High valuations and capital flooding into private equity are of utmost concern for Per Olofsson, head of alternative investments at AP7, the seventh Swedish national pension fund.
In an interview with Private Equity International, Olofsson said “quick fundraising and funds growing bigger in size” were his main cause for concern in today’s environment, in which listed equity markets are expensive.
The question of high valuations causing difficulties deploying capital is one Olofsson said his team brings up with general partners “all the time”.
“I pretty much receive the same answer from everyone, which is that they are prepared for the next downturn and they are very mindful of this when they invest in companies to go into asset-light companies and companies that are less sensitive to economic swings,” he said.
However, the likelihood that all GPs will come through the next downturn unscathed is slim.
“I don’t think it’s realistic that everyone will manage to pick companies that are less sensitive if we get into a more volatile market condition,” Olofsson said. “This will mean that [for] the companies that are up for sale today or bought today, it will take a longer time before [managers] can exit them, and this will mean lower IRRs for us as an investor.”
Despite his concerns about investing today, Olofsson cautions that in private equity it’s “extremely difficult to time the market”.
“The only thing we can do is to make sure we keep the discipline and deploy capital continuously across vintages, just to keep the diversification,” he said.
“If you allocate capital within the next few years to several GPs, that means the companies will be bought from now on until five to seven years ahead. Who knows what the valuations and the economy will look like during this time period? It’s impossible to time the cycle with this long-term investment horizon, so you just have to make sure you diversify across vintages consistently.”