After two tough years for private equity, Hafiz Lalani sees a “very different market” taking shape this year, and a chance to make deals that could once again earn the kind of outsized returns the industry experienced before a rapid run-up in interest rates dramatically slowed the pace of deal-making.
Perhaps most importantly, some owners are getting more realistic about what their assets are worth, said Mr. Lalani, who leads direct investments in private companies for Canada’s largest pension fund, the Canada Pension Plan Investment Board (CPPIB). Other owners have had time to allow their businesses to grow into the lofty valuations they were chasing.
Private-equity firms that have already overshot the fixed term of their funds, after trying to wait out a down market, are feeling intense pressure to sell assets so they can return cash to investors. The outlook for interest rates has seemingly become more predictable, or at least more stable, and for the last year financing markets have been healthy, with debt available to help pay for deals – though not quite as much as in the heady deal frenzy of 2021.
“All of that is coming together … to make it more reasonable to transact, less risky to transact for the type of returns that we’re trying to deliver,” Mr. Lalani said in an interview. “We feel like perhaps we can create a vintage that has outsized returns versus the past two vintages.”
CPPIB manages a $156-billion private-equity portfolio, and made a number of new investments in its last fiscal year that ended in March – most notably in health care and technology companies, which were key contributors to the 9.6-per-cent return the fund earned from private equity last year. At the moment, Mr. Lanani sees “a balanced pipeline” of potential acquisitions across the tech, health care, industrial and services sectors. CPPIB is likely to continue chasing deals in health care because “we feel like we’re underinvested” in that sector, Mr. Lalani said, and he sees good prospects among software businesses.
At the same time, CPPIB has sold some assets or trimmed its exposure to companies, and sold a US$2.1-billion portfolio of private-equity fund investments to French investment manager Ardian SAS, to manage its exposure to private equity.
Last week, CPPIB announced it had invested €550-million ($815-million) to buy a 20-per-cent stake in Belgian webhosting company team.blue, after the pension fund sold about two-thirds of its stake in Norwegian business software company Visma for about $700-million late last year. For both investments, CPPIB teamed up with Hg Capital, a London-based private-equity firm that specializes in buyouts of technology companies in Europe and the United States, that is still the largest investor in team.blue.
The relationship that CPPIB has built with Hg since its 2019 investment in Visma was key to getting access to its investment in team.blue, Mr. Lalani said. It allowed CPPIB to get to know team.blue’s founder and management team over a period of five years, and to watch the way the company expanded through mergers and added more software and services. “During that time, we’ve been able to leverage our network to get sharper on how this business creates value,” he said.
Those types of professional partnerships are especially important to CPPIB as a way to “mine for the most exciting opportunities” at a time when some investors have a lot of cash they need to deploy. Opportunities to make deals are more plentiful, and the spread between the prices sellers are seeking and what buyers are willing to pay has narrowed in some cases. But that means that competition for deals is once again getting much more intense, and CPPIB is aiming to stay disciplined as the market heats up.
“We’re competing with the best in the world to make the investments that we’re making, and we’re trying to drive great returns. And so we’re often outbid and that’s the nature of the industry. We’re kind of gluttons for punishment. We lose a lot,” Mr. Lalani said. “We feel good about our discipline – time will tell whether we were being too prudent or appropriate.”