By Jim Strang
The European Private Equity industry has cone a long way since the lows of the global financial crisis in 2008, recovering very strongly indeed.
Now firmly established as a mainstream asset class, regular and increasing flows of capital continue to support the growth of the industry. As the long-term performance of private equity continues to meet or exceed investor expectations, general levels of support for the asset class are, perhaps unsurprisingly, continuing to rise..
While the industry can arguably trace its roots back the 1950’s, it’s probably more realistic to look to the 1970’s and 80’s as a starting point of the asset class as we know it today; after all, this is when several of the industry’s household names – CVC, BC Partners, Permira and Bridgepoint – were originally formed, many of which were initially established as divisions of banks. From relatively humble beginnings, a great industry has grown.
The longest-established fund managers have evolved into multi-billion dollar investment houses, often offering a range of investment strategies and vehicles to investors. At the same time, literally hundreds of smaller groups have emerged in every market and cover the whole range of private markets investing from debt to equity to venture capital. Europe now boasts a fully-functioning, broadly-based private markets ecosystem. Just going back to the Millennium, our data indicates that AUM at the start of the century (as of 12/31/1999) was €55bn, whereas today (as of 12/31/2015) it stands at an incredible €415bn in AUM.
Switching sides, the investors (LPs) have also gone on their own journey as the industry has matured. Pension funds, insurance companies, banks and other institutional investors of all shapes and forms have participated in the development and growth of the asset class. Generally, the expansion of the investor base has radiated out from the UK and across mainland Europe. We now have an active LP community operating in all of the major European capitals and, indeed, many other cities beyond. The asset class has now firmly established itself in the mainstream for institutional investors’ portfolios. Why? Because the asset class has delivered against its core premise of producing attractive risk-adjusted returns. In a world of low returns from competing asset classes, private equity has delivered, even during the harshest of times.
So, where are we today and where are we going? The picture today is relatively rosy. The industry is mature, performing and growing. Investors are happy with what they are getting out of PE, and generally demanding more exposure instead of less. Private equity continues to be a relatively small part of most investors’ portfolios; given that, for many it is a straightforward decision to allocate more to the asset class across an ever-widening spectrum of choices.
As the industry has continued to institutionalise, so too have the LPs themselves become more sophisticated. They know more and demand more. The accumulated experience has risen and continues to rise at a rapid pace, a necessary pre-requisite in an increasingly complex world. LPs want more control, more choice and more tailor-made solutions (that is, portfolios constructed to meet their specific needs rather than someone else’s), and they want to pay less for all of it. They continue to refine the art of private equity investment management, using enhanced and more widely-available datasets more effectively to make better decisions and drive better outcomes.
The future likely holds more of the same. The challenge for GPs is to continue to absorb the quantum of capital and to meet the needs of LPs as different demands are made (separate accounts and co-investments, for example), while at the same time holding the line on performance. As long as these factors can continue to be addressed, then the future for private equity in Europe looks rosy indeed.
Jim Strang is head of Europe at Hamilton Lane
