Russel Pillemer

Current market dislocations caused by inflation, rising interest rates and higher volatility, have opened up more opportunities for private equity investment in 2023, according to a private equity expert.

Russel Pillemer, CEO of Pengana Capital, which manages the Pengana Listed Private Equity Trust (ASX: PE1), said the trust was seeing more compelling opportunities in private markets including private credit and the ‘secondaries’ market (buying a stake in quality businesses from other private equity managers).

“Rising interest rates have created more opportunity for private credit following several years of very limited activity in this space, and we have some ability to participate in this space.

“We’re also seeing more potential in the secondaries market, where there are some reasonable discounts for stakes in high quality businesses available.

“The secondaries market opportunities are largely due to managers needing to rebalance their portfolios after a period where listed equities fell in value while private equity continued to grow – hence they are motivated to sell off some of their private equity interests.”

The Pengana Listed Private Equity Trust recently purchased five middle-market funds managed by three different private equity firms, which were purchased at an aggregate discount of around 20% to the 31/3/22 NAV.

The aggregate portfolio has a diversified exposure to 66 companies, blending the potential for distributions over the next 12-18 months, along with potential growth from companies expected to be held for the next three-to-five years.

Mr Pillemer said that while some froth came out of private equity during 2022, many private companies are still growing their cash flows and earnings.

“Private equity investments continued to perform because the bulk of quality private equity investments are in companies which are established, often relatively boring companies, with strong cash flows.

“The cash flows are key because these companies are not relying on future forecast earnings for their valuations. These businesses are therefore not as vulnerable to interest rate fluctuations or market sentiment as public companies or start-ups.”

Mr Pillemer said private equity is a spectrum, from riskier seed capital in start-ups to well established, high cashflow businesses. “Most private equity investments globally are not in the venture capital, more speculative space, they are in well-established, proven businesses.”

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