PitchBook News - Taking the private out of PE

Also: IPO window or IPO vent?; PE rediscovers divestitures as a value creation strategy; AI & ML overview; Three of our most-popular notes of 2024...
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The Research Pitch
April 20, 2024
Presented by RSM
IPO window or IPO vent? Public listings have increased to a trickle, but how do we see the year playing out for Europe's IPO hopefuls? And what key factors could further open the pipeline? Read our new research.

Open roles: Quick reminder that we're hiring a PE reporter (EMEA) and a senior VC analyst.

Popular reads: In case you missed them, here are three of our most-read analyst notes from the year so far:
A message from RSM US LLP  

Unlocking potential in a rebounding private equity deal landscape

Will 2024 be a comeback year for private equity? With deal activity regaining momentum due in part to stabilized interest rates, PE firms have no time to waste.

As the backlog of exits continues to mount, stay ahead of the competition by unlocking the full potential of each investment. RSM's private equity outlook provides key insights into emerging market themes and priority areas for the year ahead, including:
  • Carve-outs, with an emphasis on rapid execution and strategic fit
  • Working capital optimization, including accounts receivable (AR) and accounts payable (AP) automation
  • Cost optimization, such as license and vendor optimization and a focus on outsourcing and automation
  • Artificial intelligence, as PE firms continue to assess implementation options and determine the ROI of these tools
Explore now
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Replicating a PE buyout portfolio
PE buyout strategies—and private markets, more generally—are often touted as "alternative" investments.

The word "alternative" in this context has mainly become a catch-all for anything that is different than a narrow set of traditional long-only asset classes, including publicly traded equities, rated credit, Treasury bonds, and cash.

Many investors extend this definition of alternative investments to include a perceived diversification benefit to traditional portfolios.

Despite its label as an alternative, PE buyout shares many of the fundamental investment characteristics with those of traditional public equities strategies. At their core, both private and public equity investing involve the ownership of current and future earnings of corporate businesses.

By extension, managing a portfolio of private companies has key similarities with managing a benchmark-agnostic equity portfolio of public companies in terms of generating alpha. The two main alpha drivers, sector and security selection, apply to both private and public equities.

How different then is PE buyout as an asset class?

One way to approach this question is to determine how much of the buyout model—investing in relatively small, underperforming companies that still generate enough free cash flow to service an increased debt burden—can be systematically replicated in the public markets.

To do so, we created a neural network that systematically captures the fundamental characteristics of buyout investing in a sample of public equities using take-private transaction data, quarterly financial statements, and stock price data. We then adjusted this model-based portfolio for leverage and sector exposures to construct a buyout replication portfolio: the PitchBook BRP.
Click to read more on our buyout replication portfolio.

The BRP would have performed extremely well over the last 10 years, beating the Russell 2000 Index by 11.5% on an annualized basis. Sector selection, leverage, and security selection all contributed to this outperformance at 1.5%, 2.8%, and 7.2%, respectively.

This stellar performance did not come without risks, however. The BRP has an annualized volatility of 30.9% and experienced two drawdowns of over 30%.

A PME analysis showed that buyout funds launched between 2014 and 2017 performed mainly in line with the BRP. This suggests that buyout managers in aggregate failed to outperform public markets after accounting for risk and security selection during this period.

Buyout managers do have potential alpha opportunities that are not possible to replicate in public markets, including a much broader investment universe and the ability to improve companies' operations. While buyout managers as a whole have not been able to take advantage of these opportunities, they have provided an edge for top deals and managers.

Identifying and being able to access these top managers are the keys to investors benefitting from allocations to PE buyout instead of traditional equity strategies.

For more on how we built the PitchBook BRP, download the research: Taking the Private Out of Private Equity

Andrew Akers, CFA
Senior Quantitative Research Analyst
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Thematic Research  

PE Rediscovers Divestitures as a Value Creation Strategy

For many years, PE investors sought growth over value—a strategy that was rewarded as long as multiples expanded.

But higher borrowing costs have sent investors flocking to a strategy long out of vogue: divestitures.

PE-led acquisitions of corporate divestitures have been rising steadily as a share of all buyouts.

Divested assets tend to be cheaper, allowing firms with a clear valuation strategy to win big at a time when financial leverage is less impactful:
read the free research

2023 Emerging Spaces in Review

PitchBook's Emerging Spaces tool tracks VC funding trends across innovative technologies like generative AI, electric vehicle tech, and quantum computing.

In total, we've identified 150 spaces representing 9,325 startups that raised more than $57 billion in aggregate during 2023.

Our new research dives into the sectors and startups attracting the most attention:
read the free research
Industry & Tech Research  
The AI and machine learning market is the hottest space in VC right now, but the speed of innovation can generate some noise.

Our Annual AI & Machine Learning Overview cuts through it, with updated segment and subsegment definitions, industry drivers and opportunities, market size estimates, and funding data:
read a free preview
Market Updates  
Is a comeback in the cards for European VC?

Regional deal value bounced back in Q1 with an increase of 19% year-over-year and more than 16% over Q4.

But according to our new European Venture Report, exit activity has shown little sign of recovery and could end up below last year's total:
read the free report
PE dealmaking in Europe declined in the first three months of the year as investors largely eschewed megadeals in favor of smaller add-ons.

Our new European PE Breakdown reveals that Q1 deal value declined 37% from Q4 and 20% year-over-year. Exit activity was similarly lackluster.

Still, the region had a record quarter for fundraising, as a handful of megafunds buoyed the total:
read the free report
Webinars & Events  

Be sure to add these events to your calendar:

April 29-May 1: Visit us at DealMAX in Las Vegas, where our lead PE analyst Tim Clarke will lead a session discussing where and when private equity firms will find exit opportunities. Register here.

April 30-May 1: Come see us at ILPA Summit Europe in London, where our lead quantitative and fund research analyst Zane Carmean will participate in a discussion on NAV facilities. Register here.

May 1: 2024 started on a lackluster note for US venture dealmaking, and all eyes are on IPOs as exits have been slow. Our quarterly PitchBook-NVCA Venture Monitor webinar will cover all the key VC trends. Register here.

May 2: We're sponsoring the NVCA's Annual Leadership Gala in San Francisco, an event that will honor those who have made significant contributions to the VC community. Register here.

May 9-10: Visit our booth at the Private Credit Industry Conference in Fort Lauderdale and join our global head of credit research Marina Lukatsky for a discussion on trends in documentation and deal structuring. Register here.
In the News  

Our insights and data featured in the press:
  • Real assets leads private capital strategies in the latest quarterly returns, while venture capital trails. [Pensions & Investments]

  • Why the timing is right for CVC's IPO. [Bloomberg]

  • European PE activity was slow in Q1, but a rebound may be on the horizon. [Delano]

  • The first quarter of the year was a mixed bag for European VC. [Tech.eu]
If you're a journalist interested in interviewing our analysts or requesting data, contact our PR team.

More of our recent research (* - report preview):

Market updates
Thematic research
Industry & tech research
Credit research
Coming next week (subject to change)
  • Global M&A Report
  • Emerging Space Brief: Quantum Sensing
  • Insights From Paris Blockchain Week
  • Tracking recent vintage performance and cash flow patterns in PE

Thanks for reading! Feel free to email us any time with feedback, questions, or tips!

Learn more about the PitchBook Institutional Research Group, meet our analysts, or access our research libraries for clients and non-clients.

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