As investors gathered in Geneva to celebrate Invest Europe’s 40-year anniversary as Europe’s leading private equity industry body, it seemed the ideal time to consider what the next 40 years might hold for private equity. Oakley Capital's Steven Tredget shares his key takeaways from the Invest Europe Investors’ Forum.
Steven Tredget
Partner — Oakley Capital
"Many of those I spoke to, from pension funds to private equity firms were talking about the increasing drive to democratise our asset class, making it more accessible. There were some striking statistics offered that demonstrated private equity was still relatively small and very inaccessible. Approximately $8 trillion of global private equity assets compares to c.$100 trillion of public equity and whilst the latter is more than 50% invested by private individuals, PE is less than 10%.
"This leads to two conclusions: first, that despite much talk of the reduced levels of PE funds raised in 2022, the asset class has significant room for growth as more companies look to remain private and institutional investors such as pension funds, on the hunt for better returns, allocate more capital to private equity. Second, that institutions are not alone and that the industry must do more to enable private investors to access PE."
“So the asset class is growing fast, but it’s still difficult to gain access. Investors usually have to make a multi-million commitment and that capital can be locked up for as long as ten years. This is not a solution for private investors but the private equity industry is developing answers. Attendees I spoke to highlighted how some firms now offer access for wealthy private investors through relatively new platforms such as KKR’s KPrime. The entry ticket can still be tens of thousands of dollars for such programmes.
"What surprised me most was that many investors at the Forum knew nothing about an alternative route into private equity that has existed for many years: listed private equity investment trusts. There’s no minimum investment, there’s daily liquidity, and so private investors get the same access to the underlying investments as blue-chip institutional investors, but arguably on better terms. Interestingly, data by UK retail share trading platform, Interactive Investor shows that 20% of all trades are in investment trusts: it is only a matter of time before more of these private investors diversify into private equity."
Steven Tredget
Partner — Oakley Capital
“The other hot topic on everyone’s minds in Geneva? The immediate macro situation. Investors were clear that fast-rising interest rates in the face of record inflation spelt the end of an era of cheap, easy money and with it, the asset price inflation we’ve seen over the last decade. Following the stock market corrections of the last 18 months, so-called multiple expansion is ‘out’, and the hard slog of depending on earnings growth is ‘in’. Everyone is focused on value creation- helping make portfolio companies worth more by accelerating their profitable growth, and relying less on financial engineering.
"To be sure, the focus on value creation and earnings growth never went away. Oakley Capital Investments, for instance, is the best performing investment trust in its asset class generating 23% CAGR NAV growth over the last five years. The vast majority of that NAV growth comes from earnings growth, even through periods of uncertainty including the COVID pandemic and war in Ukraine. Looking ahead, private equity is well-placed to continue generating strong returns, with the capital, expertise and a patient investment horizon to help more entrepreneurs build their businesses even through a downturn."
“The final topic worth discussing is ESG. The overwhelming view in Geneva was that private equity must be a principled asset class, with sustainability at its core. Investors demand it, businesses backed by private equity want it, as do their customers. It also matters to the fresh recruits that private equity needs to attract into the industry in order to power its growth. In some ways private equity is best placed to make the most meaningful changes towards greater sustainability.
"One LP I spoke to highlighted that with a combination of longer-term investment horizons and control ownerships, PE is best placed to lead on sustainability, leading the way in unlocking value through good governance and sustainable practises. At Oakley, that means thinking carefully about the businesses we back and the entrepreneurs we partner with. It also means investing in our ESG capabilities to ensure we have the know-how to help our companies understand and mitigate their carbon footprint, strengthen their supply chains and cyber defences, and implement good governance.”
Learn more about sustainability at Oakley Capital.
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