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As the private markets reopen, it’s not financial levers that will generate impactful returns

By John C R Nery
Managing Director and Head of Investments, Squircle Capital

 


 

After a challenging few years for private capital, this year looks to hold a more optimistic investment environment. 

Inflation is falling and interest rates are expected to continue their downward decline, so it’s likely we’ll see the M&A market opening up once again. EY’s CEO Outlook Pulse states that “PE leaders and corporate CEOs have a bullish outlook for M&A in 2024, citing the return of the megadeal in a more buoyant buy-sell environment.” 

With this renewed interest in dealmaking, there is an opportunity to build on some of the recent, positive trends that have developed within the private equity space to combat what is a recovering but still uncertain market.  

One such trend, particularly within luxury real estate, has been the rise of the crucial post investment relationships. As active portfolio management continues to prove itself as a successful tool to generate returns, so too, can longer lasting relationships. 

The focus of funds has begun to shift from the traditional private equity model of buying and flipping assets quickly, to maximising the value of existing investments through long-term asset transformation to generate returns. 

A case study: Luxury real estate

It’s clear there is renewed optimism in the real estate market across Europe, with only 27% of investors believing that the challenging economic and geopolitical conditions will discourage the closing of transactions, compared to 42% the previous year. 

But according to JLL, prime residential and hotel segments have driven investment interest above all others. You only have to look at recent acquisitions such as the BT Tower in London by American hotel giant MCR Hotels for £275 million, or the Six Senses in Rome acquired for EUR 245 million by Gruppo Statuto to see the investment appetite for high-end travel experiences and how investors are willing to cherry pick premium assets for repositioning. 

Historically, this momentum from private equity investors would’ve been channelled into buying and flipping luxury assets. But in a tough market where investment opportunities remain limited, and demand currently outpaces supply, luxury real estate is a prime example of where we’re seeing a newfound prioritisation of portfolio value creation through asset transformation. 

Asset transformation to meet modern consumer expectations

High-end consumers and their evolving expectations of the luxury market are fuelling the potential for rapid growth in this area, today seeking personalised, unique and transformative luxury experiences. But we’re in a position where demand currently outpaces what’s on offer.

In real estate, further investment in consumer experiences such as fine dining, health facilities and complimentary products goes a long way to maximise the value of assets and, eventually, returns even in a difficult market. A well-positioned asset will continue to grow even in the face of adversity. 

Digitalisation remains at the heart. More specifically, how can digital transformation be used to enhance existing in-person experiences, such as AI-driven personalisation and automation where valuable. Sustainability is also a key factor in what constitutes modern luxury, and so value creation should certainly be taking this into account. 

JLL’s report highlighted that a fifth of investors are willing to pay more for sustainable assets, and even 13% said they would pay up to 20% more than the market price if assets met high standards. This includes redesigning supply chain setups for transparency, agility and a lower carbon footprint. Transformation of assets to be more environmentally friendly will no doubt be crucial for making the asset more attractive to consumers and investors long term. 

Building upon this positive trend 

Those recognising the burgeoning opportunities in asset transformation and acting upon it now while interest is still outpacing supply will benefit the most from this trend in the long run. 

As strain on the private markets eases, there is much to be learnt from the downturn of the past few years. By dedicating more time and investment to supporting portfolio growth post-deal, PE funds can generate equal, if not more impactful returns on their investment than by focusing on financial levers exclusively. 

 


 

John C R Nery, Managing Director, Head of Invetsments, Squircle Capital – John joined Squircle Capital in 2018 and is responsible for executing the group’s investment strategy and leading its portfolio management initiatives. He sits on the firm’s executive and management committees and is a member on the board of directors of more than a dozen portfolio companies across the group’s investment platforms.

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