Aug 16, 2017

Private equity's canary in the coalmine

Valuation advisor Murray Devine is out with a new first-half private equity report, which shows that buyout firms continue to pay up for blue-chip assets but have become gun-shy when it comes to question marks. Key takeaway:

Deal volume and valuation trend lines have begun to diverge, a tendency that's typically more common near the end of a market cycle.

Go deeper: Swiss consulting firm Wellershoff & Partners this week released new research hitting on a similar theme, arguing that the large-cap U.S. private equity market is way over-capitalized when compared to disbursement activity. Moreover, it believes it is understating the problem, given the boom in private equity's shadow capital market of big sovereign wealth funds and others who are diving deep into both private equity directs and co-invests.

Wellershoff suggests one solution would be for large-cap firms to cut existing fund sizes or break them up into smaller sub-funds – something we saw over-capitalized VC firms do in 2001/2002– but acknowledges that such an outcome is highly unlikely.

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