Investment Review
Private Equity
The global private equity market remained active throughout 2019, with overall deal activity declining only slightly from the historic highs of 2018.
The robust deal volumes came despite warning signs that the cycle was nearing full maturity. Entry valuation multiples rose to more than 11-times earnings before interest, tax, depreciation and amortisation (EBITDA), reflecting heightened competition between investors as well as peak levels of dry powder, or funds available but not yet deployed. Investments were also funded by higher levels of leverage, with interest coverage deteriorating in both the United States and Europe. Meanwhile, around 40% of marketed transactions incorporated some form of earnings adjustments, a historical peak.
Buyout activity also became increasingly polarised during the year. While some investors concentrated on relatively stable companies with strong competitive positions, others sought more specialised and complex situations with a focus on creating value through operational improvements.
ADIA’s Private Equities Department (PED) continued to deploy capital across its core regions and sectors while remaining mindful of the late stage environment, focusing on businesses well placed to manage a future downturn. Healthcare was a particular area of activity, with direct investments concluded in pharma, data analytics and life science tools, while technology deals were secured in the human capital management, supply chain management and AI sub-sectors.
In total, the Department completed 18 direct investments in 2019, up from 15 a year earlier, in addition to investing in a number of early stage companies alongside our VC partners. Direct investments in the year represented 45% of overall deployment, up from 40% in 2018, with the balance committed to funds. With valuations remaining at elevated levels throughout the year, the Department was also successful in returning capital from some investments that had met their objectives.
The impact of measures taken to contain the spread of the Covid-19 coronavirus in early 2020 has resulted in significant market dislocation across industries and geographies. For private equity investors, the year ahead will present very different challenges to those that preceded it.
Against this backdrop, PED will pursue the most compelling opportunities on a global relative value basis. It will explore opportunities in private debt markets and seek to deploy capital into strong businesses that are well equipped to weather the impact of negative market conditions while continuing to support its core group of general partners (GPs). In the first few months of 2020, the Department was active in providing expansion capital to new and existing portfolio companies in the financial services space and also made investments in the software and industrial services sectors.
PED also continues to seek opportunities in the healthcare sector, with a particular focus on specialty pharma, medical technology, healthcare IT and healthcare services.
In technology, we remain optimistic about the secular growth and long-term profitability prospects in key areas, including enterprise software, across both applications and infrastructure, and selected areas in IT services, consumer internet and emerging technologies. We will also seek to combine insights from across PED’s industry practices in the pursuit of tech-enabled investment opportunities.
In the industrials sector, PED will continue to work closely with its partners to support businesses looking to retool for the digital age. Automation, digitisation and sustainability remain key themes impacting the industrial world.
In the consumer sector, the Department will pursue select opportunities and is following a number of trends, including the continued evolution and blurring of distribution channels, shifts in consumer attitudes, increasing consumption of experiences and generational ageing.
In the Asia-Pacific region, PED will continue to seek partnerships with GPs and respected local corporates to pursue both co-investments and direct investments. We remain confident of the demographic trends driving the growth of investment opportunities in the region, including those associated with consumers’ rising spending power, increased demand for healthcare and education, and technology-led business transformations.
With its specialised sector teams and a broad mandate to invest globally, PED is well positioned to capitalise on these and other trends in 2020 and beyond.