Smile Startups: Private Equity is set to overtake traditional Investment Funds

Research firm Preqin predicts continuous growth for Venture Captial and Buyout Groups

Private Equity investment is on the rise. As a matter of fact, it’s growing so much that it will likely surpass Hedge Funds within only five years as the largest “alternative asset” class (that is assets that are not stocks, bonds, or cash).

The reason for it seems to be that Investors are growing tired of dire returns on public markets and are searching for bigger profits in the private equity market.

If this prediction was correct, it would mean that an ever increasing amount of money is going to flow into companies and startup ventures, as investors are shifting their portfolio away from stocks and shares but increasingly favour VCs and Private Equity Funds over Hedge Funds.

Data for such forecast come from the research firm Prequin, as reported by the Financial Times (Fortado and Espinoza, Wed 24 Oct 2018), and show an average of the predictions of 420 fund managers and investors from each asset class.

The total assets under management in alternative classes in general is set to grow 59% to $14tn by 2023, according to Preqin. This indeed includes hedge funds, private equity, private debt and infrastructure, natural resources and real estate funds.

However, whilst Private Equity coffers are expected to balloon by 58%, from $3.1tn at the end of 2017 to $4.9tn, Hedge Funds are projected to expand by only 31 per cent: from $3.6tn to $4.7tn.

VCs and Buyout Groups set to overtake Hedge Funds whilst Alternative Investments in general keep growing

Does this sound like an overly ambitious prediction for Private Equity investors? Preqin chief executive Mark O’Hare disagrees, pointing that projections assume an annual compound growth rate of 8 per cent, which is “lower than the average growth rate we’ve seen in the past decade”.

“It is more likely to be too low than too high,” he added.

A decade ago, at the height of the financial crisis, about $3.1tn was managed in alternative asset funds. Since then, there has been a compound annual growth rate of 12.1 per cent.

European buyout and Venture Capital groups, for instance, have raised €59bn in the first half 2017 and then another €45.6bn in the first half of 2018, according to data from Invest Europe.

Venture Capital investment in European start-ups reached more than £3bn over the first half of this year, according to Invest Europe, marking the second highest level of investment over a six-month period since 2007.

That has increased firepower for private equity deals —as well as raising concerns about the prices being paid.

Investors are increasing the money going into equity deals

At the beginning of 2018 Blackstone acquired the financial analysis and data unit of Thomson Reuters in the biggest buyout deal of the past decade. In Europe, Carlyle bought the speciality chemicals unit of Akzo Nobel in what became the US buyout group’s largest deal in the continent.

Multiples paid on deals are close to an all-time high and in some cases are well beyond the 10 times multiple on earnings before interest, tax, depreciation and amortisation (ebitda) paid over a decade ago. Earlier this year, KKR sold schools group Cognita to investment group Jacobs at 26 times ebitda.

Personally, as the director of Silicon Roundabout, I am seeing the effects of this movement first hand, as activity in the VC and Angel world is definitely increasing: new funds are being started in London and across Europe almost every month and existing ones are raising the bar on their investments.

We are also seeing an increase interest for equity deals from individual investors, who are moving away from stocks, shares, and traditional investment properties and now contact us to help them find the next startup unicorn.

In the meantime, hedge funds are having a dull year. Hedge Fund Research’s index of hedge fund performance across all strategies is up 1.45% in the last 12 months as of the end of September 2018, the lowest rate of return at this point in the year since 2015.

How would all this impact Startups? In theory by providing entrepreneurs with better and easier access to capital. For example, since European companies received a total of €30.5 billion from private equity and venture capital funds in the first six months of 2018, one might very well expect a growth of that capital into the €50 billion region by 2023.


Director of Silicon Roundabout — The biggest Startup Hub and Tech Community in the UK

CEO of AGÀPE Properties — The first UK Property Investment and Multi-Let Management Company accepting cryptocurrencies