Amid the current crisis, private equity has emerged as an indispensable tool for supporting companies on the road to sustainable development. More than ever, investment strategies for the regeneration of urban wastelands and social/environmental infrastructure, as well as the regionalisation of value chains, must take centre stage.
Private equity is perfectly positioned to establish itself as a pathway to the world of tomorrow – a pathway we hope will provide sustainable, equitable and resilient growth.
Regardless of the economic scenario, the key advantage of this asset class lies in its long-term approach, which protects it from the hasty decision-making and volatility associated with listed assets. The sector also benefits from the trust of investors or Limited Partners (LP) seeking to diversify their assets in an environment of low or even negative interest rates. So much so that fund managers or General Partners (GP) held a record amount of almost USD 2 trillion of dry powder before the crisis. As such, they have ample reserves not only to support portfolios, but also to seize acquisition and recapitalization opportunities if prices fall or circumstances deteriorate. Nor is this the time to reduce positions. In a recent Private Equity International survey, only 5% of respondents said that they were looking to reduce their portfolios on the secondary market.
Close relations with companies
The private equity industry is far more mature today than it was in 2008-2009, with specialised and experienced investment teams that have honed their technical, financial and managerial skills. These professionals endeavour to maintain close relations with the companies in which they invest, by sitting on boards of directors, contributing to management and strategic decisions and acquiring strong rights through shareholders’ agreements. The result is better governance, sound operational capacity and the sharing of best practice among the various companies held in a portfolio.
Nevertheless, if private equity aspires to play a leading role in the post-lockdown “reconstruction” phase, it must avoid short-term strategies driven by speculation. Instead, it should focus on viable growth strategies and companies with the potential to transform themselves, to create value without relying on excessive leverage and to generate recurrent cash flows.
Going beyond ESG to place impact at the heart of risk management
Although profitability will remain key, the best investment themes going forward will be those that account for all “externalities” and reflect a thorough understanding of the human impact on the world. Environmental, social and governance (ESG) criteria must become a genuine instrument for managing risks and ensuring portfolio stability and not remain simply a compliance or marketing tool.
In the coming months and years, private equity will therefore have a key role to play in meeting growing needs not only in terms of social infrastructure, particularly for senior citizens, but also in terms of environmental infrastructure. This applies to water and waste management, soil decontamination to reduce the pressure on arable land, or finding real solutions to urban sprawl, promoting soft mobility and urban diversity. These assets will also provide governments with a means to facilitate economic recovery through the increased use of public-private partnerships.
The limits of the globalised model
Furthermore, while the crisis has confirmed the importance of technological innovation for healthcare, education and digitalisation, it has also underscored the excesses of globalisation and the need for regionalisation.
Supply chains must be redefined so as to achieve greater regional autonomy and increased inter-regional trade in a tripolar world (North America-Asia-Europe). In this regard, Southern Europe (Spain, Portugal, etc.) and the MENA (Middle East and North Africa) region, particularly Morocco, will undeniably have a key role to play as an alternative to more distant regions, especially Asia. The regionalisation of value chains must take precedence over a globalisated model that has reached its limit. Our aim is to contribute to these transformations by devoting the energy and time necessary to ensure their success.