Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
PE purveyors gear up as valuations normalise after ‘challenging’ period
Market valuations are set to come back to normal bands and make deals more palatable for global private equity players, which should bring transaction levels back up to their historical norms according to Neuberger Berman managing director, Singapore, Gabriel Ng.
Speaking during a fireside panel at The Inside Network‘s Alternatives Symposium in Sydney, Ng shared insights about the private equity landscape and its recent volatility.
“We’re in a pretty challenging macro environment. There is global economic softness, high inflation, rates are higher for longer and on top of all that there’s geopolitical tensions,” he said. “And speaking from a private equity perspective, transaction volumes are down 30 to 40 per cent year-on-year to-date.”
While a dive in transaction levels that deep sounds alarming, Ng pointed out that the decline was more a case of the market getting back to its comfort level after the pre-pandemic “frenzy” in 2021, when deal flow was “materially up”.
What private equity investors have now, he explained, is a more even playing field with a better buy/sell balance to work with. “What we see going forward is a bit of a reset, which we think is healthy and good for a more sustainable pace of deployment.”
Without question, however, the recent market has been a tough one for investors that make their bread choosing undervalued companies with turnaround potential. Private equity markets were basically “shut” for a time, Ng says, but savvy purveyors were still able to make equity plays if they looked hard enough and were judicious with their entries.
So it’s been a tough market as well, you know, IPO markets are shut. But at the same time, we see sponsors, were thinking of other ways of monetizing the positions, namely, through a minority stake sales, sales to corporates, or even, you know, looking at EGP letter continuation funds in the secondary market.
“While markets have basically been shut we’ve seen sponsors thinking of other ways to monetise their positions,” he said, adding that minority stake sales, sales to corporates and the secondary market have all been available options.
“So all in all, my observation is that it’s been a challenging market,” he said. “Certainly, we still do find a lot of opportunities for private equity to experience, but the key is really being selected, and having a very broad new sourcing funnel to allow you to do that.”
As an example of that expanded “sourcing funnel”, Ng pointed to SouthEast Asia and Japan, where Neuberger Berman has been paying close attention to the emphasis being placed on “generational succession” within businesses. He gave an example of a scenario where investment teams and company owners can manage a relatively seamless and profitable transaction.
“Say you have a founder is in his 70s, his kids don’t want to take a look at business so private equity becomes a reasonable kind of way to manage that succession,” he said. “Often a sponsor would come in and buy a controlling stake in business, and then have the founding family retain a significant minority, just to make sure there is some continuity in business and a smooth transition process with customers, making sure that they’re comfortable with the new ownership structure. That’s one typical transaction type that we do see.”
