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April 11, 2024

Industry Trends

Navigating the global private equity 2024 landscape

It discussed the challenges and changes in the private equity industry over
the last 24 months. Despite concerns about a potential recession, the

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economy has remained stable with record-low unemployment, reasonable

growth, and surging public markets in the US. However, these conditions
have put pressure on General Partners (GPs) to find liquidity solutions and
devise new ways to generate profits. It suggests that the industry needs to
focus more on generating strong, profitable, organic growth rather than
relying on multiple expansion and revenue growth. It also discusses the
need for funds to appraise their portfolio companies and consider
innovative solutions like continuation funds, securitizations, and NAV
financing. It highlights the importance of professionalizing fund-raising
and communicating effectively with Limited Partners (LPs). Despite a 20%
drop in overall deal count and a 24% fall in exit transactions in 2023, the
industry has demonstrated resilience. It concludes by noting the enduring
appeal of private equity for LPs due to its steady long-term returns and
diversification. At a glance, private equity continued to reel in 2023 as
rapidly rising interest rates led to sharp declines in dealmaking, exits, and
fund-raising. The exit conundrum has emerged as the most pressing
problem, as LPs starved for distributions pull back new allocations from all
but the largest, most reliable funds. The long-term outlook remains sound,
but breaking the logjam will require more robust approaches to value
creation and rapid innovation in liquidity solutions.

Source: Bain & Company

2024 Analysis: Decoding private equity in Asia-Pacific

In 2023, deal value in the Asia-Pacific region fell to $147 billion, a 35%
decrease from the previous five-year average and a 59% drop from the
2021 high of $359 billion. This extended the dealmaking slump that began
in 2022. The average deal in 2023 was 7% smaller than the prior five-year
average, and there were fewer megadeals. However, the average
megadeal was 30% larger than the previous five-year average. The
technology sector, which represented the largest share of deals in the
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region, saw its share fall to 27% from the prior five-year average of 41%.
The energy and natural resources sector was the only one to record an
increase in deal value and deal count. Global fundraising declined by 17%,
with Asia-Pacific-focused funds falling to 9%. These funds raised $100
billion, a 26% fall from 2022 and a 60% drop from the prior five-year
average of $248 billion. Despite the fundraising difficulties, the estimated
level of dry powder, or total unspent private equity capital, remained
consistently high.

Source: Bain & Company

Europe’s growth equity landscape

Growth equity, referring to investments in fast-growing companies with

revenue growth of 20% per year or more, is a compelling segment for
private equity (PE) firms and institutional investors in Europe. The market is
fragmented with about 1,500 transactions per year and concentrated
among investment firms. Over the past five years, investors have raised
over $100 billion to invest in European companies in the growth equity
stage. The number of growth equity deals in Europe grew from 1,200 to
nearly 1,600 between 2018 and the first half of 2021. However, deal
volume has contracted significantly since the second half of 2022 due to
high interest rates and reduced investor appetite. The market is highly
fragmented and concentrated, with the top ten fund managers accounting
for 45% of raised capital. Strategies for investors include looking at
companies that will soon grow beyond the venture stage, focusing on
mature verticals with strong growth equity investment, and considering
less mature sectors with a large volume of VC deals but limited growth
equity funding. The most promising sectors include biopharma, analytics,
financial technology, payment providers, sustainability technology
companies, e-commerce software and technology, marketing technology,
and customer relationship management.
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Source: BCG

Market Sentiments

The evolution of venture capital in 2024

There is a changing landscape of venture investment and dealmaking,

particularly in the wake of a challenging year for private capital. The total
venture investment in the third quarter of 2023 was $73 billion, a
significant drop from previous years. However, the promise of interest rate
cuts in 2024 is offering a glimmer of hope for startups and investors. The
three ways that the dealmaking landscape is likely to evolve in 2024 are:

1. VCs will proceed with cautious optimism: There is a shift towards more
deals in Series B+ stages, and the dominance of AI as an area of
investment is set to continue. However, investors are spending more time
than ever researching deals, acting with caution after a tough year.

