Trending Video: Private Equity Investments

Neill Jakobe, Ropes & Gray private equity partner and managing partner of the firm’s Chicago office, discusses some of the key trends impacting private equity investments. 

Transcript:

Some of the key trends we're seeing in private equity investments I would say leads with competitiveness. There's a ton of capital in the market, both strategic and corporate investors, as well as private equity firms. There's been an increasing prevalence of unique deal structures and we're seeing blurring lines between leveraged buyouts, or classic LBO, and growth equity investments. There's a lot more structured equity deals and uniquely structured minority positions from funds that typically would've done controlled deals. We're also seeing more carve out and unusual transactions where there might be a divestiture of non-core assets, or a business line by a strategic, or even PE-backed companies, in order to obtain liquidity and increase profitability of the business. Those are complicated transactions, but can also be highly successful. And finally, we're just seeing a lot of willingness to invest in industries that are facing fundamental changes or disruption. I think of highly-regulated industries like health care, financial services, education – all of those have been very busy sectors for us.

There have been a number of regulatory and legislative issues impacting PE, particularly over the last few months. Tax reform – clearly the industry is digesting the new legislation. There's limitations on deductibility of interest that financial sponsors are going to have to incorporate into their models. The new three-year hold period on profits interest for long-term capital gains treatment is something that in most cases for private equity firms that's not going to be an issue for their carry, but could be an issue for their management participants, and an incentive equity plan. And of course the lowered corporate tax rate is having an impact on the way that our clients think about their preferred structures for holding their investments. There are clearly still many advantages to holding investments in pass-through form when that's available and the economics makes sense, you can pass on, step up to a buyer, and drive higher valuations.

There are a lot of challenges and opportunities for private equity right now. As I mentioned, the competition is the key challenge/opportunity for private equity. It's largely a sellers’ market. There's a lot of money being deployed by strategics and private equity firms. Debt financing markets remain quite strong. Equity markets are relatively stable, despite what we all know is a fair amount of geopolitical uncertainty.

So there's a premium on coming up with creative approaches to distinguish your client's bid from others. This can come from strong relationships with the management team built over time. Strong sector/industry knowledge, which can help drive improved operations. Operational resources to help grow and make the business more efficient. Reputation as a credible and trusted partner – as bidding processes have become more competitive I think the reputational factors, and the ability to move quickly and creatively are taking on a lot more importance in making close distinctions between otherwise economically clustered bids. On the sell side, it's clearly an opportunity to take advantage of the very fertile market. So you're seeing sellers if they have a business, they can sell anytime soon – call it the next 12 to 18 months, they want to take advantage of the ripe financing markets and the high valuations.