Managing short-term headwinds, preparing for long-term opportunities: challenges and opportunities in private markets
Over the past decade, private markets investors have benefitted from a Goldilocks scenario that has its roots in the global financial crisis and Madoff saga. But since last year, this has been countered by three headwinds: inflation, higher interest rates and geopolitical uncertainty. However, we believe that the long-term prospects for private capital remain promising.
State of the market
The impact of inflation, higher interest rates and geopolitical uncertainty has been well covered over recent months. That said, we think the green shoots of a more promising market are beginning to show themselves, especially in relation to financing and deal activity.
As with previous cycles, starting in 2022 we saw the quality of syndicated loans deteriorate while covenants reduced, resulting in an inventory of unsellable loans at various banks that then retreated from financing deals. Understandably, tighter availability of financing dampened deal flow in 2022, but sellers did not immediately respond to this new reality and as a result bid and ask gaps grew significantly.
That said, we are beginning to see that banks are ready to selectively provide finance in certain sectors. Credit funds, which began to play a more active role in deals when banks stepped back, are still sitting on huge piles of dry powder and so also remain active. Taken together, this means bid and ask spreads are beginning to close and investment opportunities are on the rise.
It would be remiss to declare that the headwinds we have faced in recent months are coming to an end, even though conditions are promising. But while we at EQT are always aware of the short term, our horizons are inherently long-term. And in the long term, we think the trends remain promising.
Research shows that the assets managed by private markets firms are expected to surpass USD 23 trillion by the end of 2027, up from USD 14 trillion at the end of 2021 1 . There are several drivers of this growth, including the fact that investing in private markets delivers diversification benefits away from more volatile public markets and that as companies stay private for longer, private markets investing offers an opportunity to support companies during the period in which they enjoy a greater share of their growth.
Positioning for success
We believe that capitalising on these trends requires certain characteristics. The industry is becoming more global as investment opportunities appear across the world. This was a key driver of our decision to combine with BPEA 2 , which brought together one of the world’s leading private markets firms, EQT, with the third largest in Asia, BPEA. As a result, EQT is now active in countries representing 80% 3 of global GDP 4 . We believe global scale and the access, network, and shared learnings this stimulates will be vital going forward.
We also believe it is important to take a thematic approach and invest with conviction in long-term trends. Simply put, at EQT we make good companies in great industries even better. We have a distinct way of doing this: we empower decision-making at the highest level of the companies in which we invest, we bring in industry veterans from our global network of advisors to support the management team and we help our portfolio companies become even more successful and resilient by connecting them to our experience in improving operational, digital, and sustainable performance.
Finally, we think values will be a key driver of performance. For three decades, at EQT we’ve invested in a way that maximises returns while also benefitting society. We believe doing good is good business – it’s not an either-or proposition. We make long-term investment decisions based on these values, while striving to be the most reputable investor and owner. In doing so, we position companies to succeed beyond EQT’s ownership period. For example, last year we took the largest fleet of iconic yellow school buses in North America and are investing in 30,000 fully electric vehicles, creating better health for our children and better outcomes for the planet.
Short-term headwinds, long-term opportunities
To conclude, we believe that EQT is well positioned today and for the future. While we stay humble, laser focused on performance and very selective when it comes to deals, we are preparing for markets to re-open further in the future and by making sure that we have the best talent in the industry supported by great values and a strong culture.
Peter Veldman, Deputy Group Head of Fund Operations, EQT Group
1 Preqin (Oct 2022) www.preqin.com/future
2Baring Private Equity Asia.
3 2021 nominal GDP estimate; Source: Macroeconomics indicators EIU via SNL as of Feb 2022. https:// eqtgroup.com/news/2023/eqt-ab-s-annual-and-sustainabilityreport-for-2022-published/ page 11 footnote 3 of the EQT AB Annual Report.
4 Gross domestic product