Outlook: 1H 2024

In the private markets outlook for the first half of 2024, Managing Partners Mike Lukin and Frewen Lam delve into current valuation dynamics, anticipated trends in transaction volume and deal activity…

… with a particular focus on those seeking growth equity. They also highlight the expanding opportunity set in private credit. Additionally, the discussion touches on the rise of secondaries as limited partners pursue liquidity and considers the potential impact of a softening US Dollar for those investing in other parts of the world.

Anna Ellis: Hi, I'm Anna Ellis. Thank you for joining today. I've got with me Michael Lukin and Frewen Lam. And we’re here to discuss Roc Partners views on what we saw in the second half of 2023 and where we're likely to go in 2024, from a private market's perspective.

It's been six months since we last spoke, and there was a bit of a focus on the uncertain external market and the market environment, but how that was creating opportunities in private credit, in secondaries and also the mid-market private equity. A lot of that has continued, the noise at the time was increasing inflation, rising interest rates, geopolitical tensions, and a generally weakening market environment.

I'm really interested today to chat to both Mike and Frewen to see how this played out and how these dynamics might shape 2024.

So I'll start with you, Mike, really keen to dig into what we saw the back half of 2023 and what some of the key trends, dynamics are likely to be in 2024.

Michael Lukin: Yeah, thanks Anna. I think you summed it up nicely, which was just a continuation of uncertainty. I think 2023 was really a very quiet year for transactions in private markets. And I think that was really led by a lack of real conviction around where we're heading globally around the economy.

If you think back to 2021, 2022, we saw rising inflation, we've then seen wage pressure kind of coming through, and then more recently, heightened geopolitical risk continuing, particularly around the Middle East. And I think in that backdrop, you've had a situation where vendors of assets have felt like good days are ahead of us, but we don’t know when. And so if we can hold on and not sell during 2023, then perhaps 2024, 2025, we're going to see a better economic outlook. That means someone will pay you more for my asset, and so, I'm better off putting my head down, bum up and, and working through this really tough period.

On the, buy side, you've got the same lack of conviction or clarity on where we're heading with the economy. So in terms of your price expectations or what you're willing to pay for an asset, you've been quite conservative. You're pricing in, a year or two of benign economic activity and that probably makes you, roll back two years would make you non-competitive in a process that went two years earlier. And so in that context, you've got vendors who are still waiting for the prices of yesteryear, the free cash, free money, free debt environment. On the flip side, you've got vendors who are quite conservative and then also you've just seen a five hundred basis point increase on average around the world, in terms of borrowing costs. And so, just fundamentally the mathematics says if it's costing me more to borrow money, then I just can't afford to pay as much for a business as I did two years ago.

So, 2023 as a result was probably a bit of a lost year. We went through a year where, really a not a lot happened. I think what it came down to was if you just had a burning platform for whatever reason, you just needed to do something, you ended up, doing a transaction. But if you had flexibility and you had longevity to your business and you could see your way through, you were far better off focusing on how do I optimise my business. Because we talk abou