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2023 has been one of the most challenging years for private equity over the recent past.
After the Covid-era boom in dealmaking, there has been a noticeable slowdown, partly driven by rising interest rates and rising geopolitical uncertainty.
In this article, SourceCo draws on its experience to provide advice on how to optimize private equity portfolios against this backdrop.
2023 has been a year in which private equity managers have had to walk the walk. With fundraising largely stalled since mid-2022, the industry faces its toughest period for well over a decade.
Prequin measures the difficulty in fundraising by looking at funds raised against funds being sought. 2023 is set to close out with around $1 trillion in funds raised against a total of $3.3 trillion being sought. It’s not easy out there for funds seeking money.
We’ve noted an interesting trend that underpins these numbers. The largest private equity firms - most of them publicly listed - may be finding it even easier to fundraise than before.
For example, according to Private Equity International, the 10 largest funds brought in over 35% of all funds raised in H1 2023.
Learn more:
Our thesis that investors see the extra points they pay at the bigger PE firms as worth it as they’re more likely to deliver in a difficult trading environment.
In September 2023, the US added an impressive 336,000 new jobs - just short of double what economists predicted for the month. This had more than one market onlooker reach for the word ‘resilient.’ This may ease private equity’s funding woes in the mid-term, as consumer confidence rallys.
It’s also likely that the big players mentioned in Private Equity International’s report will be seen doing big business in the next 12 months.
The opportunities in this market are where they’ve always been - companies with recurring revenue, ability to adapt, and bold business models.
The uncertainty created by growing geopolitical stability will also dampen values, enabling the brave to capitalize.
Keep an eye out for more US- and Europe-based deals, as US private equity companies redirect their focus away from opportunities in China.
The call for diversification takes on even more importance in times of uncertainty. Just ask those companies that have lost billions on investments in Russia and Ukraine. A winning strategy here is often to seek out opportunities in emerging markets, whose sales are mostly composed of exports to developed markets.
Slower fundraising offers an ideal window to take a more hands-on role with assets within the portfolio and to conduct regular progress reviews. Pay particular attention to how each of the assets has performed as interest rates have risen, as compared to before, and build insights into your overall portfolio strategy.
Again, this is a fundamental not unique to 2023, but one which takes on more significant in a year like this (and safe to say, 2024). With so much geopolitical strife, rising interest rates, and even US budget gridlock to contend with, it’s important to separate the secular from the cyclical. A buyout is usually for at least five years. Ask yourself if what concerns you still will five years from now.
Using data-driven decision making is what ties our recommendations together.
Looking at what will happen and why, and building confident investment hypotheses is core to what private equity is all about.
It is also core to what SourceCo's deal sourcing solution for private equity is all about.
Our company's offering has been designed to give dealmakers competitive advantage when it comes to sourcing the best possible (and off-market) targets.
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Your private equity company faces risks on a number of fronts, some that you cannot easily forecast with any confidence.
Where portfolio optimization is concerned, it’s essential to understand the nature of the risk and how it affects the portfolio’s performance.
For example, interest rate rises will likely weigh heavier on a private debt fund than a private equity fund focus on technology. Cyber risks play much heavier in the latter than the former.
Whatever assets your company manages, consider the following for mitigation of its risks:
When looking at future trends in private equity portfolio management, we can revert to using Bill Gates’ aphorism,
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”
With that in mind, we suggest overlooking geopolitical tension and interest rate rises (as much as is possible) and focusing on issues like America’s ageing population, the great retirement, and even employee shortages.
These are the issues which are happening. And grasping this reality, and making the right investments given the circumstances will yield huge returns in some instances.
Of course, the other dominant trend now and over the coming years, is and will continue to be, artificial intelligence.
Our advice for private equity managers optimizing their portfolio is to seek to build it in only and wherever it adds value to the portfolio. If it doesn’t add value, it’s just a buzzword.
The good news is that you don’t have to have one big investment thesis - a popular idea in private equity, which only sometimes holds water.
Rather, it’s important to continue to be curious and understand how to separate value from price, insight from noise, and secular from cyclical. The undisputed best way to do this is to embrace the latest technology development and continuous learning for portfolio optimization.
Explore how we can help bring this idea to life and optimize your PE portfolio by delivering pre-vetted, off-market acquisition targets that deliver value.
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Curious about untapped targets? Schedule a free call to find a pre-vetted fit even in the most niche of searches
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