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Private Markets Newsletter

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September 30, 2024

Industry Trends

Private Credit: From mid-market to real economy financier

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There is a significant shift in credit markets as private lenders increasingly

partner with banks to finance tangible economy assets, marking a long-
term trend with substantial growth potential. Initially, private credit
markets focused on corporate direct lending to smaller, middle-market
companies, growing from $100 billion in 2006 to a $1 trillion market today.
This growth has been driven by the advantages of private credit, such as
speed, flexibility, and confidentiality, which have become more apparent
during periods of market dislocation. The next phase involves deeper
partnerships between private lenders and banks, enabling banks to
continue originating assets while private lenders like Blackstone provide
high-quality loans. This phase is expected to tap into a $25 trillion
opportunity, particularly in investment-grade strategies like asset-based
financing and infrastructure, driven by digital infrastructure and energy
transition sectors. Private credit offers compelling economics for investors,
including double-digit yields and lower risk than public loans. The investor
base has expanded to include insurance funds, pension capital, sovereign
wealth funds, and individual investors, who benefit from reduced
intermediation and better yields. Blackstone leverages its scale, sector
expertise, and access to proprietary data to create high-quality portfolios
and capitalize on market opportunities. More prominent private credit
managers with the necessary scale and resources are best positioned to
succeed as the market evolves, anticipating increased performance
dispersion among managers.

Source: Blackstone

Central European Private Equity Confidence Survey

The Deloitte Central European Private Equity Confidence Survey has been
tracking investment community sentiments biannually since 2003 and has
released its 43rd edition. The latest report highlights a significant and
sustained increase in confidence, with the PE Confidence Index achieving
its longest-ever continuous climb, surpassing the historical average to

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reach 118. This suggests a positive outlook for future activity levels,
supported by successful fundraises and the ability of experienced PE
houses to generate strong returns across economic cycles. Key findings
indicate an improving economic sentiment, with 59% of respondents
expecting conditions to remain stable and 31% anticipating improvement.
Pessimism has notably decreased, with only 10% expecting a decline,
down from 20% previously and 43% a year ago. Market activity
expectations are stabilizing, with over half (51%) predicting steady activity
levels and over two-fifths expecting an increase. The proportion of those
expecting reduced activity has dropped to just 6%. Investor optimism
about liquidity in Central Europe is also rising, with a third expecting
increased debt availability and 59% expecting it to remain the same. This
marks the fourth consecutive survey showing reduced pessimism. The
gradual and sustained recovery in sentiment, surpassing the 20-year
average, reflects cautious optimism and the experience of deal-doers who
have navigated economic cycles and complex environments over the past
quarter-century. Jan Brabec, Deloitte Partner, and Private Equity Leader
emphasizes this recovery's encouraging nature, which contrasts with the
more rapid rebounds seen in 2008, 2012, and 2020.

Source: Deloitte

Private Equity interest in lower middle market acquisitions remains

strong

Private equity firms are growing interested in acquiring lower middle

market (LMM) companies despite declining large M&A transactions in the
first half of 2024. Dena Jalbert, CEO of Align Business Advisory Services,
highlights several factors driving this trend. One key driver is the
abundance of "dry powder," or available capital, which PE firms need to
invest proactively. LMM companies offer lower costs, high potential
upside, and business agility, making them attractive investments.
Additionally, the LMM space faces less competition, allowing PE firms to

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secure favorable deals without intense bidding wars. These companies also
present opportunities for operational improvements and value creation
through buy-and-build strategies. Valuations in the LMM space are more
reasonable and stable than larger companies, allowing PE firms to spread
risk across multiple acquisitions. The current economic environment of
higher borrowing costs has given well-capitalized PE firms a competitive
edge, as they can pursue deals while others struggle with financing.
Sectors attracting significant PE interest include healthcare and
technology, home services, software and tech-enabled businesses,
industrial services and specialty manufacturing, and consumer products
with a strong e-commerce presence. These sectors are resilient to
economic cycles and offer clear growth opportunities. Overall, the strong
interest in LMM companies underscores their strategic value, helping PE
firms diversify their portfolios. The current landscape is favorable for LMMs
seeking exits or investment opportunities, indicating that the PE interest
trend in LMM acquisitions will likely continue.

