Will the chase for yield continue to work in favor of private equity, what sectors will attract everyone’s interest and will the trend of finding shared values between society and business keep growing? We asked Christian Sinding, Partner and Head of EQT Equity at Investment Advisor EQT Partners, to give his view on what we can expect of the year ahead.
I believe the development in 2015 will be rather similar to 2014 with interest rates remaining low and a slow growth in general. The impact Russia potentially will have is still a question mark, especially given the lower oil prices. Low oil prices impact businesses in many ways, not only the oil and gas industry directly but also other sectors which will have access to cheaper energy. The macro environment may drive deflation in some economies while consumer spending may see an uplift.
The US economy will probably continue its steady improvement and capital markets stay healthy.
The high gearing ratios will keep acquisition multiples at a high level and the bond markets and direct lending initiatives are likely to grow further.
The IPO market will most likely continue to be favorable, however a sudden change in the macro and political environment could affect the situation fast.
I believe the market will be more selective in appetite. Access to cheap and easy credit will continue to pose a challenge for the industry, it could even lower the return requirements and increase underlying risk. Many organizations will remain cautious while at the same time have a need to put money to work. This is why deal levels will probably remain high, especially in Northern Europe. We will likely see an increased competition for the top companies and thus increasing acquisition multiples.
And as investors continue to looking for yield, private equity will still be a good option to provide a premium.
My view is that sectors with recurring revenue business models, both towards B2B and B2C, such as within Service and Telecom remains appealing to private equity. In the Nordic region specifically, the majority of growth is foreseen within the Service sector where the businesses are less cyclical and there are many fragmented service offerings in need of consolidation. Healthcare is another sector in which EQT sees good value creation potential, mainly related to an ageing population. There are also opportunities in the Public Services sector where many operations are in need of both operational excellence and in financing – but it is a sector connected with a large political risk.
The challenges and opportunities of “diginomics” will remain in focus across all sectors, both looking at new tech initiatives but also at mature businesses and how they address and capture the prospects of the rapid digitalization.
Solutions to sustainability issues and finding “shared values” between business and society will continue to increase in importance for private equity.
Some players are likely to take on challenging turnarounds and restructuring cases in order to find deals that have a different correlation.
All stable, predictable and growing economies, for instance the countries in Northern Europe, including the Nordics, will be appealing.
But the situation in Europe as a whole looks a bit brighter, too. We see Spain rebounding. Italy is fairly stable, albeit on an unsatisfactory level, and so is France and this impacts foreign investments including private equity.
With a risk-free interest rate well below 1%, one could ask what rates of returns are reasonable and what should be aimed for? Europe as a whole may recover somewhat but it is still shaky and the situation is diverse. I am concerned about the high levels of sovereign debt across the Western world, and whether central banks can continue stimulating the economy over the longer term. What happens when those efforts are pulled back or there is a crisis requiring a firm response?