Investment Outlook 2024: Private Equity

Over the last 20 years private equity has endured numerous market crises and indeed, responded to its cynics with persistent growth after each.

Private equity is not immune to macro factors, but has shown itself able to perform consistently across cycles. As such, facing the huge macro shifts of the past 18 months - rising interest rates, significant fundraising headwinds, a slowdown in M&A – we remain optimistic about the long-term outlook. Indeed, the challenges of the current environment are generating a slew of opportunities.

The rise in borrowing costs has, for example, pushed banks to retrench from lending, and credit funds to become more cautious. This means that the equity requirement in LBO transactions is increasing, and has resulted in a capital gap that active co-investment LPs can step into. 

Another area we would highlight to investors is the small and mid-cap segment. Within the overarching trend of growth in private equity has been a concentration of capital in a smaller number of “mega funds”. There are now over 5,000 private equity managers globally, but around 200 multibillion funds into which more and more capital has concentrated. The remaining 4,800 firms focus on the mid-market. We consider this to be the engine of private equity.

In growth small and medium enterprises, prices are lower compared to the upper-mid and the large cap segment. Additionally, many of the value creation opportunities in large cap private equity have already been explored. Large and mature businesses are often very professional companies with strong management teams. They’re strong organisations, but this narrows your options in terms of creating value. In smaller companies, investors have a fragmented market chock-full of opportunities to transform businesses. And data shows that these strategies have delivered strongly, across cycles, relative to larger firms.

By sector, the immense power of artificial intelligence (AI) is only just being explored. We have identified potentially valuable applications in healthcare and biotech, such as oncology and biotech discovery platforms. There are also great businesses in cybersecurity infrastructure software; the picks and shovels of enabling technologies.

From a geographic perspective, we are certainly heading into the Asian century. India and China will combine to overtake the US and Europe in terms of GDP in the next few years. And with 80% of China private equity capital denominated in RMB, accessing China’s RMB opportunity will be crucial to exploiting the growth potential there.

India meanwhile, is expected to be the third largest global economy by the end of the decade, today at number five. India has more than 300,000 SMEs, and allows 100% foreign ownership in multiple sectors. We are particularly drawn to manufacturing opportunities. One need only look to Apple’s shift in manufacturing towards India to see the shift in fortunes at play.

Looking ahead, we believe investors should evaluate if the strategies of the past are suited to the new world we are entering. The next phase for private equity investment will characterised by different drivers to the past two decades, but investors alert to the emerging dynamics will find plenty to be excited about.