Private equity transactions are expected to pick up again in the second half of the year, bringing assets ready for exit and liquidity for pension funds that set strategic targets to invest in an asset class experiencing a tough time last year.

“The mood [in private equity] has improved. We see a lot of activity to prepare assets for exit, but you don’t see that reflected in market data yet. Activities and capital deployment will likely pick up in the second half of the year,” Michael Lindauer, chief investment officer of private equity at Allianz Capital Partners, told IPE.

Alternative asset manager Golding Capital Partners also expects private equity transactions to increase again in the second half of the year.

“I think that we are at the beginning of a new cycle in terms of transactions. We speak with GPs [general partners] and we hear regularly that preparations for transactions are starting, data rooms are filled, advisors are mandated, and ultimately talks are starting,” said Matthias Reicherter, CIO of Golding.

With the “era of free money” over, private equity firms that have experience of investing through different cycles, and the ability to create value through operational improvements, will be well placed to succeed, said Claus von Hermann, managing partner and co-head of mid-market at private equity firm Triton.

Michael Lindauer at Allianz

Michael Lindauer at Allianz

“We see a good pipeline of opportunities in our core sectors in Germany and have already been active in making new investments, such as Trench. Overall, the market has significant opportunities if you know how to manage the risks,” he added.

As the macro economic environment stabilises, with a weaker rate of inflation and the first interest rate cuts on the horison both in the US and in Europe, uncertainty dwindles and investors can better prepare for the future, Reicherter added.

This less foggy scenario is conducive to buyers and sellers adjusting their expectations, and agreeing on a “ball park” price, Lindauer said.

He said that pension funds have the challenge of being at the upper end of their private markets allocation and private equity quotas, even though private equity portfolios have remained stable and resilient so far.

“Fundraising for pension funds can be a challenge given the issue of quotas. On the other hand, pension funds might recognise the fact that it is a good time to invest given market pricing is moderating,” he said.

Mathias Reicherter at Golding Capital Partners

Mathias Reicherter at Golding Capital Partners

Golding’s Reicherter splits the playing field in two. On one side pension funds that already invest in alternatives, and private equity, will continue to invest aware of the positive aspects of private equity investments, and that will try to keep their investment portfolio at the level reached.

“However, pension funds already invested in private equity, or alternatives in general, tell us that they need some liquidity coming back – in other words, exits need to happen – and then they can reinvest,” he said.

On the other side, there are pension funds that, instead, have not invested in private equity, or alternatives in general, or are not prepared to invest in alternatives, and will have to liekly be convinced to do so, as they might look at other sources of returns, for example fixed income, the CIO explained.

Golding’s message to pension schemes is that private equity brings diversification, a better risk/return profile, and is a resilient asset class that is stable against macroeconomic shocks.

The denominator effect

For Triton’s von Hermann, some pension funds, especially those that have been established for a longer time, and are long-term investors in alternatives, are facing some issues with the denominator effect, and have scaled back on their annual commitment rate. Overall pension funds remained an active and attractive source of capital in 2023.

“With the currently muted deal activity we do not expect pension funds in Germany to overshoot their target allocation soon. There might be a shift from tech-oriented investments to other sectors – so less VC [venture capital] and more buyouts – like in previous phases of market correction, but overall, they will remain an important fundraising channel in Germany,” he added.

German pension funds are also growing steadily as contributors overweight active pensioners, meaning more cash inflows than outflows.

“This is the perfect situation to invest in alternatives like private equity. Many pension funds have relatively high allocation targets, which are not fully met yet, therefore they remain active investors in the market,” he von Hermann noted.

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