Key Takeaways

M&A

  • While private equity remains the top-performing asset class, the COVID-19 pandemic, the war in Ukraine and rising inflation (driven largely by energy costs) have challenged the industry. General Partners (GPs) managing their portfolios – and sourcing potential targets – are now confronted with these challenges along with additional pressure points such as 1) China/US trade relations; 2) Europe’s anaemic GDP growth; 3) Energy transition and 4) Inflation.
  • Democratisation of private equity – shorter investment periods, lower investment capital requirements for investors, easier access. The risk for GPs to be aware of is reputational damage.
  • GPs hold on to good assets for longer provided they are acting in the interests of Limited Partners (LPs). Lessons can be learnt from the real estate industry, which has built core, core-plus and opportunistic strategies for investors to consider
  • Impact of listed equity versus private equity – there has been a shift in private markets and a sell-off in public markets. This will likely result in increased secondary market activity
  • Software sector - perfect sector to combat inflation, backing companies whose technology can help clients re-engineer their processes and remain productive in a tight labour market
  • ESG - raising capital for impact funds requires managers to have a clear investment proposition as accusations of greenwashing continue to surface in the industry. There is a lot of focus on sustainability yet some believe that there is a detriment in focusing on sustainability. We believe the opposite. There is no arbitrage between financial impact and sustainability. 

FINANCE

  • Healthcare predictably continues to be a major counter-cyclical haven for investment.
  • The reduction in anticipated multiples (for the time being) will likely delay some sell-side opportunities until alignment is reached between buy-side and sell-side of what a fair multiple
  • With interest rates rising and volatility among currencies, there is renewed focus on hedging, and volatility may lead to high pricing
  • Funds continue to fundraise in a slightly more challenging environment but PE and private credit provide alignment for ‘patient capital’ to deliver strong returns to investors over the life
  • Very strong (and growing) focus on ESG among investors who also see that ESG investments (as opposed to investments with an ESG requirement) are capable of driving very strong returns through the value chain.

FUNDS

  • Healthcare focused private equity funds are in resurgence, with this sub-sector of private equity growing ever more important in a macro environment of an ageing population combined with the reality that the provision and expansion of state sponsored healthcare models may be nearing their limit of what is possible without private sector help. Healthcare private equity will become ever more important over the medium to long term.
  • Distressed debt and distressed asset funds are perfectly placed to take advantage of the changing macroeconomic environment (but still a valuation gap mismatch between buyer and seller expectations remains).
  • A clear focus on private equity as an asset class in adding meaningful and measurable value to portfolio companies and investing in the right management teams even more so than before to generate returns.
  • Growing importance of secondaries and a return to old-style secondaries i.e. buying and selling second-hand fund interests and tail-end assets, rather than the GP-led secondaries.

FRANCE

The country has access to a deep SME market and the French government has been supporting companies in growth technology. The growth equity market is getting very crowded and is very much “in demand” so investors need to be mindful of this. In Venture Capital (VC), France has enjoyed a record fundraising year YTD in 2022. This has been helped by the fact that talent is choosing to remain in France rather than travel overseas. President Macron has also overseen an effort to attract talent to France. The message to large corporations is: “Sign more contracts with start-ups. It is how you drive change.”

GERMANY

Germany has everything to make a successful PE market: hidden champion Mittelstands, companies led by successful entrepreneurs, sophisticated management teams, efficient debt providers and experienced advisors for all functions.

ITALY

Although family business is still the backbone of the Italian economy, interest in private equity and venture capital investments is growing strongly. If there is a need for capital — as there is — Italian entrepreneurs seem to look less and less to banks as an answer, often to private equity. Not least because there is an evolution taking place in the latter's operating philosophy. In fact, private funds are increasingly willing to consider minority stakes in companies and not just control. And what is more, buyouts, which were a rare event in the Italian M&A landscape just a few years ago, now account for more than a third of PE transactions. And the same approach applies to scalable companies. Q2-22 recorded the second best result in the last five years and venture capital rounds are showing a noticeable growth in terms of maturity: Series A and Series B raised more in the first half of 2022 than in the whole of 2021, up 17% and 66% respectively, despite international macroeconomic and financial tensions. Several elements, including the increasing interest registered by foreign operators in investment rounds, suggest that we are indeed on the right track to witness a decisive growth of the entire Italian innovation ecosystem.

United Kingdom

The UK is home to a strong pool of entrepreneurial talent; an advantage it will need to hold on to post-Brexit. In that regard, the UK’s private equity market plays an important role in providing capital to both start-up entrepreneurs and more established SMEs. Inflation, compared to recent years, is very high, which is a concern for private market participants in the UK, but this is not likely to result in an asset bubble bursting, as was seen in the dot.com crash and in the housing crisis in 2007/8.