7 Takeaways from the SuperReturn International Conference 2024
Posted by bedrock on
TL;DR
Attending this year’s SuperReturn International Conference in Berlin—the world’s largest private equity event with over 6,000 attendees, including 1,500 LPs, 2,400 GPs, and 350+ speakers—Neil Benjelloun, Head of Private Markets at Bedrock, shares key insights from the event into the current state and future outlooks of the private equity market.
Market Dynamics: The industry faces an increasing number of aging unexited companies, a high NAV-to-Unfunded ratio, and complexities due to rising interest rates. These issues require innovative capital solutions such as refinancing and secondary markets to unlock value and maintain liquidity.
Technological Impact: AI is poised to transform the private markets, improving underwriting processes and opening up new opportunities for investment, particularly in tech-focused infrastructure.
Changing Landscape: A market reshuffle is creating a clear delineation between winners and losers, with larger GPs increasingly dominating the fundraising efforts. This shift demands that smaller players adapt their strategies to remain competitive.
Future Outlook: Despite the current challenges, there’s a generally positive outlook for the 2024-2025 buyout vintages, which are expected to offer strong opportunities for value investors. This optimism is supported by an anticipated return to fundamental investment principles and a focus on strategic growth areas like niche markets and AI.
Deep dive into the key takeaways below:
1. There Are More Aging Unexited Companies
The private equity sector is grappling with a portfolio problem: aging unexited companies.
Capital markets need a jumpstart, especially with LBO debt from past deals coming due and cash-strapped LPs pulling back on commitments until these aging assets are liquidated. Right now, there are roughly 28,000 companies with a combined NAV of between $3.2 and $3.4 trillion held in private equity funds, along with about $1 trillion in dry powder waiting to be deployed. Almost half of all these assets have been held for four years or more-the biggest share since 2012. The industry is sitting on a backlog of exits with a mountain of cash behind it waiting to be deployed. This marks the first time we’ve seen such a high NAV-to-Unfunded ratio in the industry, which stood at 1:1 back in 2008. Adding to the urgency, 2018 vintages are trailing by about 60% on a DPI basis, making various capital solutions such as refinancing, M&A, IPOs, and GP-led secondaries a top priority for GPs looking to unlock unfunded capital and continue to raise ever-larger funds from existing and new LPs.
Currently 28,000 companies with a combined NAV of between $3.2 and $3.4 trillion are held in private equity funds
2. Interest Rate Complications Persist
Managers highlighted that much of the private credit pipeline consists of “good businesses with a math problem” due to higher interest rates.
Cov-lite documents, which make up over 90% of the direct lending space, offer some flexibility to borrowers, but despite this, creditor-on-creditor conflicts have cropped up in recent quarters. It’s been clear for some time that large private credit funds compromise on covenants as a means to deploy huge funds, such as Goldman Sachs and Ares, who each raised over $20 billion for their latest direct lending funds, vying for the title of largest ever private credit fund. These lenders seem to have forgotten – or chosen to ignore – that “covenants are the asset class” in direct lending, as TCW Group’s Katie Koch rightfully pointed out on her panel. Despite the amount of capital in the space, financing leverage-dependent buy-and-build strategies has become tricky as interest rates remain higher for longer, prompting increased use of mezzanine, preferred equity, and PIK structures – a shift that has benefited capital solutions funds with broader mandates. However, as real returns can be made in fixed income, LPs need to underwrite to higher returns to justify taking on additional equity risk in this market.
3. A Market Reshuffle is Creating Clear Winners
GPs all note the difficult fundraising environment but point to a reshuffling in the private equity landscape with clear winners, demonstrated by larger GPs commanding an ever-growing share of fundraising.
Private capital pulled in the lowest amount since 2018, but buyout funds raised 18% more capital YoY in 2023 (more than half of that was raised by the top 20 funds), standing out in a tough fundraising year. GPs agree there’s enormous potential in capital raising from private wealth, as most are under-allocated to private markets relative to more institutional LPs.
Buyout funds raised 18% more capital YoY in 2023
4. AI is Set to Shake-up Private Markets in New Ways
AI is set to make a big splash in private markets, bringing new tools to the underwriting process as well as creating substantial opportunities,
Particularly in digital infrastructure assets like data centers needing huge amounts of capital. AI is seen as a game-changer, enhancing tech talent multipliers and acting as a disinflationary force in the sector. The private investors taking full advantage are already using it to transform portfolio companies, sharpen due diligence, and overall make investment professionals smarter.
5. GPs Are Laser Focused on Distributions
GPs are laser-focused on returning capital to LPs in a tough fundraising environment.
Over the past two years, distributions have been 12-13% of NAV per year, a drop from the historical 20-25%. Despite this, there’s a glimmer of hope: the IPO market is coming back to life, and M&A volume in Q1 2024 was ten times higher than in Q1 2022. Even though LPs are frustrated by the slow distributions, there’s hope for a turnaround within the next year. Managers are optimistic about 2024 and 2025 vintages, though some overallocated LPs from the 2021 frenzy might see their historic fund commitments struggle. Historically, during times of dislocation, IPO windows tend to shut for 2-3 years, and we’re now in year three, with renewed interest in public listings (e.g., Arm, Reddit, Stripe) suggests a gradual reopening is taking place.
M&A volume in Q1 2024 was ten times higher than in Q1 2022
6. Niche Areas Are Key Targets For Growth
The industry is increasingly focusing on niche areas like infrastructure secondaries, GP stakes, and NAV financing.
These segments are expected to grow as LPs seek liquidity. Despite some negative press, NAV loans can be productive if used at the right stage of the fund’s life. GP stakes are gaining traction, allowing firms to benefit from industry growth and asset class performance by offering downside protection through management fee income and potential upside from strong performance. Transparency in GP stakes deals is crucial to avoid misalignment between LPs and GPs. These niche areas offer significant potential for strategic growth and effective capital management.
7. A Promising Buyout Outlook Lays Ahead
Conveniently, the industry consensus is 2024-2025 buyouts could be the best vintages of the next decade, especially compared to 2017-2021 vintages.
Apollo’s Scott Klein on his panel likened these more recent vintages to a pig making its way through a python, suggesting LPs will have to swallow the pill and move on. The forward-looking optimism is driven by a healthier level of underwriting and sobriety than was observed during the market peak in 2021. The days of easy returns, driven by cheap debt and high multiples, are over. Private equity sponsors now need to roll up their sleeves and improve their portfolio companies. As a result, it’s an excellent market for value investors who are ready – and capable – to get hands-on. The focus is shifting back to basics, where thinking through the investment, price, value creation plan, and exit options is crucial.
It’s an excellent market for value investors who are ready – and capable – to get hands-on
Conclusion
This year’s SuperReturn Conference conveyed cautious optimism and strategic adjustments in the private equity sector amid challenges like aging assets, high interest rates, and financing hurdles. The discussions underscored a need for innovative funding solutions and disciplined underwriting. Despite difficult fundraising conditions, there was hope fueled by niche market opportunities, AI advancements, and a positive outlook for future buyouts. The conference emphasised pragmatic anticipation, stressing careful planning and adaptability to harness growth opportunities in a changing landscape.
Important Notice
This presentation is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security; nor does it constitute an offer to provide investment advisory or other services. Investing in private equities involves significant risks, including loss of the entire investment. For a detailed discussion on the risks involved, please refer to the ‘Disclaimer’ section on our website.
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