Navigating private equity's turbulent waters: A Q&A with Jordan Smith, Ares Management
Amidst the unprecedented supply/demand imbalance in private equity, highlighted by $1.2 trillion in dry powder versus $3.2 trillion in unrealised investments, investors face challenges exacerbated by COVID-19's lingering effects. Despite this, opportunities emerge, particularly in sectors with controllable growth levers. The shift towards EBITDA growth as the primary return driver prompts a focus on building resilient businesses. By leveraging domain expertise and strategic partnerships, investors aim to navigate the evolving landscape, driving asymmetric growth in the years to come. Mr. Smith is a Partner in the Ares Private Equity Group. Prior to joining Ares in 2011, Mr. Smith was an Analyst at Lazard, where he focused on mergers and acquisitions across various industries. Mr. Smith currently serves on the Board of Directors for the parent entities of Cooper's Hawk, LaserAway, Virgin Voyages and WHP Global, read on as he shares his expert insight in this Q&A.
1. What are your thoughts on the current state of private equity?
Private equity is currently facing the greatest supply / demand imbalance in its history, whereby GPs are sitting on $1.2 trillion in dry powder vs. $3.2 trillion in un-exited assets, with 26% of global buyout dry powder now four years or older (source: Bain 2024 Global Private Equity Report). This backdrop is a result of the continued ripple effects from COVID-19 which delayed traditional sale processes, led to supply chain disruptions, changes in purchasing patterns / replacement curves and ultimately, higher interest rates. In an environment where LPs are looking for GPs to return capital, we see two key themes. First, there continues to be strong demand for “A” assets which have demonstrated growth and resilience, but there has been a much shallower market for lower quality companies. And second, we are quickly coming into what we believe will be a buyer’s market given the sheer quantity of companies and / or sponsors in need of liquidity, extended duration or DPI. As we have experienced through cycles (e.g., the GFC), the best private equity vintages are often the ones that follow deployment lulls, such as what we have seen in 2022 and 2023.
2. How are you trying to invest in this market environment?
In this market environment, we believe it is important to conduct extensive industry research and market mapping to develop conviction in key industry trends where there may be attractive secular tailwinds and a supportive beta. We use this thematic approach to proactively identify companies in sectors of interest where it is possible to invest behind controllable growth levers. In any market backdrop, there are attractive opportunities, and we believe it is important to construct a portfolio with vintage diversification. In the current environment, we have found that having access to capital can create asymmetric growth opportunities – and where flexible capital and partnership (whether with founders, GPs or LPs) can unlock attractive opportunities. We have actively deployed capital into new platforms to capitalize on transformational growth opportunities, whether via M&A or organic initiatives.
3. How do you see the role of private equity evolving in the years to come, and what opportunities or challenges do you anticipate?
There has been quite a sea change in the private equity landscape over the past couple of years. In the prior 10-year period characterized by low interest rates, a meaningful amount of private equity returns was generated by multiple expansion or market beta. With the rise in interest rates, we believe EBITDA growth will be the principal driver of returns going forward. The onus is on sponsors to build great businesses to generate attractive returns. As the market has matured, we have narrowed our focus to where we have demonstrated domain experience, and by leveraging pattern recognition, resources and value creation initiatives, lean into opportunities where we believe we can partner with management teams to drive asymmetric growth.
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