The private equity community met in the south of France this week in an event that was more subdued compared with last year’s September bonanza.
A total of 3,000 delegates made their way to Cannes this week. This compared with over 5,000 in September of last year, when big-name keynote speakers such as Thoma Bravo’s Orlando Bravo and Strategic Partners’ Verdun Perry drew packed rooms and attendees from across the globe descended on the seaside town’s sunny shores.
Valuations were top of mind for panellists and attendees alike. As the market awaits where Q4’s audited marks will fall, the mismatch between where private markets valuations sit compared with where the secondaries market is pricing assets was a common theme.
Indeed, data from investment bank Greenhill revealed at the conference showed that second-hand fund stakes traded hands at an average discount to net asset value of almost 20 percent last year, with stakes in buyout funds trading at a 16 percent discount. Both figures are at decade lows and have dropped significantly on 2021.
Imogen Richards, global head of Pantheon’s investment structuring and strategy team, told attendees that her firm’s portfolio looks as though it is going to be flat or up a few single digits once the chips fall.
On one panel, the question was: are the wide discounts in secondaries pricing a function of the abilities of buyers in that market? Or were NAVs simply too high in the first place? The consensus was that 2023 will be the year that valuations fall back down to earth.
Managers are reluctant to mark down their assets if they can hold onto their valuations – a figure they may not be able to claw back to if they acquiesce to a reduction today, one attendee noted. Ultimately, such a stalemate chokes deal volume, with buyers unwilling to pay up top dollar with debt at expensive levels unless the candidate is a stand-out performer.
Speaking on one of the panels, Stéphane Etroy, head of European private equity at Ares Management, said 2023 would be the year of flexible capital – structuring transactions without necessarily triggering control. Some managers have been open to other private equity players buying in via minority and structured equity transactions, something that puts “oil back in the system”.
Another reason why managers are keen to keep valuations where they are is because of the tight fundraising market. Alessandro Tappi, CIO of the European Investment Fund, described the fundraising market as “painful” with managers not reaching first closes in the way the market had seen in previous years.
“There is a migration towards a certain breed of opportunities,” Tappi said. Known fund managers are monopolising commitments, so first-time teams can expect to be last in the queue. There is also more competition between alternative asset classes.
However, Piet-Hein den Blanken, a managing director in AlpInvest Partners’ primary funds investments team, said he didn’t mind fundraising becoming a bit harder as the balance of power shifts in LPs’ favour. From his perspective, the fundamentals of private equity remain strong. “Even if this year is a difficult year with slowdown, the medium- to long-term view from my perspective is very much untouched at this point,” he said.
Private equity managers should buckle in for a bumpy ride this year. After private companies came away in a relatively strong position in 2022, the full effects of inflation and interest rate rises are expected to bite this year. The market is waiting to see what happens with valuations in the coming 12 months – the outcome of which will have a material impact on how dealmaking eventually plays out.