The media would lead you to believe that private equity is on snooze, repeatedly reporting reduced deal volumes over the last 12 months. These recurring tales of a year-on-year drop need to be viewed against a backdrop of unprecedented deal volumes in the preceding years and the reality is that a lot of deals are still happening, albeit that a lot of focus is on super premium assets which have been trading at very high prices over the last year notwithstanding inflationary pressures and high interest rates.

The continued expansion of the universe of PE players means that 100+ potential fund buyers in an auction being whittled down to 5 or 6 real contenders is now the norm, and personal relationships can often underpin a successful bid strategy - particularly between individuals at a buyer and seller GP. People who know each other from previous roles working together, or in their private lives, are far more likely to have the confidence to enter the final throws of a transaction featuring a highly competitive asset.

There is still some pain to digest - but many GPs and other stakeholders predict a substantial uptick in deal activity over the coming months.

A number of institutional sellers may have sat on their hands waiting for a near term improvement on multiples that few are forecasting will happen. After a 5+ year period of zero cost capital and low inflation up to 2022, valuations are still adjusting to reflect the more normal interest and inflation rates which many think are now close to settling. And whilst global recession may have been shallower than some had feared, and deal flow is more favourable than it has been for a year or so, some PE firms still may not have fully reflected their markdowns in valuations (and it will be interesting to see what regulators will make of that as part of their on-going international scrutiny around private market valuations).

As Apollo's Scott Kleinman put it, some investors still need to "swallow the lumps through the system" and accept lower returns. However, on the brighter side, most investors feel that the next 3-5 years will offer a golden vintage as investors get back to their value creation basics. And with so much dry powder, most commentators seem to think a 30-50% spike in deal activity is realistic, with some going further and suggesting deals would be "back with a vengeance" at 100%+ growth on current activity levels.

Many believe that we are still in the early stages of a 10+ year phase of GP consolidation – with opportunities for acquisitive GPs to grow and diversify their offering and future proof.

LPs and management teams alike are looking for more financial firepower, resources and services from a "one stop shop" PE sponsor. As value creation plays an increasingly critical role in driving returns, the biggest synergies don't lie in traditional cost-cutting skills. They are driven by an ability to attack sectors on a global scale, and to deploy extensive human resources and capital across the world to identify and execute the best growth opportunities. Add in a continuing, relentless focus by LPs to invest only in the best performing funds, and the fact that the number of PE funds globally has tripled since 2019 whilst a handful of mega funds continue to account for more than a third of the capital raised, and it seems likely that quite a few more independent funds will find new homes within those larger players over the next decade.

That said, it's not black and white. Mergers and scaling up have in the past also sown the seeds for spin-outs of teams that fear getting "lost" on a larger platform, and will point to any empirical evidence that shows emerging, spin-out and deal-by-deal funds outperforming the more established players.

A recurring theme over the past few years has been the rise of credit funds stepping in for banks (and in some cases stepping on banks' toes) in light of liquidity constraints, regulatory scrutiny, and higher cost structures born by banks. But whilst private credit funds may have taken ground ceded willingly or unwillingly by banks, the future may lie in collaboration.

It was interesting to hear Katie Koch, CEO of US credit asset manager TCW Group, talk through the rationale of TCW's recent tie up with PNC, one of the US's largest and most diverse financial institutions. Having collaborated with each other in various ways for over 15 years, TCW feel that they will have a unique opportunity to combine the best of both.

Banks have unparalleled origination capabilities and a diverse range of products but cannot always lend on deals, whereas credit funds have plenty of firepower to lend but cannot offer the same wealth of origination sources or products. Key to the success of this venture, suggests Koch, is the fact that both parties are required to commit both capital and talent. Also, a 100% focus on mid-market transactions, not least because "nobody can originate opportunities like a US mid-market bank".

What are the odds on a similar European tie up soon?

Companies need unprecedented levels of capital for large scale transformational projects. A number of sponsors have long positioned minority PE investment to support large corporates for some time. And now, with an increased cost of capital in the debt markets, the stage may finally be set for this to really take off.  

Apollo certainly think so, pointing to their recently announced US$11bn purchase of a 49% stake in a joint venture with Intel to build a new high volume chip factory in Ireland. Intel had reportedly already invested $18.4bn in the facility to date, and intend to redeploy some of the investment proceeds to other parts of their business. The modern challenges facing large corporates - like reducing dependency on Asian microchip supply, development of AI, or the race to net zero - require substantial capital, and where an investor can bring expertise as well as cash to such a significant degree surely more large corporates are going to follow suit so they can push ahead with ambitious plans.

Tapping into non-institutional capital remains on the agenda, consistent with what we heard last year and are seeing in practice.  

An obvious driver is the more challenging institutional fundraising market as the mega funds continue to dominate the LP market, but various political agendas to better educate the world at large on the nature of private capital, risk and returns are also driving a desire to see more direct and indirect Joe Public exposures to the asset class. In fact, it was refreshing to see speakers head on acknowledge that the difficulty in channelling retail money is not the lack of available fund structures (there has been plenty of innovation in this space over the last 5 years), but operational constraints presented by a large investor base with smaller cheques and greater liquidity needs than large institutional investors.

Regulatory pressures to improve consistency and transparency on valuations ought to help too, and GPs are now proactively looking for liquidity solutions as they work on investment structures that could give retail investors an exit route. An overnight revolution seems unlikely, but a 3-5 year story that could transform both the participation in, and the perceptions of, the industry feels quite possible.

The line between public and private stock investment may be getting increasingly blurred, and the imminent intergenerational wealth transfer from baby boomers to millennial and Gen Z investors – who may be more receptive and attuned to PE – will be another push factor here.

