Where Are the Opportunities in Private Investing Today?
Over the past two years, the upheaval of the pandemic has resulted in seismic shifts to many areas of the investing landscape – that includes private markets. Private investments have long attracted savvy investors looking for the potential for returns that outpace the public markets. But what does the private investing environment look like today, and where are the opportunities that investors should be looking for? Below, John Geis and James Parr of Cresset Partners share their perspective on the current state of the private markets and what investors should be aware of:
So much has changed over the past two years as a result of the pandemic. What are some of the key drivers that are influencing your investing decisions today as compared to pre-COVID?
Geis: The pandemic has tested all businesses, but the experience has also underscored the importance of investing in resilient and durable businesses. So, our approach at Cresset Partners hasn’t fundamentally changed. That said, the pandemic affirmed our view as long-term investors that great people leading strong organizations with identifiable moats is, and always will be, paramount.
Parr: As John said, we have always been focused on non-cyclical industries that have long-term tailwinds supporting their future growth. That said, there are particular winners and losers within industries, which has put greater emphasis on strong management teams and nimble business models. For example, health care adapting telemedicine, or the supply chain effects on the logistics industry as a result of how people have changed their buying habits through the pandemic.
What are the industries that currently look most attractive to you from a private investment standpoint, and why?
Geis: Healthcare and wellness, food and beverage, and financial services are Cresset’s focus areas. All of these sectors exhibit the same fundamental building blocks: large and growing markets, less correlation to the broader market, fragmentation, and attractive profit margins. Of course, there are subsectors within each of those industries that are more or less appealing. The aperture of our investment mandate is open so that we can curate the highest-quality, risk-adjusted returns for our limited partners.
Parr: Further expanding on the industries that John references above, health care continues to be an attractive opportunity because of the massive amount of change and innovation happening. That disruption, such as rethinking value-based care, has spurred private companies to develop interesting new business models. Similarly, the pace of innovation in asset management, and the massive amount of wealth creation happening, makes certain firms within this sector appealing, particularly those that have the scale to constructively disrupt traditional ways of doing things.
What opportunities do private markets present that are less attainable through the public markets?
Geis: The trend has been for many companies to choose to stay private for longer periods of time, so there’s a substantial and growing universe of investable companies in the private markets. But, more important is the opportunity for lower middle market and middle market companies to access resources to grow and execute on their growth initiatives over longer time horizons. For a long-term investor, this is a fundamental advantage that can accrete significant value to shareholders.
Parr: Reduced exposure to market volatility and the ability to drive and structure attractive risk-adjusted returns is a key advantage of private investing. Also, private investing often offers the ability to exert more control and influence important decisions, such as serving on a board of directors, top-grading management teams, and adding additional resources. Finally, public markets constantly need to appeal to shareholders quarter after quarter, so they can be incentivized to have a short-term focus. Private investing is focused on longer-term returns and therefore can make meaningful investments to better position a company for future value creation.
How do you see the current private investing environment playing out? Where do you foresee the opportunities going forward?
Geis: I view the next 5-10 years as a continuation, albeit accelerated, of existing trends in private investing. There are a massive number of businesses that will continue to transact as a function of founding entrepreneurs retiring, which will result in continued consolidation of certain industries. There’s also a significant amount of private equity capital that will fuel M&A across the entire private company landscape. At Cresset Partners, we’re focused on investing in founder-owned businesses that have “crossed the chasm” in terms of the business’ size and scale. We’re open to minority recaps and minority growth investments in businesses like these, where we can bring significant experience and rigor to bear, but not directly compete with the thousands of private equity sponsors that traditionally desire control buyout transactions. We have observed that with the right partner aboard, founder-owned businesses can unlock tremendous value over a longer hold period.
Parr: Technology and innovation continue to accelerate. As the saying goes, the only constant is change. That change creates opportunities, and the key is to be able to identify and react quickly and thoughtfully to the changes happening across industries. Even disruptions such as increasing labor costs and production costs create opportunities for innovative businesses, such as the emergence of robotics and automation to supplement manual labor. Companies that embrace change and invest in growth will continue to be successful and attract the significant amount of private equity capital John mentioned above.
Clearly, there is a lot of opportunity. How does an investor new to the private markets get started?
Geis: There are a select number of wealth managers and RIAs with institutional-grade private markets investing expertise. I recommend working with a firm that offers access to high-quality direct opportunities where, over time, one can construct a diversified portfolio of private company positions. Alternatively, a private equity secondaries fund can be interesting for an investor with more limited liquidity.
Parr: Private markets are typically difficult for retail investors to access. However, as John noted, there are a select number of firms that have dedicated private investing teams with deep knowledge in the space, as opposed to firms that rely on a Rolodex of private funds.
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