Despite today’s uncertain political and economic climate, the wheels are turning at a record rate in the private equity market.
One reason for this is record-low interest rates. The governments of major economies are unable to raise interest rates significantly for fear of disrupting the still-fragile global recovery. This has contributed to the burgeoning amount of capital being allocated to private equity, as investors seek alternative sources of return.
With record levels of ‘dry powder’ (the funds private equity firms have available to invest) and an abundance of cheap debt, the price expectations of sellers have soared.
Market research firm Preqin estimates that, in 2016, $72.2 billion was raised for Europe-focused buyout strategies alone. For private equity as a whole, the figure rises to $112 billion.
Private equity funds have $167.8 billion in buyout ‘dry powder’ at their disposal – the highest level ever outside the 2008 peak.
However, being awash with cash has its disadvantages. Specifically, when too much capital is chasing a limited supply of assets, valuations can go awry.
For Roger Pim, this means having a disciplined focus on repeatable value creation.
To achieve this, Pim has constructed a portfolio of managers for the Standard Life Private Equity Trust (SLPET). With strong operational skillsets and sourcing networks, this carefully-selected group is able to generate value by transforming companies, irrespective of the market environment.
“What we’re doing is building a conviction portfolio by backing the leading private equity managers across the European and US markets.”
To identify the leading private equity managers, Pim uses Standard Life Capital’s large team of private equity experts to sift through the European and US universe of private equity funds. Despite the destabilising nature of Brexit, Pim continues to consider opportunities in the UK, albeit selectively.
“In our view, it’s very hard to predict the exact implications of the Brexit negotiations. Therefore, what we have done is to ensure our Trust is well-placed, irrespective of the outcome. With just 15% of the Trust’s underlying investments in the UK, we are not overly exposed. And, while there are concerns around Brexit, we have found instances where it has caused pricing anomalies that our managers view as opportunities.”
In addition to the benefits that long-standing partnerships bring, Pim also ensures the Trust is active in the right sectors – structurally significant areas of the market that are integral to the transition to a more digital global economy.
For example, SLPET has a long-standing relationship with Swedish private equity firm Altor. One of the companies in Altor’s portfolio is market-leading battery producer CTEK.
As a global leader in battery charging solutions, Sweden-based CTEK was first in the world to introduce the ‘smart way’ to charge a battery, an approach designed around communication between the charger and the battery.
Altor helped CTEK set ambitious growth plans that involved international expansion and the optimisation of all aspects of its supply chain, marketing and future research and development.
In order to capture the attractive returns offered by private markets, investors traditionally have to accept lower levels of liquidity. However, SLPET’s structure means its shares can be traded with the liquidity profile of listed equities.
Straightforward, liquid access to game-changing and less correlated investment ideas are some of the reasons why Pim believes booming buyouts and SLPET have a bright future.
For further information, please visit our investment trust web site:
The opinions expressed are those of SL Capital as of October 2017 and are subject to change at any time due to changes in market or economic conditions. This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice. The value of an investment can fall as well as rise and is not guaranteed – an investor may get back less than he/she put in. Past performance is not a guide to future performance.
This article is issued and approved by Standard Life Investments Limited. Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority.
© 2017 Standard Life Aberdeen, images reproduced under licence.
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