Conference Presentation, Panel
The Promise and Pitfalls of Private Equity | Global Conference 2024
Milken InstituteMark Thierfelder, Joe Baratta, Anne-Marie Fink, Patrick Healy, Jonathan D. Sokoloff, Pete Stavros
- Investors are expected to reach investment destinations despite market delays, with a neutral comparison to the 2008–2012 period citing improved liquidity and distribution availability.
- Capital invested between 2019 and 2021 will require an extended period to resolve as holding periods lengthen to six, seven, or eight years to maintain target internal rates of return (IRRs) and manage multiple contraction.
- Market multiples are predicted to decline from 2021 levels to accommodate borrowing costs returning to approximately 9%, while private equity vintages formed during low liquidity may benefit from constrained leverage and better purchase prices.
- Holding periods will likely extend as exiting investments becomes more difficult due to the large volume of capital in the market, necessitating more aggressive EBITDA growth to offset valuation pressure and potential IRR drops to 10%.
- Exit strategies are expected to diversify beyond initial public offerings (IPOs) toward continuation vehicles, sales to high-net-worth channels, and public market recycling, though continuation funds are predicted to remain a small ecosystem component due to GP preference for cash payouts.
- Private equity is anticipated to significantly outperform public markets over the next decade, driven by deteriorating fundamentals in public indices like the Russell 2000 and superior private market governance models that facilitate operational improvements.
- Institutionalization of private markets is advancing into a "third inning," enabling longer asset ownership, liquidity via equity recycling, and the sale of large private stakes to broaden access for individual investors.
- Liquidity management faces challenges regarding small remaining ownership pieces and the alignment of interests between buyers and sellers, though new capabilities for accurate deal valuation are expected to emerge to satisfy limited partner (LP) cash demands.
- A decade-long mega capital expenditure cycle is forecasted in the electricity ecosystem, driven by compute power, data centers, electric vehicles, and HVAC electrification, creating substantial opportunities for new capital.
- Public markets present opportunities where a significant percentage of companies trade far below previous highs, contrasting with a private market opportunity set described as larger than the available capital base.
- Industry impact is projected to extend beyond financial returns through financial literacy training for millions of employees, decarbonization initiatives, and bridging opportunity divides at a scale unmatched by middle-market public companies.
- Democratized investment vehicles are expected to enhance competitiveness by offering certainty of capital and non-cherry-picked fund slices, potentially growing the allocation of private equity in individual portfolios from tiny levels.
- Public market governance is viewed as having deteriorated over the last 25 years regarding liquidity and holding speed, whereas private governance is seen as superior for driving stakeholder projects.
- Public markets will continue to serve as a viable venue for long-term liquidity, particularly for buying high-quality portfolio companies from private firms, while private equity firms maintain confidence in deploying and returning capital despite current pauses.
- Significant private market growth relies on public policy changes, specifically revitalizing 50-year-old ESOP laws, to facilitate company ownership for 50 million people and achieve massive economic impact through government support.
- Identifying specific psychological characteristics in leaders, termed "Burt Beans," who can build cultures in challenging industries, is identified as a necessary industry capability for future success.