Despite declining valuations in private equity, Schroders Capital’s European private equity chief Richard Damming remains confident, dismissing concerns as mere industry “noise”.
In the face of fluctuating private equity valuations, Damming reassures that they remain undeterred. “You sell a company at the price you want to sell it for, and otherwise you don’t sell it,” says the head of Schroders’ European PE branch.
“For a private equity professional, it’s essential to approach the asset class as public equity,” said Damming, when asked about private valuations. “But you invest in a firm for roughly five years, have a growth plan and position it for an exit. If the sale doesn’t pan out, you let the company flourish and keep reaping profits until a successful sale.”
Warnings about private equity are gradually echoing louder. Last year, global private equity funds witnessed a fall of over eight percent, based on data from Burgiss. Concurrently, valuations are feeling the heat, and dry powder, as Van Lanschot Kempen reports citing Preqin data, is nearing a record peak.
Equity for all
As private markets democratise, comparisons with their public counterparts intensify. Consequently, valuations are under the microscope more than ever. Damming fields such questions increasingly but dismisses them as mere “noise”.
This democratisation trend, prevalent for a while, has witnessed the emergence of semi-liquid funds since 2007, retail top-ups from 2013, and Eltifs starting 2015. These are all variants of private equity investments, some of which Schroders offers. Such instruments demand more transparency regarding valuations. Damming explains, “For semi-liquid funds, we have to provide monthly NAVs. This way, investors can make monthly entries and quarterly exits based on the valuation.”
Two-way trend
Two key drivers power the democratisation trend in private markets. The first is the widespread notion that individuals too seek the lucrative returns seen by institutional investors.
From a fund manager’s perspective, Damming comments, “Institutional clients, especially from developed markets, are heavily exposed to private equity. These investors are presently over-allocated as public markets have plummeted. Thus, they’re holding back from new private market commitments, seeking newer investor types instead.”
Newbies in focus
New entrants in the arena, especially private banks like InsingerGilissen and ING, are now tentatively exploring private equity. Initially, they gravitate towards the major players, focusing on big buyouts. This approach might not be the most strategic now, but it’s a logical first step.
Unsurprisingly, newcomers are zeroing in on this specific category. Big deals have showcased impressive performance lately. As per Van Lanschot Kempen, from January 2018 to 2023, private equity buyouts outpaced their listed counterparts by a factor of two. However, venture capital’s performance over this span closely aligns with the Nasdaq Composite.
Damming concurs but also underscores the favourable conditions for these transactions, citing the low-interest-rate climate. “During the boom times, the revelry was ceaseless,” he recalls.
Shifting focus
Contrary to the trend, Schroders consciously zeroed in on low and mid-market deals. Damming believes these deals, though smaller in scale, can yield returns parallel to mega cap buyout private equity but with reduced risk. “Bigger companies are closely tied to public markets, making them more cyclically volatile. Due to their considerable debt, these big deals are now feeling the pinch of rising interest rates,” he elucidates.
Schroders’ focus is on promising small and medium buyouts. Last year, this strategy yielded an uptick of about five percent. Most of the firm’s funds comprise 60 percent primaries handling deals ranging from €100 million to €400 million, 20 percent co-investments, and 20 percent secondaries. Damming justifies this allocation saying, “Primaries ensure diversification and long-term returns. Co-investments, on the other hand, allow for more defined choices.”