Four Factors That Will Likely Shape Private Equity in 2017
The market took investors on a wild ride in 2016. The year opened with US stocks posting one of their worst first weeks ever, markets plunged in June after the unexpected result of the Brexit vote, and stocks jumped after Donald Trump’s surprising presidential election victory — but bond markets witnessed a massive sell-off.
These gyrations are one of many reasons why investors look to alternative assets, including private equity, to diversify retirement portfolios and potentially insulate their self-directed IRAs against drastic stock and bond market moves. Self-directed IRAs allow account owners to invest beyond traditional markets and into assets like private equity and private debt.
At PENSCO, where we custody alternative assets for our clients’ self-directed IRAs, our account opening trends point to increased investor interest in private equity investment vehicles (PE). In the first half of 2016, 67% of clients who opened a new self-directed IRA invested in PE vehicles, up from 62% in the same time period of 2015.
For private equity investors, here are four factors that may shape the industry in 2017:
1. Rising interest rates: For the past decade, investors who participated in private equity deals have been doing so in a historically low interest rate environment. But, that’s changing: While the Federal Reserve instituted a small rate hike in December 2015, it again raised rates last month on December 13. The Fed now predicts three quarter-point rate hikes in 2017, up from its previous expectation of two.
Low rates can help private equity firms, keeping their cost of capital low and allowing them to borrow money at attractive rates to finance deals. IPO activity also tends to surge when rates are low because paltry bond returns make stocks appear attractive and investors are eager to invest in PE-backed offerings.
For instance, Bain & Company said abundant capital and cheap debt made 2014 a great time for PE funds to sell. Private equity exits surged in 2014, with buyout-backed exits hitting record highs worldwide and deal value up 67% over the year before.
But rising interest rates may make it more difficult in 2017 for private equity firms to fund deals as well as pursue exits.
2. Uncertain regulatory climate: Investors will face a vastly different regulatory climate this year. In his run for president, Donald Trump did not talk extensively about financial regulation, but he vowed to repeal the 2010 Dodd-Frank law that imposed regulations on financial firms after the Great Recession.
Until it becomes clearer which actions President-Elect Trump will take or which policies his administration will enact, PE activity could slow. In addition, a recent article in the Wall Street Journal explained that Trump’s pledge to loosen business regulations might not easily be achieved:
Trump’s promise to eliminate regulations on U.S. businesses will likely take years to fulfill given the complex steps involved in reversing them and political and legal challenges from Democratic lawmakers and state attorneys general. … In some cases, replacing rules will be as arduous as making them in the first place, particularly in the financial sector where some regulations have been issued by multiple agencies.
3. Accredited investor definition could expand: Last year, SEC Chair Mary Jo White said the SEC would move ahead “relatively soon” in its review of the rules governing who qualifies as an accredited investor.
A year later, the SEC rule-making process slowly continues, but Congress is moving the baton forward. According to InvestmentNews, the House has passed legislation that would expand the accredited investor standard. Current rules limit accreditation to investors who have more than $1 million in net worth, excluding the value of their homes, or earn more than $200,000 annually.
Under the bill, InvestmentNews said the expanded accredited investor definition could include investors with securities-related licenses, like financial advisors, and those who have experience related to a specific deal, such as a doctor who wants to invest in a medical startup. The industry will keep a close watch on any definition changes that have the potential to expand the number of investors who can participate in private equity deals.
4. Access to private equity investments will expand: The once “private” world of PE is undergoing a sea change, as regulatory and technology advancements make deals accessible to a wider swath of investors. Previously, access to private equity investments was limited, and investors often needed to be accredited and have personal connections to participate in an offering.
But Title III of the JOBS Act, which went into effect in May, allows everyday investors to buy shares of private companies that are issued on securities crowdfunding platforms. While securities crowdfunding platforms can still limit access to accredited investors, some are now open to the general public.
Crowdfunding is part of a broader surge we are seeing in the number of online financing platforms, such as peer-to-peer and marketplace lending sites, that provide access to private equity investments. We expect a fresh wave of online funding portals will enter the space in 2017, driving access to private equity investments.
At PENSCO, our clients are slowly showing interest in emerging financing platforms, like peer-to-peer lending. However, it’s important to remember that all investments come with risk, and for private equity there may be more than usual in 2017 given the shifting regulatory environment. It’s crucial for investors to conduct thorough due diligence and work with a financial professional before making an investment decision.
To learn more about investing your self-directed IRA into private equity, download our free investors guide.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.