We at Kensington continuously evaluate broad economic developments as well as conditions specifically applicable to the private markets. Within the private equity markets, we target sub-sectors and geographic regions that we believe offer the best opportunities for strong returns as well as receptive markets for the sale of mature portfolio investments.
Economic Environment
The Fed has increased interest rates and the Bank of Canada has followed suit. Automobile and light truck sales across North America may have peaked for this business cycle. Canadian household debt levels are very high, and Governments have actively taken steps to slow the pace of growth of home prices in Vancouver and Toronto. We continue to be concerned about the possible impact of protectionism that is growing in the developed world. These signs point to a weakening in financial markets and potentially a reduction in the price expectations of sellers. There continues to be a lot of cash in portfolios and the demand for yield investments seems to be insatiable. Kensington seeks to navigate the Fund through this economic environment, including with a view to the potential impact of protectionist policies. Alternative investments, including venture capital and private equity, have provided significant diversification opportunities for portfolios seeking returns that are not tied to the public markets.
Current Private Equity Market Conditions
We continue to see a steady flow of opportunities in the mid-market buyout, growth equity and venture capital sectors. In the continuing low interest environment, purchase multiples on buyouts have been rising to cyclically unattractive levels. As a result, we have recently been focused more on growth and venture investments – where the relentless pace of technology innovation continues to spawn attractive new companies – than on buyout investments. Mature companies can be attractive but the pricing must be sensible in order to be able to achieve acceptable returns. We think that investing in a private company today probably means it will be held through the next recession, so we use leverage conservatively and prepare for a better priced buying environment to be ready to acquire if the economy does slow down. Another very important factor is the opportunity to develop and grow the business that creates real lasting value to generate significantly better returns than organic growth might allow. The demographics of business ownership, with baby boomer founders seeking liquidity for retirement, continue to create opportunities for the mid-market buyout sector as a whole. KPEF is in a strong position to pursue these deals on attractive terms through its strong network of proprietary business relationships.
– According to Pew Research Center
The market remains open to sales of mature companies from private equity portfolios, as high quality businesses continue to be acquired by strategic and financial buyers at attractive prices. Value can be added to companies acquired from founders who are retiring by deepening the management talent in the firm, giving that invigorated management better access to capital, and improving the focus of the business to make it an excellent, easy to acquire division of a larger company in the same industry.
Public markets have become receptive to initial public offerings (IPOs) again and KPEF is targeting some liquidity events during the coming year.