Experts say the global economy is pushing private equity to move from growth investors to value investors. How long will it last?
“Value-oriented strategies have become more in vogue,” says Fraser van Rensburg, a founder and managing partner with Asante Capital.
Value-oriented strategies are deals where investors buy assets at discounted prices. These assets may be distressed or just underpriced.
Van Rensburg says PE firms need to be patient and careful not to overpay. “LPs started forgetting what GPs were paying for assets,” he says. “So if an asset that was really worth 10x or 12x Ebitda is being bought for 15 or 17 times Ebitda, LPs kind of forgot that that might not be the best thing long-term, because there was such a growth tide and the performance that was coming back from these funds just got better and better. LPs tended to forget the fundamentals of buying smartly and buying at good prices. So that’s come back in vogue again now.”
PE firms are raising funds specifically for underpriced targets. For example, this week New York-based Diameter Capital closed its Diameter Dislocation Fund II with $2.2 billion in capital commitments. The fund will look to invest across sectors with a focus on dislocated credit, stressed and distressed investments emerging from either micro-cyclical dislocations or macro challenges.
However, van Rensburg cautions that this trend may not last long-term and things will turnaround eventually. “The most important thing to look out for is the pickup in M&A markets because that will be the clear indicator that we’re on the road to recovery and the market has bottomed out.”
When do you think deals will pick up again given market conditions? Give me your predictions at [email protected].
–Cole Lipsky
