Private Equity (PE) is expecting to grow its 2020 momentum through 2021. It has gotten 2,346 deals resulting in an increase in its volume by 21.9 percent compared to 2020. Record fundraising and low-interest rates have triggered PE market tailwinds. Additionally, the firms’ new funds set up by professionals like Gary McGaghey, Williams Lea Tag CFO, have resulted in deployable capitals of high levels.
As traditional PE deals increase competition while putting pressure on returns, the firms are looking to evolve into alternate asset managers diversified with holdings of different asset classes. For instance, from 2015 to 2019, the top US investment players had their assets under management (AUM) drive an average annual net new money (NNM) flowing between 5% and 15%. For the traditional active set managers, their flows drove negative.
Gary McGaghey remarks that insurance companies are now targeting PE firms for hunting NNM. Most insurance products like long-term care insurance, life insurance, and annuities have stable liabilities that need long-duration assets. Two main reasons drive this dynamic. Firstly, PE managers offer assets of higher returns hence enabling insurers to generate equity with higher returns and additional spread. Secondly, they result in additional fee income, increase in AUM, and permanent capital by accessing the insurance company’s balance sheet.
Gary McGaghey concludes that as PE founders and funds lock gains that can increase capital gains taxes, the uncertainty of the tax law will impulse more deals. Therefore, the funds mainly focus on the growth of portfolio companies, value creation, and assets as their payments rise. (ESG) is integral for portfolio companies that need a sustainable strategy on value creation, applying from the phase of dealmaking to the end of the investment. As a result, PE organizations are expected to analyze ESG risks more on their portfolio and selectively when choosing targets.