The war in Ukraine, rising interest rates, from inflation and of uncertainty seem to have rung in 2022 the end of the euphoric period for private equity. But turbulent times also bring their share lessons andopportunities.
With inflation and interest rates rising sharply, the end of the post-2008 cycle of low (or even negative) interest rates, which fuelled a frenzy of investment - peaking in 2021 with the creation of over 100 tech "unicorns" in Europe alone - looked set for 2022. During this golden decade, low interest rates justified high valuation multiples on equities, as investors sought to compensate for low returns with alternative and/or riskier investments. Against this backdrop, companies with cash-flow profiles and a long time horizon (tech, biotech, etc.) were mechanically favored.
This period was particularly marked by two Anglo-Saxon expressions: " Fear of missing out " (or FOMO), and " Fake it till you make it ".... The overabundance of liquidity and low returns on traditional assets created a distorting effect where fear of opportunity cost sometimes pushed investment beyond the rational. Taking advantage of excessive hype and an erosion of the attention paid to due diligence, companies such as FTX, Theranos and WeWork were the unfortunate symbols of the deleterious conjunction of these two mindsets.
With, for example, $400 billion worth of European tech companies going up in smoke over the course of 2022, the " end of easy money " seemed to have been announced, and this era was now over. However, this idea needs to be nuanced.
Firstly, not all sectors have been affected in the same way, with companies that respond to the ecological crisis or societal issues coming out on top. Secondly, the partial withdrawal of institutional investors has made room for new financing methods and new players (lending platforms, crowdfunding, family offices, micro funds, etc.). Thirdly, and most importantly, money hasn't disappeared completely! In fact, the amount of dry powder (i.e. cash still to be invested) is reaching record levels worldwide. As for the US S&P 500 and Nasdaq Composite, they were up sharply at the start of 2023.
However, to conclude that nothing has changed would be going too far, and it would be better to speak of a partial " reset ". With the balance of power once again in favor of investors, fund-raising contenders will no longer be able to do without careful communication, highlighting more resilient business models and a real capacity for international deployment. The question of embodiment, both internally and externally, must also be approached in a different way, focusing on solidity, seriousness and operationality in order to build the indispensable relationship of trust that enables us to weather crises. When the market no longer buys blindly, it is essential to show it the differentiating qualities we offer...
Arthur Arlaud senior consultant