The State of Private Equity

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This year was my fourth time attending SuperReturn - one of the world’s biggest private equity conferences. As Berlin, where I am based, isn’t a much-frequented destination for private equity funds, it is a must-have event for me, and most other Berlin-based LPs: It is by far the easiest way to meet a lot of GPs over the span of just a short week.

So how was this year’s SuperReturn? What were the highlights, what were the themes - and how do I view the industry after a week of meetings?

A short history of SuperReturn visits

Attending the conference for the last four years has been very insightful - not just because I had the chance to meet many interesting GPs, but also because the meetings blend together to help get a picture of the state of private equity:

In November 2021, it seemed like we were at peak private equity. Interest rates were still low, COVID seemed to be coming to an end, and fundraising posed no challenges yet. As a small family office with an unusual background, some GPs made it seem like meeting us was a favor - just give us your money and thank us for letting you into the fund.

In June 2022, that mood had shifted a bit. Interest rates were starting to be on the rise, inflation was rallying, and geopolitical tension started to rise amid Russia’s invasion of Ukraine. But despite that, GPs were oddly optimistic. My personal highlight was meeting a software-focused buyout fund, who proudly told me that the take-privates that they executed at 20x EV/EBITDA in 2021 were now possible at 10x EV/EBITDA - but seemed to not understand my question when I asked whether they’d reprice the 2021 deals to the 2022 multiples.

In June 2023, mood seemed to have hit a trough - but was shifting towards cautious optimism. Interest rates seemed to have hit their peaks, as did inflation. Some consumer-focused businesses were struggling. But if you are a GP focused on boring B2B service companies, your portfolio companies seem somewhat stable. Some GPs even acknowledged that multiples had come down relative to their entry prices - a rare show of humility.

Which brings us to June 2024.

Private Equity - at a crossroads?

The mood of this year’s SuperReturn, to me, seemed somewhat odd, even relative to the tumultuous prior years.

Fundamentals, and the state of the economy, seem to be improving. Interest rates are starting to come down (although slower than expected). Inflation is stabilizing. There seems to be no imminent economic crisis on the horizon, although there is a lot of geopolitical uncertainty, arising from areas such as the ongoing war in Ukraine, the China-Taiwan conflict, and of course, the ongoing US election. Public markets also have performed nicely, improving the prospect of IPOs and thus an exit channel for GPs that had been closed in the prior years.

But at the same time, the outlook for private equity, despite its rapid rise in recent years, seems uncertain. Higher interest rates have not only brought down the valuation of existing portfolio companies, but have also reduced the scope of companies that can generate sufficient returns for the private equity funds. Even as value creation teams and buy & build strategies allow more firms to tap into alternative growth paths, the competition for good companies will continue to heat up - which might bring down returns. Alternative channels such as wealth management or retail clients can only offset fundraising challenges to a degree.

Of course, it is not surprising that GPs try to sell me on what is working well rather than highlight those that might speak against an investment in private equity. But to a degree, it feels like they are putting their heads in the sand rather than face the truth: When probing for challenges around leverage amid rising interest rates (just when tech mega-buyout firm Vista has to write off >$2BN (!) in equity just three years after its investment), GPs told me that they tend to be more conservative in regards to leverage - with “just” 5-7x turns of EBITDA as leverage. When asking what the biggest challenges in their portfolio are, it’s not write-offs - it’s that one portfolio company is growing a few percentage points slower than they thought in their base case scenario. Rather than be honest with their challenges, they dodged the question - it felt like the equivalent of answering “I tend to work too hard” when asked for your biggest weakness at a job interview.

Which made it feel ungenuine, and left me feeling uninspired. While my careful optimism in regards to private equity’s long-term performance continues (especially in the lower end of the markets and in the case of highly specialized GPs), I think this was the first time where I didn’t have at least one memorable meeting.

Past and Current Trends

But even if I had no notable meeting - perhaps it’s worth highlighting how 2024 compared trend-wise to some of the 2023 meetings:

Carve-Outs: Still a big strategic focus for many GPs. As many publicly listed firms need to focus on their core business after years of easy growth, private equity stands ready to take underperforming divisions off their hands. Especially for complex carve-outs, valuations still seem somewhat lower - but properly executing them continues to be more easily said than done. Also, if everyone seems to do them, the question arises if prices will stay low.

Continuation Vehicles: A big trend among secondaries funds. In the past, it seemed like GPs highlighted them as an addition to traditional LP-led secondaries (perhaps also given the skepticism around conflicts of interests). This year, that changed: Many secondary funds actively highlighted the risk-reward they see in adding GP-led secondaries to LP-led secondaries, some of them even retaining full flexibility around the percentage of GP-leds in their funds.

Evergreen Vehicles: Surprisingly, this 2023 trend topic was less of a focus in 2024, at least for institutional clients. I wrote about the Rise of Permanent Capital (including Evergreen Vehicles) recently, driven partially by how much GPs highlighted their desire to raise permanent capital vehicles during last year’s SuperReturn. This year, just one GP brought up that they were raising an EV - perhaps less of a thing to focus on during such challenging times.

Other Highlights

With that in mind - what else was notable this year?

Tiny Houses: As I wrote on LinkedIn, Tiny Space was probably Berlin’s hottest start-up last week. Rumors were circling all around: One attendee said that SuperReturn saw the two Tiny Houses last year and offered to finance all the houses we saw this year. Prices apparently started at €12K per day, with double-digit waitlists of GPs looking to book them. Even as fundraising continues to be challenging, you can be sure that SuperReturn as a business will be a profitable endeavor.

New Family Offices: I was pleased to see that many new family offices attended SuperReturn this year - including those on the smaller side relative to the 250M€ “minimum investable assets” that is often thrown around. On the same note, it is also those family offices that seem to break the common pattern of middle-aged white men as family officers (please note that I am well aware that I also fit this description) - a pleasant development to bring more much-needed diversity into our industry.

Flo Rida: After Nile Rodgers (2021), Duran Duran (2022), and Earth, Wind & Fire (2023), this year’s big performer at a SuperReturn afterparty was no other than Flo Rida. It felt like a throwback to my high school days, and it was a great performance - the crowd seemed to have a good time, which is not an easy feat considering that it was 90% white men in finance in suits. 😉 The rumor mill around who will perform is always a key talking point around the conference - maybe one year it really will be Eminem or Beyoncé.

Next week, back to “regularly scheduled programming” of insights and essays. What was your SuperReturn experience? Did you have a takeaway from your meetings? I would love to hear them - feel free to reach out on LinkedIn, or even easier, just reply to this newsletter.

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