Private Equity Monthly Newsletter – January 2024

Industry Trends

The debt markets opening up again in 2024? Deals 2024 outlook

It discusses PwC's Deals 2024 Outlook report and its implications for the commercial real estate industry. Tim Bodner, real estate deals leader with PwC, highlights that the economy is in a good state and the Fed's decision to stop interest rate hikes will bring stability to the market. He also mentions the significant amount of capital flowing into private capital markets, particularly from insurance companies. Bodner notes that investors are interested in upper Class-A assets and multifamily housing due to an undersupply of housing in the US. It also touches on the impact of climate change on commercial real estate, with Bodner stating that climate-related matters have become a significant part of investment decision-making. Lastly, he mentions that the real estate industry is transitioning, with a shift in focus towards value creation and operational efficiencies.

Source: REjournals

Navigating the European private equity M&A scene

It delves into the key trends in European private equity M&A in 2023 that emerged despite the subdued global M&A environment. These trends include the return of public to private transactions, with listed assets considered undervalued and attractive to US-based sponsors. There is also increased governmental scrutiny in cross-border transactions, with new foreign direct investment regimes and rules on foreign subsidy regulation. The asset management industry is seeing a trend of consolidation, with significant M&A deals occurring between asset managers. Alternative routes to liquidity are being explored due to slow IPO markets and difficult conditions for general M&A activity. Lastly, it highlights the differences in M&A deal terms between Europe and the US, with European terms generally considered more seller-friendly. The Fried Frank M&A team in London is mentioned as well-equipped to guide clients through these trends and challenges.

Source: Lexology

CVCA's venture capital and private equity market analysis for Q3 2023

The Canadian Venture Capital & Private Equity Association (CVCA) released its Canadian market overviews for YTD Q3 2023. The Venture Capital (VC) Canadian Market Overview showed a decrease in deal count and investment amount in Q3 2023, with $1.2 billion invested across 134 deals. However, pre-seed and seed stage investments are on track to reach record highs set in 2022, particularly in the Cleantech and Agribusiness sectors. Exit activity has also increased, with a total YTD exit value of $6.8 billion across 28 VC exits. Ontario, Quebec, and British Columbia were the main regions for VC investment. The Private Equity (PE) Canadian Market Overview showed an increase in dollars invested by 33% in Q3 2023, with $5.8 billion invested across 481 deals. However, the average deal size has declined, reaching an all-time low of $12.07 million for 2023 YTD. PE interest in Canadian tech companies remains strong, with ICT making up 20% of all investment in 2023 YTD. Quebec was the most active province in the PE space, accounting for 57% of total deal flow and 53% of total dollars invested.

Source: Fasken

The 2024 landscape of private markets reporting

There is an increasing focus on sustainability factors in regulatory reporting standards over the past two years. It highlights five key themes for the coming year: increased regulatory scrutiny, near-term decarbonization plans, audit-ready ESG disclosures, focus on biodiversity loss, and addressing plastic pollution. Regulatory bodies are mandating the disclosure of ESG metrics to prevent greenwashing, with the EU Corporate Sustainability Reporting Directive (CSRD) requiring large companies to apply new rules from 2024 and SMEs from 2027. It also emphasizes the importance of decarbonization plans, with the ESG Data Convergence Initiative adding Net Zero Commitments to its 2024 reporting framework. The need for audit-ready ESG disclosures is growing, driven by new regulatory requirements and the need for data comparability. It also highlights the increasing focus on biodiversity loss and the need for companies to outline their actions to protect biodiversity. Finally, it discusses the growing recognition of the harmful effects of plastic pollution and the need for companies to take proactive measures to reduce their dependence on single-use plastics.

Source: Private Equity Wire

Market Sentiments

Decoding asset management trends: A look at Q3 earnings calls

It highlights the key takeaways from third-quarter earnings calls of asset management firms. Firstly, asset managers are focusing on the insurance sector to boost recurring fee-earning assets under management (AUM), with insurance assets making up between 6% to 50% of total AUM among large publicly traded asset managers. Secondly, there is a continued demand for private credit and infrastructure, with private debt-managed assets expected to reach $2.8 trillion by 2028. Infrastructure assets have also been performing well, returning double-digit gains in Q3 for some managers. Lastly, it highlights the importance of operational excellence in the challenging operating environment of 2023, characterized by global market volatility, high interest rates, geopolitical turbulence, and regulatory changes. Asset managers are focusing on creating value through the operations of existing portfolio investments to enhance long-term value and increase returns to investors and shareholders.


