There is cautious optimism for private equity investments heading into 2024, which could provide defensive opportunities in an uncertain economic environment.
Eric Deram, managing partner at Flexstone Partners, has outlined some key factors driving promise in the asset class in the new year, which include slow market recovery and an increase in “retail friendly” private asset funds.
“The fear of a global recession is abating [and] pundits expect interest rates to stabilise and potentially come down as early as mid-2024 with inflation under control,” he said.
“The state of the economy is not a major concern for operators anymore with supply chains largely normalised although higher rates do continue to pressure cash flows.
“Over the last few weeks, we have experienced a clear rebound of business activity, particularly in the small- and mid-market across the US, Europe, and Asia where we operate. We expect this recent upward trend to continue throughout 2024.”
He also predicted a transition from a buyer’s market to a buoyant secondary market.
“The secondary market definitively was a buyers’ one in 2023. However, volumes were below expectations with less than $70 billion transacted in the first nine months of the year,” Mr Deram noted.
“Fundamentals remain very strong with a large amount of secondary capital raised over the last few months, investors still suffering from significant overallocation to private equity and narrower bid and ask spreads. As a result, we expect the secondary volumes to reach $130–150 billion in 2024.”
Additionally, an increase in “evergreen and semi-liquid funds in the market” for retail investors, coupled with regulators facilitating access to the asset class, could contribute to a rise of “retail friendly” funds, he said.
Mr Deram also highlighted how alignment of interests could be challenged. He explained: “From ‘NAV financing’ to ‘GP-led continuation vehicles’, GPs have moved away from traditional mergers and acquisitions (M&A) exits to engineered liquidity substitutes.
“These structured ‘exits’, while offering liquidity for distribution starved LPs, often undervalue companies, increase inherent risk, and more generally seem to favour the interests of the fund manager rather than its investors.”
His outlook for 2024 included the potential for some fund managers to fail to raise a new fund, given they are currently struggling to attract interest for their new fund.
“They are (ab)using some of the instruments described above in a bid to increase liquidity but the current over-allocation to private equity from institutional investors, compounded by the misalignment of interest this is creating, will further push investors away from their offering,” Mr Deram said.
GCM Grosvenor’s head of strategic investments, Fred Pollock, highlighted that private equity can provide outstanding access to defensive strategies.
“The private equity environment was broadly ‘treading water’ during 2023, but there have been good opportunities to invest in defensively positioned companies and strategies such as credit.
“Healthcare is attractive due to secular tailwinds, and we are also seeing good defensive opportunities in consumer staples – this is an area which has been undervalued and there are a number of quality companies enacting succession plans, which is creating opportunity.”
The firm manages the Pengana Private Equity Trust for Australian investors (PE1) which has “gone from having zero exposure to private credit just two years’ ago to increasing allocations in this sector”, Pollock said.
The PE1 portfolio is now exposed to more than 500 underlying companies, predominantly based in the US and Europe. It has recorded NAV growth of 14.8 per cent per annum for the last three years and 9.7 per cent per annum since inception in 2019.
