Core Equity Holdings’ De Waen: 2023 will be a transition year for private equity

‘The debt market of today is incompatible with the private equity market of yesterday,’ De Waen told PE Hub Europe.

In the third instalment of our outlook Q&As for 2023, PE Hub Europe caught up with Thomas De Waen, managing director and co-founder at Core Equity Holdings.

Thomas De Waen, Core Equity Holdings

The Brussels-headquartered firm launched in 2016 as a spinoff from Bain Capital, with the idea to do something different from the usual private equity model. The firm raised just over €1 billion for its debut fund in 2017, with commitments primarily from university endowments, foundations and large family offices.

What’s different about Core Equity Holdings’ model?

The private equity model hadn’t evolved much because it didn’t need to. It was working well, so people kept doing the same thing. We wanted make it more long-term. From the get-go, we’d plan to hold them for 10 years or longer. For us, sourcing and executing deals was not a great use of time. It’s incredibly inefficient, you spend most of your time working on stuff that goes nowhere. The idea was to create a portfolio that’s going to be less than five businesses. We have three, and that’s what we want. Another difference is the intent to deploy more equity capital, once we own the business, as opposed to the time of transaction.

It’s a more efficient use of capital. We deploy resources where the chance of winning is much higher.

How do you choose the target companies?

We’re looking for two things. Number one, you don’t want existential risk that you don’t control. That could be technological or regulatory risk. For example, a business could disappear tomorrow, because either a new technology has emerged or a regulation changes, and that business is no longer necessary. That tends to make you target more “boring businesses”.

Secondly, we want to have companies that have a very long runway of growth. That often means roll-up stories.

What will be the most important trends affecting your dealmaking in 2023?

We’re focusing on finishing our current fund; we’re going to raise more capital to invest more in our existing portfolio. Then at some point, we’re going to raise more capital to do one more big deal. But most of the dealmaking is within the portfolio. That shields us a bit from some of the market dynamics we’re seeing, because it’s more reliant on bilateral transactions.

We’re coming out of 20 amazing years in private equity, where the basic macro-overlay was: central banks have your back. I think 2023 will be a transition year. Private equity will go from a dominant model, where you buy great assets and there’s always someone to pay a higher price, to one where people have to create genuine value to get the returns to work.

What’s keeping you up at night?

Availability of funding is a concern. If you were debt financing around three years ago, or even 18 months ago, you would be getting a margin of 400 basis points, on the base rate of basically zero. At the moment, if you want to hedge for five years, depending on where you are in Europe, it’s somewhere between 250 and 350 basis points. Basically, that capital has gone from costing 100 basis points, to costing more like 1,000. Four percent to more like 10 percent. That’s a very meaningful change. The debt market of today is incompatible with the private equity market of yesterday. One of those two will have to adjust.

What are you looking forward to in 2023?

To be honest, I don’t think it will be a fun year. But it is comforting to know that differentiation is going to pay off. At least we hope so. For a while, private equity was like shooting fish in a barrel. Multiples were going in a way that you just had to hold assets and not do anything completely stupid.

I think that that time is over. In a way, it’s going to bring about a healthier private equity industry.

Editor’s note: Throughout December and January, PE Hub Europe will be publishing Q&As with private equity industry leaders. Check out our interview with Riverside Europe’s Karsten Langer here.