Outlook: H2 2025

Anna Ellis: Hi, I'm Anna Ellis. Thanks for joining us to discuss what we've seen in private markets for the first half of 2025 and what the rest of 2025 might look like. 

When we first caught up at the start of this year, we had a lot of political uncertainty surrounding elections in the US and the upcoming Aussie election. Interest rates were still at 4.35% and there was a bit of a depressive mood around liquidity and a few other things. And now I would like to chat through some of these things with Frewen Lam and Alex Tandl. 

Thank you for joining me. 

Frewen, I might start with you. I'd like you to summarise what you're seeing in private markets at the moment.  

Frewen Lam: I'd like to generally say that a lot of the thematics that we talked about previously are likely to persist into this calendar year. And while, we'd like to say that there's cautious optimism in the market, I think the reality is that there are still ongoing risks.  And I look at the backdrop around the data over the last three years, and while there was a pickup in activity between sort of ‘23 and ‘24, we're still a far away from the highs of 2021. 

So if you look at fundraising, we're at less than 1/3 or 1/4 of that prior peak fundraising. We saw a sequential decline in fundraising on investment activities, less than half the levels that we've seen previously. 

And of course around this topic of exits, some pretty sobering statistics with recent exit activity. Some data that we saw showing exits that actually were achieved were on average about a year longer than previously at more than 5.7 years compared to 4.7 years. Or some of the venture capital statistics that we saw were 2017 funds that only delivered a .3 DPI. 

So I think that's the general market environment. Clearly over the last few months, some additional geopolitical headwinds and that's likely to play into private equity activity over the balance of the year. 

Anna Ellis: And have you seen some actual examples of how some of these themes have impacted private equity funds and others looking to exit? 

Frewen Lam: You know, I think the big topic as I've interacted with a lot of institutional investors recently have really been around, tariffs and taxes. Whether it's reciprocal taxes or revenge taxes out of the US recently or even in Australia with unrealized gains tax on high super balances. 

So all of these things, I think are going to have some impact on the way that people think about deployment and activity. 

There are probably a few thematics that come out of this. The 1st is that there was a period over the last few years of US exceptionalism and an overweighting of capital flowing into the US market. I think at least for this foreseeable there'll be a focus on diversification and thinking about whether you want to put all of your eggs in that one basket and where else you might want to shop. 

Secondly, maybe a couple of examples of how we've seen it play out in, in actual investment or divestment activity. At the end of last year, we were looking forward to a few exits that we knew were in the pipeline. One involving a company in the healthcare space that had not a large US exposure, but some US exposure in the plan around for that GP… 

Anna Ellis: Was this an Australian GP? 

Frewen Lam: I won’t say where it is, but it's a global business. And the GP, I basically spent 3 weeks through Asia and in the US, two weeks in the US throughout April. It's Liberation Day played out. 

And the response around that asset was we're likely to delay this because we don't know exactly where tariffs will land for our US exposure. And we don't want that noise kind of going into the IPO. So that's one example. 

And then the second example that I'll have is a company in our time zone in the auto industry and it's a very domestic business has continued to perform very well, but we're selling to global buyers and a large portion of which would in North America and that transaction ended up getting pulled or delayed. 

So the first example is something that you see what I would put into that first order effect. If there's a direct US impact on that business, I think buyers are going to be much more cautious going into this current market environment. And what tariffs do is it just adds uncertainty to all of our forecasting. And you know, that's likely to delay deals until we see clarity around that. 

The second one is really around a second order or a lower order effect, whether it's downstream demand,  general demand or around potential buyers of assets. So it really ends up kicking out a lot of this activity either until the second half we see more clarity or potentially into 2026.  

Anna Ellis: And what are some of the things that private equity or GPs might do in response if something like what you just described, Liberation Day tariffs, uncertainty. So yes, they don't exit, but are there other things that GPs, they don't just sit there and sort of wait? Do they do some other things or pivot or look at other options, other types of exits? 

Frewen Lam: Great question. So I can even speak to in in these two cases. And I think part of this speaks to the tools that private equity has in its toolkit in both instances, great assets, healthy margins, high cash generation. And so both GPs responded by saying, look, if exits are going to be delayed by you, we're going to refi pay a dividend in the meantime. 