2. Relationships and brand trust are critical to doing deals and

fundraising: The focus has shifted from deal sourcing to expanding
networks and strengthening existing relationships. Most VC and PE
investors are centralizing all the real-time network data that sustains
relationships across their entire firm.

3. AI combats deal complexity and competition: Firms are planning to

adopt more AI across their workflows in 2024 to drive productivity,
accelerate researching companies of potential interest, and decide
whether or not to invest in a company. AI can help streamline the deal
research process and allow investors to reach data-backed decisions faster.

Source: Forbes

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Direct lending outlook: High return potential, more deal activity

In our view, 2024 could extend the trend of rewarding years for investors
in direct lending strategies. While higher-for-longer interest rates, slower
growth and stickier inflation may present challenges for some borrowers, It
is not expected that credit losses to become unhinged. Instead, the
benefits investors are seeing from higher rates will outweigh pockets of
concern in portfolios and create attractive new opportunities for selective
lenders. High interest rates in 2023 cooled deal activity, which had hit
record levels in 2021 and 2022. Despite the lower volume, returns for
investors in direct lending peaked last year, as the benefit of higher rates
and the recoupment of mark-to-market markdowns taken in 2022 more
than offset a modest uptick in losses. Here’s a closer look at what the
investors can expect this year:

1. A (Moderate) Decline in Asset Yields, but Above-Average Return

Potential

2. Emphasis on Asset Selection, Portfolio Construction

3. More Robust Deal Activity

4. A Bigger Opportunity Set

Even with yields likely to moderate from their 2023 peak, the returns will
exceed those seen in prior years. Of course, some borrowers are likely to
struggle with higher rates, so the key for investors will be finding a
manager well-positioned to minimize losses. It is believed that direct
lenders who maintain discipline and stay selective will be best suited to
deliver strong risk-adjusted returns.

Source: AllianceBernstein

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Restructuring wave coming for private equity

In 2023, a record number of private equity owned companies filed for

bankruptcy due to heavy debt loads and rising interest rates. Among the
642 total bankruptcy filings, 104 were of PE-backed and venture capital-
backed companies, marking a 174% increase compared to 2022. Medical
apparel provider Careismatic Brands, a portfolio company of Swiss PE firm
Partners Group, filed for Chapter 11 to eliminate $833 million of its debt
and reduce its interest rate burden. The company's interest expenses rose
to $64 million in 2023, a 179% increase compared to 2019. Seth Friedman,
managing director at Abacus Finance, noted that fixed charge coverage
ratio covenants have become important again in loan covenant packages.
He also mentioned that PE firms are prepaying debt to reduce the burden
on their portfolio companies. René Canezin, a managing partner at
Evolution Credit Partners, stated that lenders consider three scenarios in a
stressed environment: the company's need for time to adjust to a rate
increase, whether the business model is broken, and whether the rate
increase revealed that the business model won't work in a normal rate
environment. He also mentioned that most companies are able to amend
and do soft restructurings.

Source: The Middle Market

Market Opportunity/ Challenges

Infrastructure debt – An attractive component in private credit portfolios

Infrastructure debt is an advantageous component of private credit

portfolios. It is believed that infrastructure debt can enhance private credit
portfolios by providing improved diversification with an illiquidity
premium compared to public assets, attractive risk-adjusted returns and
downside protection, while benefitting from infrastructure-specific

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characteristics. There are four fundamental characteristics of private

infrastructure debt, which make the asset, class an attractive component of
a private credit portfolio: 1. Low Correlation to Corporate Credit, 2.
Consistent Performance Across Economic Environments, 3. Compelling
Risk-Adjusted Returns, 4. Lower Risk than Equivalent Corporate Debt.
Furthermore, it is believed assessing the potential benefits of infrastructure
debt is warranted, given the long-term, durable market tailwinds of the
asset class:

• Digitalization, increased mobility and decarbonization trends are

driving increased demand for infrastructure. It can be seen that there will
be increased regulation, social evolution and technological advancements
underpinning these trends now and in the future.

