IPEM Paris 2024 – The Daily Spin – September, 11th
Discover a summary of Wednesday at IPEM Paris 2024 with the Photo Gallery (relive our events: Comms & Marketing Lunch, Wrap Party), the TV Studio Interviews, and the Video Highlights!
Find below the full Photo Gallery of TUESDAY, SEPTEMBER 10th
Find below all the TV Studio Interviews of TUESDAY, SEPTEMBER 10th
Find below all the Video Hightlights of TUESDAY, SEPTEMBER 10th
More specialization. More innovation. More opportunities to adapt and grow: A feeling of genuine optimism on Monday Sept. 9th of IPEM Paris 2024.
A packed auditorium at the Palais des Congrès saw Antoine Colson, CEO and Managing Partner IPEM introduce the Day 1 theme, “At a Crossroads: How the private market industry is adapting in harder times.” And judging by the numbers, there were plenty of eager minds, keen to hear from their peers. In total, 2,000 firms were in attendance, including 800 GPs and a record 1,300 limited partners.
“Thanks to everyone joining us this week on IPEM’s mission. We really want to be the hub for the industry to grow together and to stay as a united community of private capital investors,” said Colson.
After a period of upheaval and ongoing challenges, this is a time for GPs to reflect on what needs to be done to ensure they are back to being ‘okay again’. With LPs assessing where they should be changing their allocation weightings, and whether to stick, quit or double down on certain asset classes, the conditions are right for PE firms to adapt, evolve, and seek out ways to ‘forge confidence’.
In a captivating opening discussion, “Having the confidence to forge ahead in private markets”, KKR’s Mattia Caprioli and Tara Davies remarked that some of the best PE vintages have been in times of dislocation. Buying companies in periods of dislocation may have higher risks but it gives GPs time to drive value although it was noted that bid/ask spreads are still quite wide. One of KKR’s investments, a hairdressing business, has tripled its profits post-Covid.
KKR’s discussion emphasised the importance of bottom-up investment strategies, citing the Telecom Italia deal as an example of private capital solving corporate challenges. Moreover, infrastructure is a politically neutral asset class, meaning it doesn’t necessarily suffer from the volatility experienced by other asset classes during times of political uncertainty.
Even though M&A activity has not really picked up, and IPO markets are still relatively shut globally, “the reality is, when we look at our numbers, we’ve been much more active this year than we were last year,” said Caprioli.
Thematically, he said the most compelling areas for the firm today include digitization, AI, energy transition and changing demographics.
With distributions down and exits still struggling to build momentum, there is no denying that there is some level of tension between GPs and LPs. Firms are under pressure to provide much needed DPI, given that the average yield has fallen to a multi-year low. A lot of funds were raised in the last few years, and that requires returning capital to investors, “so there is tension rising on the monetization side. But that to me brings to the point that ultimately this bid offer spread we’ve all been talking about for the last couple of years is starting to narrow. There will be more opportunities to find matches when private equity investors start moving assets and we’re going to be bidding for those,” said Caprioli.
Technology as a confidence builder
As investors look at the world today, with all of its shifting power dynamics and technology-driven disruption, there are ways for private markets firms to capitalize on long-term megatrends. And reinforce the deep pool of confidence that LPs have enjoyed over the last decade or more.
Steffen Meister, Partner and Executive Chair of the Board of Directors at Partners Group gave a compelling presentation on the outlook for private markets entitled “Private Markets: The New ‘Traditional’ Asset Class in a ‘Brave New World’.” In his view, the next generation of technology will be THE game changer in the next 10 to 15 years. Business innovation transformation has the potential to be an economic tsunami, generating huge shockwaves beneath the surface of global markets. AI/technology will drive faster innovation and enable companies to transform at scale and speed, particularly in industries including pharmaceuticals, materials science and energy markets.
In his presentation, Meister highlighted a number of areas of fundamental transformation including:
🟠 Industrial Automation
🟠 Analytics and Digital Enablement
🟠 Smart Cities
🟠 Water infrastructure
🟠 Supply chain infrastructure
🟠 Clean Power
Meister noted that this could represent approximately a $30 trillion investment opportunity for successful private markets investors to unlock. Re-globalisation and Re-shoring represent significant opportunities in this context.
