Trends Watch: Private Equity Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Tim Partridge, Managing Director, Altera Investments.

What is your outlook for private equity investing? 

We hold a cautiously optimistic outlook for private equity investing. The current market environment may pose challenges to targeted return assumptions when harvesting portfolios, as valuations are impacted by the broader economy. Portfolio companies that are highly or over-levered may face challenges as well. Sponsors with considerable dry powder and early in their investment period may have an advantaged position to deploy capital. The volatility in valuations and compression in some cases are likely to create more value entry points for new acquisitions.

Our optimism is based on our area of focus, which is investing in lower-middle market private equity. This area incorporates small-to-medium businesses, which generally use less leverage than larger businesses. In many cases, these are family or founder-led businesses with very healthy financial conditions. They are typically more regionally focused in terms of the markets they serve and have other resilient characteristics. Focusing on this area of the market affords approximately 10x the opportunities than the upper market, which leads to situations where businesses can be purchased at much more reasonable pricing. In our view, high-caliber sponsors are well-positioned to find good investment opportunities throughout the economic cycle and have more shots on goal in the lower-middle market.

What are the greatest opportunities you see and why?

Sponsors that have demonstrated the ability to consistently deliver strong performance through market cycles present the greatest opportunities. It is increasingly important to identify opportunities that have been delivered via skill rather than riding the tide of a long-term up market, given the challenged interest rate environment and other economic factors.

We typically find the greatest opportunities among sponsors targeting industries displaying secular growth and those evolving through the emergence and influence of technology and/or going through transformative demographic shifts coupled with other fundamental indicators of relative stability (i.e., significant addressable markets, fragmentation of market participants, etc.). We typically find the greatest opportunity among lower-middle market sponsors.

What are the greatest challenges you face and why?

Our biggest challenge has been and always will be sourcing compelling investment opportunities and effectively underwriting the incorporated risks. The number and type of risks, both macro and idiosyncratic, cannot be understated. Identifying and understanding how various risks may impact an investment are critical in pursuing an opportunity. Our mission of finding differentiated sources of return revolves around identifying sponsors that have consistently delivered attractive returns, without excessive use of leverage, and having enough conviction in the sponsor’s ability to continue delivering outperformance. This sourcing effort requires us to exhibit both patience and discipline so that we can appropriately identify, assess, and scrutinize the layers of risk involved in any given investment strategy. These challenges are ongoing regardless of the macroeconomic backdrop.  

What keeps you up at night?

From an investment perspective, the reality is that as detailed and comprehensive as we may be in underwriting and monitoring an investment, there may always be things we do not know. That in mind, we find some comfort in our focus on the lower end of the market. This has largely insulated us from widespread competition – particularly from large, institutional capital. We believe this has allowed disciplined sponsors to acquire valuable assets at attractive prices with less leverage than a typical deal done up market. While there are structural barriers that make it difficult for large allocators to participate in this part of the market, increased competition over time would make it more challenging for our sponsors to continue acquiring businesses at favorable valuations and drive long-term value creation.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.