Source: Global Banking & Finance Review

Market Sentiments

Investors see ‘Golden Age’ of private credit

Investors are currently experiencing a "golden age" of private credit, driven

by favorable macroeconomic conditions such as higher interest rates and
the use of floating-rate structures, according to a report by M Capital
Group. The private credit market has expanded significantly, growing from
$1 trillion four years ago to $1.7 trillion in 2023, and is projected to reach
$2.8 trillion by 2028. Christian Mouchbahani, a managing partner at M
Capital Group, attributes the positive outlook to the flexibility,
customizability, and attractive investor-risk returns of over 10% offered by
private credit, along with an illiquidity premium that maintains a spread of

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200 to 300 basis points over-leveraged loans and high-yield bonds

Investor sentiment is strong, with 58.9% of investors stating that private
debt met their expectations in the past year, and 27.5% saying it exceeded
expectations. Nearly half the investors plan to commit more capital to the
asset class in the next 12 months. The demand for private credit is further
highlighted by acquisitions, such as Janus Henderson's purchase of a 55%
stake in Victory Park Capital to expand its private credit capabilities.
Geographically, the US private credit market has grown from $40 billion in
2000 to $1.2 trillion in 2023, while public high-yield markets have shrunk
by nearly 25% since 2021. In emerging markets, banks currently provide
about 90% of corporate funding, but this could shift as Asian banks reduce
their appetite for new credit, presenting opportunities for alternative
lenders. The overall growth and its implications for credit markets are
substantial despite nearly 30% of assets under management remaining as
dry powder. Despite the challenges, prevailing trends, and favorable
market conditions, private credit is striving as a viable financial solution for
both investors and borrowers.

Source: M Capital Group

Avoiding Wipeout: How to ride the wave of private markets

This analysis discusses the challenges and opportunities in the private

markets, highlighting that while they have grown significantly over the
past decade, they are also becoming increasingly complex and
competitive. Investors need to adapt their strategies to succeed in this new
environment. The authors argue that the traditional approach of relying on
past performance to predict future success is no longer effective. Instead,
they propose a more forward-looking approach that focuses on
understanding the underlying drivers of performance. This approach
includes assessing the quality of a firm's management team's quality,
competitive position, and market attractiveness, emphasizing the
importance of operational capabilities. The authors suggest that investors

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should look beyond financial metrics and consider how a company

operates its culture, as well as its ability to innovate. Finally, they discuss
the role of technology in private markets, suggesting that digital tools can
help investors make better decisions by providing more accurate and
timely information. In conclusion, to succeed in the increasingly complex
and competitive private markets, investors need to adopt a more forward-
looking and operationally focused approach and leverage technology to
make better investment decisions.

Source: Bain & Company

The private equity storm

On April 22, Nathanaël Benjamin, the Bank of England's Executive Director

for Financial Stability Strategy and Risk, expressed concerns about the
private equity (PE) market's current state. Despite its exponential growth
over the past two decades, the industry faces significant challenges due to
higher borrowing costs, market volatility, and economic uncertainty. PE has
grown from $2 trillion in assets under management in 2013 to $8 trillion in
2023, creating 12 million jobs and contributing 6.5% to the global GDP.
However, recent investments have dropped to $84.7 billion, and most
deals are relatively small. The PE sector has thrived during a period of low
interest rates, but the recent rise in rates has led to a slump in fundraising,
dealmaking, and exits. Bain & Company's report highlights a 20% drop in
overall deal count and a 24% decrease in exit transactions. Despite
accumulating $7.2 trillion in fresh capital since 2019, the industry faces
challenges finding deals, leading to a record $2.5 trillion in dry powder.
The number of publicly listed companies in the US has halved over the
past three decades, with many taken private by PE firms. This trend raises
concerns about financial stability due to the lack of transparency.
Bankruptcy filings by PE and VC-backed companies surged to 104 in 2023,
a 174% increase from 2022. While there are signs of stability with
moderating interest rates, cautious optimism prevails. The first quarter

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2024 shows promising GenAI adoption in investment decisions and market

analysis.

