Outlook on Private Equity Amidst Rising Interest Rates

Naji Nehme, CFA, Chief Investment Officer at Petiole Asset Management, and Johannes Huth, Chairman of KKR Europe, Middle East and Africa, discuss the latest trends, strategies, and opportunities in the world of private equity. Below are the highlights of the webinar:

• Market & Private Equity (PE) Trends: The rapid increase in interest rates has shifted PE market dynamics dramatically, leading to a decline in transactional activity due to costlier debt financing and sellers' reluctance to accept lower purchase prices.

• Response of KKR: Despite the altered market dynamics, the portfolio continues to perform well with successful hedging strategies, although deal flow has slowed.

• Public vs Private Valuations: The impact of higher interest rates is less severe in private markets, leading to a discrepancy in valuations between public and private firms.

• The Rise of Private Debt: The reticence of traditional lenders has led KKR to rely more on private debt, a market growing in scale and value that may become a permanent feature of the PE world.

• The Role of Carve-outs: The carve-outs trend is expected to continue, and has been a significant focus for KKR with several successful deals in Europe.

• Sector Focus: KKR remains focused on the environmental, social and corporate governance (ESG), healthcare, and digitization/ software sectors. The sectors have not changed, but they emphasize value-orientation over high growth-oriented/ high-multiple deals.

• How KKR invests in ESG: KKR invests in ESG through avenues such as the Impact Fund, Infrastructure Fund and their latest European fund, and is considering additional initiatives on climate change.

• Consumer Sector Trends: The European consumer market is robust, with KKR consumer brands performing well and luxury goods companies indicating healthy demand.

• Exit Strategies: Exits and monetization have slowed due to closed IPO markets and a decline in secondary sales, but KKR remains open to targets with revenue or profit margin growth potential.

• Selling to Corporates: Corporations, bolstered by substantial cash reserves, are seeking growth through mergers and acquisitions, and continuation funds remain a viable strategy for certain assets.

• A Good Time to Invest: Lower leverage, pricing, and multiple assumptions create an optimal environment for business acquisition, making 2023-2024 potentially strong vintage years.

• Portfolio Strategies: A cautious approach to the recovering stock market is advisable. Private debt and the reintroduction of fixed income into portfolios represent growing allocation opportunities.

• Pressure on Banks: The European banking system remains shielded from the banking crisis thanks to prudent regulation and limited real estate exposure (unlike US regionals).

• Advice to a Young Graduate: A career in PE is still a unique opportunity for those with a genuine interest in business. Passion and curiosity are prerequisites for success.

Watch the full webinar above.