Mike Lukin: Probably a couple of things happening that are quite interesting and worth exploring a little bit this morning. The first what I would say is around asset allocations to private markets and the opportunities to support new funds being raised, and what we’re hearing a lot on the ground from you know, local institutional investors and international institutional investors is a flood of money really early in ‘22 into private market allocations. And those allocations being deployed with private equity firms and then followed by basically a slowdown in exit activity and a reduction in the kind of listed equity valuations and bond market valuations for that matter. And so there is a lot of noise around about allocations to private markets being relatively constrained at the moment, you know, a lot of international investors are overallocated.
In Australia, more locally, we’re seeing a lot of the superannuation funds international funds that are subject to fee regimes and regulatory aspects around kind of how they allocate to private markets in higher cost asset classes looking to reduce their exposures to become the low cost option in the market. I think all that from an asset allocation perspective, from a market perspective is probably meaning two things. One is for new funds being raised next year, it’s going to be really hard. So particularly I think in the first half of ‘23, what you will see is probably longer fundraising periods for new funds. Opportunities to access funds that perhaps didn’t exist historically because of you know, those allocations being tightly held by you know, foundations, endowments those kind of groups in the US. So I think those top tier firms globally are probably looking going to look to explore other markets like Australia, like high net worth markets globally, for capital in a way they haven’t probably done so since the global financial crisis in coming out of the financial crisis.
So I think from a kind of allocation and opportunity to access funds, I think we’re going into probably an interesting time. Probably more interesting is what we see in coming down the prior pipe around secondary opportunities, not only kind of from an Australian perspective or an Asian perspective, but also from a global perspective. So firms that
are overallocated to private markets, you know, the US investors generally have a 31 December balance date. They’re going to look at their portfolios and say I’m overallocated, I don’t have capital to deploy. How do I actually make capacity in my portfolio? How do I kind of weed out, you know kind of where I want to be deploying capital? So I think what we’ll see kind of coming out of 31 December is a lot of deal flow on the secondary space and I think that will basically permeate through global opportunity sets. In Asia, I think we’ve also got the additionality of a number of you know US and European investors, and I think it kind of applies to Australia as well kind of coming back closer to home with their allocations and we’d see these regularly when you have downturns people to tend to deploy capital closer to home. They feel more comfortable if they’re based in the US to deploy in the US based, based in Europe deploying in Europe. And so I think what we’re going to see is a lot of secondary opportunities coming to market around the Asian markets around Australia from offshore investors who are kind of trying to repatriate capital. I think we’ll continue to see a steady flow of opportunities out of the superannuation market here where, as this focus on fees continues to kind of roll through as we see more mergers and
acquisitions monks superannuation funds, we’ll continue to see opportunities as people reposition at portfolios, right size their portfolios, have minimum check size that is above their existing allocation sizes, basically looking to dispose of those investments, and I think that’ll be a really interesting or strategic opportunity longer term.
I think around the market itself in the private market exposure that that we have, my sense is we’re probably going to see a little bit of reduction in valuation over the next six months – 12 months and really if you think about how private investments are valued it’s, in essence, the earning stream on a business multiplied by the market multiple for those businesses. And if you think about the ‘22 story, the ‘22 story was all about that market multiple coming down. And we’ve seen that one turn or two turns of EBITDA less in valuations for businesses, but on the other side, you’ve really seen really strong economic performance and really strong earnings performance from a lot of businesses. And so the portfolio valuations will continue to hold up through this market environment because the economy is still strong.
What we’re seeing going into ‘23 however is probably a reduction in kind of earnings driven by the consumer becoming more cautious, you know can’t have the interest rate rises the inflation cost pressure coming through the system and that not have an effect on the economy. And so I think as we roll into ‘23, we will see those earnings numbers come down. We’ve seen the multiple come down and so from an investment perspective, I think we’ll see some really interesting buying opportunities in ‘23 as a result. We’ll have both parts of the equation coming to kind of call it cyclical lows great opportunities to acquire on the back of that and then, kind of as we come out of that slow down ability to grow earnings ability to see multiple expansion coming back into the portfolio.
And then finally, I think the other piece is with, had a great bull market in equities for a long time. In essence, it has come off a lot over the last nine months in particular what that tends to mean is that listed companies become more focused on their own internal businesses. And what is core, what is non-core, shareholder activism becomes more important as people are looking at their portfolios and saying well, it’s not up just through beta by 20% this year. Company A you need to sell that non-core asset, or Company B you need to you know merge with another company. And so I think that kind of activity means we’ll see more corporate carve outs. We’ll see more sale of non-core assets and I think we will potentially see some more privatizations as listed boards kind of recognize and realize that we’re not going into a really strong bull market environment. You can’t allow the market to get you out of a takeover offer, kind of historically in bull markets what tends to occur people put a takeover offer on and you can reject it and then kind of beta of the market basically makes that look like a really good decision. When the market’s flat to declining, it becomes more difficult to sit there in front of shareholders and say we’re going to reject this offer from another company, or from private equity for that matter. So I think the way we’re thinking about it – where are the opportunities for next year, in particular I think access to some great fund opportunities, opening up of otherwise closed private equity firms/ venture capital firms to new investors. I think the big one we see is really going to be around secondary opportunities both the strategic rationale from superannuation funds but then the more opportunistic around, buying/selling in the market. And then from a more traditional kind of buy side, good pricing, good entry multiples, good time to have money committed to private equity to give the best private equity firms in the market the opportunity to deploy capital into what should be, call it a cyclical low over 2023.
Anna Ellis: Great, so quite a few shifts in the external environment but still lots of opportunities in private markets.
Mike Lukin: Yeah, I think that’s right. I think one of the things that private equity does well is take advantage of those shifts, right? That’s those structural shifts those, shifts in the cycle are actually where private equity does exceptionally well. So it’s you know being brave when others are fearful, it’s being cautious when others are bullish, that tends to be where private equity does well. Sell when the market’s hot, buy when no one else has capital – that’s how you can kind of drive long-term great returns out of this asset class.