One of the biggest challenges that fund managers will face in the private equity (PE) space over the coming years is the increasingly stiff competition and the rise of global megatrends that are reshaping the investment landscape, according to Amundi.
New firms have entered the private equity space in view of rising demand from the investors for the asset class.
Citing Preqin data, Amundi said the number of active private equity funds in the market has increased consistently over the past decade.
As of January 2018, there were a record number of 2,296 PE funds globally, an 26% increase from January 2017.
On the back of strong performance, new capital flew into the PE market reached a record high of $453billion in 2017, the highest level ever raised in any year.
In addition to rising competition, private equity managers have to deal with five global megatrends – technology, globalisation, demographic, environmental and societal changes – that are reshaping the investment environment, Amundi said.
‘We believe that in this new competitive and evolving scenario, active minority investment strategies in small and medium sized companies may be a successful way to compete, as these allow market participants to take advantage of synergies in partnership with management,’ Amundi noted in its cross asset investment report.
This active minority investment strategies in small and medium sized companies offer managers more flexibility in terms of dealing with the megatrends than major corporations.
Adopting an activist approach means taking minority stakes in unlisted companies, remaining very involved in any management decisions, with a medium- to long-term investment horizon on average, it added.
In order to create value, activism has to be selective by investing in companies with high-quality managements, robust financial fundamentals and convincing stories on profitability.
‘For example, we believe that ESG companies have a competitive advantage as to benefitting from the above global megatrends and this, could be very beneficial for ESG adoption in private equity,’ it said.
In this respect, the asset manager sees opportunities in France, Germany and northern Italy.
Lastly, geographic proximity plays an important role in maintaining better and more effective relationships with managements, given that the activist approach requires access to family-owned and owner-managed businesses.
New AUM record
The PE industry posted a strong year in 2017, as global assets under management reached a new record of $2.83 trillion as at June 2017, up 9.6% from the end of December 2016, more than doubling the size of the industry at the end of 2006.
This has been its ninth consecutive year of growth since the global financial crisis. The fundamental driver behind investors’ interest and confidence in PE has surely been its ability to deliver steady attractive returns.
PrEQin Private Equity, the asset class benchmark, has consistently outperformed the S&P 500 TR and MSCI World TR indices since the start of 2005, and performed strongly over one- (+17.3% annualised return), three- (+13.4%) and five-year (+15.4%) time horizons to June 2017.