PE predictions for ’17: Fundraising apace, small-business boost, tax changes

Andrea Kramer, Managing Director, Hamilton Lane

Donald Trump’s election as president and the GOP’s ascendancy at both the state and federal levels carry significant risks related to uncertainty. But the market’s perception of a business-friendly Trump administration will likely have little impact on the fundraising environment in the short term, Hamilton Lane Managing Director Andrea Kramer told Buyouts.

“Fundraising over 2016 is still up. It’s not at the heights we’ve seen at that 2006-2007 timeframe, but it’s continued to grow,” Kramer told Buyouts. “I think unless the markets move materially during 2017, I don’t expect fundraising to drop off considerably.”

At the same time, LPs are demanding more of their fund managers as they prepare for — or expect — some sort of market correction after seven years of economic growth.

“I would say it’s not necessarily a question of cynicism so much as it’s preparedness. I just need to know. I can see surface-level what my portfolio performance is, but I want to know how that’s created, and how much is being created by alpha vs. beta,” she said.

“You’ve seen a lot of pressure on GPs to deliver a great deal more transparency, and that’s [in the form of] data. I think it does deliver more transparency. But data alone doesn’t tell you everything,” she added. “What’s critical as a next step and what we’ll see continue to grow is the technology and platform to analyze that information.”

Jae Yoon, CIO, New York Life Investment Management 

New York Life Investment Management LLC Chief Investment Officer Jae Yoon is optimistic about the economy’s short-term growth prospects, particularly for private assets operating at the smaller end of the market, he told Buyouts.

“People are starting to be more aware that the mid- and small-cap space in private-asset classes is better for diversification,” Yoon said.

New York Life’s institutional-asset-management product line includes Private Advisors, GoldPoint Partners and Madison Capital Funding, each of which is an active participant in the PE market. Yoon also oversees small- and large-cap securities strategies, as well as fixed-income assets.

“The thing that gets me excited over the next two years [is similar to what] we saw in public markets,” Yoon said, adding: “It gives small- and mid-cap equity in the U.S. a big boost. And I don’t see how that doesn’t follow through in private equity and other private markets.”

Mark Weisdorf, Strategic Investor/Senior Adviser, Star Mountain Capital

Mark Weisdorf’s investment career includes nearly a decade at the helm of JPMorgan Asset Management’s $10 billion infrastructure investments group. Now a senior adviser at Star Mountain Capital, Weisdorf said President-elect Trump’s plan to inject $1 trillion into infrastructure projects could lead to a spike in productivity for a variety of small businesses.

“There’s a lot of smaller construction companies, hauling companies, equipment renting or manufacturing companies that will benefit from investments in infrastructure and transportation,” he said. “Whether it’s the food trucks, the local restaurants, the local logistics companies — hauling, dump trucks. And workers will have more work and more pay to spend at local retailers.”

That’s good news for PE firms with small and mid-market businesses, he said. Weisdorf’s belief in the viability of Trump’s infrastructure proposal, or at least some version of it, has been reinforced by voters in Los Angeles and New Jersey passing initiatives that created funding to improve transportation-related infrastructure.

“Voters are actually voting to increase tax revenue to pay for infrastructure. That’s something that gives me a lot of confidence in making that bold prediction,” he said.

Antony Karabus, CEO of HRC Retail Advisory

Antony Karabus says retailers will have to look hard at overall infrastructure costs in 2017.

“Previously, it was much easier to predict earnings in an environment that was primarily store-based, where the cost infrastructure was largely fixed,” he said. “The level of complexity in the current omnichannel environment is much more complex as the e-commerce channel adds a significant level of variable costs to the business.”

The amount of debt loaded into retailers “will be increasingly difficult to service” in 2017, Karabus said. “More and more retailers don’t have the same profitability, so they are paying the interest with [payment-in-kind] notes, which is increasing the size of their debt. It’s getting harder to finance [retail deals] now because there’s not much growth going on in the industry. Amazon is taking more market share from traditional retailers. It’s a much more complex time. There will always be retail deals but the bar is being raised to make the deals profitable.”

Christian Atwood, Partner, Choate, Hall & Stewart

Christian Atwood, a partner at law firm Choate, Hall & Stewart, thinks the election of a new president could lead to changes in corporate- and personal-tax rates.

