Public markets are continuing to shrink and have been doing so for several decades. This means high quality companies are staying private for longer, a trend we do not see changing any time soon.
According to data by Edison, there are around 10,000 private equity-backed companies and almost 6,500 growth and venture capital companies today – so a universe of around 16-17,000 in total. In 2000, this combined figure was less than 3,000 companies.
Contrast that with US-listed companies: in the year 2000 there were around 7,000 but today there are less than 5,000.
Access to private capital continues to increase and the investable universe for private equity is expected to roughly double in size over the next decade, from its current level of around $5trn assets under management.
Private equity firms have also learned important lessons from the early days of the industry, becoming experts in creating value and supporting portfolio companies into their next stage of development.
Private equity firms today are much more specialised by sector and also have teams of operational experts who can help identify and accelerate opportunities for organic growth within portfolio companies.
Furthermore, ‘buy and build’ strategies, where a private equity-backed company acquires other smaller businesses to reap benefits of further scale and synergies, are a bigger part of investment plans.
Private equity investment managers these days take full advantage of the asset class’ governance model, often taking controlling positions in businesses, which enables them to heavily influence strategic direction and ultimately help talented business leaders reach the next level of growth.
Lucrative opportunities despite market uncertainties
The opportunity set within private equity is building strongly, even despite recent market uncertainty. Money tends to flow into private equity at the wrong time – i.e. at the height of a bull market – and then often flows out again just when the best opportunities start to emerge during difficult markets.
We believe that you need to stay invested in private equity and not attempt to time the market. Periods of uncertainty and volatility tend to present differentiated opportunities such as corporate carve outs and public to private transactions, and family owners of attractive businesses can often be more willing to sell long-held assets for liquidity or portfolio reasons. Furthermore, entry multiples tend to be lower during these periods, compared to long-term averages.
This confluence of factors means that currently, private equity investors could take some very interesting businesses private at reasonable entry prices.
Looking back at historical market turbulence (for example, the financial crisis and the dotcom bubble), the bottom of the cycle was when some of the most lucrative private equity deals were made at attractive prices, compared to when a bull run is underway.
Whatever the latest development across artificial intelligence, digitisation, the green transition or medical technology, private equity investment is usually leading the charge and private markets remain the best way to access growing niche market leaders and disruptive businesses of the future.
Valuation uplifts remain strong upon exit
The past 12 months have seen a debate emerge over whether private equity valuations need to readjust, given movements in the listed markets, however we believe the ultimate test of a private equity valuation is the price at which a company is sold through a structured sale process.
The volume of private equity exits has been relatively low during 2023 but sale prices during the year have remained encouragingly attractive from the abrdn Private Equity Opportunities Trust’s underlying portfolio holdings. For example, the average sale valuation uplift in our portfolio over the first nine months of 2023 has been 23% relative to the unrealised valuation two quarters prior. This 20-30% valuation uplift upon exit has been persistent over the last decade.
Alan Gauld is lead portfolio manager of the abrdn Private Equity Opportunities Trust. The views expressed above should not be taken as investment advice.