Global alternative assets remain resilient in 2023 amid economic uncertainty

Preqin's "Alternatives in 2024" report analyses trends in the alternative assets industry. Despite market headwinds and a challenging fundraising environment in 2023, Preqin analysts are optimistic about the future of global alternative assets. Private debt fundraising has done well compared to other private capital asset classes, and secondaries deal flow is expected to increase in 2024. The report highlights that private equity is facing challenges due to rising interest rates, but investor appetite remains strong. Venture capital investor sentiment is improving despite challenges. Private debt fundraising is holding up due to its attractive structure. Hedge funds' AUM has grown primarily due to asset returns, not inflows and outflows. Real estate is under pressure due to rising interest rates, making fundraising difficult, especially for smaller funds. Infrastructure fundraising fell sharply in 2023, but deal activity in the third quarter was robust, and energy transition will continue to support long-term growth.

Source: Yahoo Finance

Market Opportunity/Challenges

Private assets in the age of the 3D Reset

Dr. Nils Rode discusses the shift in global private markets due to geopolitical and economic changes. It highlights four key themes reshaping the investment landscape: decarbonisation, demographics, deglobalisation, and technological advancement, specifically the AI revolution. Decarbonisation is expected to provide investment opportunities for decades, with infrastructure investments being the most direct play. Demographic trends, particularly in countries with young populations, present opportunities in real estate. Deglobalisation, driven by the Covid-19 pandemic and geopolitical tension, highlights India's private equity market as a focus asset class. The AI revolution, considered the fifth industrial revolution, is expected to impact real estate and infrastructure markets. Dr. Rode recommends focusing on long-term trends, diversifying portfolios, and rethinking past strategies to navigate this new era.

Source: Independent Online

How private equity firms create value in uncertain times

The private equity (PE) firms are adapting to the ongoing shifts in the macroeconomic environment. They are focusing on five critical areas: cash and liquidity, cost, talent, technology, and sustainability. Cash management is becoming more sophisticated, with PE portfolio companies unlocking trapped cash across their operations. Cost management is also critical, with funds making targeted investments to upgrade finance functions. Talent management is being revolutionized, with a focus on improving skills and creating specialist cross-company teams. AI is dominating the technology agenda, with PE funds exploring how it can disrupt business models and create opportunities. Lastly, improving a portfolio company’s environmental, social, and governance (ESG) performance is seen as a catalyst for value creation. It suggests that corporate leaders can learn from these strategies.

Source: Harvard Business Review

Rise in Private Credit: Banks and asset managers as frenemies

The transformation of the financial world since the 2008 economic crisis is led by alternative-asset behemoths like Apollo Global Management and Blackstone. Following the global financial crisis, banks were forced to reduce their lending, leading business clients to seek capital from alternative asset managers offering private credit. Apollo, with Athene accounting for about half of its $631 billion in assets under management, is more of an insurer than an alternative asset manager. Athene is devoted to providing fixed annuities for retirees, a business it leads in the U.S. It also mentions the growth of Athene and the expected continuation of this trend as the U.S. population ages. It also discusses Apollo's deal with Concord Music Publishing and Blackstone's private credit model. It also mentions the bankruptcy of private-equity-backed radiology provider Envision Healthcare Corp., one of the worst losses ever for KKR. It concludes with calls for more regulatory supervision over private credit.

Source: Institutional Investor 

ESG Scope/ Trends

2024 Forecast: The evolution of private equity and ESG

There is an increasing integration of ESG (Environmental, Social, and Governance) considerations into private equity firms' investment processes in 2023. It predicts five key trends for 2024:

  1. A move towards outsourcing routine ESG monitoring and reporting due to the difficulty of justifying a large in-house ESG team.
  2. A rise in ESG-related costs, leading to increased scrutiny of these costs and careful allocation by in-house legal and finance teams.
  3. An increased focus on the Corporate Sustainability Reporting Directive (CSRD) reporting, which will affect US-headquartered firms with European offices and portfolio companies.
  4. Continued politicisation of ESG, particularly in the US, with a clear divide between states supporting ESG considerations and those that do not.
  5. A rise in ESG litigation and enforcement actions, with an expected increase in greenwashing claims and regulatory enforcement actions.

It also mentions the potential tension between ESG and antitrust laws, with European regulators being more encouraging of private sector collaborations for sustainability objectives than their US counterparts.

Source: Sustainability Magazine

Artificial Intelligence Scope/ Trends

Crossing the AI Chasm in 2024

Raj Bakhru, CEO and Co-founder of BlueFlame AI, discusses the potential of AI in the alternative investment management industry. Despite initial struggles with implementation and underutilization, the future of AI in this sector is bright, with an expected increase in AI deployments and a shift towards 'productionizing' AI in 2024. AI can enhance portfolio research, refine risk management strategies, and automate routine tasks. It emphasizes the importance of AI solutions that can integrate with existing systems and workflows and stresses the need for effective change management and staff training. It also highlights the importance of data quality and security. It suggests that firms should select AI solutions that can connect with systems like Pitchbook, accelerate the review of unstructured content, aggregate views across documents, prepare for LP meetings, draft initial responses to DDQs/RFPs, and interact with CRM using natural language prompts. It concludes by stating that the right AI solution can lead to significant time savings and efficiency gains, and those who have the right solution in place will be on the path to AI success in 2024.

Source: Traders Magazine

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