Private assets

Is the future of investing private?

December 02, 2024 - 4 min read

Eric Deram

Managing Partner – Flexstone Partners

What are the macroeconomic trends driving private equity?

In terms of macro drivers, interest rates have always been the key driver. We've seen this over the last two years when interest rates increased very substantially, very steeply, we saw a very deep downturn in terms of activity of private equity. Now, we expect interest rates to continue to decrease a little bit, but they will remain higher than they used to be over the past few years. As a result, we see two implications for private assets or private equity in general:

One is a rebound of activity. And we've seen this over the last quarter or so in terms of deal flow and general M&A activity.
The second one, which is a little bit counter intuitive, is on performance. Higher interest rates actually drive higher performance in private equity, because it forces discipline throughout the value chain.

The bottom line though, as far as Flexstone is concerned, is that private equity activity and returns go up and down depending on macroeconomic environment or macroeconomic events , but our recommendation has always been - and will continue to be - to invest consistently.

Private equity activity seems to have peaked around 2021. Is it declining since?

I don't think private equity activity has picked over the last few years. Certainly, we saw a high in 2021, but that was really a catch up for 2020 and 2019 due to Covid. Going forward, we expect private equity to continue to grow double digits over the foreseeable future. There are many reasons for that, and I think the main one - and this is my favourite phrase or sentence affirmation this year - is: the world is private. Wherever you look at, 80% plus of companies are in private hands and you need private equity to finance that economy. In addition to this, you have a significant growth of interest for the asset class from private individuals - High net worth individuals. In addition to this, private equity in general still represent only less than 10% of the total capitalisation of the public stock exchanges on a worldwide basis. For all these reasons, we certainly do not see private equity numbers as having peaked today.

What are the opportunities in private equity going forwards?

In terms of opportunities going forward, one needs to understand that at Flexstone Partners, we have always believed that diversification is by far the best defence against anything that can happen, to returns of a portfolio in particular - private equity portfolios. So, we always thrive to diversify as much as we can in every single program we manage. That being said, we do emphasise, over the near term and the medium term, clearly the US and Asia over Europe. In terms of type of investment funds, the Evergreen semi-liquid funds will grow very substantially.

Secondaries are also very interesting as well as co investments. In terms of sectors, we continue to shy away from heavily regulated sectors regardless of the environment or regardless of the geography. And finally, as you know, we focus on small & mid-market and we remain convinced this is the sub sector of private equity which has the best chances of delivering superior alpha.

Do you think individual investors will play a part in private equity’s growth in the future?

We certainly believe that the interest from private wealth or private individuals for the asset class is growing very substantially. Every single asset manager is raising an evergreen semi-liquid fund, and we believe this is a very exciting and interesting development for the asset class going forward, both for fund managers such as Flexstone Partners, as well as investors.

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