• Constrained public investment and bank retrenchment have led to a

recent supply and demand imbalance for infrastructure equity and debt,
creating opportunities for private markets to fill in the gap.

• The increase in infrastructure equity projects and required financing

has resulted in greater need for debt capital providers, as returns for
infrastructure equity investors are largely predicated on the amount of
financing they can raise.

Global infrastructure investment is expected to exceed $3.7 trillion a year

through 20351, with a total gap of $5.5 trillion over the same period that is
expected to be funded by private investors, whether via debt or equity. As
private lenders have become increasingly critical as a source of capital for
infrastructure development, it is believed that the market will continue to
provide attractive opportunities for scaled, and experienced infrastructure
lenders.

Source: Ares Management

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The disintermediation of lending - Private debt shines bright

In the realm of alternative assets, private debt has emerged as shining star,
experiencing a rapid evolution and now basking in what many are calling a
golden moment. Amid rising interest rates, private debt has remained
remarkably resilient, delivering robust returns, and attracting fervent
investor interest.

1. Disintermediation of lending: Recent events and stress in the banking

sector have accelerated the shift of lending from banks to private players,
with institutional investor stepping in to fill the void.

2. Growth of private debt: Private debt, particularly to companies backed

by private equity, is rapidly expanding and forecasted to reach USD 2
trillion by 2027, competing with traditional funding routes.

3. Regulatory implications: Tighter regulations on banks may further

drive the growth of private debt markets, with regulators preferring
institutional investors as lenders.

4. Opportunities in commercial real estate: Reduced lending by regional

banks presents opportunities for private debt providers to enter the
commercial real estate sector, albeit with challenges such as covering
financial costs.

5. Challenges and caution: The rapid growth of the private debt market
brings challenges like unorthodox underwriting techniques and increased
leverage, emphasizing the importance of disciplined underwriting and
seniority in the capital structure.

6. Regional nuance: While the US leads in the private debt market, Europe
and Asia also show promise, albeit with regional differences in banking
focus and regulatory frameworks.

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The disintermediation of lending from banks to private players represents

a significant shift in the financial landscape. Private debt presents a wealth
of opportunities for investors and borrowers alike. However, navigating
this complex and rapidly evolving market requires careful attention to
regulatory changes, disciplined underwriting practices, and a nuanced
understanding of regional dynamics. By staying informed and adapting to
market trends, investors can capitalize on the potential of private debt as a
valuable asset class in 2024 and beyond.

Source: UBS Asset Management

Artificial Intelligence Scope/ Trends

Harnessing generative AI in private equity

Generative AI technologies are causing significant disruption across

industries and business functions, including private capital. Firms are
leveraging AI to gain insights into potential impacts and opportunities
across their portfolios, streamline or automate back-office functions, and
enhance the underwriting process. For instance, CVC applied a generative
AI lens to over 120 of its portfolio companies to prioritize investment.
Italian online educator Multiversity Group used generative AI to answer
routine student queries, saving professors' time. Generative AI can also
bolster due diligence by providing a more comprehensive picture of a
target company’s prospects. Tools can analyse large amounts of customer
reviews and convert unstructured text data into structured formats,
enabling deal teams to focus on generating insights. Generative AI can
also transform fund operations by speeding up the sourcing and
evaluation of deals. It can reduce the screening time per company from a
day to an hour, making team members more productive. AI tools can also
scrape and analyse vast amounts of data, generating clear, analytical
reports. Firms are advised to scan their portfolios, link AI initiatives to

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strategic objectives, manage change effectively, build fluency in generative

AI tools, and consider how AI can transform their operations.

