Managing Partner Frewen Lam, and Investment Director Anna Ellis discuss the key drivers of private markets during the first half of the year, the increased GP-led transactions in secondaries, and the notable uptick in deal activity for smaller, growth-oriented businesses which is driven by less uncertainty and more realistic valuation expectations.
Anna Ellis: Hi everyone, I'm Anna Ellis, thanks for joining. I have with me today Frewen Lam and we're going to talk about what we've seen for the first half of 2024 and what we see playing out for the rest of 2024 and into 2025 for private markets.
So, last time we caught up in January this year, we talked a little bit about what we've seen for transaction activity for 2023 and how that had been quite down for private markets. We reflected on the fact that a lot of that was driven by uncertainty both for buyers and for sellers around the global economic outlook.
And perversely though how that was creating quite a few opportunities in private markets around private credit, we talked about the rise of the secondary market, particularly GP led secondaries given the need for liquidity. And probably from a growth equity perspective, we talked about how businesses given they wanted to take their businesses to market at some point, they hunkered down and spent some time working operationally on improvements so that they'll be ready to come to market, when the market turns.
So Frewen, welcome! Thanks for coming today. Could we start today with talking about transaction activity? We talked about as I just said how it was down in 2023, we thought that maybe it would start to come back in 2024. What are you seeing around that?
Frewen Lam: Thanks, Anna. So, I think a lot of the themes that we talked about in the first half of this year have continued to persist into 2024. And so, views on interest rates and inflation are the valuation gap that sort of exists between buyers and sellers. And also some of the geopolitical factors that have been influencing how people perceive risk around the world, have continued to play out.
So relative to the first half of this year where I think there was excitement around potential rate cuts potentially coming through this year, as the year has moved on, I think people have adjusted their expectations over that coming very quickly.
Certainly, in some economies around the world, there has already been some reduction in interest rates. But at the same time, there are parts of the world where inflation is still sticky and we're not seeing rates coming down as quickly as people would like. So, that's still going to, I think, weigh on expectations and how people perceive the market environment going forward.
Anna Ellis: And there's been a little bit of chatter recently about IPO markets keen to get your thoughts, not just I suppose in Australia, but globally whether you see any change in what we've seen in the last 6 to 12 months?
Frewen Lam: Yeah, I think the statistics so far are still relatively subdued. So, clearly we were coming off some highs from a couple of years ago where even Australia had a few hundred IPOs in a year or the US had almost a thousand IPOs in a year. And we're really dealing in a sort of a market environment where in Australia I think year today it's been in the tens and in the US, maybe in the low hundreds. So, there's still a bit of wood to chop in this areal before we see market conditions really start to pick up materially.
Anna Ellis: Okay. And talking about some of the international markets, I know you've been travelling a fair bit in the last few months. I think you've hit the US, you've hit Europe, Asia as well. Are there any common themes that you're seeing in private markets over there? Any key differences? Perhaps you could share some views around that?
Frewen Lam: Yeah I mean, I've talked to a lot of asset owners around the world and trying to reconcile some of the statistics that we see in the data versus how they're thinking about things and hearing the anecdotes. And so, if you look at the stats, there's been a decline in capital raising and there's been also a lot of that capital flowing into larger funds.
So just to give you one statistic for last year, while capital raising was down, I think something like 25 managers raised half of the global capital. And it was one of the most difficult times for first time fund managers in over 13 or 14 years. And I think that trend has continued. So, there's a bit of a flight to quality, in some ways. I think part of what this reflects is just the environment around lower transaction activity. If a lot of these asset owners aren't getting capital back, many of them are complaining about being overweight private equity. So how this manifests in their allocations is either, fewer allocations, to their managers or to fewer managers. So smaller bite size or fewer managers. And this has created a bit of a tougher time for anyone below that top 25.
And so, a lot of the GPS that we speak to basically say the expectation now is not a one and done in a couple of months, but a much more elongated capital raising.
