Private Equity Cycle: Kurt Björklund on Where We Are and What's Next

Understanding the Private Equity Cycle

• 💡 Kurt Björklund, Executive Chairman of Permira, discusses the cyclical nature of private equity, noting it's the third major cycle he's witnessed.
• ⚠️ Current challenges stem from a period of low interest rates followed by inflation, leading to rate resets and a valuation reset, creating an "exit digestion problem" in 2022-2024.
• 📈 While public markets have seen significant outperformance over the last three years, private equity has faced liquidity lock-ups and underperformance compared to benchmarks like the S&P 500.

Defining True Private Equity

• 🎯 Private equity is defined as controlled buyout governance, emphasizing asset selection, strategic transformation, and operational improvements over five years.
• 🔑 Key elements include a sense of urgency due to time constraints, strong alignment between management and GPs through incentives like carried interest, and patient capital.
• 🚫 Blending private equity with buying small stakes or entering capital structures without governance control shifts it towards the broader alternatives basket, away from true private equity.
• 💰 Financial engineering (debt) can amplify outcomes but should not be the primary reason for investment; organic EBITDA growth is the fundamental driver of returns.

Industry Shakeouts and Future Opportunities

• 🚀 Difficult periods lead to creative destruction, where underperforming GPs struggle, allowing well-performing firms with solid strategies to raise funds and thrive.
• ⏳ The industry is likely in year three or four of a typical four-to-five-year cycle, with a pickup in exit velocity for well-built portfolios.
• 💡 Technology and AI are identified as major themes for the next decade, transforming industries like pharma, B2B services, and consumer tech.

The Shift from Public to Private Markets

• 📉 The number of public companies has significantly decreased, with public markets increasingly focusing on larger companies ($10B+).
• 🧩 This creates a space for private equity and alternatives to fill, owning companies of sizes previously inaccessible to public investors.
• ⏳ The ultimate destiny of a company is not necessarily to be public; exits can be to strategics (synergistic buyers) or other financial owners.

Investor Suitability for Private Equity

• 🎯 Institutional investors (pension funds, sovereign wealth funds) with long capital durations are well-suited due to their ability to forego liquidity for premium performance.
• ⚠️ Retail investors with a high and unpredictable need for liquidity may find it harder to invest in private equity, even through semi-liquid wrappers, which often come with trade-offs in returns.
• 🔑 Ultra-high-net-worth individuals who can think long-term or generationally can benefit from private equity's diversification and access to unique companies.

The Decline of Public Markets

• ⚠️ A shrinking public market, partly due to regulation and the rise of ETFs/index trading, limits investment opportunities for retail investors.
• 📊 The decline in analytical depth for smaller and mid-sized public companies, coupled with the growth of private equity, contributes to this trend.
• 📈 While beneficial for private equity's growth, the decline of public markets is seen as a medium problem for society and economies, limiting access to growth companies for those not participating in private markets.