Decarbonisation solutions with strong momentum
The private asset market has grown enormously. According to the Bain & Company industry report, the capital raised amounted to 108 billion dollars in 2003 and climbed to over 1.2 trillion dollars in 2021. The dry powder, i.e. idle investment capital, amounted to around 500 billion dollars in 2003, compared to 3.4 trillion dollars in 2021.
There is currently also a rapid development in private market funds with a focus on environmental issues. We concentrate here on sectors characterised by mega-trends that generate disruptive innovations to challenge existing business models. We expect higher premiums to be generated with specific themes. In this context, it is all the more important to find active management that masters the art of finding growth companies and funds in the jungle of the private equity industry, which benefit most and sustainably from mega-trends.
The focus is on companies that strategically position themselves as solutions providers for ecological transformation through their product or service offering and can therefore profit from the mega-trend of decarbonisation. The decarbonisation of the global economy is experiencing increasing societal support and has strong financial support from policymakers. Last year, for example, the Inflation Reduction Act was passed in the USA. This has massively increased tax credits for companies that are active in sustainable energy production, for example. The European Union also supports solutions low in CO2, or those which prevent emissions altogether, under the EU Green Deal.
Beware of companies with high levels of debt financing
Private equity investments have different degrees of immunity to interest rate hikes. In particular, there is pressure on those transactions that are usually heavily financed by debt capital and cannot generate high growth. However, debt plays a minor role in the areas of growth and venture capital. The funds specialising in buyouts for very highly capitalised transactions also have difficulty executing transactions at high sales prices.
Generally, an environment of persistent and high inflation will challenge the private equity industry as a whole. Ultimately, the key question is: How high is profitable growth and how well can the relevant company pass increasing costs on to customers? In this context, direct access to the most promising companies and above-average securities selection capabilities is crucial.
Private equity – something just for professionals?
Until now, the private equity asset class was primarily suitable for professional investors with high investment volumes due to the illiquidity and the long holding period of the investment of eight to ten years. However, a form of «democratisation» has now taken place. For example, the minimum deposits for private equity funds have fallen from several million Swiss francs to around 100,000 Swiss francs on average, with some of these funds allowing limited redemption options.
Financial products and digital platforms continue to spring up, enabling individual investments in unlisted companies and funds at even lower entry volumes. But here too, it is important to note: the lower the diversification, the higher the potential risk of loss.