Weather the storm
Investing through cycles is the best way for any private equity firm to navigate current and future shocks. That builds confidence. Speakers on the “What it takes to be an all-weather investor” panel discussed the need for the industry to focus on resources right now, including AI capabilities, talent acquisition, operating partners, in order to ensure that they can generate sufficient value and sell companies at higher multiples in the years ahead. Alignment, collaboration, spreading carry as far as possible across the team to include even the most junior partners…these were regarded as key aspects of being a successful all-weather investor.
As Nikos Stathopoulos, Managing Partner, Chairman of Europe, BC Partners remarked, culture is important “and the biggest challenge is to maintain a strong culture that people feel they can be a part of. This is a partnership industry.”
No one can ever predict future shocks or recessions but what came across loud and clear during the morning sessions at IPEM Paris 2024 was the commitment by GPs to remain true and faithful to their respective investment philosophies, cognisant that private equity is a cyclical asset class. The PE industry has enjoyed a boom time, growing year-on-year for well over a decade. A slowdown, a pause, is no bad thing.
Good businesses with bad balance sheets
In private credit, investors are seeing big opportunities in areas such as asset-backed finance, “where we have the chance to build highly diversified portfolios”, remarked Armen Panossian, Co-CEO and Head of Performing Credit and Portfolio Manager, Oaktree Capital Management.
Speaking on the topic of “how to invest like a contrarian”, Panossian noted that rescue lending was another interesting investment area for the firm; especially over the next few years when sponsor-owned companies that are highly levered and facing financial stress/distress need to refinance. Panossian clarified that “good businesses with bad balance sheets” would inform how they identify potential deals in the coming years. There are some great bargains to be had, moreso in the US. Healthcare services are at the top of our list,” he said. Certain areas of technology could also present opportunities.
Investing in a fragmented world
On the panel session, “Investing in a fragmented world”, the discussion emphasized the resilience of infrastructure investments, which continue to attract LP due to their consistent performance and inflation-linked revenues that mitigate rising interest rates. “The big difference with infrastructure is hopefully non-erodable franchise value. It’s a business that compounds slowly over time. Duration is your friend,” remarked Michael Dorrell, CEO and Co-founder, Stonepeak Infrastructure Partners.
One interesting theme that was presented on the panel was the downward trend in distribution yields in recent years, which have contributed to LP uncertainty to some degree within private equity. As Ivan Vercoutere, CIO & Managing Partner, LGT Capital Partners, commented: “Show me the money! We’ve gone from a 25% distribution yield to about 15% in 2022 to about 10% in 2023. And if we look actually at the first half of 2024 – especially the first quarter – in some cases it has fallen to single digits, depending on the segment.”
That is putting a lot of pressure on investors’ portfolios. The big question is, with approximately $4 trillion of unrealized NAV, how is liquidity going to be achieved?
Strategies or products providing liquidity will be in high demand: structured financing at the portfolio company level, secondary funds and continuation vehicles at the fund level.
“Any strategy providing new blood in to the financial system will be favoured right now,” stated Benoit Durteste, CEO & CIO, Intermediate Capital Group.
2007 on steroids
Various perspectives on portfolio construction were presented, illustrating the importance of pacing and cyclicality in returns, with early cycle investments yielding significantly higher gross returns than those made late in the cycle. The late cycle environment in 2021 was very frothy; “it was like 2007 on steroids,” said Vercoutere.
A trend toward specialization in private equity was noted, as LPs increasingly favour sector specialists over generalist approaches, with Durteste suggesting that ever larger platforms will become home to specialized strategies. “We are heading towards greater specialization,” he said. This was reaffirmed by Wesley Bradle, Senior Portfolio Manager, Private Equity, Florida State Board of Administration, who brought an LP perspective. He noted that in the early days the portfolio consisted approximately of 70% generalists, now that figure is approximately 70% specialists.
