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AltAssets is the private equity news and research service from Almeida Capital
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PRINT THIS PAGE SCM's Fifth survey of the private equity market07/11/2006. Source: SCM Strategic Capital Management AG . 
Private Equity posts record outperformance against listed equity, amidst strong investment and realisation activity, says SCM in their fifth survey of private equity. The year 2005 has been a very good year for Private Equity. The US Private Equity marked posted a strong annual performance for the third year in a row and European Private Equity markets showed strong positive performance numbers for the second year in a row. The results achieved by the Private Equity industry were the best on record during the last five years in both the USA and Europe. European buyout partnerships were the best performing Private Equity sector in 2005.
Outlook: Private Equity markets are still far away from a bubble, but increasingly challenging
As the year 2006 progresses, all dials continue to indicate that the good times continue. Fundraising, investment activity and exits develop on track without any sign of a slowdown. By way of example, funds monitored by SCM recorded a 25% increase of distributions during the 1H 06 compared to the 1H 05.
"Investors are worried whether the recent surge of USD 10bn+ buyout funds leads to excess capital in the market. But as the year 2006 progresses transactions like TDC in Denmark (EUR 12bn), Philpps Semiconductor (EUR 8.3bn), Pages Jaune (EUR 3.3bn), the German chemicals company Brenntag (EUR 3bn) or the attempted acquisition of the Hong Kong based Media firm PCCW (EUR 7.7bn) show that the trend towards larger deal sizes continues" says Stefan Hepp, CEO of SCM Strategic Capital Management AG.
But there are also further signs of continuing upward pressure on entry valuations in the buyout and venture capital sectors alike. The stock market jitters during the 2Q 06 led to the postponement of a number of IPOs and, in particular, reminded investors about the volatility of Asian markets where global investment flows have a very large impact.
But overall we are still living in a benign environment for Private Equity investing that provides many opportunities. Competition is intense as ever, valuations are rising and so do interest rates. At the same time, many Private Equity professionals point to the fact that the looser covenants reduce the risk posed by an economic slowdown to all but the most leveraged companies to meet those covenants.
"Deals done during 2002-04 often had a low leverage by historical standards and rather tight covenants. The abundant supply of debt financing with loose covenants and low coupons in 2005 has thus created an almost ‘once in a lifetime’ opportunity to recapitalize deals as it allowed funds to repay lots of capital to their investors without unduly increasing the financing risk of their portfolio companies. 2005 may, however, have been the crest of this wave and we expect fewer distributions coming from recapitalizations in 2006" says Stefan Hepp.
Key findings of SCM’s 2005 market review:
- Private Equity is back in fashion: The combination of strong performance based on realized returns and a surge in distributions ignited renewed investors’ interest in the asset class. As a result, global fundraising for Private Equity funds reached an all time high with significant increases of new capital committed in all regions. In total about USD 229bn have been raised in 2005.
- Mega-buyout funds received most of the new capital raised: About 60% of all new capital raised in the US (65% in Europe) went to funds with more than USD 2.5bn in size. The 15 largest Private Equity managers by total assets under management accounted for 36% of all capital raised in 2005 globally.
- Trend towards larger deals is set to continue: Looking at the closing sizes of new funds raised by the 15 largest Private Equity Manager in 2005, these managers collectively added USD 83bn to their war chest, which again suggests that the quest for larger deal sizes will continue. Indeed, M&A volumes (announced deals) have increased by 14% during 1H 06 over the same period in 2005. However, despite record fund sizes one needs to put the growth of the industry into perspective. The capital raised by the 15 largest firms in 1H 05-1H 06 still amounts to just 0.7% of the capitalization of the S&P 500.
- Global investments exceed the 2004 level with a record investment amount recorded in Europe: Investment amounts have increased strongly in 2005, reaching a volume of about USD 108bn. The growth of investment volume was driven by a strong advance in European investment activity that resulted in a record transaction volume of about USD 49bn.
- Venture capital is still dominated by the USA: In contrast to buyouts, the venture capital industry still displays the industry image of the nineties with the USA dominating global investment activity. In 2005 more than 60% of all investments made in early stage and expansion financing stages were located in the USA. A notable increase has, however, been observed in Asia where the global share of investments in early stage increased from 13% in 2004 to 22% in 2005.
- Venture capital performance improved in 2005: Both in the US and Europe investors in venture capital funds have seen an increase in performance driven by realizations. US venture capital partnerships reported the highest 12-months performance since the bubble year 2000. Over a 10-year investment horizon, US venture capital remains the best performing US Private Equity sector. Venture capital partnerships in Europe improved their performance as well but still lag their US peers by a wide margin.
SCM Strategic Capital Management AG was founded in 1996 and provides management and advisory services for institutions building Private Equity and/or international Real Estate portfolios. With more than USD 4.5 bn of assets currently advised SCM ranks among Europe's leading providers of capital for Real Estate and Private Equity funds and enjoys unsurpassed access to the world's foremost managers in these areas.
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