GPs double down on value creation to maintain returns - AVCJ Forum

“If interest rates stay where they are and I can invest in debt and earn 12%, what is my expected return from equity for it to be in the cap stack? From a buyer perspective, when you rely on leverage, no, expected returns cannot come down, or you won’t attract capital,” Alicia Gregory, deputy CIO for private markets at Future Fund, told the AVCJ Australia & New Zealand Forum.

Investors accept that the drivers of returns will change, given the cost of debt financing has been rising. Rather, the emphasis has switched to active ownership.

“Our base case is multiple compression, so we are already starting behind the eight ball,” said Simon Kinzett, a senior director at Permira. “We must do an awful lot more to drive value creation.”

This view was endorsed by Nicholas Macksey, a partner at BPEA EQT, who observed that earnings growth will be the key driver of returns in the coming phase. He expects this to be accompanied by a more pronounced shift towards sector specialisation as managers concentrate on a handful of areas where they have the deepest knowledge and the strongest value creation capabilities.

“You need to understand your value creation plan even before you make the investment, so you hit the ground running,” he said. “Losing those first six, 12 or 18 months of a deal as you learn the ins and outs of the asset is no longer possible because you aren’t generating returns through leverage.”

Kinzett added that all GPs are doubling down on where they have pattern recognition and looking to go deeper across a narrower collection of themes. At the same time, sale processes are becoming more concentrated as vendors and intermediaries – wary of broken processes – focus on buyers who they know are interested in certain kinds of assets.

“In the early 2000s, a bank would send out about 50 IMs [investment memorandums],” Kinzett said. “Today, it’s a very narrow process with two, three, or four GPs.”

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