Specialization is expected to continue as the market evolves and adapts to today’s Brave New World, and it will be not the strongest, but those who can best adapt, who will survive. There was a clear sentiment that the industry has a tremendous ability to innovate and evolve – particularly in private equity. GPs will find new ways to add value to their portfolios and get back to that 25% historical average of distribution yields. Indeed, consistency will be king when it comes to DPIs as the exit landscape warms up over the coming years.
Morning Summit Session Key Takeaways
During a packed morning schedule, delegates shimmied their way in and out of a number of Summit Sessions, which began with a far-reaching set of discussions on Venture & Growth Equity.
Speakers remarked that they are seeing a two-tier market, with intense competition for high-quality deals and more creative deal structures for lower-quality companies struggling to raise capital.
Regulatory and compliance software, as well as healthcare software leveraging generative AI, are emerging as attractive investment opportunities, particularly in Europe.
Valuations remain strong for high-growth, high-quality businesses, with bidding wars and premium multiples common, while lower-growth companies face challenges.
An increase in secondary investments, private equity consolidation, and share-for-sale deals were referenced as a way to provide liquidity in the current market environment.
Also, there were some concerns raised about the sustainability and longevity of business models in the artificial intelligence space, as rapid technological changes may lead to quick obsolescence of software and models.
Continuation vehicles are an emerging tool for growth equity firms to provide liquidity to LPs while maintaining business continuity, but it was noted that standardisation of terms and processes are needed.
Successful growth equity firms are taking a versatile, platform-based approach, spanning early-stage to late-stage investments, to build relationships and capture opportunities across a company’s lifecycle.
On the AI side, firms are developing proprietary AI-based tools to aggregate data, map markets and qualify potential investments more efficiently. Governance and data labelling are critical challenges in leveraging AI for investment decisions, as firms need to ensure proper data handling and model neutrality. Regulation of AI, particularly around energy consumption and infrastructure, was raised as an important consideration for investors as they navigate the evolving AI landscape.
Within DeepTech, despite an overall decrease in venture capital investment, the sector is still growing. Integrating the investment approach from early to later stages is crucial to de-risk deep tech investments, as the sector requires different considerations compared to traditional SaaS investments.
Speakers referenced the need for continued investment, both public and private, to support the growth of Europe’s deep tech ecosystem to help it catch up with global hubs like the US.
For the Infra & Real Assets Summit, industry experts delivered a series of compelling insights to the audience, with clear suggestions that digital infrastructure is the most booming sector along with decarbonization. Changes in European regulation are helping accelerate digital infrastructure such as data centers and fiber optic networks. The power needed to operate data centers is tripling every eight years. There was 259 hyper scale data centers in 2015 and 992 in 2023. That number is forecast to reach approximately 3000 by 2031.
It was suggested during the summit that fund managers need to incentivize management to align their interest with LPs and GPs. Twenty years ago, the infrastructure business consisted mostly of assets that did not need a lot of management (e.g. road networks). Nowadays, though, much of the value is created almost exclusively by management.
Within energy transition, 2023 was the hottest year ever recorded. As such, the need for private capital to finance the adaptation of Europe’s existing infrastructures and fund energy transition is growing ever more vital. It was also noted that Amazon, Google and Meta are investing a lot in energy to fuel their data centers as the AI revolution continues to build momentum.
So wraps up an incredible day packed with knowledge and a huge amount of upbeat sentiment on how the private markets industry can forge its way towards a new period of confidence. Everything will be okay. Again!
Afternoon discussions reveal the critical role private credit will play in the future global economy
After digesting a rich menu of industry viewpoints throughout the morning, the post-lunch program continued to deliver an impressive ‘feast for thoughts’. And this is hardly surprising when there are so many strategic and operational considerations for GPs to consider as they build their deal books. And look to reinforce their confidence levels when so much of the world is in flux.
Navigating a New Economy: Private Capital’s Expanding Role
The afternoon’s proceedings saw a fascinating discussion featuring Robert Seminara, Senior Partner, Head of Europe & Head of European PE, Apollo, on how private capital is extending beyond private equity to help companies grow and prosper in the New Economy; one that will be dominated by AI/digitization and energy transition.
