There is potential for a rebound in valuations and multiple appreciations in global private equity as previous headwinds abate for the asset class, according to a private equity specialist.
Fred Pollock, Chief Investment Officer at US private equity powerhouse GCM Grosvenor, which manages the Pengana Private Equity Trust (ASX: PE1), the only true access point to a diversified portfolio of global private equity investments for Australian investors, anticipates that global private equity will benefit from stronger activity levels across 2024 as buyers and sellers meet at more reasonable prices following sharp reversals in 2022. “Previous headwinds are now looking like potential tailwinds for PE.
“Lows were seen in 2023, by which time multiples had contracted significantly. Cashflows however, certainly for a number of the companies in the PE1 portfolio, grew during this time, which resulted in portfolio valuations remaining stable. But over the first half of 2024 multiples for the industry as a whole have started to recover.”
Mr Pollock said private equity demanded a longer-term view than most asset classes. “Longer term diversification is important for a private equity portfolio, and this includes diversifying across economic cycles, by making investments over multiple years. PE1 is now fully invested, having taken advantage of the dislocation to add some investments to the portfolio at more attractive valuations.
“The portfolio is diversified across sectors, industries, transaction types, and strategies, with a focus on US-based ‘middle market’ companies, often family-owned businesses, valued between US$500 million to US$1.5 billion.”
Private equity returns are typically measured with reference to the internal rate of return (“IRR”), which takes account of the time value of the cash flows into the investments. Since its inception to 30 June 2024, the underlying investments in the PE1 portfolio have generated a 17% IRR, exceeding the upper quartile of global private equity returns during that period. A higher proportion of the underlying returns are expected to flow through to PE1 now that it is fully invested.
Mr Pollock said the PE1 portfolio was seeing an uptick in exits and realisations, and that the global PE market seems balanced overall.
He also said the US Federal Reserve’s rate reduction was contributing to tailwinds. “The cost of financing has pulled back and there are forecasts that rates will continue to come down – not to zero, but back to a more middling level.
“High interest rates have had an impact in the short term. Markets went from being frothy during 2021 to relatively quiet for deal activity in 2023, following those rate hikes.
“But 2024 is on pace to outstrip 2023 in terms of activity.”
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