The Consolidation and Convergence in Private Equity

Published on04 MAR 2019

The article below is from our BRIEFINGS newsletter of 04 March 2019

Goldman Sachs' Céline-Marie Méchain started the firm's private equity coverage business in France in 2000, at a time when the industry was relatively new. We caught up with Céline who shared her thoughts on the latest trends influencing the industry.

How has the private equity industry changed over the last two decades?

Céline-Marie Méchain: The private equity landscape has evolved dramatically in the last two decades. In 2000, private equity investment firms — also known as financial sponsors — in Europe were a relatively undefined category of buyers. Today, private equity represents about one-quarter of M&A transactions globally and about a third of our investment banking core agency revenues. The amount of cash raised by financial sponsors has reached record highs of about $800 billion at the end of 2018 globally. That means that private equity firms are making ever-larger acquisitions, raising bigger funds and expanding into new sectors and areas of the economy including the most cyclical. Sponsors' transactions, for example, in the TMT and natural resources sectors increased substantially in 2018 and represented 24% and 21%, respectively, of overall M&A volumes.

What does the competitive landscape look like?

CMM: The search for yield in a low-rate environment has prompted new players to jump into the market. Our private equity business used to focus on traditional financial investors, but we extended our coverage footprint over the last two years to include the growing community of acquirers such as infrastructure and sovereign-wealth funds, family offices, pension funds, insurers and special purpose acquisition companies. As a result, we rebranded our team FSIG, or Financial and Strategic Investors Group, to embrace these new operators. In Europe, in particular, we have seen family offices, fueled by old money, emerge as formidable competitors to traditional private equity firms and have recently extended our coverage of portfolio companies to around 500 additional companies.

How are traditional private equity firms responding?

CMM: Most traditional firms have professionalized their teams over time by creating sector specialization, recruiting operating partners and senior advisors from the industry, and fighting a war to attract and retain the best talents. They are also increasingly using big data to industrialise their deal flow and gain efficiencies. In an effort to increase scale, private equity firms are themselves also consolidating. For many years, the industry was dominated by independent private equity firms. Today, those firms are essentially transforming into listed alternative asset managers and are growing by acquiring other asset managers and third-party managed funds that invest across a variety of asset classes, ranging from credit to real estate to generate synergies. This consolidation trend among the general partners of these investment vehicles has, in fact, accelerated over the last few years, as has their access to public markets. And we only expect this trend to continue.

Are you seeing any changes in how PE investors are exiting their investments given the market volatility?

CMM: Given how buoyant the M&A market has been over the last 12 months, all exit routes were open until now. But in the last few months, we have seen some limited partners and pension funds make direct investments (usually on a minority basis) in companies through primary or secondary private placements and more bespoke or confidential exit processes, thereby bypassing the competition from strategic buyers, other private equity firms or public markets. Doing so allows the underlying sponsor owner to avoid the regulatory burden of public disclosures, while potentially reducing the expenses they would otherwise incur by investing through intermediaries. The managers of the underlying portfolio companies, for their part, see such private placements as a way to get cash and stay private for longer — without having to deal with market volatility.

You're also involved with Goldman Sachs' Launch With GS, Goldman Sachs commitment to invest $500 million in women-led companies and investment managers. What's the environment like for women-led ventures in Europe?

CMM: When the Launch With GS program was first announced, it was a very happy day for me in part because the number of women CEOs and founders is very limited in France and in Europe. In the benchmark French stock-market index, the CAC 40, there is only one women CEO, Isabelle Kocher of Engie. After the program was launched, our office was flooded by proposals from female entrepreneurs, and I expect that this program will open up a new pipeline of opportunities that we can either invest in or use to help create a favourable ecosystem of female-led businesses. In fact, Goldman Sachs is also co-sponsoring a research and teaching position at the Paris Institute of Political Studies, commonly referred to as "Sciences Po," to develop and scientifically evaluate the barriers women face in starting new business ventures. Investing to reduce the gender investment gap will be a fantastic experience.