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Where is private equity investment opportunities?

2017-06-27

With the slowdown of macroeconomic growth and industrial upgrading, the integration of mergers and acquisitions will become an important way for enterprises to become stronger and stronger. Private equity mergers and acquisitions will become an important direction for future development, and drive private equity industry to enter a new stage of development.


As a long-term investment asset class, private equity products have important allocation value, which is of great significance for improving the return of assets portfolio. Overseas leading investment institutions, such as the Yale University endowment fund, used private equity as the largest asset class in its portfolio, with a weight of more than 30%, and its private equity assets reached 36% in the past 20 years. Singapore's Government Investment Company (GIC) and other large sovereign funds also use private equity as an important tool to enhance asset returns. According to Palico statistics, the proportion of PE asset allocation of global high net worth individuals and family offices also increased rapidly from 19% in 2010 to 29% in 2015.


In general, private equity is a high return asset. The global private equity fund returns to 18% in the past 20 years, of which the first quarter of the outstanding fund returns is 29%, obviously outperforming the two market share index. From the perspective of the risk return characteristics of large class assets, liquidity premium is an important factor for its high return (i.e., a longer lock period for higher returns). From the decomposition of private equity returns, earnings growth, valuation multiplier and financial leverage are the source of high returns.


The new direction of private equity investment


In recent years, the domestic private equity market has developed rapidly. Benefiting from the accelerated pace of new issue, the gradual improvement of multi-level capital market, and the increasingly active merger and acquisition activities of enterprises, the amount and amount of private equity fund are increasing year by year. In 2016, the scale of private equity fund raising to nearly 1 trillion and 400 billion yuan, double the size of 2014. At the same time, the restarts of IPO, the development of the merger and acquisition market and the landing of the new three board stratification system have also made the exit channels increasingly diversified, and the opportunities for the withdrawal of private equity funds have increased.


With the slowdown of macroeconomic growth and industrial upgrading, the integration of mergers and acquisitions will become an important way for enterprises to become stronger and stronger. Private equity mergers and acquisitions will become an important direction for future development, and drive private equity industry to enter a new stage of development.


First of all, since the second half of 2016, IPO has significantly increased speed, which is conducive to the exit and earnings of private equity investment. In 2016, 227 enterprises in A share were successful, IPO reached a five year high. Since 2017, the number of IPO has almost reached 2 per day, and IPO normalization is the trend in the future.


Secondly, from the view of the company type, the domestic private equity fund is more invested in the new industry with high growth. It can grasp the opportunity of China's economic transformation and enjoy the dividend of the industry growth and the rapid growth of the enterprise. Nearly 50% of domestic private equity funds are invested in TMT, medical health, cultural media and other new economic areas. In November 2015, the 13th Five-Year planning proposal issued by the Central Committee mentioned that we should support new industries such as energy conservation, bio technology, intelligent manufacturing, high-end equipment, new energy and so on, and develop new space with the development of new power. In terms of industry growth, the average forecast net profit growth rate of the media, computer and communications companies in 2015 is above 30%, far higher than the traditional industries such as defense industry, commerce, transportation and transportation.


Whether from the demand of economic transformation or the guidance of national policy, the emerging industries have broad prospects for growth in the future, and are expected to become a new driving force for China's economic growth.


Third, from the valuation multiplier, private equity funds are the best means to enjoy the value spread of the one or two level market, especially in the context of the high valuation of the A stock market. From the point of view of the investment valuation, the valuation of the investment mark on the two level market has been at a high level, and the P/E multiple of the computer, communication and media industry is generally above 50x. Private equity funds often participate in the earlier investment of enterprises, and cost has certain advantages relative to the two level market investment. According to an "chinese Unicorn enterprise valuation list TOP200" provided by ARI, 47 start-ups in the domestic TMT sector have been valued at more than $1 billion. The top 5 companies were all set up after 2010, and a significant increase in valuation in a short period of time, private equity funds in these industries will also be expected to get rich returns.


At the same time, the holding and acquisition transactions in the domestic private equity market are rising rapidly in recent years, and gradually become an important direction for future development. In addition to providing an increasingly important source of return for financial leverage in mergers and acquisitions, holding investment will play a more active role in investment. Under the "new normal", the holding type private equity fund can give full play to its own trading structure design ability and active management ability under the "new normal", and take leveraged buyout, platform merger, management purchase, asset stripping, sandwich investment and special opportunity investment. Various ways to capture investment opportunities in the period of economic transformation, such as capital restructuring and debt restructuring.


In addition, a prominent feature of the excellent private equity fund managers is that more active management is imposed on the invested enterprises, by providing a full range of value-added services for the invested enterprises, improving the profitability of the invested enterprises and the valuation multiplier when they exit. Excellent private equity fund is expected to maintain a higher return level than the two tier market in the future. The excellent fund management team has a rich accumulation of resources in the financial industry and industry, and can provide the invested enterprises with strategic planning, resource introduction, and treatment.


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