Jesse de Klerk, partner at Stafford Capital Partners, offered his outlook for 2023 and reflections on 2022 for PE Hub Europe’s Q&A series.
Stafford’s European hub is in London, while its North American HQ is in Austin, Texas and its Asia HQ is in Sydney, Australia. Established in 2000, the company has over $7.5 billion in assets under management.
The company’s private markets business works in private equity, venture capital and sustainable capital via separately managed accounts and co-mingled funds. Its real assets business offers individual and combined co-mingled investments in infrastructure, timberland and agriculture.
What were the highlights of your dealmaking in 2022?
Despite the weakening of the economic environment, we secured several significant new private equity co-investment mandates with clients globally, and furthermore our clients are looking to extend their in-place programmes. We see this as a sign of trust from our clients and continued commitment to the PE sector. We have also continued to source high-quality global dealflow across a broad range of GPs within our extensive network. Pleasingly, our ability to close transactions has not been impacted by the current economic environment albeit our clients have become more cautious.
What was the biggest challenge to completing deals in 2022?
We have found that client conservatism has been the key factor in driving execution slowdown in 2022, and rightly so. The key negative factors that are driving the current economic climate (most notably high inflation rates, increased interest rates and a drop in business and consumer confidence) directly impacted most PE sectors. The slowdown in the economy and the uncertainty about the future outlook has made it more challenging to get investment conviction as making assumptions about future earnings growth and cashflow conversion requires a high level of scrutiny.
How do you expect the first six months of PE dealmaking in 2023 to compare the last six months of dealmaking in 2022?
Overall, we expect deal activity to slow down further in the first half of 2023 as investors adopt a wait and see approach. The second half of 2022 was still an active period for private equity, but this was partly the result of processes already having started in the first half of the year. However, we believe deal activity will vary dependent on the sector and the segment. It is likely that the segment for larger deals will be more challenging as these deals are more dependent on the availability and pricing of credit. With increasing interest rates it is likely that fewer deals will be completed in this segment unless pricing levels or return expectations are lowered.
Also, we expect continued interest in sectors and themes that exhibit strong long-term secular growth such as healthcare, energy transition and resource efficiency. Also, we also see a preference for services businesses over trading businesses given the lower risk to net working capital efficiency.
What will be the most important trends affecting your dealmaking in 2023?
The change in economic conditions will have an impact on deal sourcing and selection. We have always focused on (smaller) companies with less debt financing and this prudent approach pays off during periods of recession. Also, we are experiencing an increasing client demand for investments in environmental and social impact themes, particularly in Europe where LP exposure demands continue to increase in this area. Sustainability has been a core theme for our organisation for close to two decades and will be an even more important focus area for us in the years to come, leveraging upon our long-term expertise and the valuable network we have established globally.
What’s keeping you up at night?
Given our focus on sectors that exhibit long-term growth and companies that are fundamentally sound and conservatively financed, we are confident that the portfolios we have constructed for our clients will be resilient during a recessionary period. At the same time, we may experience a short-term drop in valuations as public markets drop. This may concern clients and our prime focus is therefore on staying close to our clients in order to provide them with real-time information and strategic advice in order to guide them through this period of increased volatility.
What are you looking forward to most in 2023?
We expect the coming years to be attractive vintage years for private equity and we are preparing ourselves for a busy 2023. We recently closed new investment mandates with that will start investing in 2023. Our global deal pipeline remains very healthy and we look forward to investing our clients’ capital in the best opportunities we can source.
Editor’s note: PE Hub Europe’s Q&As with private equity industry leaders will continue to appear throughout January. Check out our interview with EQT’s Arvindh Kumar here.