I had the pleasure of speaking at the China Development Forum last week on the opportunities for global investors. Here is an excerpt from my discussion.
It is really an excellent time to be in private equity if you have the expertise, the know-how and the track record. In the last decade, we have focused on diversification, lower leverage, and invested in both growing and resilient sectors. These are lessons we have learned from the range of financial and geopolitical issues that have deeply impacted the investing environment over the last 10 years.
In a volatile landscape, private equity is a stabilizing force. For instance, at the onset of the pandemic in 2020, Eurazeo had boots on the ground and we were able to help our portfolio companies gain access to capital and pivot their business model to preserve their market positioning. I know many other investors supported their portfolio companies in a similar capacity, saving countless businesses and jobs.
Through 2025, we can expect an unusually high level of uncertainty, asset prices in an excessive level, and low interest rates. In this context, alternative, private, and alpha markets will be key to deliver the great returns that the PE industry had constantly deliver over the last 20 years.
How do we achieve this?
Leverage our expertise as investors that are used to navigating very competitive environments. . With soaring levels of dry powder, robust credit markets and recovering economies, the 2021 deal markets promise to be incredibly busy. To succeed in this very competitive environment you have to be as strong, seasoned, dynamic, and aggressive as ever.
Acknowledge that a polarized economic landscape emerged and is critically affecting deal flow. Investors have transformed their investment strategy, focusing on the sectors and companies that best address the challenges that the future holds. The sectors that have proven most resilient to the pandemic are familiar: technology (especially software), industrial goods, financial services (especially fintech and payments) and healthcare. These four broad sectors accounted for over 65% of all transactions last year and are set to see most of the action in 2021.
Continue to offer an international gateway for our portfolio companies. We pride ourselves on being a value-add partner, attracting the best entrepreneurs by helping them go from good to great, bringing more capabilities, increasing operating resources, expanding networks, and bridging a global footprint across four continents. Over our 100-year history, we realized that there are many great middle market GPs, but very few that had our value proposition of helping companies develop internationally. This is a niche for us that we are developing over time. In China, our exceptional win-win partnership with CIC was the result of 10 years of the successful development of our companies in China.
Remain steadfast in driving responsible investing. There is increasing attention from LPs and entrepreneurs on companies’ impact on the environment, societal issues, and corporate governance, signaling that investors are more carefully evaluating the standards for due diligence. In order to face this great challenge, there is no other road than adaptation. Private equity companies have a key role to play in this transformation: they have the means, the speed of action, and the global reach. That is why Eurazeo has been a pioneer with a very specific approach: ESG for us is not a matter of setting up an isolated Impact fund. Instead, we have put ESG at the very heart of everything we do, both in terms of our investment targets and our investment processes.
Invest in the growth in Europe. The middle market in Europe is very attractive. While the perception is that there Europe is slow-growing, the reality is there is a highly educated population, one of the strongest middle classes, plenty of entrepreneurism and a lot of innovation. This is especially true in the Tech sector. The exceptional market is a result of the combination of a deep market of fast-growing, European-born companies and attractive valuation dynamics compared to other regions.
The Covid-19 pandemic is another demonstration of a “VUCA” environment: volatile, uncertain, complex, and ambiguous. The pandemic has accelerated many of the trends already in evidence when we entered this decade of exceptional transformation. The post-crisis world will be more indebted, more unequal, and more local—but also more digital, and more sustainable.
We continue to see significant demand for capital from companies of all shapes and sizes looking to expand and are meeting that demand with a growing influx of capital from institutional investors looking for yields and great returns. Our investment companies are tremendous vehicles for growth and value creation for the whole economy in the post-crisis environment: the private equity industry supports more than 30 million US jobs and approximately 5% of U.S and European GDP. Our economic, social and environmental impact is substantial.
This is really our moment.
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