Looking ahead: Predictions for 2016

Jeff Horing, co-founder and managing director at Insight Venture Partners, thinks the IPO environment may improve toward the end of 2016 if the markets can recover. “I suspect there are a lot of substantial private companies that could be candidates. I think our world of tech/software PE will remain aggressive and competitive,” he said.

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Chuck Esserman, CEO and founder of TSG Consumer Partners, said the firm expects a busy year ahead, with one potential platform deal moving in the right direction. “We were very close to closing two additional large investments in the second half of 2015 — one ultimately sold to a strategic buyer and the other one could happen early [in 2016],” Esserman said.

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Jamie O’Hara, president of TSG Consumer Partners, said the firm will look to deploy its newly raised TSG7A with $2 billion for larger deals and TSG7B with $500 million. “We have the team to do those [smaller] deals, but we are focused on larger checks,” he said. “As we looked forward, we wanted to add that second fund [TSG7B] that can effectively do the same size transactions back from TSG4 and half of TSG5.”

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Alok Singh, co-founder and managing principal of Bridge Growth Partners, thinks there was some over-leveraging in buyout transactions in 2015, particularly in technology. “People will hopefully become more thoughtful in regards to valuation and use of leverage in 2016,” he said. “Strategics will continue to have substantial capacity to do deals, but I believe it will be harder for private equity due to tighter debt markets.”

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Kelly DePonte, managing director at Probitas Partners, declined to make a specific prediction. “A year is a long period,” he said. “You tell me what happens in the U.S. and European public security markets, and I’ll tell you what happens in U.S. fundraising. I don’t think we’re going to have a plunge anywhere near ‘08 and ‘09, but PE’s a cyclical business. There’s cycles to fundraising. There’s cycles to returns.”

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David Peden of Kentucky Retirement Systems expects to see more caution. “It would not shock me if we get to 2016 and the amount of money deployed into the space is lower than what it was in 2015,” he said. “I think we’re going to be a little more choosy. We’ll probably still deploy our [usual] $200 million … but if we didn’t it wouldn’t break our heart.”

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Albert Huddleston, founder and partner of oil and gas specialist Aethon Energy, said: “There’s a lot of people out there who wilt under adverse circumstances, and I think you’re going to see a lot of wilting in 2016-2017.”

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Bela Szigethy, co-CEO of Riverside Co, said he expects the firm’s pace of acquisitions and exits to keep pace with 2015. It will probably make about 16 platform company acquisitions and about 32 add-on deals. Riverside also expects to sell about 17 platforms in 2016, after about 15 in 2015. “We have about the same pipeline as we did a year ago,” Szigethy said. “Deals get done when prices are high because that’s when you want to sell and that’s when buyers figure out ways to buy.”

Szigethy added that interest rates may edge up, which could cause prices to ease back slightly, but credit conditions will remain favorable overall. “We’ve never had a problem raising debt and don’t expect a problem,” he said. “In 2016, first- and second-lien borrowers are probably going to need to cut back a little bit.”

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A middle-market GP who asked not to be named said: “There was over-leveraging of transactions particularly in the world of technology [in 2015]. All that stretching and reaching will have an impact on valuation. People will become more thoughtful [in 2016]. Strategics will still have more capacity to do deals. It’ll be harder for private equity. Multiples will go down for smaller deals.”

The mid-market GP also said that because so many large PE firms are flush with cash, “You will find some still being pretty aggressive [in 2016], but they will need to put more equity in. They may pay the same price, but they will have to put in more equity dollars and that will lead to slightly lower returns. People are currently going up to 40 percent [equity contributions]. They will have to go over 40 percent [in 2016].”

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A banker who asked to remain anonymous said: “I think 2016 will look a lot like 2015 on the M&A front, although perhaps a little slower. If the Fed raises interest rates again, you may see more deals as folks try to lock in cheaper money. Otherwise, I don’t expect much of a difference.”

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A growth equity GP who asked not to be named predicted more M&A in the new year. “I do think the emphasis will be on doing smart deals [buying good assets and paying smart prices for them]. But I do think there is more M&A ahead … My sense is that PE folks are going to get a little more cautious about deals and valuations. That said, there is a ton of new capital that has been raised in 2015 that needs to be put to work.”

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A fund-of-funds LP who asked not to be named said: “As long as there’s no cataclysmic change in the market … [there is] no reason for fundraising to slow down next year. Most of the big names came to market already, the only difference is they’ll come with different products to market.”

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For its 2016 predictions in M&A, PricewaterhouseCoopers said distressed opportunities in energy — and continued interest and proliferation of funds in technology — may drive private equity deal activity in these sectors. “While there is risk of the anticipated interest rate increases and tightening credit markets to damper deal activity, we expect the deal frenzy to continue. Private equity buy-side activity will remain increasingly focused on alternative ways to deploy capital and become a solution for companies beyond traditional buyouts.”

Photo: A French fortune teller arranges her cards as she prepares to meet a client in a Beirut gathering for local and foreign fortune tellers, known as the Chance Festival, in Beirut June 2, 2006. REUTERS/Jamal Saidi