Whether fundraising or investing, it’s critical for GPs to make sure they can navigate an environment that poses the dual threat of rising portfolio company costs and muted multiple expansion during ownership.

Andrew Schardt, head of global investment strategy and co-head of investments at Hamilton Lane, says the market environment is “going to be more of a deal-pickers and thematic investing market – more so than it’s been over the last decade”.

In other words, the strategies, geographies, and types and sizes of companies that managers are choosing will have a much greater impact on the performance of their portfolio over the next three to five years. 

“You have to pick strong companies and management teams and sectors and fundamentals. But just as important as that asset picking is… the edge you have in that deal,” Schardt says. “What is the unique way you have to access that company – to be able to find it, to buy it – that others don’t have? Because there’s literally 10 times as many companies of size and scale in the private landscape.” LPs are particularly impressed when they know GPs have run their playbook before and have owned companies in a similar category, he adds.

Looking at specifics

Specialisation in the hunt for niche investment opportunities is not new. In fact, the post-pandemic trend towards specialisation has attracted capital to sub-sectors including healthtech, fintech, climate tech and cybersecurity – strategies that are somewhat insulated from the rising rate environment and have the potential to perform well against a variety of economic backdrops. 

Doubling down on core investment themes also lends itself to more M&A in the industry. 

Recent examples include EQT’s acquisitions of both Baring Private Equity Asia for €6.8 billion, giving it a “pan-Asia presence at scale”, and European life sciences firm LSP for €450 million. In May, Apollo Global Management said it was committing up to €1 billion of managed capital to life sciences VC firm Sofinnova Partners’ investment vehicles and was buying a minority equity stake in the firm. Also this year, The Carlyle Group acquired London-based life sciences investment firm Abingworth.

Overall, firms are spending a lot more time thinking about their strategies, says a senior adviser at a global investment firm. “GPs believe the metric that this industry is going to definitely double [in AUM], and there is a lot of thinking around alignment within firms and ‘value creation 3.0’.” He characterises this as GPs trying to push boundaries and get faster in their transformation, especially when it comes to addressing new sources of capital, like the retail channel. 

As market participants note, generating returns in such an environment can be significantly harder. Being a generalist will only make things that much more challenging.

– Graham Bippart, Robin Blumenthal, MK Flynn, Craig McGlashan, Andy Thomson and Chris Witkowsky contributed to this report.