Outlook for growth equity is positive, portfolio tweaks imminent
Public markets’ lackluster performance will direct PEs to focus on transforming their portfolio positions
As per a report by Preqin, buyouts, growth equity, and venture capital account for about 69% of the PE spacev. PE firms, whose funds have long been a core holding for pensions and other institutions, are racing to develop new products that will appeal to wealthy individuals, marketing these to financial advisers who manage their money.
To conclude, the current trend in growth equity shows that uncertainty in the market is significant and is unlikely to return to the successful listings and value creation last seen in 2020-21.
Public listings, which had driven PE exit value in the past six quarters, slowed significantly in 1Q22. This resulted in an increase in the holding period and a focus on asset portfolio, as well as the need for LPs to look for liquidity via sponsorship sales.
To quote a major PE consultant, “It will be essential to help management wring out revenue gains, preserve (and even expand) margins, and manage cash on the balance sheet. At the same time, it will be important to help future-proof the business by focusing on key initiatives such as environmental, social, and corporate governance.”
Tweaks in strategy
PEs have identified two key focus areas in addition to their business as usual:
i. Consult their portfolio companies for more efficient operations, help them create value, and be prepared to exit as soon as the market normalizes.
ii. Fully understand the microeconomics of the sector, the value creation levers available, and the risks they are underwriting. There are now inflation playbooks developing across the GP and LP landscape as investors race to protect margins and future returns.
That said, PEs are known to have a finger on the market pulse. So, when they sense a shift, we will see their strategy change again.