Scale, duration and custom structures are vital in this regard and those with the biggest asset reserves, including Apollo, will continue to focus on scale to support the world’s biggest companies. For context, Apollo currently manages approximately $700 billion of which around $520 billion sits in its credit business.
“We think of private credit as a real enabler for these companies, to fund their growth. If you want to be talking to the biggest companies, you need the biggest pockets of capital,” said Seminara.
A few months back, Apollo invested $11 billion alongside Intel so that they could put money into a chip facility that they are creating in Ireland.
“If you think about the future that we’re all envisioning with AI, you don’t just need chips, you need data centers, you need the infrastructure around that including green power, and we think a large part of how that’s all funded will be with private credit.”
Apollo has developed a 10-year head start in effectively allocating and structuring insurance capital to earn 300 basis points spreads on deals, which is difficult for competitors to replicate.
Another aspect of scale is the ability to provide customized financing solutions. Apollo has multiple platforms, including an inventory finance business, an aircraft finance business, all of which are originating small loans every single day.
“We put them on the insurance balance sheet. And so we’re getting a double balance; we’re getting the equity increase because we own the equity. But we’re also getting really nice assets for the insurance balance sheet and earning spread,” commented Seminara.
Private Credit: The Backbone of the Global Financial System
As Greg Olafson, Global Head of Private Credit, Goldman Sachs Alternatives, pointed out on the panel “The long runway for Private Credit”, credit formation is at the core of all economies. It’s borrowers and lenders interacting directly. Lenders are better able to assess risk because they are the ones doing the underwriting, there’s no asset/liability mismatch and it is solutions-oriented.
“That’s why it has a long runway. Its foundations are very robust,” said Olafson. “Private credit now competes on size with the broader syndicated loan market and I think its growth is sustainable.”
There was a strong overall sentiment that private credit, with its lack of intermediation, will play a key role in financing the New Economy and present a wide swathe of opportunities. Panelists noted that regional specialisation can provide advantages in origination, portfolio management, and restructuring, particularly in fragmented markets like the DACH region. It was also noted that private credit performance will likely show increased dispersion, as managers’ ability to handle business stresses and restructure capital becomes a key differentiator.
Referring back to the Intel deal referenced by Seminara, the whole premise of an AI future will depend on massive amounts of private capital investment. A single chip facility needs data centers, power production capabilities, transportation, transmission lines…and so the list goes on. This presents a huge opportunity for global credit investors. If different regions of the world don’t spend this money, they’re going to be left behind. “You don’t want to be the continent without AI when the rest of the world has it. And so I think Europe is recognizing the need for this,” suggested Seminara.
A Long Runway: Sustainable Growth for the Next Era
Investors often think ‘direct lending’ and sponsor-owned companies when they hear private credit but it is a far broader church. From asset-backed lending to litigation finance and music royalties, the spectrum of investments is significant. However, the common thread is to provide bespoke lending solutions with a higher spread than traditional capital markets.
Speaking about trends, Taj Sidhu, Managing Director – Partner, Head of European and Asian Private Credit, The Carlyle Group, referred to non-sponsored lending, ABS and investment grade private credit, which, in his view, “is going to be a big growth trend”. On non-sponsored lending, he added: “It is a very large addressable market that historically hasn’t been served by the private credit market. But it requires a specific skillset to underwrite and portfolio manage.”
As the long runway seemingly looks set to extend for years to come, it will increasingly require local market specialization, especially in respect to origination and portfolio management/restructuring.
“We get to see more high quality deals in markets like Germany which offer a lot of SME deals. You need to know your way around local markets when doing finance restructuring deals. I see banks moving in to a more focused arena such as revolving credit, which should leave ample space for private credit funds,” suggested Markus Geiger, Head of Private Debt, ODDO BHF.
First lien senior secured loans are delivering 10 to 12% returns to investors, who have benefited from the higher rate environment given the floating rate nature of loans: private credit is basically long interest rates.
However, there were words of warning expressed that companies who put capital structures in place in 2020, before global rates shot up, now face potential refinancing issues. This could impact some credit investors if businesses ultimately default on their loans. Panelists emphasised the need to carefully pick proven managers who can navigate uncertainty and position themselves properly when these capital structures need to be re-profiled in the coming 12 to 24 months.
