Schroders Capital’s Paul Lamacraft sees increased focus on sustainability and impact in 2024

In the small/mid-market, the numerous value creation levers available coupled with low leverage will deliver outperformance in this higher interest rate environment, says Lamacraft.

Paul Lamacraft, Schroders Capital

Sustainability and impact (S&I) strategies will be more in vogue in 2024 as “societal and climate challenges continue to mount globally”, Paul Lamacraft, senior private equity investment director at Schroders Capital, told PE Hub Europe in the latest of our 2024 outlook series with PE dealmakers.

London-based Schroders Capital provides a range of investment strategies, including real estate, private equity, secondaries, venture capital, infrastructure, securitised products and asset-based finance, insurance-linked securities and impact investing. The firm has over $88 billion assets under management.

What do you expect to see in 2024?

Fundraising has reduced significantly in 2023 as LPs adjust to a changing macro environment and the denominator effect. I expect this to rebalance in 2024 as investors become more accustomed to a higher interest rate environment and still see attractive returns being generated across private markets and the denominator effect reduces.

I also expect to see an increased focus on S&I strategies as societal and climate challenges continue to mount globally. Next year we will likely see more evidence to support our view that positive impact can be achieved at the same time as delivering attractive financial returns as more impact funds mature and we see realisation over the medium term.

The resilience of valuations in our focus areas and the growth levers available to private equity specialists in the small/mid-market will remain very important and should also gain greater recognition in the year ahead. Therefore, my outlook across our key markets in private equity is positive for 2024, however, there remain significant macro headwinds that may limit investment growth including elections looming in sizeable economies.

What opportunities do you see going into 2024 and what are you most looking forward to?

There are two key areas that I am excited about for 2024: S&I and small/mid-market transactions. I have been delighted to see the growing levels of interest from LPs to invest into S&I funds. We are also supporting a number of LPs who are seeking bespoke, focused impact mandates targeting specific areas that are most important to them. We are seeing increasing specialisation in this part of the market, as GPs move away from generalist impact models to more focused approaches that draw on specific skills associated with such areas as the circular economy, energy transition or climate-focused strategies.

Within the small/mid-market, I believe the numerous value creation levers available coupled with low leverage will begin to deliver outperformance in this higher interest rate environment where financial engineering is less fruitful. We have seen over many years the superior returns in private equity that can be generated from the small/mid-sector specialists and I expect this to become even more pronounced in future years.

What factors are driving PE dealmaking? 

There is a strong demand for capital from innovative players in the venture and growth stage and we are now seeing some very attractive opportunities, particularly in early-stage businesses as valuations have moderated. With the innovation we are seeing in areas such as AI, the early-stage venture arena looks very exciting. We also see very attractive opportunities to continue our model of backing established businesses led by experienced management teams who see opportunities to expand and professionalise. These are two key elements of our “transformation” model in the small/mid-market.

Increased scale through M&A can also serve to improve efficiency and drive financial returns, and also enable product and geographic expansion, particularly during a time where valuations look appealing. Businesses with capital and the vision to continue to grow in the current market environment have an opportunity to really increase market share over the near term.

We also see increased emphasis on S&I and continue to see strong interest and inflows into strategies designed to mitigate and adapt to climate change and environmental and societal challenges. Increasing capital is encouraging dealflow in this space, but this can be a double-edged sword. In some areas of S&I, valuations are becoming more heated as more capital chases deals.

Another area of excitement is the secondary market, especially in GP-led transactions where our team has been very active. Over the last few years, the quality of companies being presented in GP-led transactions has improved significantly. We are now seeing some of the “crown jewels” in portfolios being presented as GP-led opportunities.

What types of companies are ripe for PE buyers?

We are fans of the small/mid-market buyout space where our global investment team has been investing for many years across Europe and the US. This is a significant part of the market and the major driver of employment and GDP across many economies. By investing into companies at this stage, we are able to access them at attractive valuations and can help transform them through professionalising, adding senior management capability, investing into IT systems, expanding product or geographic offerings through either an organic focus or through M&A. Being able to bring our expertise in sustainability to the table and introducing best-practice approaches can also be a significant value driver for such companies as we seek to scale them.

These value creation levers deliver businesses that become highly attractive to both strategic players but also to larger private equity investors, who will often pay a higher multiple than we paid at entry, benefiting the management teams we have backed and delivering strong financial returns for our investors. Typically, we see the most attractive companies across our five core industry sectors: healthcare, technology, consumer, business services and industrials. We like to focus on less capital-intensive business models with strong visibility over revenues and earnings and also benefitting from pricing power in an era where inflation is once again a factor to manage.

What are the themes influencing the private equity sector?

The PE model works well for a variety of reasons but one of the most important is the long-term focus that private equity managers typically have. The ability to make decisions and invest into businesses with the knowledge that the benefits will potentially take a couple of years to really begin to flow through is very powerful. Investing into people, processes and technology can all deliver value, improve long-term efficiency and enhance margins during a holding period that can exceed five years. Pursuing an M&A strategy can also supercharge scale, improve reach, diversify revenue streams and client concentration. These are some of the attributes that we look to develop in the businesses that we invest into; having the time and vision to encourage this is what often drives the attractive returns we expect.

Editor’s note: PE Hub Europe will be running 2024 outlook Q&As with senior private equity dealmakers through December. Read here the latest in the series with Marcel Lacaze, MD at Hillhouse.