Politics, disruption and how private equity can weather the storm

On day two of SuperInvestor 2017 in Amsterdam, news broke of a possible coup in Zimbabwe. The state of the world’s politics – and its impact on markets – was even more on delegate’s minds than usual.

According to Bobby Vedral, Partner at Goldman Sachs, markets are currently sentiment-driven, and that sentiment is upbeat. Recent Goldman surveys had shown that investors are still bullish, despite the fact that Trump’s infrastructure investments and tax reforms are yet to fully materialise.

But there are things they should keep a close eye on, he reckoned. Whilst Asia was heading into a relatively quiet 2018, China was still one to watch, particularly if sentiment turned negative: “If we turn on China, it could have a big effect on markets. The key thing is that it doesn’t matter what happens in China, what matters is what we think happens in China.”

This year, Europe lurched from crisis to crisis, but 2018 would see the Americas dominate the agenda once again. There were upcoming elections in Argentina, Chile, Mexico, Colombia and Brazil; “and these are the darlings of the international investment market,” said Bobby. Mexico could see itself with an ousted Nieto and a left-leaning Government. Brazil has two populists competing against each other – one of which is often referred to as “the Trump of Brazil”. Further north, the primaries and the Mueller investigation were looming, he reasoned.

Over in Europe, Russia would be working hard to normalise relations ahead of its World Cup hosting, thought Bobby, while the European Union could be heading towards Europe 3.0 - a multi-speed Europe.

In the UK it wasn’t Brexit, but the possible implosion of the Tory party - who only have a three-seat majority - and the prospect of a Corbyn government, that could cause Britain its biggest headaches.

A Democrat come-back?

Commenting on the latest election results in the US, Mary Jordan, National Correspondent at the Washington Post, argued that they showed a real promise of change, and what could be the beginning of a Democratic comeback.

“Last week something extraordinary happened,” she said. “At the start of last week, out of the 100 members in the House of Delegates, 34 were Democrats. When last week’s vote came in, 49 were Democrats.” But that wasn’t the most newsworthy aspect of the results, as she went on to explain: “Almost all the new seats that flipped were women, and almost all of the women had never run for office before. The most significant thing that is going on is that Hillary Clinton’s loss, and all this talk about sexual harassment, is making people run for office that would never have thought of doing so previously.”

With this wind at the back of the Democrats, where did that leave Trump? Few doubt that he would see out his term, but not many could envisage a second. That said, counties that voted overwhelmingly for Trump were still behind him, according to Mary. “There are some fundamental issues, many related to growing inequality, and I think that whoever is the next President has got to address some big issues on fairness.”

"One thing was for certain, Trump had changed American politics forever."

Economic issues not forgotten, Mary argued that the result of the NAFTA negotiations would be “all in the spin”. Tax reform would happen, to one extent or another, but the biggest question mark hung over Trump’s promised infrastructure investment: “Everybody thinks he is going to do it in the next three years, it’s coming, and he will do some splashy things,” she said.

One thing was for certain, Trump had changed American politics forever. “We didn’t think a reality TV star could be a President. He had 14 years of TV training, and we all underestimated how useful that was,” she said. That, along with his use of social media, meant that “politics that we used to know - the traditional path to the White House - has gone,” she concluded. “But it has people thinking they can run.”

How does the political backdrop affect private equity?

How did this global political backdrop affect the private equity market? Can the industry continue to take advantage of opportunities and navigate threats?

Two things became clear during the ensuing discussions. The first was that private equity could remain nimble enough to navigate a changing landscape, as Thomas von Koch, Managing Partner & CEO at EQT Partners explained: “Our strength is in our governance. The board and the owners can sit and we can act very quickly. In a public setting, boards are paid to avert risk and are poorly equipped to tackle the future head on.”

“There aren’t that many right opportunities, so we can’t focus on an industry vertical. We have to be opportunistic.”

The second clear theme was that, with public markets shrinking and an increasingly digitised world, opportunities continued to present themselves. Indeed, according to Steven Mayer, Senior Managing Director, Co-Head of Global Private Equity at Cerberus, private equity itself was built on opportunism: “Almost all of our private investments have the premise that we can improve the business,” he stated. But finding the right opportunity continued to be a challenge, he added: “There aren’t that many of them, so we can’t focus on an industry vertical. We have to be opportunistic.”

Digitisation was a massive opportunity for the market, and healthcare, for instance, was “the last frontier to be disrupted,” according to Cathrin Petty, Partner and European Head of Healthcare at CVC.

Gabriel Caillaux, Managing Director and Co-Head of EMEA, General Atlantic agreed, adding that we hadn’t even begun to see the pace of change that digitisation would bring. Not only that, but private equity was an under penetrated source of funding in many areas.

What about threats?

Still, the storm was coming, said Thomas, the only question was when. “We’ll still be open for business, but we need to be very selective in what industries to invest into,” he cautioned.

Cathrin, who added that, in addition to geopolitical and interest rate threats, there were also specific subsector threats to consider, said that they would be looking at those that could continue to have strong underlying growth through a cycle.

The threats that occupied Gabriel’s mind included the current valuation environment and the amount of competition in the industry. “There are a lot of investors that have never seen a downturn,” he warned. “They think they are invincible. How are they going to react when and if the downturn comes?”

Steven remained upbeat though, dispensing with some sage advice: “opportunities and threats are flipsides of same coin. Nobody has a perfect cyrical ball, so find 10 variables that are most likely to affect your outcome, and see how many you can control or influence.”