Mega Deals…Reality check needed? (perhaps when it comes to exits)
Switching over to private equity, there was both optimism and a small element of caution that mega deals would be making a comeback. A high profile series of managers including Cinven, Silver Lake, Brookfield Private Equity and The Carlyle Group discussed the current deployment cycle. Key characteristics that they look for in large deals include asymmetrical risk profiles, recurring revenues, clear value creation strategies, and robust exit optionality.
The panelists highlighted the importance of a disciplined, contrarian, and operationally-focused approach to investing, especially in the current macro environment. The challenges of the European IPO market and the need for consolidation were discussed, with panelists emphasizing the importance of having a deep track record for IPO candidates.
“The market has become increasingly conducive to doing these deals. We have more confidence in the quality of earnings in many of the assets we’ve been investing behind,” said Maxim Crewe, Partner, Consumer, Cinven.
One of the key factors in successfully executing mega deals – defined as EUR5 billion or higher – is having discipline across cycles and contrarian thinking, noted Brookfield’s Managing Partner, Tristan Tully. “What’s the price of an asset and what is its intrinsic value?”
Christian Lucas, Managing Partner, Silver Lake, sounded a slightly more cautious note on the deal outlook: “We feel European stock market valuations are stretched. We are sober about where the markets are.”
Buying multi-billion dollar companies is one thing but selling them is quite another. And firms know all too well how challenging the overall exit landscape is today. The reality is it is hard to exit a business when it is valued at multiple billions. Carlyle Group’s Head of European Private Equity, Michael Wand, when discussing the IPO market, said that there were still too many stock markets in Europe, and there needs to be some consolidation.
At the mega deal end of the spectrum, GPs face the same pressures of delivering constant realisations to investors as those who buy and sell in the mid- and lower-middle market. Sometimes, that means having very honest discussions with deal teams, the panelist remarked. “Our job is to exit and return capital to investors. DPI is the new IRR,” said Wand.
Overall, the panelists expressed excitement about the European private equity landscape, emphasizing the need for the right skill set to identify and unlock opportunities, as well as a long-term perspective and disciplined approach.
A similar level of hopefulness, in respect to climate investing, came through on the panel “In a new era for climate investors – innovate or stagnate?”
Panelists view it as a generational opportunity supported by large corporates and stakeholders. Systemic change is required, though, moving beyond incremental progress to transformational change across high-emitting sectors and catalysing capital for the Global South. Asset allocators are urged to treat climate investing as a value decision, focus on resource efficiency and pollution control, follow emerging managers with expertise, and use impact-based accounting to measure portfolio externalities.
Reimagining the Future GP: A New Vision for Private Equity Leadership
As the afternoon’s program reached its denouement, an engaging panel entitled “Reimagining the future GP” held court, during which a range of views were shared. Instead of specialization, GPs need to find ways to be ‘special’; whether that’s an advantage finding deals, a particular operational advantage, an ability to uniquely understand consumer behaviour.
This is becoming more relevant as GPs compete to partner with the most exciting management teams and entrepreneurs because, in effect, the tables have turned.
The generalist model is being challenged. As Gabriel Caillaux, Co-President and Head of EMEA Business at General Atlantic explained: “The relationship between the GP and entrepreneur is becoming more important; we now pitch them not the other way round. It’s a completely different business model. They perform about as much due diligence on us as we do on them. If your value creation tools aren’t suitable you won’t win deals.”
At Hunter Point Capital, a GP stakes business, GPs are asking where they should be on the ESG curve, or what AI/data analysis tools they should be using to be best-in-class. Avshalom Kalichstein, CEO of Hunter Point Capital said that GPs have to commit their own balance sheet to take on new capabilities “and this requires a certain level of risk acceptance”.
Indeed, the panel stressed that ff you’re running a successful PE firm you have to continually focus on growth. And really maintain an entrepreneurial mindset. “If you can’t adapt and act as a real entrepreneur then some GPs will have a more difficult life,” said Antoine Flamarion, Co-founder, Tikehau Capital.