And so this focus on exits continues to persist, and we've also seen other situations where there have been delays in exits around assets and GPs taking advantage of the market environment to consolidate and basically buy out our competitors often an attractive pricing and enhance their market position as well. 

Anna Ellis:  And obviously we're a few months on from Liberation Day and there's sort of uncertainty is likely to persist. And I'm just bringing a bit of a question on you, but how do you think GPs will continue to respond to this because there might be a point in time where the uncertainty is the new normal. Do you have any thoughts around how that will be navigated or is that just the big question that no one really knows the answer to? 

Frewen Lam: Well, I think it comes back to this 1st and 2nd order effect that I talked about. I think anything in that first order bucket may see delays and where we're likely to continue to see deal doing in areas that are pretty topical at the moment. 

From an industry perspective, whether it's artificial intelligence related investments, more security-oriented investments, whether it's you know cyber or food security or national security as certain industries or more domestic businesses where there's a needs based or a more defensive in nature. 

So we still see healthcare transactions going on. Very interestingly, even down here, we're seeing transactions involving restaurants, well QSR sort of related businesses that aren't really affected by global trade. 

Anna Ellis: So GPs who are exposed or in the 1st order, for example, or even 2nd order, they'll reach into the toolkit. But otherwise, in terms of excess, we'll just continue to go with those sectors that are perhaps less impacted and that kind of thing. 

Alex Tandl: Anna I think you obviously spend a lot of time in the Australian mid-market. I'd be really interested to hear what you're seeing in that context. What's your take on what's going on? 

Anna Ellis: Yeah, and it's interesting talking about the election and the timing of it. I think there's no doubt that there's a little bit of a pause, not just in industries which are exposed to public policy, but overall, when there's an election upcoming, everyone kind of goes, let's not do anything immediately. 

So I think probably the first half of 2025 suffered a little bit from that in terms of transaction volumes. And I'm talking here specifically in the in the mid-market and lower mid-market. 

I think overall when we sit back and look at what we've been saying and what the data is telling us is that calendar ‘24 actually saw a rebound in transaction volumes back to where they were pre COVID. It doesn't feel like that because we had the COVID peaks and all the transactions and exits that happened then. But certainly there was a marked increase in transaction volumes in 2024 on 2023. 

I think we've already just talked about a lot of the uncertainty that's been plaguing discussions that we've had in this recording for the last couple of years. But I think perhaps to Frewen's point about private equities toolkit and GP toolkit, I think everyone in the market has found a way to get deals done. 

And some of the trends we've seen because of the uncertainty and things taking longer, I think there's been no doubt an increase in bilateral transactions happening. I think that's a benefit for both the buyer and the seller. 

And I think advisors as well, if there's an intermediary involved, it just, we know that time is a killer for deals. And so it just enables two parties to come together. They've got high conviction and to interact and agree terms a lot more quickly than it is if you do a broader auction. 

And I think the other thing that private equity does well, and there's a lot of different types of GPs and we see a lot of the different ones at Roc, is that some have higher conviction in other sectors than others. And so if you can marry up the founder or the business owner with that GP like that makes for a much quicker process if they can align quickly. And as I said, time is definitely a killer of deals. So that's one thing we've seen. 

I think another thing that emerged and perhaps was out of favour several years ago was contingent, contingent and deferred payments. So earn out. So I think perhaps we really weren't seeing many of those certainly during the COVID. And post COVID. 

I think now that's been a way to navigate that uncertainty, whether that is how is the next 12 months going to play out? Are you really going to hit your forecasts or whether it's the external environment or maybe it's valuation related. And I think that's something else that has allowed parties to sort of come together to get deals done and also more quickly. So I think both sides are sort of more willing to look at those kind of things. 

So there's some of the trends we've seen in that sort of mid-market, lower mid-market. 

If I think about perhaps what the outlook is, I think I sense on the ground and you know, get the privilege to speak to a lot of founders and I think we're all consumers. I think the psychological impact of interest rates domestically coming down is actually really positive. So you know, one of the reasons interest rates come off don't it doesn't necessarily mean that the economy is going well, but I think psychologically that has a really positive impact. 

