While activities remain challenging, sentiment and activity amongst both private equity GPs and LPs are increasingly positive, according to a new report from industry body Invest Europe and global management consultancy Arthur D Little (ADL).
Some 83% of GPs expect fundraising to stay the same or increase over the next 12 months – compared to 50% a year ago, matching investor optimism, with over 90% of LPs expecting higher capital commitments to private equity over the next three years.
The fifth annual edition of Invest Europe and ADL’s survey gives a forward-looking view of expectations and priorities for the Private Equity industry and is based on interactions with more than 250 managers and investors. Its positive short- and medium-term outlook is reinforced by Invest Europe’s H1 data.
Private equity and venture capital funds raised €59bn in the first half of 2024, a 15% year-on-year increase, but down by 28% compared to the amount raised in the second half of 2023. Over the same period, private equity funds invested €40bn in European companies, down €5bn or 11% compared with H2 2023.
Advances in technology and the uncertain geopolitical landscape are directing where investments are being made. Deeptech & AI now heads the list of most attractive target sectors, favoured by 68% of GPs, closely followed by defence – a new entry in the list of sectors – with dual-use technologies that can serve both civilian and military applications, a particular focus. Some 24% and 26% of GPs and LPs, respectively, say they are more willing to consider investments in this area.
Renewables have dropped from the top five choices for investment, while sectors linked to squeezed consumer spending and legacy industries (consumer goods & retail, automotive, industrial equipment, chemical, and transport) make up the bottom five investment destinations.
Showing increasingly positive sentiment, GPs intend to intensify their focus on exits, with 66% stating they expect to concentrate on it more in the next year than in the previous twelve months. As a result, 71% of managers see more exit transactions in the next year compared to the last 12 months, a sentiment echoed by 68% of LPs. Both groups also expect increased valuation levels for assets. A rising tide of exits is expected to lead directly to an improved investment environment.
In terms of strategy, operations, and investments, GPs were previously focused on the risks and opportunities presented by ESG. This has been supplanted by AI, as an investment opportunity, a technology to deploy at portfolio companies, and as a way of differentiating their own operations and performance. A third of GPs see the use of AI as a differentiator and over 80% of all respondents expect it to impact their operations in the near future. The potential risks to businesses posed by AI are also high on the agenda with 69% of GPs expecting an increased focus on the technology in their due diligence assessments, behind cybersecurity, which around-three-quarters of GPs expect to influence future due diligence processes.
At the same time complying with sustainability-related regulations remains a key priority for the industry. For GPs, ESG has become a normal part of operations, although for LPs it is still seen as the most important factor for private equity in the near future, ranked top by 68% of respondents, in line with last year. 53% of LPs increasingly expect managers to register their funds as Article 8 or Article 9 under SFDR regulation – effectively meaning these funds must have a strong focus on ESG objectives or position themselves as “impact” funds.
