Private equity houses are jostling to get access to deals as capital inflows to their funds stay lavish while rising prices paid for companies are a risk for the sector, industry players said on May 16.
There is no lack of opportunities yet to place capital even as deals become ever bigger. At the same time, certain sectors, smaller deals and the seed capital business continue to thrive, financiers said at a seminar.
"There is an excess of liquidity across markets, I think that's probably a fair statement in general, but we think in our market there is not an excess of liquidity, it's quite the contrary," said Thomas Barnds at Accel KKR.
Barnds said his fund, which specialises in buy-outs of technology companies of less than $100 million, had fewer competitors also because tough regulation was making it hard for such smaller firms to access capital markets.
Other fund managers said that capital would continue to flow into the sector as long as private equity houses kept returning solid cash to investors. But higher prices paid were a risk because they make it harder to sell a firm at a profit.
"If the benchmark valuations when you're exiting to the public markets or to strategic investors decrease, there will be some serious problems with the right multiples on exit," said Jeffery Grady, a private equity fund manager at Swiss bank Julius Baer.
Grady said that multiples paid for companies were now at seven or eight times earnings, with 4.5 times often mentioned as a more normal level.
Private equity houses buy companies they think are cheap, often using large quantities of borrowed money, repaying interest with cash flow generated from the firm which they often drastically restructure. They then aim to sell the asset either to another corporate or to financial markets.
But while the buy-out business may appear overly frothy, venture capitalists - a different branch of private equity where investors put money in start-up companies - said they could choose from a wealth of investment opportunities.
Private equity investors also indicated several further risks to their industry, notably rising interest rates, which can potentially have a huge impact on the highly leveraged business and from currency swings.
"The interest rate risk is significant and the currency risk is. All these operations are now quasi global. The euro/dollar risk is a significant issue for a long-term fund," said Baer's Grady, who does business in Eastern and Central Europe.
Analysts have warned private equity funds - which raised over $200 billion last year world-wide, much of it borrowed - may end in choppy waters if interest rates start rising further as expected.
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