In the realm of ultra-high-net-worth entrepreneurs and investors, private equity has emerged as the reigning monarch. Michael Sonnenfeldt, founder and chairman of Tiger 21, a network managing an impressive $150 billion in assets, revealed that their members have tripled their allocation to private equity over the past decade. This surge is indicative of a broader trend among former entrepreneurs turned wealth preservers, who are increasingly recognizing the potential in this sector.
Private equity's ascendancy is remarkable, especially considering the industry's struggle in 2022 after a decade-long bull run. However, 2023 paints a different picture, with an EY report indicating a 15% rise in private equity activity in the second quarter compared to the first, culminating in total deal values of $114 billion, propelled in large part by a surge in Europe.
Sonnenfeldt highlighted that venture capital has also become a significant player in members' portfolios, reflecting a growing interest in groundbreaking industries. The allure of artificial intelligence, climate, and energy markets as vast opportunities for long-term growth is palpable among these discerning investors. This forward-thinking approach positions them to potentially outperform the market.
However, not everyone shares this optimism. Dan Rasmussen, founder and CIO of Verdad Advisers, warns of a potential storm brewing for private equity. Rising interest rates and declining tech valuations are identified as critical challenges. Interest rate fluctuations exacerbate the debt load that private equity takeovers carry, which frequently exceeds 60% of net business value and puts additional stress on these ventures.
Another obstacle lies in private equity's substantial exposure to the technology sector, which has seen valuation fluctuations. As multiples decline, concerns arise, particularly for smaller firms with higher debt levels. Comparatively, large tech companies with significant AI exposure have experienced value surges in the current climate, bolstering sector averages.
The Federal Reserve's aggressive interest rate hikes in 2022 further complicate the landscape. While a pause in rate hikes has recently been announced, the indication that rates may remain elevated for an extended period poses challenges for heavily leveraged markets seeking rapid expansion.
As private equity's trajectory continues to unfold, its resilience and adaptability in the face of adversity will undoubtedly shape the investment landscape for years to come.