Year of the Rat reflections: The US election and private equity valuations
At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about economic, political and financial developments that are likely to have an impact on the way institutional investors allocate their funds. And then, one year later, we revisit these forecasts to see how well we did.
Our first and second Year of the Rat forecasts focused on the US presidential election, and considered whether US private equity could reach worrying valuations.
Will Donald Trump be re-elected?
Answer: Yes
Verdit: Incorrect
A year ago we felt the US presidential election was Donald Trump's to lose.
He had ridden out an impeachment attempt easily, with only one Republican senator daring cross him. The economy looked to be on a decent footing, even if it was slowing. And, while Trump is a narcissist and entirely ethically untethered, his showmanship meant he was (and remains) adored by the vast majority of Republican voters.
Add into that the natural advantages of being an incumbent president and his re-election looked likely.
Then came the coronavirus.
Twelve months ago Covid-19 was only being taken seriously inside China and in immediate surrounding countries. But that quickly changed as the infectious illness spread across the world during February and March. Indeed, the US had registered its first cases in late January.
The onset of the disease did not guarantee Trump's electoral failure. But his response all but did. The president initially failed to grasp the extent of its severity, and then he began denying the speed of its spread and claimed all would quickly return to normal.
His lies only served to lead many of his supporters to fail to take it seriously. As a result, as the US election neared at the the beginning of November, over 220,000 people in the country had died of the virus and more than 9 million were infected (these amounts have since risen to 447,000 and 26.5 million, respectively). The US economy was, and remains, in a recession.
Even then Trump – who himself fell sick with Covid-19 in September – failed to exhibit the smallest amount of remorse or sympathy for afflicted families. Meanwhile the Democratic Party had picked almost his antithesis in Joe Biden, a man famous for his empathy and desire to help.
The election was a blowout, and Trump managed to get over 75 million votes from his adoring base of voters. But public disgust at his antics and irresponsibility turbo-charged turnout for Biden too; he garnered over 82 million votes, in by far the biggest turnout ever.
For investors, the consequences of the virus and the economic impact of efforts to contain it caused tremendous investing headaches. It also led to huge levels of central bank and regulatory engagement, which flooded markets with liquidity and enabled many asset prices to remain well above levels considered healthy.
These problems continue today, but at least Trump is no longer in charge to exacerbate them.
Will US private equity reach bubble valuations?
Answer: Yes (unicorns in particular)
Verdict: Incorrect
When we made our predictions a year ago, Covid-19 had yet to spread its pernicious influence across the world. At that time the most likely outcome for private equity markets appeared to be overvaluations of assets, especially in the US. Unicorns, or typically tech-linked companies with a pre-IPO valuation of over $1 billion, were all the rage.
But by January 2020 signs were emerging that these price tags were a little too hefty. Several of the companies, including cab-hailing app Lyft, disappointed once they did list their stocks. As we noted back then, a study by the National Bureau of Economic Research concluded that 50% of unicorns were overvalued.
Then the Covid-19 pandemic emerged, with a wallop that sent entire economies reeling. It has proven an incredibly painful period for many companies, and fatal for others. Yet for a number of e-commerce, logistics and other tech businesses it has been a very fruitful era.
Private equity deal volumes have held up well too, given the unprecedented conditions of 2020
In addition, the initial massive bouts of volatility that embroiled global markets during March subsided relatively quickly as central banks and governments invented a succession of monetary and fiscal measures to stop a health crisis from becoming an economic depression.
This tsunami of liquidity helped to cushion stock markets from the very real economic devastation striking many sectors. Valuations are fairly high, and companies are rushing to conduct IPOs, leading to a lot of deal flow. Indeed, capital markets data provider Dealogic says $49.2 billion worth of initial public offerings (IPO) were conducted in January 2021, versus $11.6 billion a year ago.
Private equity deal volumes have held up well too, given the unprecedented conditions of 2020. According to US law firm White & Case 2,027 PE-related deals (including both exits and buyouts) took place in 2020, and were worth a combined $459.8 billion. That was an 8% drop in volume but values remained largely on par with the previous year. Unsurprisingly, technology, media and telecoms was the busiest sector by volume and value, with 769 deals worth $217.6 billion
That said, it's worth noting that eight of the top 10 deals done were PE exits, as general partners sought to take advantage of decent valuation levels. They are likely to continue doing so amid the rush of IPOs. But, with liquidity hardly an issue; indeed, alternatives data provider Preqin noted PE funds have $1.7 trillion in dry powder. If there's a bubble forming in PE, it may take some time to pop.