Steffen Pauls led KKR in Germany for over eleven years before becoming CEO of Moonfare. In 2015, he left the American investment company with a new goal: making private markets accessible to individuals. He understands all too well this target group sometimes has ethical concerns regarding this sector.
Pauls speaks to Investment Officer from his home in Munich - a rare moment of peace for the CEO who normally divides his time between offices in Europe, the US, and Asia. His company Moonfare, one of the first private equity platforms for retail investors, serves more than 4,000 clients and operates in 22 countries. And so does Pauls.
Is such a life recommendable?
“One of my sons recently told me he also wants to pursue a career in private equity. Not a bad idea per se, as long as he’s not doing it just for the money. Life is short, and one way or another, you’ll earn your money.”
“But I genuinely enjoy my work. Additionally, people sometimes forget that our work is also beneficial for society,” said Pauls, also the founder and CEO of 7 Global Capital, a Luxembourg-based private equity boutique operating from Silicon Valley with $400 million under management.”
How do you help society?
“Since the turn of the century, the percentage of companies seeking a stock market listing in the United States has been decreasing. Nowadays, 88 percent of all US companies with revenues exceeding $100 billion are privately owned. So, despite some investors thinking differently, by far the majority of investment opportunities are in the private market. What we’re doing now is democratizing that market: providing more people access to assets that until recently were only bought by institutional investors.”
Is investing solely in the stock market no longer sufficient for a retail investor?
“Not if you want to outperform the market. If you select the best private equity firms, the top quartile, you consistently outperform the S&P500 by several percentage points. However, you can’t just throw a pile of money into a bunch of companies and hope for outperformance.”
“Active management is required for alpha, something almost unattainable in the public market. Major buyout players like KKR, Carlyle, or Blackstone have the resources and expertise to implement operational improvements as owners of a company and influence the company’s strategic agenda.”
It’s sometimes claimed that large private equity firms are plunderers. Do you understand that complaint?
“That complaint is familiar and not entirely unjustified. There was a time when private equity firms were indeed plunderers. Portfolio companies were broken up and a lot of assets were sold off, and after pocketing bonuses, they left the companies for dead.”
“However, that has fundamentally changed for most of the industry, especially for the well-known names I mentioned earlier. They are all public blue-chip companies with an incredible amount of oversight.”
“Institutional investors are becoming increasingly demanding when it comes to certain societal or ethical standards. Firms that do not meet those standards will ultimately go bankrupt.”
“There will always be black sheep that fly under the radar. Some of them don’t have the best impact on their portfolio companies, society, or the reputation of private equity.”
Many organizations, including the IMF and the ECB, regularly warn about the systemic risks of private equity investments, especially private credit. Are you ever afraid they might be right?
“We’ve seen a hype in private credit. Investors have poured enormous sums of money into that market over the past 18 months. Many companies have started using those loans, but because capital has become very expensive, it eats into the returns. The likelihood of defaults by the portfolio companies of private equity firms therefore increases enormously.”
“So it’s entirely justified to warn about risks in the private lending market, especially the commercial real estate sector in the US is a ticking time bomb. I believe we will see more and more defaults. That’s inevitable.”
Does that mean disappointments will be greatest in the US?
“No, quite the opposite. I believe we will see a soft landing in the US, which is a miracle. However, expectations regarding the European economy were overly positive at the time these credit investments were made. Investors, in my opinion, didn’t properly factor in the economic downturn in Europe.”
That sounds concerning.
“I actually think that 2024 and 2025 will go down in history as two of the best years for private equity. Valuations in private markets lag about 12 to 18 months behind public markets, and we’ve seen incredible peaks there. Also, multiples in private markets are generally very reasonable at the moment. So, we will probably soon see significant increases in value.”
Further reading on Investment Officer Luxembourg:
- IMF sounds alarm over perils in private credit markets
- Eltif 2.0: Moonfare pioneers liquidity matching mechanism
- McKinsey: Private markets hit a rough patch