Source: World Finance

Sovereign funds shift assets into reverse, turn to private debt

The 2024 Invesco global sovereign asset management study reveals

significant shifts in sovereign wealth funds' (SWFs) asset allocations due to
persistent inflation and geopolitical risks. High inflation and interest rates
have notably impacted asset valuations, particularly in growth-oriented
industries and those with significant debt. The 2024 Invesco global
sovereign asset management study reveals significant shifts in sovereign
wealth funds (SWFs) asset allocations due to persistent inflation and
geopolitical risks. High inflation and interest rates have notably impacted
asset valuations, particularly in growth-oriented industries and those with
significant debt. Consequently, SWFs increase allocations to equities,
infrastructure, and commodities while reducing cash, private equity, and
real estate investments. Fixed income allocations remain steady at 28%,
with equities rising to 32%. Illiquid alternatives account for 22% of total
assets, with private equity and real estate allocations decreasing, while
infrastructure and hedge funds/absolute return funds see increases.
Despite cooling on private equity, SWFs increasingly invest in private debt,
particularly infrastructure debt, real estate debt, and corporate lending.
Most SWFs expect interest rates to remain relatively high, with 71%
anticipating mid-single-digit rates. Geopolitical tensions are the top
concern for 83% of respondents, followed by climate change, with
inflationary fears diminishing. The study also highlights a significant shift in
attitudes towards AI, with nearly all sovereign investors now recognizing
its importance in their investment processes, a stark contrast to 2019.

Additionally, there is a 10% decline in SWFs with ESG policies, which is

attributed to a more mature and stringent approach to ESG investing. Over
80% of respondents incorporate ESG attributes in manager selection,
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reflecting the growing sophistication and higher standards in ESG

practices. This maturity in ESG understanding drives stricter definitions and
expectations from asset managers. While the US dollar remains the
dominant reserve- currency, the study reveals concerns about rising US
debt levels and the potential risks associated with its continued
dominance. However, finding viable alternatives has proven to be
challenging, and the prospect of a unified BRICS currency is being viewed
skeptically. Against this backdrop, gold is an increasingly attractive option
for central banks seeking to hedge against various risks and diversify their
reserves. Precious metals' status as stable, reliable, and apolitical assets has
made them particularly appealing in an uncertain world. Meanwhile, the
growing interest in emerging markets, particularly in Asia, reflects a
broader trend towards greater diversification and the search for higher
returns. While investing in these markets comes with risks and challenges,
the overall trajectory is clear, with central banks increasingly looking
beyond traditional reserve currencies to navigate a changing global
landscape.

Source: Investor Strategy News

Sector Update

Why private equity is investing in healthcare

The promise of robust returns and societal impact drives a significant

influx of private equity into the healthcare sector. Over the past two
decades, PE investment in healthcare has surged from $5 billion in 2000 to
over $200 billion in 2021, with an estimated $66 billion in 2023. Biopharma
has emerged as the dominant sub-sector, accounting for nearly half of the
total healthcare deal volume in 2023. PE firms are also expanding
geographically, particularly in Asia and India, due to growing middle
classes and improved healthcare infrastructure. PE firms employ a "buy

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and build" strategy, acquiring and scaling healthcare businesses through

additional acquisitions, aiming for economies of scale and extended reach.
They focus on improving shareholder value by driving efficiencies and
lowering costs, although this approach can lead to higher short-term
healthcare prices. Despite skepticism about rising patient costs and profit
prioritization, some argue that PE can bring much-needed efficiency and
innovation to healthcare. Top PE firms like The Carlyle Group, KKR, TPG
Capital, Blackstone, and Bain Capital have substantial investments in
healthcare, focusing on areas like mental health, chronic disease
management, and healthcare technology. The sector's intrinsic demand,
driven by aging populations and complex healthcare needs, remains
strong. Innovations in GLP-1 medications, Alzheimer's, and cancer
treatments create new investment hotspots. Regulatory changes are
increasing scrutiny on pricing and cost-to-value ratios, with states like New
York, Illinois, and California enacting laws for greater transparency.
Investors can gain exposure to PE through listed firms or index funds,
spreading risk and potentially benefiting from the sector's growth.

