This is an edited extract from the Professional Planner ‘Guide to advice for high-net-worth clients and family offices’, download the full copy of the guide here.
IPO activity in Australia has hit a decade low, according to the Australian Securities and Investments Commission. This is not just a local issue, it’s a global trend. In the US, for example, the number of listed companies has fallen from 7300 in 1996 to around 4300 today.
Consequently, investors globally are steadily increasing their allocation to private assets.
According to consultancy group EY, around US$24.4 trillion ($37.3 trillion) of capital is invested in private markets and that figure is expected to grow significantly, driven by an increase in high-net-worth investors, intergenerational wealth transfer, and companies staying or going private.
Private markets can offer a broader and more flexible opportunity set than public markets, as well as the potential for attractive, less volatile, uncorrelated returns. EY says private capital has displayed great resilience in volatile conditions and presents tremendous opportunities for investors and entrepreneurs globally.
But investing in private assets, and private equity in particular, is not like investing in public assets.
Apart from the obvious differences around how participants access the market, raise capital and communicate to shareholders, there are also important differences in terms of liquidity, transparency and risk.
As a result, experience, reputation, relationships and scale are all critically important.
Value creation formula: Approve, improve and apply
As one of the world’s largest private equity investors, EQT has deep expertise in assisting companies across the different stages of their development and helping them to drive growth and value creation.
Underpinning EQT’s success is the group’s experience across cycles and active ownership mindset. We call it the EQT Playbook, and it has helped support value creation for over 30 years.
Our patient approach to deploying capital, and our thematic, sector-based approach to sourcing deals means that investment decisions are guided by strong fundamentals and macro trends.
Put simply, we aim to make our investments work smarter, not harder.
Identifying and riding the mega-themes driving investment markets is one way to work smarter. Before looking at specific companies, investors should look at the sectors and industries benefiting from long-term secular tailwinds such as favorable demographic shifts, consumer behavior and government policies.
Good businesses operating in those industries will have growth automatically baked into their profile, giving investors a head start.
However, while thematics are important, there is also no substitute for quality. A foundational principle for us at EQT is to invest in good businesses with attractive fundamentals. And our mission is to make good businesses great by adding value through active engagement and strong governance.
We are not looking for turnaround stories, no matter how fast the sector and industry they are operating in is growing.
Making smart investment decisions requires patience, which can be testing when opportunities appear urgent and time sensitive.
FOMO, the fear of missing out, is not just a social but also a financial affliction for many people today. Poor investments are often the result of being rushed to make decisions without adequate due diligence. Taking the time to identify good businesses reduces the risk of errors as well as the cost and time involved in having to correct them.
A rising tide lifts all boats
When it comes to those mega-themes driving investment markets, some are more obvious than others, such as artificial intelligence and digitisation, energy transition, and social infrastructure, which encompasses healthcare, aged care and retirement living.
But wealth management is also an emerging theme in Western countries, driven by ageing populations, and rising levels of household wealth and debt.
It is also a fragmented sector, dominated by a large number of small and medium-sized enterprises (SMEs). This creates opportunities for consolidation and growth through M&A, particularly as baby boomer business owners seek to sell and retire.
EQT, which manages €266 billion ($477.6 billion) in assets, has a natural advantage at the big end of town and focuses on large deals in the vicinity of over €350 million. But the value creation principles that underly the EQT playbook can be applied to organisations of any size.
For private advisory firms looking to attract capital and accelerate growth, there are a number of qualities that can make a business stand out, starting with a high-quality team and a robust governance framework.
For SMEs, that includes having formal systems and processes for ensuring the business is managed effectively, performance is monitored and measured, and strategic goals and priorities are set and met.
In a fragmented market, high-performing businesses with a competitive advantage of some sort – be that an area of specialisation, proprietary technology or an exclusive referral relationship – are also highly sought-after, as they are able to make bolt-on acquisitions and apply their competitive advantage more broadly.
Daniel Bullock is head of private wealth, Australia & NZ at EQT.