I think one of the other things that it also creates given the lack of liquidity is… I think we're going to talk about this topic around the secondary market, which we did touch on last year. And so this really plays out in a couple of ways. If asset owners, if they are overweight, they're really thinking about do we need to trim our portfolios. And so, there's a continued increase in secondary activity on the LP side, but also on the GP side, increased secondary activity because with the lack of transactions happening between buyers and sellers, part of the reason is because of valuation expectations. So, if you're a seller, you're preparing an asset for sale, bids aren't coming in where you where you think you'd like them to be and you clearly still have a lot of confidence in that asset going forward. And so a lot of the GPS are asking themselves, well, do we want to continue to own this? Let's give our LP's an option of whether they want to roll or sell.
Anna Ellis: And in terms of, there's a few different types of secondaries, you're seeing GP led more than on the LP side. What are you seeing or is it across the board in the types of secondary transactions?
Frewen Lam: I think it is across the board. I think where it's shaking out is about 50/50in these types of deals. Global transactions in the secondary side have been depending on the statistic provider that you come across, it's about $120 to $130 billion a year. That's been pretty consistent over the last few years.
Anna Ellis: And what about regions? Is it the same across the different regions? We were talking about the US, there's Asia, there's Europe, is it consistent? Are we seeing the same thing or is there different pockets, different things happening?
Frewen Lam: I think the most consistent part of the market really still has been on the buyout end of the spectrum because the GPs do control the assets. Whereas on the venture side, pricing tends to be steeper discounts. There are probably more issues that you need to deal with. I mean, we're certainly seeing a lot of venture groups come to the market looking to sell assets because I mean there hasn't been a venture backed IPO in a while of scale, they've got to look for other avenues to sell assets. And so, they're either single asset transactions that we see down in Australia for example, involving venture backed companies that have just taken longer to get to an IPO event. There's a very large one in Australia just in the last six months, or in the US some sort of restructurings of portfolios where selected assets have been taken out and packaged up into portfolios.
Anna Ellis: And we might be taking a step backwards to look at the big picture here and it might be assumed knowledge for many, but perhaps Frewen could we just take a step back and talk about why secondaries are attractive to private markets investors like some of the characteristics that make them attractive.
Frewen Lam: Yeah, the summary really is for sellers, it's a liquidity solution, obviously. For buyers, it's basically another way of playing private equity where you've got the potential for shortage durations. And it's a mathematical thing to me. So if you're buying an LP stake halfway through it's fun life, then in theory you're not committing for that full 10 year period. But you're committing for the remaining duration of that fund's life.
Anna Ellis: Yeah. And I suppose you touched on liquidity there, there hasn't been a lot of other options for liquidity in the market because we've been talking about lower transaction volumes. Is that right?
Frewen Lam: Yeah, that's right.
Anna Ellis: Yeah. Okay. So maybe changing tact a little bit. I know one of the other things you've been in the market for quite some time. You've seen many different types of elections. I think there's a lot of activity globally at the moment in and around elections in those different regions we were talking about before. How have you seen that influence private markets historically and what are you expecting to see over the next 6 to 12 months?
Frewen Lam: Yeah. I mean, this has been the largest election year globally for the democratic world for a while. And so, investors generally, I think it's well known that during election years, people are generally fairly cautious because of potential changes that may happen if there is a change in government or a changing policies that come as a result of new governments coming to power. And so not surprisingly, this has had a bit of an overhang on 2024 as well.
And there are some elections that have already taken place more or less either in line with expectations and markets have continued to run as they were or there have been elections where the results have been material changes or created some uncertainty and you've seen sort of markets react to that. So, I think this will continue to play out in the second-half of this year as well.
Frewen Lam: So Anna, we talked a lot about sort of global markets and expectations. Maybe you can tell us a little bit about what's happening in Australia.
Anna Ellis: Yeah, sure. I mean, I can only speak with our business, we focus more on what we'd call the growth part of the market. So that's businesses that have sizes of sort of sub one $100 million in enterprise value. And a lot of what you've been saying actually does resonate.
I know we've been talking on a global scale, but certainly if we talk about 2023, everyone was just so uncertain and we had particularly locally had those interest rate rises that just one after the other came. And I think it just really disrupted consumer confidence, business confidence, both buyers and sellers were just locked in this cycle of uncertainty. And if we don't have to do something, why would we do something. Which makes sense, right? But then after a while, we all know that business owners, they have a plan whether they're getting older, succession, sick, whether they had a five-year business plan and they're now in years six or seven or maybe their debt is maturing, they need to refinance.