Source: Finimize

Big deals rule: Healthcare private equity midyear update

The "Big Deals Rule: Healthcare Private Equity Midyear Update" provides
an overview of the healthcare private equity landscape as of mid-2024. The
report highlights a rebound in North American deals, with significant
interest in large-scale assets and IT investments. Additionally, there has
been a noticeable shift of investor focus towards India. The update is
authored by Nirad Jain, Kara Murphy, Jeff Woods, Justin Doshi, Sharon Fry,
and Mike Vandenberg, who are partners at various locations including
New York, Boston, Atlanta, and Denver. It underscores the dynamic nature
of the healthcare private equity sector, driven by substantial deals and
strategic investments in technology and emerging markets.

Source: Bain & Company

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Midyear Review

U.S. private equity market recap - August 2024

This piece provides a comprehensive overview of the U.S. private equity

(PE) market, focusing on key metrics such as deal activity, fundraising,
exits, and leveraged loans. In July 2024, deal activity and value saw
significant month-over-month (MoM) increases of 12% and 59%,
respectively, although the year-to-date (YTD) deal count is down 9%
compared to 2023. Despite a challenging fundraising environment
dominated by mega and buyout funds, the market remains optimistic due
to anticipated interest rate cuts by the Federal Reserve, which are expected
to spur M&A activity. The largest deal in July was the formation of "New
Paramount" by Skydance Investor Group, involving an $8 billion
investment. Dry powder levels remain high at $1.2 trillion, but are
expected to decrease as dealmaking picks up. Fundraising has been weak,
with YTD capital raised at levels last seen in 2020. New Mountain Capital
closed the largest fund in July at $15.4 billion. Leveraged loan issuance
surged to $151 billion in July, driven by banks becoming more competitive
in anticipation of rate cuts. The Fed is expected to cut rates in mid-
September, which should provide further relief to PE firms. Continuation
funds remain popular as traditional M&A and IPO exit channels are muted.
The fundraising outlook suggests a challenging environment, particularly
for mid-market managers, with high costs of capital and a slump in exits.
Take-private deals have increased, and PE firms are focusing on value-
creation strategies amid ongoing market uncertainty.

Source: Ropes & Gray

Artificial Intelligence Scope/ Trends

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Transforming deal execution with Generative AI

Private Equity organizations in Canada are experiencing heightened

activity due to dropping interest rates and an influx of high-quality assets.
This surge necessitates extensive due diligence, data analysis, and
decision-making, which are traditionally time-consuming tasks. The
introduction of Generative AI offers a parallel to the impact of digital
spreadsheets in accounting, promising to enhance efficiency without
reducing workforce numbers. GenAI tools, such as KPMG's Kleo, leverage
machine learning and pattern recognition to process data and generate
human-like text responses, significantly aiding in tasks like document
summaries, content generation, and report writing. Investment
professionals can leverage GenAI for quick wins, such as text generation
support for transaction teams and meeting transcription, which familiarize
teams with prompt engineering. Medium-term optimizations include
applying GenAI across the investment lifecycle for tasks like news analysis,
thesis testing, and financial analysis. GenAI can generate diligence
questions, classify financial documents, and assist in modeling and
analysis, thereby streamlining the due diligence process. In the long term,
GenAI has the potential to deeply integrate into PE firms' workflows,
creating a specialized knowledge base that drives value across deals.
However, challenges like data hallucination must be managed with proper
safeguards. To maximize GenAI's benefits, firms should establish a secure
foundation, identify new use cases, and build awareness and best
practices.

Source: KPMG

We hope you find these interesting and insightful. Check out our webpage
below to learn more about our Private Equity offerings.

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Deepesh Bhatnagar Harish C N Guneet Kaur Julka

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