Five predictions for 2013

No one knows with absolute certainty what’s in store for 2013, but that doesn’t mean some reasonable predictions can’t be made. Here’s five of our own:

Firms will find ways to quantify value-add: LPs have made no secret that they want GPs to begin explaining precisely how they created operational value in their portfolios. Investors are clearly trying to separate managers who were in the right place at the right time from those with actual value creation capabilities. To meet LPs’ expectations, fund managers will enhance their performance attribution analyses in 2013. After exit GPs will not only examine changes in EBITDA, valuation multiple and leverage since acquisition, but analyse the impact of specific initiatives undertaken (a smart marketing campaign for example) – as well as high level metrics like revenue growth and changes in cost of capital – to demonstrate value-add. 

Costs of business will increase: Managing a private equity firm will become more expensive. Chief financial officers are no longer able to double as compliance officers in response to new regulations. Back office professionals, or at least sophisticated software, will be needed to manage LPs’ ever-increasing information requests. And courting investors worldwide (including Asia, Latin America and Africa) for the next fund means more hotel bills, travel tickets and dinners. None of this will come cheap. 

Accounting “convergence” stalls: In July the US Securities and Exchange Commission (SEC) delivered a long-awaited report on whether the US would adopt international financial reporting standards. Their answer? “We’re still not sure.” Unfortunately until the US makes a decision one way or the other it will be more difficult for the Financial Accounting Standards Board, which is responsible for setting US standards, to converge as much as it can with international standards. Sources say the SEC is concerned the broad “principle-based” approach exhibited in international standards wouldn’t transfer well in the US, which because of a more litigious culture, needs clear and precise guidance. In other words, don’t hold your breath on 2013 being the year accounting standards finally converge.   

Responsible investment will become more sophisticated: Firms will become more skilled in tracking non-financial drivers of value. GPs already have a strong appreciation for how environmental, social and governance (ESG) initiatives can impress investors and save costs. But there’s a difference between being able to provide case studies that highlight the firm’s best work in responsible investment, and creating a formalised ESG policy that is wholly adopted in the deal making process. Moreover GPs will make greater use of models designed to score and track portfolio companies on key responsible investment pillars, and then relay the information to investors in quarterly reports. 

GPs will request more investment extensions: The billions in dry powder raised during the industry’s golden era five years ago is now “use it or lose it” for many GPs. Because investment periods typically last five years, that will mean GPs either request a fund extension, concede the capital, or become less picky in their deal selection process at the risk of lousy returns down the road. Expect most GPs experiencing this “trilemma” to pursue that first option. 

Happy new year from everyone here at PE Manager. Starting next Tuesday, will be taking a look back at some of our publication's best guest articles over the course of 2012, as well as some new guest contributions on what's in store for 2013. Also, from midday 24 December until 1 January our newsrooms will be closed in celebration of the holidays. We look forward to bringing you market-leading news, commentary and analysis of the global private equity industry in 2013.