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PE assets leap, but industry faces stricter rules, slower economy: Deloitte

  • PE AUM grows to $3.65 trn over 10 years
  • LPs push capital as they increase exposure to PE
  • GPs prepare for slowing economy

High returns have driven more institutional investors into private equity, giving GPs more capital to buy companies. This has led assets under management to swell to $3.65 trillion globally over the past decade, according to a new report from accounting giant Deloitte.

But while industry growth has been dramatic, a slowing broader economy may force PE to adjust, the report says.

Other factors as well could challenge GPs on growth, including a stricter regulatory environment led by the Securities and Exchange Commission, which has increased its scrutiny of the industry since 2012.

In addition, as more firms come online, heightened competition for deals threatens to keep prices high in an already inflated environment.

Adding to all that, new technology constantly threatens firms that can’t keep up, the report said.

It’s a brave new world for PE but one the industry can overcome as long as GPs prepare, the report said. The means enhancing back-office functionality and investing in infrastructure to support regulatory compliance, the report said.

Many firms, of course, are already doing this — and some GPs consider the effort burdensome.

‘Greater focus on efficiency’

“In a heightened regulatory environment with slower growth, internal controls and transparent processes increase in importance,” the report said. “With this change likely comes a greater focus on value creation in portfolio companies and overall operational efficiency.”

PE’s growth was driven by institutional investors, which are attracted to its outperformance over public markets, the report said. PE capital-raising has growth 4.6 percent over the past 10 years. Uncalled capital, known as dry powder, has grown at a 9.2 percent rate, the report said.

Exits have grown by 8.6 percent over the past decade and the unrealized value of portfolio companies has grown at 16.7 percent, the report said.

Total assets under management in the industry have grown 13.7 percent annually.

Growth is due to several factors. These include the obvious one — outperformance, which PE achieves through favorable deal terms, improving valuations, easy access to capital and financial engineering, the report said.

Institutional investors have thus flocked to the asset class. From mid-year 2014 to 2016, the number of LPs allocating less than 5 percent to private equity dropped. About 88 percent of investors polled in 2016 plan to commit the same amount or increase allocations over the next 12 months, the report said.

Photo: A worker places gold bullion on display at precious-metal dealer Hatton Garden Metals in London, July 21, 2015. Courtesy REUTERS/Neil Hall