“It wouldn’t surprise me if we see a phasing out or elimination of the estate tax,” he said. “It’s still a big concern, a big issue for wealthy families. If that goes away, it would have wide-ranging impact on estate planning strategies.”

Healthcare, particularly the Affordable Care Act, is ripe for change, he said. “There is a tremendous amount of opportunity [in healthcare] and a tremendous amount of uncertainty for investing in healthcare-related businesses,” he said.

Atwood expects modifications to the Affordable Care Act “but not a wholesale ‘blow-it-up-and-start-over approach.’” He also wonders what Rick Perry, the ex-governor of Texas, will do as head of the Department of Energy. “Will we continue to see a little bit of rebound in price of oil? This will lead to more deal-making in the energy space.”

Annie Lamont, Managing Partner, Oak HC/FT

Annie Lamont, who focuses on healthcare information services and financial-services technology at Oak HC/FT, says fintech VC rounds won’t be as frothy this year.

“We will begin to see down rounds in fintech and some break in the frothy valuations,” she said, noting the “euphoria” in the sector. “A lot of players don’t know fintech, and when you don’t know a sector, you don’t know what can go wrong,” she said.

In regard to healthcare legislation, Lamont says Obamacare will probably change much less than people are predicting.

“Why did the American public think Obamacare didn’t work? It’s because of affordability; they didn’t see the innovation,” she said. “Some subset on the exchanges heard that prices were going up and insurance companies were getting out. That’s the piece they have to fix. You can’t fix it by eliminating [Obamacare] but by making it more affordable.”

Insurance and “regtech,” which refers to technology banks and investors use to deal with financial-industry regulations, will be the big winner in terms of funding, she said. “That’s where the heat is,” Lamont said.

Lee Gardella, Managing Director, Adveq

Lee Gardella, managing director, head of risk management for Adveq, said he expects the all-time fundraising record of $450 billion, set in 2007, to fall in the New Year. One major factor is the inclusion of so-called shadow capital from co-investments in that total.

“This is a bigger asset class than it was 10 years ago,” Gardella said. “Without a doubt, that’ll drive fundraising.”

Bullishness in financial markets, anticipated spending on infrastructure and a desire by LPs to put money to work after receiving big distributions in recent years will contribute.

“Everything is going in the right direction,” Gardella said. “You have good returns that are outpacing competing asset classes, you have increased allocations to private equity, LPs are receiving distributions and they have to get the money back to work.”

Gardella expects fundraising to approach or reach the $500 billion level for the first time. The industry isn’t as easy to measure as it had been because of all the ways LPs are deploying capital in the asset class.

“You have to include the so-called shadow capital from co-investments and direct investments,” he said. “To us, it’s all fundraising. It’s all money being put to work that drives demand for more transactions after LPs receive distributions.”

Upacala Mapatuna, CIO, Victory Park Capital

For 2017, Victory Park Capital is keeping a close watch on a variety of industries, and how certain sectors react to changes in policy, rates and other idiosyncratic as well as macro factors, said Upacala Mapatuna, chief investment officer of the firm.

She expects deal activity for the firm to pick up across the board in 2017. One of the sectors the firm is watching is healthcare.

“Healthcare is a very interesting space where you could have a combination of high debt issuance and potential regulatory change, resulting in shifts between winners and losers,” Mapatuna said.

Mapatuna also sees a healthy pipeline of hybrid structured transactions that combine elements of debt and equity securities, partly because buyers and sellers still remain apart on price.

“Processes are not always getting done, so people are asking for a structure that bridges the gap between buyers and sellers,” Mapatuna said. “In these situations, we look to protect ourselves on the downside but are willing to let sellers keep more of the upside in order to bridge that gap. Our recent pipeline on the more flexible capital side — the solutions that blend debt and equity — has been very interesting and quite robust.”

To protect itself against higher interest rates, Victory Park is also focusing on providing floating-rate loans. The firm doesn’t expect a quick rise in rates, however.

“There’s more likelihood that there will be movements on the interest rate side, on the tax side — both with corporate and individual taxes — and on the regulatory side,” Mapatuna said. “These shifts have the potential to impact industries that are interesting for private equity and debt players, leading to interesting opportunities to deploy capital in 2017.”

Buyouts staff compiled this report.

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