So I think that we'll see more transaction activity on the back of that. 

And obviously it also reduces that big bid ask spread between two parties and it makes valuations easier to align on. I think that's certainly something that we'll see over the next sort of period of time. 

The other thing that's just not related perhaps to the outlook, but another observation that we've seen in the market is because growth has been harder to come by is that private equity have always had part of their playbook is to execute on transactions because they're really good at doing that. 

But I think we've seen a heightened level of bolt on activity partially well probably mainly because growth has been a little bit slower. So building scale and growth more quickly within sort of by finite timeframes, there's been a lot more bolt on activity. So that's been keeping the industry busy. 

Anna Ellis: So perhaps, Alex, let's pivot a little bit. Another topic that has been extremely prevalent over the last couple of years has been secondaries. We've spoken a lot about it and how the dynamics around the lack of liquidity, slower exits and a slower fundraising market. But GP is wanting to get out and fundraise, has created great opportunities for secondaries. I'm just keen to understand, are they still attractive? What are you seeing when it comes to secondaries? 

Alex Tandl: Yeah, sure. So maybe if we start at the top and maybe try and frame just how big the opportunity and how quickly it's growing. Obviously hard numbers are hard to come by, but triangulate in a couple of different sources. 

The broader PE AUM has grown from maybe $2-$2.5 trillion 10 years ago to $5-$5.5 trillion dollars today, right? So that's a growth rate of around 10% a year.  

And contrast that to secondaries around 10 years ago that was around $20 billion and today that's around $100 - $120 billion, right? So that's a growth rate of a growth rate of around 20% CARG. 

You put those two numbers together and the penetration of secondaries within the broader context of your private equity AUM. The $120 today versus the $5-5.5 trillion that's around 2% versus maybe 1% 10 years ago. 

So by all measures it's growing twice as fast as the broader PE landscape, and penetration is increasing it's doubled, but it's still a relatively small proportion of overall AUM and deal flow in in the sector. 

So I think to your question, what is driving it? Is it going to continue? 

My views on this is it's really if you think about the innovations within private capital, secondaries is one of those innovations that is genuinely valuable to both GPs and GPs and LPs. And so what we're seeing is a confluence of both demand and supply led interest in these assets. 

So if you think about the supply side, it's really a story about liquidity. And in this case it's both LP and GP led liquidity. 

So in the Australian institutional context, we've spoken a lot even just today, but in previous discussions around the lack of DPI in the current environment. I think if you think back to 2010 to 2020-2021 LP's were running at a cash yield distributions of around 20 plus percent. So I think the challenge for them back then was how do you stay deployed, right? They're getting a lot of money back. 

Roll forward to 2021-2022 onwards and that's running at 9 or 10%. And so they've got the exact opposite challenge now. And so it's really about how do you generate liquidity. So you're seeing a lot of LP led secondaries in terms of getting some DPI and generating liquidity. 

And what's really interesting here, I think, which is quite different from the way in which secondaries grew up, I guess really is a niche perhaps for distressed assets is you're getting, you're seeing a lot of GPs that are leading secondaries themselves. 

You know, these tend to be called continuation vehicles and here you're seeing a lot of GPs that are actually focused on the crown jewels, so to speak. And so this ride the winner strategy is something that we've really seen in the past couple of years where you've got GPs that own these assets. 

So known industries, known management teams and they want to go again for another five years because they see the opportunity ahead.  

Anna Ellis: Makes sense. Like you're in it, you know it. 

Alex Tandl: Absolutely right. So it's one of these things that really makes sense. And so investors on both sides of the transaction, so to speak, are willing to enter into a trade. 

The other driver, which I think is probably well known, but we'd be remiss not to touch on as the denominator effect. So as we see revaluations in particular in listed asset classes and obviously there's been some gyrations of late, institutional capital needs to rebalance their portfolio. So that's another driver of secondary transactions. 

And then in the Australian context, a driver over the past, the big driver over the past couple of years has been the consolidation within the superannuation industry. 

