Alex Barr and James Witter, partners and co-heads at Sarasin Bread Street, write that it’s been an eventful year with many negative headlines about the dynamics of the private equity market – is the asset class still attractive?
The uncertainty caused by steep interest rate rises kept many private equity (PE) investors on the sidelines in 2023, making it a particularly tough time for fundraising. Nonetheless, as PE firms are adjusting to the new environment, we believe the longer-term trends driving PE returns are still intact.
Behind the negative headlines about deal volumes, some of the strongest PE managers have successfully continued significant fundraising efforts during 2023. Agile managers have already sought to take advantage of opportunities that have emerged more recently, for example, there has been a spate of ‘take private’ transactions of UK-listed companies with depressed valuations. One of these is Apollo’s purchase of The Restaurant Group (owner of Wagamama).
It is also important to note that large listings are but one route for managers to exit their investment. In recent years, more than 80 per cent of exits have been via trade sales to strategic buyers or sales to other, typically larger and more global, PE managers. Faced with higher interest rates, successful PE firms are less likely to rely on debt to generate attractive investment returns, and focus on applying industry expertise to improve the companies in their portfolios.
What are the key investment themes and opportunities in private markets?
Exciting areas for new investment include artificial intelligence (AI) and cyber security, together with a slew of opportunities across automation, digitalisation, healthcare and the transition to lower-carbon economies. These are complex technologies and businesses, so many firms are choosing to specialise in specific sectors and use in-depth knowledge to add value to their investments.
With interest rates appearing to have peaked and markets expecting a series of rate cuts this year, opportunities in the secondary PE market look increasingly attractive. (Primary PE funds invest directly in private companies; in the secondary market, investors can buy a stake in these primary funds, offering a greater degree of liquidity.)
What do you look for when selecting private equity managers?
It’s important that PE managers can identify crucial areas where a business can be improved, and then apply practical expertise to help create value. Sarasin Bread Street’s leadership team has been investing with leading PE managers for over 20 years and has a global network of manager relationships.
We believe the most successful private equity managers are able to draw on extensive resources, such as expertise in mergers & acquisitions, pricing, capital markets, procurement and other specialist areas such as innovative use of data and analytics – for example, through good use of AI tools. These capabilities are increasingly important for managers to gain and maintain a competitive edge.
How can investors start allocating to PE?
Whilst there is no single ‘right’ way, seasoned investors in the asset class generally build PE exposure gradually, deploying capital over a number of years. In PE, it’s essential to select the best managers in order to access the type of returns that private markets have generally delivered.
Investors can build private equity exposure through a disciplined approach to annual investment and reinvestment, in a manner designed to provide a carefully selected balanced portfolio of private equity investments.
