Against a backdrop of de-globalisation, high inflation and interest rates, economic uncertainty and geopolitical turbulence--such as Russia’s continuing invasion of Ukraine and the conflict in the Middle East--it’s important to take a long-term view, said LPEA president in his introductory remarks at the conference, which is a key perspective in private equity.

But the good news is, “we also know that private equity performs better, relatively speaking, versus the alternatives during difficult times. During downturns. All the evidence suggests that private equity is alpha over public markets and is maximised during downturns,” added Mansfeldt. The worse the stock market performs, the better--relatively speaking--private equity does, though this, of course, doesn’t mean it’s impossible to lose money in private equity.

And all that being said, we’re coming into this period “with the coffers completely stuffed with cash,” noted Mansfeldt. “There’s $5trn of dry powder sitting in private equity funds worldwide.” The industry has a lot of potential.

Macro themes: disinflation, growth slowdown, 1970s parallels

Mansfeldt was also the moderator of a panel dedicated to the buyout market, which featured Britta Harper (Blackstone), Joshua Stone (EQT) and Hind El Gaidi (ICG). Panellists discussed the macro themes and trends they were seeing in the industry, valuations and fundraising, amongst other topics.

For Harper, managing director in Blackstone’s real estate group, disinflation, growth and parallels to the 1970s are three key issues in the macro picture. “We think that the disinflation process is going to be prolonged,” she said. “We do think that inflation is going to continue to drop, but we’re still far away from the 2% target.” Blackstone’s view is that rates are going to be higher for longer, which is being reflected in the stock market.

On growth, Harper thought that it was a matter of “when, not if” a slowdown in growth would be seen in the US, UK and the eurozone.

“For the third one, I would call it parallels to the 1970s,” said Harper. She expects to see continued volatility in interest rates and inflation. “And for that reason, we’re also pivoting into sectors that will have strong income and strong income growth.”

Winners are those who can reap rewards of resilience

Confronted with an uncertain outlook and the increasing cost of capital, general partners have decisions to make, said ICG’s El Gaidi. “In these market conditions, it’s not all doom and gloom, I would say, because there is a runway for growth, and there will be winners and there will be losers. And the winners are the ones who are able to reap the rewards of their resilience.” Those who can differentiate themselves in the market--in terms of client strategy, for example--will have an advantage.

“Valuations are super dynamic, and also defined by industry, of course,” added El Gaidi, but she would expect to see some valuations coming down. Another aspect of note is the evaluation of risk, she said, referring to task forces being put together by the UK’s Financial Conduct Authority and the US Securities and Exchange Commission on this subject. It’s not just methodologies and inputs that are in the spotlight, but also governance.

Science-based targets

Regarding sustainability, ESG criteria and valuations, EQT’s Stone mentioned that “we are pushing all of our companies to sign up for SBTs--science-based targets.” A number of companies have signed up for this so far, he noted. Once you get more companies, you get more data and then you can start to track this against valuations.

AI transformation

“We see AI as one of the mega-trends , as technology transforms the way in which we work and in which we live,” said Blackstone’s Harper, who added that they’re seeing “a huge demand for processing power.” A ChatGPT inquiry, for instance, requires 10 times the computing power of a Google search. There will be an “exponential growth” in the need for computing power, and “that makes computing, data centres, the ecosystem and the suppliers around them the key for us to focus on going forward.”

More infrastructure for data storage and data processing will also be key as more and more data is created.

“Our feeling is that we’re just in the early innings of that trend, and it reminds us a little bit of where we were in logistics as e-commerce started to take off,” she said. But the sector also has higher entries to barrier, such as land use approvals or expertise.

Words of wisdom

To conclude the panel, Mansfeldt asked the speakers: to somebody entering the private equity space, what would be a piece of advice that you’d like to offer?

“Pay attention to fundamentals,” said Harper.

“Think ahead, all the time,” was El Gaidi’s recommendation.

Keep in mind, said Stone, that private equity “is definitely a long-term product.”