With managers adding value through active ownership and operational value creation, private equity investing also offers differentiated return drivers beyond those of more passive public investments.


Putting fresh capital to work in private markets in the years following declines in public markets has historically proven rewarding over the long term. We currently favor strategies that can take advantage of price dislocations. But we also see opportunity to grow exposure to digitalization and the transition to a low-carbon economy.


Secondaries. Secondary market managers specialize in buying assets from other private market managers (GPs) and investors (LPs). With some LPs needing liquidity due to portfolio rebalancing or forced selling, and GPs needing liquidity for continuation funds, buyers are able to negotiate better prices for assets.


Value-oriented buyout. As businesses streamline costs, focus on core assets, and spin off nonperforming assets, we expect to see increased opportunity for buyout funds to invest in take-private deals, carveouts, and divestitures.


Lastly, investors should not lose sight of long-term growth opportunities—notably in themes such as the transition to the green economy, growing healthcare needs, and digitalization. Some assets exposed to these themes may have suffered as technology themes have fallen out of favor in public markets. But this may mean better entry points for private investors.



Positive factors


Supportive corporate fundamentals: Private company earnings and profit margins are still positive overall.


Increasing opportunity set: Valuation dislocations in some parts of the market may offer better entry points. Volatile markets can incentivize business owners to sell or force a reevaluation of selling price expectations.


Operational value creation: Private equity operational value creation capabilities enable companies to react faster to changing market conditions and adapt their business models to weather crises.



Negative factors


Negative economic pressures: A prolonged slowdown in economic activity could pose a risk to underlying portfolio company earnings, valuations, and deal flows.


Less attractive exit environment: In a negative economic scenario, managers are likely to delay exits. Fund terms may be lengthened, which could ultimately lower internal rates of return (IRRs).



Main contributors: Karim Cherif, Antoinette Zuidweg


Content is a product of the Chief Investment Office (CIO).


Original report - Private equity: CIO View, 19 January, 2023.