You know, there's any number of reasons why a business needs to do something and eventually you just can't hold off anymore. So, I think that's one reason why when we came into 2024, particularly in our business from that growth market perspective, we actually did see a marked uptick in the number of deals coming to market. So, I think that's one thing that we saw.
I think another reason why we saw that deal up that uptake is, we had our last rate rising in Australia and I think it was November after a there was a bit of a pause. Then we had one in November and then we've had a bit more of a pause. And I think that's really important in that growth space. Probably one of the things that business owners can see most tangibly in their business is the impact of interest rates, inflation, input costs, and then just for how consumers and businesses are talking around just at the coal face.
And so I think there was, I've called it, less uncertainty in the market for the first quarter of this year. And that prompted, again, as I said, a whole number of businesses to come to market because probably they've been planning to and they'd held off and they wanted to and they felt that there was less uncertainty. In terms of what's happened in the number of deals that have actually transacted. I think the feedback and the stats would say deals are still taking a lot longer. So, when it comes to crunch time, people are still not pressing the button quickly. Deals are not getting done in like six weeks, eight weeks. It's really like, six months, eight months, that's how long things are taking, but deals are getting done.
I think the other thing that we're seeing is because businesses did have that time in the growth space to sort of reflect on what they're doing, they wanted to trade through very difficult periods. They've looked at their cost bases, they've looked at their margins and particularly businesses that do have pricing power. They've sort of said perhaps they were a bit of a laggard in putting up prices because they haven't had to sort of respond so quickly. But we've seen businesses come to market that have genuinely been working on; How can we improve our financial profile? How can we make our businesses more sustainable? And therefore, they're more attractive to private equity buyers when they do come to market, which makes it more likely that you're actually going to get a transaction done.
I think the third thing that I've probably observed as well is probably around the valuation side. And again, I'm just talking probably about that growth market, but there was probably a little bit of overlap even between the venture and growth market, particularly in the heady times of 2021 post COVID, where the multiples in the comps were just so high. And so, I think business owners were looking at that and saying, I want that. And, and the reality was we're in a different environment now. We've got high interest rates, we've got sticky inflation, we've got we've got a completely different market. And I just think it took twelve to eighteen months for that to play out psychologically for a number of business owners to go, we're just not in that market anymore. And even though perhaps their advisors were telling them that sometimes you have to see it yourself. So, I think they're more realistic around their valuation expectations.
I think the second thing, and it's sort of been a while since we've spoken about it is probably COVID. So, there was a lot of noise in numbers around COVID and then afterwards normalizations to the point where everyone was going what is normal? I think you can take a view on a on a consumer business or even a B2B business. But I think we saw COVID implications playing out in ways no one ever even imagined and we didn't know what was normal anymore. I think that cycles now played out. You can look at pre COVID, so 2019 numbers, and you can look at more recent trading and say, okay, can we can we connect the dots here? What is sustainable? Where's the growth? And allows that sort of meeting of minds around valuation to occur. So, I think in short, people and myself would say that transaction activity has still been patchy, but there's certainly been a marked pick up in the growth space compared to say 2023 where everyone was still on pause.
Having said that, I think we've got some more uncertainty coming ahead. There's now talk…So I think when we last spoke in January, we were talking about perhaps there'll be a rate cut towards the end of the year, maybe early 2025. I think everyone's knowing that that's not going to happen now. So, I think everyone's again now focusing particularly in that mid-market and lower mid-market on what does this mean for my business? Is my business optimised to trade through a lower economic growth cycle? So, I think you know the good businesses, they will continue to transact. It might still take a little bit longer, but I think the businesses that are not of a high quality, picking up on some of the thematic you've talked about on a big macro scale, they're going to find it hard to get deals done.
Frewen Lam: Great, thanks for the insights.
Anna Ellis: Thank you Frewen, and thank you everyone for joining us for this chat. If you want to hear anything else about what we've been talking about today we've got some information on our website, but please feel free to reach out to any of our team. Thank you.