Private Equity

The private equity market enjoyed another record‑breaking year in 2018, with fundraising and deal activity maintaining a robust pace even as valuations topped all‑time highs.

The asset class continued to exert a strong pull on both existing and new investors, attracted by expectations of future outperformance relative to public markets.

Having already hovered above their post‑crisis average since 2014, median entry multiples broke assertively higher in 2018 to a new record of more than 10‑times pre‑tax earnings. Leverage multiples also reached levels last seen a decade ago, supported by investors’ continued appetite for sub‑investment grade debt as a source of yield.

At first glance, the market conditions shared certain similarities with those from the last cyclical peak in 2007. However, they also differed in several important respects.

The percentage of equity contributed to acquisitions in 2018 remained comfortably above 40% on average, compared with just over 30% in 2007, providing a significant cushion in the event of a downturn. Companies also continued to face little difficulty in servicing their debt, with interest coverage multiples still at healthy levels. Meanwhile, default rates remained both stable and low – below 1.8% in the U.S. and negligible in Europe.

In keeping with the backdrop, 2018 was also a year of firsts for ADIA’s Private Equities Department (PED), particularly in its now mature principal investing activities.

Since 2012, PED has built a substantial team of professionals with direct transaction experience organised by region and across five industry sub‑sectors.

In 2018, investments sourced by this team in collaboration with its partners comprised approximately 40% of PED’s overall new commitments, a new high, and up from around 30% in 2017. The total value of new principal investments by PED increased 50% in 2018 compared to 2017, and has more than doubled since 2016.

The Department successfully completed 15 principal investments across its core sectors in 2018, in addition to several smaller direct venture capital investments, with an emphasis on opportunities where it could provide a differentiated capital solution to a seller or GP partner.

Of these, two transactions alone involved a total commitment of more than $1 billion: the acquisition of a significant minority stake in Pensions Insurance Corp (PIC), a leading player in the U.K.’s bulk‑purchase annuity sector; and an investment into UPL Corp., the international operating unit of Indian agrochemicals solutions provider UPL Ltd. (see case studies).

The UPL deal was also a demonstration of PED’s increased focus on the Asia‑Pacific region, which included investments in China and India during the year.

Outlook

With valuation and leverage metrics at or near record levels, private equity returns are likely to face headwinds going forward. Indeed, there were signs during 2018 of heightened caution in the market, as investors took note of sudden, sharp drops in public equities at various points during the year. While these proved short‑lived, they served as an indicator that the prolonged equity bull market may be entering its latter stages.

As it did in 2018, PED will continue to favour opportunities with defensive or structured characteristics that will prove resilient across market cycles.

In keeping with its long‑term focus, the Department has identified a number of important secular trends across sectors that it believes will provide significant opportunities in the years to come.

In financial services, a key focus will be the ongoing digitisation of traditional products and services. The potential of fintech is widely recognised, and this has been reflected in valuations. However, we see promising opportunities to support businesses seeking growth capital, and established companies seeking to transform existing assets with technology across a range of industries.

PED also remains attentive to the healthcare space, which is evolving rapidly to meet the needs of ageing populations and to lower costs for overstretched healthcare systems. These range from life science companies to the “over‑the‑counter” and specialty pharmaceutical space, to the areas of wellness and disease prevention.

In the Industrials sector, PED is working closely with founders, corporations and private equity partners to provide solutions to a range of challenges, including providing capital to companies seeking to expand globally, and helping businesses retool for the digital age.

Key areas in Industrials include sustainability, with a focus on energy efficiency, food safety and security, and water and waste management. We also see opportunities emerging from the growth of industrial connected devices, which will fuel demand for capital in areas such as automation, robotics, machine learning and cybersecurity.

With its specialised sector teams and a broad mandate to invest globally, PED is well positioned to capitalise on these and other trends.

In the year ahead, the Department will continue to seek out principal investments in its core sectors. It will also continue to make new fund commitments to partners with which it has developed broad relationships built on a mutual understanding of priorities.