BVCA Summit: PEs take long-term view to ride out uncertainty

Several panellists emphasised the importance of being well-positioned on long-term "megatrends" to weather the storm, including the role of ESG and sustainability in valuations, as well as cybersecurity and intangible assets such as intellectual property.

Karan Khemka, a Singapore-based partner at EMK Partners, and David Merriman, director in European investments at direct lender Beechbrook Capital, emphasised PE's ability (and requirement) to be patient in holding out through cycles, supporting their portfolio companies as needed. In the meantime, sponsors will also need to focus on widening the skillsets of their teams, Khemka added.

Market volatility is driving the GP-led secondaries market, with continuation funds increasingly viewed as a viable exit option. However, with tickets going down in size and some non-traditional players having left the market for the time being, there is very strong undercapitalization and buyers can't be very selective on what they are looking at, according to Philipp Patschkowski, secondaries managing director at Neuberger Berman. Still, the markets in Europe and the US are very established with a lot of opportunity still untack and room for growth for both existing buyers but also new market entrance, he added.

Sponsors see continuation vehicles as "a very attractive exit option" especially for high quality, resilient business, and particularly given the non-completion element of M&A processes, said Astorg director Michal Lange. However, the industry needs to recognise that these are complex transactions and they might look as if you are selling to yourself if the intricacies of the structures are not clear, said Chris Bulger, general counsel at Virtuvian. Providing optionality to LPs, transparency and a clear rationale for the process, as well as demonstrating alignment through the investment, is often the right way to go, said Stephanie Mata, investor relations managing director at Three Hill Capital Partners.

All panellists agreed that the role of the underwriters is critical during price negotiations as they often guarantee a fair deal for existing LPs, with Astorg's Lange adding that with market liquidity expecting to increase in the next two years, parties will engage more comfortably on the price discovery.

Weighing up risk
In a discussion on the global capital perspective, James Brocklebank, managing partner at Advent International, said that geopolitics are a relevant macro theme in the industry. Structural energy prices in Europe might affect appetite and the risk quality in the UK, which could make firms reluctant to invest in the country. Funds raising in US dollars have some power, however, he added.

Aside from the obvious macroeconomic risks, speakers at the conference also discussed the political risks around PE and the industry's future reputation. Several panellists linked the increasing democratisation of the industry to potential risks; Partners Group's Antony Esposito highlighted the balancing of liquidity risks versus investors' expectations as a key concern.

The BVCA's Michael Moore noted that any mismanagement of retail money could garner the industry a lot of negative attention, which could prove "worse than Barbarians at the Gate". Joana Rocha Scaff, managing director and head of Europe private equity at Neuberger Berman, said that there is no reason why the population at large should not benefit from the returns generated by the industry, but also emphasised the need for this to be managed well to avoid any reputational risk.

US perspectives
The summit also heard from several US sponsors and LPs. Deep Shah, co-president of Francisco Partners, admitted in an on-stage interview that the European approach to the technology sector makes his firm nervous. The overlap with health business and government is one of the main issues deterring health technology investment activity in the European space, he said. Francisco Partners' investment portfolio is 25% in healthcare technology, with 98% of those investments based in North America, he added.

ESG is another example where the investment experience between the US and Europe differs, Shah said. Francisco Partners hired a head of ESG this year, but the topic is under attack in the US, where investors from certain states refuse to support GPs if ESG is part of their strategy, he said.

In a discussion about North American LPs views on investing in Europe and the UK, Maria Tarhanidis of insurance company Brighthouse Financial and Erin Wedepohl of endowment Texas Permanent School Fund (TPSF), both said that they see PE as a long-term asset class and a diversifier of their portfolios. Their firms are currently above their usual PE allocation targets due to current market volatility, they said. Wedepohl added that TPSF is sticking to long-term trends and not trying to be too tactical in its allocations, for example, by shifting towards special situations funds.

Wedepohl reflected a view held by many US LPs on Europe. With around 15-16% of its PE portfolio in the region and having struggled to achieve success with country-specific funds, the firm was seeking to reengage with Europe as a whole for some time. While international travel is back post-COVID-19, engaging with Europe has been rendered difficult by the firm's capacity constraints in a crowded market, plus market volatility, she admitted.

Backing the UK
A ray of hope was provided in the keynote speech by business economist Mark Gregory. The visiting professor of Business Economics at Staffordshire University and former EY UK's chief economist highlighted the UK's appeal as a foreign direct investment destination, referring to research from EY's European Investment Monitor and its UK Attractiveness Survey 2022. Since 2016, investment in the country's manufacturing, finance and business services has fallen. However, investment in the health and life sciences sector has more than doubled, while food and drink and digital investment had each increased by around a third. There is also a growing expectation that energy, financial services, consumer and business services will drive the UK's growth in the coming years.

Some sponsors are putting their money where their mouth is when it comes to supporting the UK. In a panel on the outlook for deals in the current macroeconomic climate, Tikehau Capital CEO and co-CIO Thomas Friedberger emphasised the importance of the UK to the listed French GP, noting that the firm has doubled the size of its UK team since Brexit. Tikehau has an 80-strong London team and has moved its head of private equity from Paris to London, Friedberger said. He also emphasised the European PE market's ability to build "European champions" from national or regional champions, arguing that the industry can still create significant value and scale in this way.

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• Topics
• GPs
• LPs
• Investments
• BVCA
• United Kingdom
• United States
• ESG
• Secondaries