The industry is looking ahead to several important elections this year where PE is directly or indirectly impacted by decisions on the ballot paper.

The US election looks pretty binary - and is currently too close to call. Biden brings a very real prospect of increased tax rates alongside unprecedented US focus on climate change and infrastructure, whilst Trump will champion tax cuts and hydrocarbons. Each of the foregoing, will have their advocates and detractors in the industry but everyone agrees that we are in for a rollercoaster ride, and we will all be experts on swing state polling and the US electoral college by November. A Trump victory may be on the cards on the basis of current polling but, as David Rubenstein highlighted, every poll prediction 5 months ahead of a US election over recent times has proven to be wrong…

As for the UK, still the hub of the European PE industry, opinion polls point to it being a change election (and for the PE community this could also mean a change of the treatment of carried interest). But the campaign has just gotten underway and we expect the choices to crystallise and focus minds over the coming weeks.

Last year Hunter Point attracted a lot of interest as they talked through some of their recent GP stake purchases, and evidently a number of GP investors have acted on it.

One panel highlighted over 30 GP stake sales to institutional investors in the last year - a run rate of around 3 deals per month. Most involved private equity GPs (although a small amount of infra and private credit was also evident), and whilst there were some smaller deals, around 40% involved a cheque of US$100m or more.

The leading GP stake holders in this highly specialised market undoubtedly have a first mover advantage. They have a portfolio, track record, experience, and a growing resource to offer genuine strategic advantage to the GPs they work with - whether that is in origination, value creation, capital structuring or depth of sector coverage - as well as a stronger balance sheet to seize growth opportunities quickly. Whilst succession challenges within GPs undoubtedly drives a lot of activity, an increasing number of GPs are welcoming these investors around their partnership table for the added resource, firepower and experience they bring.

And whilst an ultimate exit route may exist for GP stakeholders in the form of an IPO or trade sale to the larger fund consolidators, a secondaries market will also surely emerge over the next few years, as GP stakeholders look to achieve some liquidity for their own investors without having to persuade the GPs to sacrifice their business model, culture or independence.

It was also interesting to hear the important role that key GP stake holders, such as panel participants Blue Owl, play in supporting new market entrants, setting aside dedicated capital pools for investment in the next generation of GPs.

A lot of investors continue to be attracted to the megatrends surrounding technology and healthcare, but a few remarked on improving conditions in other sectors that have been a little neglected. Many observed improvements in confidence in consumer, particularly in the US, as well as industrials and financial services. Increased global regulation continues to make businesses that focus on compliance and certification attractive, and others saw opportunities in the convergence of data, energy and national security considerations.

But most agreed that AI is an industry wide, limitless opportunity - as businesses across the board continue to develop their understanding of how AI can transform their business model, products and services. Others also pointed to energy transition/net zero as the dominant investment opportunity for “the next 2 or 3 decades”.

We also heard about GPs looking for asset classes whose performance is not correlated to the general economy and that are ripe for private market investment. Panellists and attendees highlighted interest in sports investments (including a focus on female sports) and natural capital and forestry – something that rings true to us from our own work in these spaces.

No doubt mindful of mainstream Hollywood morality tales, investors are starting to engage on some of the tricky questions posed by AI development – whether that is uncertainty around their potential applications and resulting security risks, ethical questions, workforce impacts or the massive energy burden. For the time being, technology companies are now largely regulating themselves – which might be a bit of a worry, given that self-regulation by tech companies in other areas (e.g. social media) has a questionable track record to date. National regulators are grappling with how to police the industry without stifling innovation or driving AI companies elsewhere. In the meantime, can PE investment in AI portfolio companies and the overlay of an ESG lens deliver a better form of self-regulation?

This might be ESG’s biggest test in PE to date given the financial returns at stake and the impact AI is forecast to have on society.

Two or three years ago, continuation funds was the topic du jour at SuperReturn, and it’s safe to say that prevailing market conditions in the period since have driven a significant uptick in their use. GPs argue that, alongside secondaries, they are a great route to provide longevity to a business but they face huge scrutiny from LPs.

This is understandable, and no doubt feels justified to LP investors, but some GPs think these should now be a little easier - arguing that they are invariably a good news story for LPs. We are aware of GPs starting to share views between themselves on what represents “best practice” - not just to technically comply with fund documentation, but also to establish some common commercial ground rules that might help LPs, portfolio companies and regulators alike get comfortable that they are being fairly treated and there is no systemic risk arising.

Whilst undoubtedly creating a smaller scrum than Kim Kardashian last year, Bjorn Ulvaeus and Arsene Wenger proved to be inspired choices to highlight ripe opportunities for investment.

Bjorn and EQT's Pophouse hope to secure a stable of rights for around 10-12 global music artists from their shortlist of 350 - and they know what they’re doing. Driven by data and technology, and with streaming facilitating global expansion at zero cost, pairing up with Bjorn’s unrivalled expertise in financially exploiting ABBA’s catalogue over the last 3 decades feels like a no brainer – and yields to date of 20-30% per annum suggest they’re right. ABBA’s voyage (pun intended) may not be a blueprint for all, but it certainly shows what can be done.

In the meantime, whilst cautioning against investment in European men's football until some proper financial control is put in place, opportunities are abound in sports rights - with investors pointing to strong financial performances across decades in US sport franchises, various successful investments into league competition bodies, and the ongoing explosion of interest and emerging commercial opportunities across various women’s sports. Anybody thinking these are vanity assets or unsound financial decisions distorted by personal passions may want to look a bit more closely.