Private Capital update - Big Picture Investor Perspective
Transcription
Hello, and welcome back, it's time to take another look at private capital, a lot has happened in the last couple of months. So I thought we'll start off by taking a big picture look with an investor perspective. So a little bit of data first for prospective, private capital. And what I mean by that is not just venture growth, buy out bad real estate, infrastructure, private debt, natural resources, all included, has had an incredible growth in the last 20 years. So if you look at this, I refer to this is Moore's Law of private capital, maybe not quite every two years doubling, but every four to five years doubling in terms of assets under management in this respective asset class. Now, who allocates the most to private equity, they're basically we've seen a little bit of change, but still family offices, the entities of high net worth individuals and families that may have sold some of their family business, allocating to private equity, are still by percentage of total AUM ahead of the curve with around 20% of their AUM allocated. Again, this is a global number when we go around the world, it's quite different and allocations if anything increase as we go from west to east. Dry Powder, the term that the press likes to bet around dry powder has naturally increased as well. Let's not forget, the private equity model relies on private equity firms having money readily available, if and when opportunities present themselves. So by definition, the industry will never run out of private of dry powder. Nevertheless, the measure to keep an eye on is, is dry powder within 20 to 35% of total AUM, should it ever fall below 20%. I would start getting worried. And should it ever go above let's call it 40% I would start getting concerned about the ability of private capital to find investable companies to invest in Until then though, yes, assets under management have increased so has dry powder. Now, obviously, with AUM going up potential and seriously large numbers of private equity firms looking for a target. Clearly prices have increased as well. If you look at 2008 We were at about seven eight times EBIT on multiple per as the valuation of firms that are acquired by buyout firms. And but nowadays, the the number is closer to 11 and a half to 12 times EBIT da, as you can nevertheless See, as we're standing here in the first quarter of 2023, we are seeing already valuations drop in line with the behaviour of public markets. So, private equity Wilds delayed in adjusting to market environments that are potentially a bit more contentious than what we've seen in the last decade. Private equity is also exposed to gravity and in line with its public market peers will start seeing lower valuations. Now. There are pros and cons on that. As a private equity fund, I am on the one hand hyper excited when I can achieve exits at a decent price or potentially as we saw in the last three, four years at times at at valuations that exceeds even the upside modelling on entry. Nevertheless, as one exits when obviously is also keeping an eye on entry valuations, and it's pretty much the other side of the same coin. Now, valuations obviously are significantly lower now to enter into deals competition is a little bit less as well because private equity firms, despite well funded are rather sitting on the sidelines and waiting to see what happens we will have to see what happens in the second half of 2023. But also interest rates have increased substantially. So any one of the buyout funds working with debt and leverage will obviously you have to adjust their model before they assess whether or not to go into private in a private deal. On that note, that is basically brings me to the end of that very, very brief update from an investor's perspective on the latest in private equity and venture capital. We will come back and I will see you for our next session where we have a closer look at venture capital. Thank you
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