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What next for private equity?

How private equity has influenced the investment landscape

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Private equity is enjoying a boom. Private funds have raised billions of dollars over the past decade or so, partly because many of the most exciting companies in the world are listing later in their lifecycle.

It means that more value creation is taking place before companies list publicly. For example, Amazon had its initial public offering (IPO) with a stock market valuation of USD $400 million (£322.60 million). Facebook was one of the most expensive listings in the history of the financial markets with an IPO in 2012 valuing the social media giant at $104 billion (£80.62). Uber was the biggest valuation in 2019 at $82 billion (£66 billion).

"That is an extremely significant series of numbers," says Edward Mathias, Senior Adviser and Partner at The Carlyle Group, one of the biggest investment firms in the world.

"Private companies are generating tremendous interest in cash flows. They are also creating new models for profits and expenses. Amazon lost about $3.3 billion (£2.68 billion) in the first 10 years of its existence. Uber lost $3 billion (£2.43 billion) last year. Private equity is a business which has changed dramatically." 

US has scale; but don’t underestimate Europe


The US, and to a lesser extent, Chinese investment companies have led the charge in the exponential growth in the private financial markets, industry experts say.

In the US market, for example, software and life science ventures dominate the private financial markets. By comparison, Europe looks quiet, with fewer start-ups, but perhaps size of market is not as relevant as the value the start-ups produce.

Certainly, this is what Anne Glover, Chief Executive and co-founder of Cambridge-based venture capital firm Amadeus Capital Partners, believes.

“Europe will never be completely at the scale of either the US or China in its venture activity. But scale isn't the measure of success. Returns are the measure of success,” she argues.

"Europe is at the beginning of a 50-year innovation cycle"

"If you look at the returns over the past 10 years from venture capital, European returns are identical, if not, in some years better than US returns. So it may be a smaller industry, but it is now a very successful industry, which is why it's able to raise capital."

Rob Moffat, Partner, Balderton Capital, sees vast improvement in the quality of early-stage businesses in Europe and is confident that the trajectory in Europe is upward.

“The quality and the quantity of founders that we see just goes up dramatically every year. I think that we have better people, building more interesting businesses, moving faster.

“And that creates a lot more value. That makes it a much more exciting place to invest. And while our entry valuation has come up a bit, the valuation of these companies has gone up dramatically.”

Glover is also optimistic that European innovators are coming into a phase of stronger growth.

“I strongly believe that Europe is at the beginning of a 50-year innovation cycle, that is not just incremental innovation, or disruption, as big as that may be, but fundamental innovation,” she says.

What European private markets need to get better now at is their exit strategies, Glover adds.


Impact, impact, impact


Private equity has also seen an influx of money toward funds with a conscience. These aim to have a positive effect on the world through investments that benefit the environment or society in some way.

Europe has been at the forefront of a worldwide shift from conventional philanthropic giving toward investments that have financial as well as Environmental, Social and Governance (ESG) targets.

“Impact can be more keenly felt and measured in private markets,” says Diana Noble, who was CEO of CDC Group, the UK’s £5 billion development finance institution, for five years from 2011 to 2017.



“ESG has become incredibly strong in Europe and the US was quite far behind that,” Noble, who is also Non Executive Director, Court of Directors at the Bank of England, observes.

“More recently, the US has actually leapt forward with impact investing, and actually to some extent, in America the concept of making money and doing good in the world too is culturally a great fit and has really taken off very fast.”

This escalation in demand is being met by the market, with many investment companies now claiming their products meet the standards of the United Nation’s Global Compact principles relating to human rights, labour rights, the environment and anti-corruption among others.

But the UN Global Compact is a voluntary initiative and with little statutory regulation around ESG labelling, there is a lot of potential for confusion in the market over the reality of what certain funds will actually deliver in terms of ESG impact.

Bridges Fund Management is a UK-based specialist investment firm that aims to address some of the country’s most pressing environmental and social challenges, aiming to make the UK economy more inclusive and more sustainable. It has invested more than £1 billion since it was founded in 2002.  

Co-founder and Partner, Michele Giddens, is relaxed about any potential confusion in terminology and targets around responsible or sustainable investment.

She says: “It is confusing but I think it’s good, because all those different players coming in using this label in different ways just shows this isn’t just for the pioneers anymore. The fact that they're all showing up, and they all want to talk about impact is the first sign of momentum.

“I am confident the impact integrity, and all the measurement that needs to come, will follow.”

Edward Mathias, Anne Glover, Rob Moffat, Michele Giddens and Diana Noble all took part in the 12th Annual Private Equity Symposium. It was hosted by London Business School and Private Equity at LBS 27-28 June 2019 with support from the Private Capital Project at Harvard Business School with funding from the Division of Research and Faculty Development and the Joshua J. Harris Alternative Investments Program, The Wharton School and CBID Capital International.

Context

  • Europe is at the start of a 50-year innovation cycle – is private equity ready to take advantage? Top names in private equity and venture capital gathered at London Business School to discuss and debate the rise and rise of private investment 
  • In the leading private equity community on the US west coast, software and life science ventures dominate the private financial markets. By comparison, Europe looks quiet, with fewer start-ups. However, is the size of European private markets as relevant, when the returns from the companies it produces match their US counterparts?

Florin Vasvari is Professor of Accounting: Chair, Accounting Faculty and Academic Director of the Private Equity Masterclass delivered in Hong Kong.

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