Source: Bain & Company

Expert Opinion

Private Equity’s next big leap

AI is potentially a game-changer for PE firms seeking advantage in an

ocean of data. If widely and responsibly deployed. It can help unlock
incredible value previously unobtainable. The rise of Generative Artificial
Intelligence (genAI) has made AI a priority for private equity (PE) firms.
GenAI can create opportunities for PE firms, making their deal-making
process more effective and improving the performance of their assets.
However, harnessing genAI requires technical capabilities that many funds
and portfolio companies lack. AI can make humans more productive and
accelerate human creativity. There are three major opportunities for PE
firms to create value with genAI: improving the speed and quality of the
deal process, applying genAI post-close during integration and across all
portfolio companies, and freeing up a third of all knowledge worker hours.
However, only 24% of PE firms are using AI effectively. To unlock the full
value of AI, high-quality, contextual, indexed, and searchable data is
needed.

Here are five actions Per and Chris recommend that PE firms can take now
to keep up the pace:

1. Unleash the power of your people: Start with a bottom-up approach,

make AI tools available for everyone to find their own ways to cut hours
from their work. This could prove very effective in freeing up to 40% of
people’s time — even without proprietary data and training.

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2. Pilot high-value use-cases: Launch pilots to demonstrate the power of

combining AI models with your proprietary data to build tailored high-
value applications for both the fund and select portfolio companies. The
aim is to generate a ‘flywheel effect’ where humans and machines
collaborate and amplify each other’s performance and learning. For
example, analyse the tasks most knowledge workers spend time on, then
pick a subset of these where AI can have an impact. Then build these
applications instead of selecting use cases that aren’t well suited for AI
development or offer lower value to fewer people.

3. Shape your workforce transformation: Most of the near-term value

generated by AI will come from augmenting the existing workforce to free
up time from a subset of their tasks. To scale broadly will require a
carefully designed workforce transformation, with a tailored approach by
key roles and focus on behavioral change. A first crucial step is to carry out
a value assessment, based on census data and impact benchmarks by
industry, function and role. This aims to size the magnitude of the value at
stake, where in the organization this resides, reinforced by actual data
from the first two efforts to inform the business case for the investment.

4. Accelerate data modernization: Data is the essential fuel for the highest
value AI applications. In a world where speed can make or break a deal, AI
is redefining what’s possible, but data access and governance underpin
that goal. Not only do you need to have the data, but it also needs to be
in the right place, making data cloud capabilities vital for all PE firms. In
many cases, cloud efforts were started before AI but must now be
accelerated and funded to meet shorter timelines and higher expectations.

5. Launch ‘Trusted AI’ governance: Given the scale of disruption that AI is

likely to create, almost every PE firm will need to take action to minimize
risks of widespread adoption. This includes adopting a ‘Trusted AI’
governance framework, ensuring compliance with emerging regulations
and upgrading cyber-protection.

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Source: KPMG

‘Wealthtech’ and changing regulation present opportunities for PE firms

in 2024

Christian Kent, a Managing Director at global investment bank Houlihan

Lokey, believes that private equity firms can capitalise on opportunities for
modernisation, digitalisation, and consolidation in the wealth management
sector. The Financial Conduct Authority's consumer duty regulation has
put pressure on the approximately 5,000 independent financial advisors
(IFAs) in the UK to manage their compliance. As a result, many smaller
firms are seeking to join larger organisations to better manage compliance
and focus on client services. Kent notes that compliance is a differentiator
and well-invested platforms can hire the best people. He also observes
that larger firms are getting more enquiries from smaller IFAs due to
consumer duty. The UK wealth management sector is growing due to an
ageing population and pension reforms. Kent also highlights that the
sector is ripe for digitalisation, with wealth management technology
companies becoming prime targets for private equity deal activity. He cites
FNZ and InvestCloud as examples of larger private equity-backed
businesses that have capitalised on wealthtech. Kent believes there is room
for consolidation in the UK market, with a trend of private equity-backed
platforms moving up the size spectrum.

Source: Private Equity Wire

We hope you find these interesting and insightful. If you want to know
more about our Private Equity offerings, check out our webpage below.

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Private Equity
We help private equity & venture capital firms with
deal sourcing & evaluation, post-close support,
portfolio monitoring, and PortCo support.
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Deepesh Bhatnagar Harish C N Guneet Kaur Julka

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