GPs are adapting to a climate of uncertainty by developing different fund structures
Buyouts continue to dominate the PE landscape; however, a variety of other alternative asset classes, including venture capital, real estate, growth equity and infrastructure, are growing faster.
In Europe, growth/expansion has become a popular strategy, comprising a record 12.9% of all deal value in 2022. It reached a peak in the industrial sector with Blackstone’s recapitalisation of last-mile logistics firm Mileway, the year’s biggest deal overall with a value of €21 billion.
Specificity is taking hold, with GPs raising more specialised funds that can help LPs meet narrowly defined allocation objectives.
Deals are growing smaller, being easier to finance and requiring less debt. In 2022, deals of $0.1B gained share, and the majority were between $0.1B and $1B. This trend is fuelling interest in add-ons that can add value to platform companies by expanding their footprint or services.
Firms that can tie value creation to ESG initiatives are winning on two fronts.
"Private equity firms in Europe continue to navigate uncertainty in the financing environment resulting from a tense geopolitical situation, rising interest rates and high inflation. After a sharp decline, 2023 is seeing an easing of the situation with stronger growth and investment, and a focused approach on specialized funds. Overall, fundraising and divesting current investments are at the forefront. The industry is evolving at a strong pace, driven by an uncompromising pursuit to meet the dynamic demands of the market."
GPs are diversifying their sources of growth and structuring funds to attract different investors
Underwhelmed by public markets, investors are looking for greener fields in private markets. Alternative funds are especially attractive, offering better returns and new diversification options by allowing access to a wider swath of the global economy and a broader spectrum of asset classes.
In response PE firms are structuring funds to attract wealthy individual investors, who represent vast yet less penetrated pools of capital. While they hold half of the estimated $275 - $295 trillion of global AUM, individuals represent just 16% of AUM held by alternative investment funds.
Alternatives allocation has risen markedly amongst ultra-high net worth individuals, as well as sovereign wealth funds and family offices.
"We can see this at play in Asia. Family offices and HNWI see benefit in investing in PE funds, while the Fund Managers are seeking alternative sources of investment. Macroeconomic trends are a factor for this shift, but geopolitical factors cannot be overlooked. A great deal of private wealth has left China and found its way to Singapore and Malaysia. PE funds are, to many, ideal investment alternatives."
Economic downturn is prompting fund managers to construct resilient portfolios
Many fund managers believe that in an uncertain environment, operational transformation can deliver more sustainable and replicable ways to create value in portfolio companies. Energy transition in oil & gas is a particular area of focus.
Following the collapse of Silicon Valley Bank and Signature Bank, risk management is top of mind across sectors. For PE investors, this means fortifying existing portfolio companies while GPs look for discounted assets to multiply their positions in competitive spaces.
While tech firms drove decline in public markets in 2022, private portfolios continue to focus on the more resilient software subsector.
GPs are considering how to gain market share in a downturn. The ability to spot opportunity and having the fortitude to seize it will yield superior performance over time.
"Portfolio companies have been heavily affected by the geopolitical climate and continued economic instability globally. However, PE backed companies and funds taking this opportunity of market uncertainty to invest, acquire and expand geographically. Having said that, the holding period for portfolio companies is expected to be longer, resulting in few exits. This cycle is inevitably slowing down fundraising which is shifting investor confidence to less risky assets such as real estate or private debt."
"Digital transformation can drive significant value for companies, but companies need to be deliberate, communicate effectively to all stakeholders and most of all prepare. Deloitte analyzed 10 years of financial disclosures from more than 4,000 global organizations and found that power of digital strategy, executed with specific technology investments, and organizationally equipped to accommodate change can meaningfully shift a company’s valuation. This takes significant time, effort, and expertise – companies need to invest in the right talent both in terms of strategy and implementation. Having worked with organizations at various stages of their digital transformation process, we know how to identify the right talent for each company’s needs."