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Q1 2023 - (released May 2023)

SA's quarterly Private Equity & Venture Capital magazine

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From The Editor's Desk

by Michael Avery

In the realm of finance, public equity markets have hogged the headlines of late, leaving their private counterparts in the shadows. Yet, as any seasoned observer will tell you, appearances can be deceiving. While private equity markets remained seemingly impervious to the choppy waters of their public counterparts, the US Federal Reserve’s historic interest rate tightening has caused ripples that are now beginning to crest.

 

The result? Monetising holdings has become increasingly difficult, dealing returns a significant blow. This has been compounded by a dearth of exits via public listings, given the current negative public market sentiment. With equity valuations toppling, mark-to-market valuations of portfolio ompanies have followed suit.

 

Enter Bain & Company’s Global Private Equity Report 2023, which reveals that a record $3.7trn of dry powder is eagerly seeking deployment in the global private equity market. This sum spans across buyout, venture capital, infrastructure, real estate, and distressed private equity – a diverse array of asset classes that’s sure to pique the interest of investors looking to put their money to work.

 

But here’s the thing: Private equity fundraising is facing a bit of a conundrum. Sure, transactors are talking about the “denominator” problem – that’s when investors in private equity funds have a set percentage of their portfolio allocated to private equity, but that allocation can shrink if another asset class – say, public equity – takes a nosedive. However, that’s only part of the story.

 

In my view, the bigger issue is that institutional investors – the kind that can make or break a fundraise – are getting wise to the game. They’re starting to realise that private equity firms have had it pretty easy for a while now. Returns have been steadily declining, yet there’s an absurd amount of dry powder sloshing around out there, waiting to be deployed. And as a result, these LPs are starting to demand more than just a financial commitment and a slice of the fees.

 

They want a say in how the portfolio is managed. They want to be involved in decision-making. They want more control.

 

Now, this isn’t necessarily a bad thing. In fact, it could be seen as a positive development – after all, these are big-time investors we’re talking about, and they have a lot of expertise to bring to the table. But it does mean that the days of private equity firms calling all the shots are numbered. And if they want to continue raising big bucks, they’re going to have to start sharing the power.

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