Following the flagship SuperVenture and SuperReturn events in Berlin, it is clear that Private equity (PE) professionals are facing a rapidly changing environment.
The official agenda and feeling from attendees pointed to several key trends, with an industry witnessing a shrinking number of unaffected niches, making fundraising increasingly difficult for all but a select group of General Partners (GPs).
While challenges continue to present themselves, the atmosphere was positive and celebrated the innovation and agility within the industry:
1. Fundraising Challenges
The primary hurdle for most PE firms lies in fundraising. While limited partner (LP) appetite remains strong, the constraint lies in LP placement capacities. Consequently, only a few GPs are successfully raising funds. This shift requires financial services professionals to adopt innovative strategies to attract LPs and secure capital commitments.
2. Resilient Operating Performances
Despite the challenging environment, portfolio companies are generally demonstrating resilience in their operating performances. The share of troubled companies has increased slightly but remains far below the levels seen during the financial crisis of 2008-2011. This stability is encouraging and provides a solid foundation for future growth.
3. Flat Portfolio Valuations
Over the past few quarters, portfolio valuations have remained largely flat. However, this should not be seen as a cause for concern. Many companies are steadily growing into their valuations, suggesting a positive trajectory for future returns. Financial services professionals should focus on value creation during stewardship, as it will be instrumental in driving outsized returns.
4. Changing Market Terms and the Role of Private Debt Funds
The pressure to deliver attractive internal rates of return (IRRs) is pushing GPs towards exploring new market terms. Private debt funds are expected to play a significant role in re-igniting deal activity. With higher interest rates and banks retracting from financing PE, private debt funds are well-positioned to fill the gap. However, the efficient deployment of funds becomes crucial, considering smaller average deal sizes.
5. Exit Activity and Liquidity
Exit activity holds promise as it provides some relief for the capacity constraints faced by LPs. The much-needed liquidity can enable LPs to participate in new investment opportunities. However, fundraising will remain challenging for the foreseeable future. Financial services professionals should be prepared to navigate a tough fundraising market and explore alternative avenues for capital.
6. Unchanged Underwriting Standards in a Changing World
GPs assert that their underwriting standards remain unchanged. However, in a higher interest rate environment, questions arise regarding their ability to provide alpha to investors. While the responses often include terms like “attractive” and “risk-adjusted,” it is crucial for financial services professionals to carefully evaluate the implications of changing market dynamics on alpha generation.
7. Supply Chain Reliability and Geopolitical Stability
Contrary to populist criticism, changing views on supply chain reliability and geopolitical stability are creating new investment opportunities. The shift towards near or onshore production presents potential avenues for PE investments. Financial services professionals should keep a close eye on these emerging opportunities and assess their risk-reward profiles.
8. Talent Access and Retention
Access to and retention of talent have emerged as a primary concern across most portfolio companies. PE firms are increasingly building capabilities to support their portfolio companies in this strategic endeavour. Financial services professionals should focus on developing expertise in talent management and identify innovative strategies to attract and retain skilled professionals within portfolio companies.
As the private equity landscape evolves, it is clear financial services professionals must adapt to the challenges and capitalise on emerging opportunities, are clearly out there given the positivity in the room.
Navigating the difficult fundraising environment, prioritising value creation during stewardship, and embracing changing investment themes are key to driving success in the evolving PE world. By staying informed and proactive, financial services professionals can position themselves as trusted advisors and strategic partners to GPs and LPs alike.
To find out more about JTC’s private equity and venture capital services, please contact Martin Punt directly.