The main theme at the last pre-pandemic SuperReturn in February 2020 was the transition of private equity from an alternative to mainstream asset class. Fast forward to the just completed 2022 iteration of the event and this evolution has further accelerated.
A host of LPs and GPs were in attendance at the Berlin-based SuperReturn this month, with a supporting cast of thousands of bankers, lenders and industry service providers.
One of the key takeaways from the event was the buoyant fundraising backdrop, even though this has yet to be reflected in the number of announced and closed fundraises so far in 2022. It feels incongruous to have such heightened activity levels – highlighted by Brookfield’s ground-breaking $15bn debut transition fund – in the context of the current market and economic uncertainties.
However, despite multiple major headwinds – such as elevated inflation, rising interest rates, supply chain challenges, dampened consumer confidence, and the ongoing Ukraine conflict – private equity senses opportunity.
This is perhaps the greatest attribute of the private equity asset class – the true long-term approach to value creation. While the performance of public markets ebbs and flows as a result of abundant news-flow and fickle changes in investor sentiment, private equity is able to chart a steadier course. Public company CEOs – which must have an eye on the share price and an ear open to the ministrations of large and vocal institutional investors – rarely have the stability of strategy afforded by pre-agreed multi-year business plans with a single, aligned investor.
Buying opportunity ahead
SuperReturn was held in a week where the Federal Reserve and Bank of England both raised interest rates to levels not seen since the global financial crisis. While some high-profile industry leaders have warned of an impending “terrible hangover”, at SuperReturn, private equity investors did not seem similarly dispirited and appeared to be readying for a compelling near-term buying opportunity.
Particular highlights included Orlando Bravo, the leader of tech-focused private equity firm Thoma Bravo, making a persuasive case for private equity software investing versus names in the listed software space. For Eric Resnick, the CEO of KSL Capital Partners, the sharp snap back of consumer travel to pre-pandemic levels was underpinning a strong argument for leisure sector investing.
Diversity, culture and the role of ESG in driving value creation were also widely discussed at the event, while innovation in credit markets continues – with fund solutions financiers all out in force promoting their NAV and GP funding line products.
More consolidation likely
We have been witnessing consolidation in the industry, with behemoth capital providers looking to fill gaps in their arsenals – such as the Brookfield acquisition of Oaktree, which in turn acquired 17Capital. On this theme, SuperReturn saw continued discussion on the pace of growth and scale of opportunity in GP stake sales. We saw a fascinating panel discussion with groups including Blackstone, Blue Owl and Investcorp – which all made the case for private equity investment in private equity firms.
Another theme discussed at length this year was the merits of continuation vehicles and GP-led secondary transactions, which enable GPs to crystallise a return while continuing to manage elements of a portfolio.
With the IPO market likely to remain in a difficult place, and strategic buyers increasingly focusing on core activities, supporters of continuation funds point to the positive selection bias of high-quality assets and management teams without having to wildly overpay.
It is clear there remains an enormous runway for GP-led secondaries, which still only represents a single-digit percentage of the wider buyout market, despite exponential growth over recent years.
Private allocations increase
The popularity of private equity has clearly intensified, and there is an argument the asset class has become a victim of its own success. LPs have significantly increased private equity allocations in recent times and were arguably over-allocated coming into 2022. The recent public markets sell-off has further increased this weighting. This has driven growth in the number of LP secondary transactions this year, as LPs seek to free up liquidity to deal with re-ups and to make other strategic capital deployments.
Indeed, the secondary market might be considered the true innovator in private equity, providing liquidity to what is inherently an illiquid asset class. Experts point to the large institutional fundraising machines entering the secondaries market in recent times – such as CVC, Ares and ICG – as evidence of the sheer weight of capital and resources set to be deployed in this part of the market in the period ahead.
According to Preqin, AuM across all alternative asset classes increased at a compound annual growth rate of 10.7% from 2015 to the end of 2021 – a rise from $7.23tn to $13.32tn. It expects this to accelerate
further to reach $23trn in 2026. These figures, combined with the positive energy and vibrancy of dialogue at SuperReturn this year, underscores our long-held argument on the permanency of private equity’s promotion to the mainstream.
Simon Tilley is managing director at investment bank Stephens.