Anthony Tutrone, Global Head of Neuberger Berman Alternatives, added that LPs are reducing the number of core relationships they have. “They want more strategic partnerships, knowledge exchange and they are focusing their resources on this,” he said.
As GPs continue to navigate and manage their firms through harder times, there was a clear sense from the panel that the industry is in a strong position. With no doubt at all that there will be further growth on the supply and demand side in private equity.
The message to the audience was: Look past the storm.
Afternoon Summit Sessions Wrap-up
The afternoon summit sessions kicked off with the Impact Summit, in which a series of discussions looked at the promise of impact in emerging markets, investing in education and social inclusion and whether or not mainstream impact funds had now arrived.
In the Infra & Real Assets Summit, delegates listened to how the digital infrastructure market is experiencing significant growth, with investor allocations doubling from an average of $50 billion per year to over $100 billion per year in the last five years. This growth is driven by factors like cloud computing, AI, and the increasing demand for data storage and processing.
However, developing digital infrastructure projects comes with challenges, including regulatory complexities, market dynamics, technical hurdles, securing long-term capital, and ensuring access to power grids with adequate capacity.
As more investors recognize the potential of digital infrastructure, competition in areas like towers, fiber networks, and data centers is intensifying. This increased competition can lead to pricing fluctuations, requiring investors to thoroughly understand the specific dynamics of the market. Success in this sector hinges on expertise, as investors increasingly look for fund managers with specialized knowledge in real estate development, regulatory compliance, and securing power supply for data centers.
During the discussion on Resilience and Growth of Renewable Investments, it was noted that despite economic challenges, renewable energy investments have grown to over $2 trillion globally. Investors are drawn to the sector due to its macroeconomic support and stable, long-term returns. Significant reductions in costs for technologies like batteries and solar PVs have enabled new business models. This shift is allowing for more dynamic and profitable ventures such as solar-plus-storage and base-load energy solutions, moving beyond dependence on government subsidies.
The focus is shifting towards energy storage, management, and diversification of renewables. While policy consistency remains a challenge, the outlook for achieving net-zero emissions is optimistic, driven by technological advancements, grid improvements, and sustained investor interest.
During the discussion on Electrification/Grid Infrastructure, the session explained that integrating renewable energy sources such as wind and solar presents challenges due to their intermittent nature, making it essential to upgrade the grid infrastructure, particularly transmission lines, to manage this variability. However, the process is slowed by lengthy and complex permitting requirements, delaying crucial grid modernization projects.
Speakers noted that significant private capital investment is needed to expand and strengthen the grid, but regulatory frameworks must be made more attractive and transparent to encourage these investments.
Additionally, it was noted that the rapid growth of renewable energy and electric vehicles is straining supply chains for critical minerals and battery components, requiring collaboration between governments and industries to ensure a sustainable and resilient supply chain.
The afternoon concluded with the North America Summit. During the session on opportunities in the US private credit mid-market, panelists discussed the impact of higher interest rates. Default rates have risen to 3.5-4%, with pick-up income increasing to 11-12%. Small and medium enterprises (SMEs) have remained resilient, but capital structure issues may emerge in the coming years. The market is showing cracks, especially in public BDCs, which have seen increased default rates.
Gross yields in private credit are expected to stabilize around 10% over the next 18 to 24 months, as direct lending remains a strong asset class despite fluctuating interest rates. It was noted that regional banks exiting asset-backed lending presents opportunities for private credit growth, with potential expansion in asset-based lending, factoring, and specialty finance markets.
Within the US mid-market, operational improvements and sector-specific expertise, particularly in healthcare and tech-enabled services, were given as key drivers of value creation in private equity deals. Emphasis was placed on having a consistent investment strategy too. GPs should avoid market timing and maintain consistent capital deployment, focusing on relationship-building and developing a “shadow portfolio” to source deals outside of auctions.
See you all today for the second and last day at IPEM Paris 2024!
Discover a summary of Wednesday at IPEM Paris 2024 with the Photo Gallery (relive our events: Comms & Marketing Lunch, Wrap Party), the TV Studio Interviews, and the Video Highlights!
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