This is a sponsored article from Flexstone Partners (an affiliate of Natixis Investment Managers).

In the context of stabilising interest rates and a growing appetite from individual investors, Eric Deram of Flexstone Partners discusses the rise of private equity.

As more investors seek alternatives over traditional public markets, an important question emerges: is the future of investing private? At Flexstone Partners (an affiliate of Natixis Investment Managers), we believe that private equity not only has a promising future but is essential for financing the global economy. Here’s a deeper look into the driving forces behind this shift and the opportunities that lie ahead.

Interest rates are stabilising

Interest rates have always been the key macro driver of private equity activity. As rates increased steeply over the past two years we witnessed a notable downturn in private equity transactions. While rates have stabilised, they are expected to be at higher levels than in the long period of ultra-low rates following the global financial crisis.

However, there are two key implications that arise from this economic environment:

1. Rebound in activity: Recent quarters have shown a resurgence in deal flow and M&A activity, indicating that investors are gaining further confidence in private equity.
2. Enhanced performance: Higher interest rates can lead to improved performance in private equity. This may seem counterintuitive but stems from the discipline that rising rates enforce across the value chain, compelling firms to operate more efficiently and strategically.

While private equity activity may fluctuate with macroeconomic conditions, consistent investment remains crucial for capturing long-term returns. Our recommendation has always been – and will continue to be – to invest consistently, regardless of the prevailing economic climate.

The role of individual investors

One of the most exciting developments in private equity is the growing interest from individual investors. With the launch of new regulations, such as ELTIF 2.0 (European long-term investment fund), and the increasing number of evergreen semi-liquid funds, private equity is becoming more accessible. We see this as an exciting evolution for the asset class going forward, both for fund managers like us, and investors.

Growth potential

Contrary to the perception that private equity activity peaked in 2021, we argue that the asset class continues to exhibit robust growth potential. The peak observed in 2021 was largely a recovery from the COVID-induced slowdown of 2019 and 2020. Moving forward, we anticipate double-digit growth in private equity as it plays an increasingly vital role in the economy.

The rationale is straightforward: Over 80% of companies globally are privately owned¹, underscoring the need for private equity to fuel this sector. Furthermore, private equity still constitutes less than 10% of the total capitalisation of public stock exchanges worldwide². With high net worth individuals showing growing interest in this asset class, the outlook for private equity is indeed bright.

Opportunities on the horizon

Diversification remains the cornerstone of our investment strategy at Flexstone Partners. A well-diversified portfolio is the best defence against market volatility, particularly in the realm of private equity. Our focus for the near and medium-term is on the US and Asia, where we see opportunities in:

• Evergreen semi-liquid funds: These investment vehicles are gaining traction as they offer greater liquidity (one of the main challenges of investing in private assets traditionally) and flexibility, making them attractive to both investors and fund managers.
• Secondaries and co-investments: These strategies provide opportunities to enter established funds or invest alongside primary investors. They allow investors to capitalise on existing investments while diversifying their exposure.
• Small and mid-market investments: We firmly believe that the small and mid-market sub-sector of private equity holds the most potential for delivering superior alpha. These companies can be more agile in adapting to market changes.

In conclusion, we believe the future of investing is increasingly private. With macroeconomic trends favouring private equity and a growing appetite from individual investors, this asset class is poised for continued growth.

As we look to the future, one thing is clear – private equity is not just a trend. It is a vital component of investing in the real economy and a promising avenue for investors seeking long-term growth and diversification.

Find out more about Flexstone Partners’ approach to investing in private markets and its four key differentiators in this video.
 

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^1,2 Source: Kohlberg Kravis Roberts & Co LP (KKR), Global Macro Trends, 2024.

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This is a sponsored article from Flexstone Partners (an affiliate of Natixis Investment Managers).