Private equity – Feature
interest rates. But that is not the world in which we will inhabit going forward. In fact, the new world will be as far from it as you can get.
This could raise a big challenge to what PE can offer in an investment portfolio. Research by Bain found that – after out- pacing public markets for a decade – the performance of pri- vate equity funds was the same last year as if the money had been put in the S&P500.
Getting sluggish
Looking further ahead, private equity is on track for sluggish growth during the next five years, according to investment data company Preqin. Institutional investors, a key source of capital for private equity funds, “are becoming more risk averse,” prompting some to shift money out of such funds and into real assets and private debt, which are viewed as safer bets, Preqin said in its analysis.
“Our forecasts suggest that the sweet spot that private equity markets have enjoyed over the past few years is likely over,” the report states.
This puts private equity in a different place entirely: one that is neither a megatrend nor a pyramid scheme, but instead, facing something of a new reality. So where does it leave private equity from an investor perspective?
There is still much to be positive about, says Andre Bourbon- nais, global head of Blackrock’s long-term private capital. “We see that private equity multiples, which have increased, still remain attractive relative to the public markets,” he adds. And investors are honing their approach to the asset class. “Investors are looking to see if there is value in participating earlier in a corporate lifecycle – such as growth – or investing in assets which bring together different sectors, such as energy and fibre delivery to homes,” Bourbonnais says. “Investors increasingly need to be multi-dimensional in order to identify and underwrite these opportunities.”
Global opportunities
Looking at geographic private equity opportunities, in the US, Bourbonnais is focused on strategies including corporate carve- outs, family-run businesses, private investments in under-ap- preciated public companies and consolidation strategies. Moving closer to home, there exist real private equity opportu- nities. “Europe is likely to follow a similar trajectory with ele- vated valuations and investment appetite, albeit with some dis- persion across the region,” he adds. “In the UK, asset prices should continue to reflect the uncertainty in the economic out- look, with private equity funds continuing to find take-private opportunities among public companies they see as undervalued.”
Asia also offers opportunities. “We believe China continues to
offer strong long-term opportunities, especially in technology, healthcare and consumer goods,” Bourbonnais adds. Bermont-Penn picks out one particular asset class as attractive. “Venture capital, which typically targets companies at an earlier stage of growth than private equity, can be better isolated from macro conditions,” he says. “For example, WhatsApp, Airbnb, Uber and Zoopla – the latter of which Octopus backed – were founded and funded during the last downturn.”
Not insulated But the new reality does, and will, impact on the investor out- look of the asset class. “Private equity investors mustn’t be naïve or complacent in thinking their portfolios are insulated from the wider macro-economic forces,” O’Neill says. “The fair value of an asset will be impacted by rising interest rates, infla- tion and labour shortages.” Bermont-Penn does also offer a proviso about the potential risk involving PE. “Like all asset classes, private equity is not with- out risk, and by the nature of being a private market you are investing into a less liquid portfolio, which DB schemes in par- ticular need to be conscious of, depending on where their fund- ing ratio and timescales are.” Nevertheless, Bermont-Penn notes that for DB and DC schemes, adding private equity to their portfolio, at the right stages, could be a method of improving growth, enhancing diversification and adding impact. “In a world where ‘once in a generation’ events seem to be happening with increasing regu- larity – the dot-com crisis, the global financial crisis and Cov- id-19 among them, this asset class can be a useful addition in a pension fund’s tool kit.”
Issue 118 | November 2022 | portfolio institutional | 53
We have seen private equity come and go. It is not just about being in the asset class, it is about being with the right manager within
that asset class. Matthew Cox, Esmee Fairbairn Foundation
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