So if you think about a smaller superannuation fund, they may run a private equity portfolio of a couple hundred million dollars. They merge into one of the really large superannuation funds and now suddenly they're diversified PE portfolio of a couple hundred underlying investments is now the same size as one single check size. And so you'll see what they'll do is they'll look to clean up the portfolio and there'll be lots of opportunities for secondaries there. 

I think the other important side is the demand side. And so you've got investors that are really interested in secondaries mainly for two reasons. 

I think one is really around pace of deployment and so contrast secondaries to a typical at call closed end private equity fund where you're making a commitment to private equity, you're not actually investing in private equity because it may take you several years for that capital to be called, by which point the landscape may have changed significantly. 

A secondary on the other hand, is an opportunity to generally invest maybe not 100 cents in the dollar, but 80 to 100 cents in the dollar out of the gates. And you know what you're getting exposure to. 

And then the other one is really around diversification. 

So if you're trying to build a private equity portfolio, it can take many, many years to get set. And so secondaries are often opportunity to get a lot of diversification, whether that's by vintage, which you know is important for returns through the cycle, by manager and by industry. 

So I think they're a couple of reasons that we've continued to see secondaries be a real driver of growth in the industry. And I think by some accounts it'll double again by 2030. 

And so there aren't that many industries where you see 20% compound growth rates over a long period of time. But secondaries is one of those. 

Anna Ellis: continuing to mature every time we talk about it. And there was an interesting thing that you mentioned there because it sounded like there's a lot of institutional investors that are actually leading the secondary side. 

Traditionally some people think that it's the institutional investors that are actually investing or buying. So who else is out there? Whose buying? 

 Alex Tandl: Yeah. So I think often when people talk about secondaries, they talk a lot about the resurgence of high net worth and private wealth capital in the private equity industry. 

I think two stats that come to mind in the Australian context, I think by volume now by count, 40% of investors in private capital in Australia are private wealth or high net worth of all family offices. That's increased fourfold over the past couple of years. The more relevant metric of course is value of investment rather than the number of investors. And so that's increased I think around threefold. It's up to 23% today with the balance being institutional investors, right. 

So that's a very big increase. 

I think the obvious question there is, well, why is that? What's driving it? 

I think if you if you try and unpack that, the first is I mean the appeal of the asset class. I think to everyone here that should be pretty obvious as to why private capital and private equity in particular is an attractive asset class. 

You know superior long term returns relative to list of another asset classes over a very long period of time. Quite diversified industry exposure relative to listed markets, I mean, I think I haven't looked at the numbers today, but if you think about the US context, 30 or 40% of the S&P 500 is just the MAG 7.And so it's a very, very concentrated, concentrated bet. 

And then private equities tends to be uncorrelated to other asset classes. So I think that's been true for a long time. That continues to be true. I can see why they want to invest in the asset class. 

So I think the explanatory variable here as to why we're seeing it now is really more around access. And so for a long time, private equity was really only accessible to institutional capital. And a lot of that is to do with the at call capital construct that we've spoken about. I mean, also minimum check sizes. 

And so evolutions within the industry, in particular evergreen funds, for example, mean that the asset class is suddenly accessible to a much broader universe of universe of investors. 

You know, I think if, if I was asked to make a prediction or place a bet, it'd probably be that we're going to see a lot of appetite for evergreen funds going forward. Like if you just think about it at the highest level, what are some of the features of an evergreen fund? It's an upfront commitment. There's no, there's no at call component. So you're not managing capital call commitments, you're getting access to a diversified portfolio from day one. And in pretty much all the cases that we're seeing in the market, there's access to liquidity as well. 

So for a high net worth or a private wealth investor that is certainly getting set in an asset class for the first time, that's really attractive. 

So I think that we're going to see evergreen funds continue to gain in popularity over the next couple of years. 

Anna Ellis: Certainly, I think I've heard Mike call it the democratisation of private equity. So I think that sounds like what you've just described. 

 Anna Ellis: Well, thank you, Alex and Frewen, really appreciate your insights today. 

Thank you everyone for joining. If you want to hear or see anything else about what we've spoken about today, you can jump on our website or reach out to any of our team. Thank you.