Outlook on Private Equity Amidst Rising Interest Rates

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.