Q1 Market Review by Rupert Bell, Director of DACH

Rupert Bell highlights a striking duality in the market at the close of Q1: while some firms remain mired in the fundraising crisis, others thrive with bustling activity and investor interest. 

Despite challenges, signs of resilience emerge, underscored by a growing sophistication in private equity operations. 

A view on the market at the end of Q1

There are times in my job when I feel as though I am talking to two separate markets – on the one hand, firms who continue to see events dominated by the fundraising crisis, unable to break the cycle of no exits and no liquidity and for whom deal making just remains impossible given the combination of interest rates, inflation and gaps in valuation expectation; on the other, teams in seemingly very similar situations who fizz with activity, pipelines full, diligence well underway and LPs fighting to get into their funds.

For sure, there are niches where recovery is slower and more painful, for example where financing costs play an outsized role in the viability of a deal; small-cap firms have felt much less of a dip in the last 18 months, if at all. And it has been striking to track announcements of new fund closings where hard caps have actually been lifted to accommodate excess demand.

Reflections on market dynamics

I am cautious not to underestimate the challenges facing many players, and it can be difficult to draw too many conclusions from this bifurcation, but a few thoughts come to mind:

  • Luck does play a part, but where a firm has a great story, investors will eventually find it; this may take patience and a whole lot of effort but in most cases, the match is eventually being made.
  • Deal flow, especially at the mid or small-cap level, can be strongly influenced by the level of hunger investment teams demonstrate in sourcing. It may not all be converting into completions quite yet, but the teams leaning forward into the market are telling a very different tale about late-stage activity now than those leaning back and waiting for things to come to them.
  • There are signs that valuation gaps may be somewhat more readily bridged than a few months ago, as private sellers recognise the peaks of 2021-22 may not return for some time and choose to get on with the rest of their lives, and financial sellers take a holistic view of the trade-off between the last 10% and locking in an exit, any exit, to promote the next fundraise.
  • Overall, the private equity model has become far more sophisticated than just a few years ago and not every firm has been able to keep up with the new norm on cost, pace or sophistication; we are seeing a growth in the gap between the best and the rest.
  • New names are emerging and an entrepreneurial approach is being rewarded with capital, deals and talent. For every firm failing to raise the next fund and switching to deal by deal (a euphemism if ever there was one…), we hear of a new entrant with a fresh approach and a compelling differentiation.

Private equity is gradually coming out of one of its periodic down cycles, with certain players accelerating ahead of the rest of the pack. Leadership and culture drive much of this. The industry is founded on analytical rigour and excellence in execution, but it is increasingly the soft skills, rather than the hard ones, that define the winners.

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