of re-investment. |
