PE, VC fund-raising frenzy likely to slow down in 2019

SPOILSPORTS Stretched valuations, protectionism, weak growth key challenges, says report

MUMBAI: Private equity (PE) and venture capital (VC) deal making in India has seen record activity levels in recent years, with 2018 setting a new high of $35.1 billion, but global cues could play spoilsport in the coming months.

Indian PE/VC deal activity in 2018 topped the previous high of $26.1 billion set in 2017, data from consulting firm EY showed. Mergers and acquisitions also had a great year, with the total deal value crossing the $100 billion mark in 2018.

PE fund-raising has exceeded $400 billion annually since 2014, but high pricing is putting pressure on future returns and distributions have slowed, leading some managers to cut their targeted returns, according to a report by alternatives asset data tracker Preqin.

“It is quite clear that the environment is changing. We are at best in the late stages of a decadelong expansion, asset valuations are stretched, and economic growth in most places is weakening, all of which is compounded by growing protectionism and ‘trade wars’. Investors everywhere see a challenging environment ahead for returns,” said Mark O’hare, chief executive officer at Preqin.

According to the report, 72% of investors and 62% of fund managers named high asset pricing as a key concern in 2019, making it the biggest issue cited by either group.

These pressures, coupled with increasing crowding and competition in the market for both fund-raising and deal making is making the environment even

PE/VC INVESTMENTS IN JANUARY 2019 DROPPED BY 49% TO $1.8 BILLION, COMPARED WITH THE SAME PERIOD IN 2018

more difficult for fund managers. Both the fund-raising and deals marketplaces are more crowded than ever before, making it particularly challenging for fund managers without an established track record, the report said.

A record 3,749 PE funds have been in the market since the start of 2019, collectively seeking to raise $972 billion, an all-time high, said Preqin.

Additionally, almost half of fund managers (46%) saw increased competition for deal opportunities in 2018 and 35% saw competition for deals as a key concern in the months ahead.

The Indian deal making environment has been hit, with PE/VC investments in January 2019 dropping by 49% to $1.8 billion, compared with the same period last year, EY data shows.

The fall was on account of an absence of large deals.

Dealmaking in 2018 scaled record highs on the back of eight deals of more than a $1 billion each, compared with 11 such deals in the preceding 12 years.

“The year 2019 looks like it might mark the end of the unprecedented boom in fundraising we’ve seen in the past few years. The flood of capital and participants that have entered the industry have put pressure on pricing and this has a knock-on effect on future returns that we may already be seeing emerge,” said Christopher Elvin, head of private equity at Preqin.

With concerns about a market correction on the minds of many investors and liquidity reducing, investors are likely to exercise caution in terms of where and with which firms they deploy their capital, Elvin said.

These concerns around the health of global private equity fund-raising and deal making activity also come at a time when several Indian fund managers are out in the market to raise marquee funds.

Renuka Ramnath-led Multiples PE and True North are in talks to raise at least $750 million and $900 million, respectively, for their latest funds.