“Apart from healthcare, we favour stable defensive areas within the consumer sector in the advanced world. While we are also positive on consumer products in Asia/emerging markets due to rising wealth and strong demand, healthcare in this region is less attractive due to low per-capita healthcare spending.” Jessie Juan points out, too, that foreign companies still face certain restrictions on investing or owning large hospitals in China, for instance, but fewer restrictions apply to smaller facilities and peripheral services. In the IT space, technological innovations built in the US are “highly appealing”, but in Europe the firm has a neutral view on IT because it is less mature and there are fewer companies with an attractive product pipeline. For venture and growth companies, the report says, fundraising remains difficult after a decade of disappointing returns and exit market softness, however, valuations remain compelling.
“A new push into technological progress and improved exit markets support our more optimistic view on growth companies. As a result, we have turned more positive on primary investments in the growth equity space and we remain very positive on direct investments in growth equity.” While conditions for private equity managers look better than they have in recent years, Partners Group warns that “certain funds” are nearing the end of their investment period and some managers might be pressured to deploy capital given their slow investment pace over the past two years. This may help explain why pricing on larger transactions has bounced back quickly.
The report says listed private equity is continuing on a strong recovery path – despite public market turmoil – and a number of investment environment and portfolio factors will see this endure. A focus on portfolio management by private equity managers seeking to cut costs and restructure debt in the past 18 months has led to earnings holding up better than expected and an increase in operational leverage. The investment and exit environment has improved, meaning that realisations have picked up. In addition, the balance sheets of listed private equity vehicles are now far stronger than they were 12 months ago, and a raft of new funds – including five IPOs in the first half of the year – have expanded the universe.
With regard to public partnerships, Partner Group says concentration risk should be considered, which in some cases is significant. “We favour those managers which prove their deal sourcing capabilities by deploying cash over the coming months. Business development companies are in a good position as lending terms are still very attractive.” It also believes that fund-offunds are still very attractive and will outperform in the next year. This is due to lagging NAVs and the fact that over-commitments look manageable, recently supported by positive net cash flows as a result of pick-up in distributions.