Insights from IPEM: Forging Confidence

Earlier this month, the International Private Equity Market (IPEM) convened in Paris at the Palais des Congrès. Titled 'Forging Confidence', this year's event sought to bring clarity to markets amidst ongoing turbulence and changing trends. Running for three days, 5,500 participants from 55 countries heard 320 speakers share their insights through a mix of formal presentations and bilateral discussions. Grégoire Langhade, Managing Director, Financial Sponsor Coverage, analyses the key trends impacting the market, and what they mean for the year ahead.

Private markets have not been immune to the volatility that has defined recent years. A sudden rise in interest rates signalled the end of easy liquidity – dramatically changing the cost of financing and resulting in a marked reduction in M&A activity. At the same time, ongoing geopolitical tensions have led to supply chain instability and fast-moving digital developments are transforming processes at breakneck speed.

Despite difficulties, private capital has remained resilient, with growth continuing across asset classes. With interest rates set to remain elevated and continued disruption firmly on the cards, the sector is well-placed to weather – and even benefit from – challenges to come.

Economic instability has shifted investor priorities from returns to resilience. With a demonstrated ability to react swiftly and efficiently in times of crisis, private markets have continued to provide steadfast support. In turn, the market landscape has shifted.

Speakers at IPEM shone the spotlight on the changing recourse to private debt. While historically, it was used for flexibility on cyclical businesses, it has become the new standard for midcap deals and is being increasingly used by companies as a way of building familiarity with a typical private equity report. While this is a novel approach, as demonstrated by the strong performance of portfolio companies, it is proving effective.

Discussions also focused on the growing number of large businesses either going private or staying private for longer. A key determining factor for many is the strength of private governance models: from leadership to operations and compliance, General Partners (GPs) bring a whole suite of competencies that function as an ecosystem for transformation.

Importantly, GPs recognise that investments in a business must be substantial, and offer considerable transformative vision that comes from years of sectoral expertise. What’s more, when it comes to building profitability in adverse markets, they recognise that the solution is not resilience through size, but growth through transformation. Indeed, while smaller, more specialised companies carry more risk, they offer far greater potential when it comes to profitability.  

Discussions among Limited Partners (LPs) supported the merits of approach, though there is still a general hesitancy when it comes to investing in private markets. Indeed, the downward trend in distribution yields over recent years has left many LPs limiting activity to large funds with historically strong results as they are seen as safe harbours when it comes to market turbulence. However, with the onus firmly on liquidity and an increasing appetite for risk, LPs are becoming more open to investing in smaller sectoral sponsors.

The breadth and pace of technological transformation has altered the scope for investment in private markets. Artificial intelligence (AI) tools mean innovation is no longer confined to digitalisation and automation is enabling companies to transform the scale and speed of their operations.

While speakers acknowledged that this offers promising opportunities for investment, the pace of change means the outlook for these markets can change quickly. Those best able to adapt are most likely to succeed, and in line with this, we are seeing a growing trend towards specialisation – with LPs increasingly favouring sector specialists over generalist approaches.

The pace of technological transformation is also increasing demand for digital infrastructure such as data centres and fibre optic networks. That said, an increasingly complex regulatory backdrop means subsequent growth must honour requirements for both decarbonisation and digital infrastructure – something investors must keep in mind.

Whatever direction it takes, speakers agreed that the next wave of innovation will be simultaneously domestic and global – opening new avenues for re-globalisation and re-shoring. In a high-interest rate market, understanding and acting on these opportunities will offer the most direct path to growth.

The outlook for the sector is one of optimism and patience. Currently, private equity is showing its ability to react, adjust, and lead. New strategies, including a normalisation of private debt and a greater focus on specialisation, are set to spur investments as exits become more visible – even if returns may temporarily be lower.

Meanwhile, as AI, digitisation, and decarbonisation continue to evolve, qualitative and quantitative factors must be balanced. Importantly, investors must leverage their expertise to determine the areas that are best positioned for transformation. Coming away from a lively and well-attended IPEM, it is clear there will not be a shortage of opportunities in the year ahead.