Private capital insights

On the ups and downs of future returns

On the downs and ups of future returns

"As an industry, we have to suffer on a return basis. It's already happening – every year you delay, you're losing around 2.5% of IRR. So, if exits are two years late, you're already around 5% down, even if you get the same sort of multiple as you invested at. Yet what happens next could be massively positive – the productivity gains to come from AI and the potential for energy marginal costs to trend to zero. So, I think there will be some difficulty on returns in the short term, but tremendous opportunities in the medium to long term."

Daniel Lopez-Cruz, Global Head of Private Equity, Investcorp

What is the biggest challenge for investment returns according to the experts?

Delayed exits causing IRR loss
Lack of AI implementation
Data cost barriers for smaller managers

"In the future, it's going to be harder to compete because of AI, especially if you're a sub-scale manager. We haven't yet seen AI impact the business in a way that it ultimately will. The cost of data is so high that if you're a sub-scale manager, you won't have the data to train models. Firms spend hundreds of millions of dollars each year on data that they buy. Then, there's all the data they create internally. Over time, the differential between scaled and sub-scale managers is going to grow rapidly. If you're not thinking about this as a tool in your organisation, you're going to be left behind very quickly."

Jenny Johnson, President and Chief Executive Officer, Franklin Templeton

On how AI will affect the private capital landscape

"The financial industry has done a phenomenal job in confusing people - cleantech, ESG, SDG, impact, purpose – even Al Capone had a purpose. I think we should keep it simple. It took humanity 2,500 years to move from zero to a $2trn economy; in the last 50 years, we moved from $2trn to $100trn. That pace of acceleration is simply too extreme for the planet to sustain – it can't supply all the resources and absorb all the resulting pollution if we continue to rely on traditional business models. Whichever business you are in, you need to manage resources and control pollution regardless of ethics, subsidy, politics. It's just good business.

Nino Tronchetti Provera, Founder and Managing Partner, Ambienta

On sustainability terminology

On tariffs

"A lot of companies are having a bit of a Mike Tyson moment, where everyone has a plan until they get punched in the face. Everyone ran scenario planning for tariffs and they had a plan for what would happen if the Trump administration came into the White House.

John Romeo, Managing Partner, Oliver Wyman

Most of the 84 businesses we have bought would not consider themselves environmental champions, they were managing their resources efficiently and differentiating themselves – and as a result, they have outgrown their peers by three times. It's simple. Don't get confused with all the terminology."

Nino Tronchetti Provera, Founder and Managing Partner, Ambienta

But I'm not sure many had a plan expecting to see Elon Musk's son in the Oval Office, and it's that level of unpredictability that caught folks a little bit off guard. I think a few GPs discovered they were running a little more risk than they realised. All this has just highlighted that a static plan doesn't really survive contact with these dynamic markets.

John Romeo, Managing Partner, Oliver Wyman

On value creation in the mid-market

"Management teams in the mid-market are good teams; they just don't have the right experience to grow past a certain point. Many companies we deal with, they get to, say, $200m in revenue, then they get stuck in the mud for five years and they throw a lot of stuff against the wall. You need to help them get the tractor back on the road. But don't overwhelm them. Pick two to three things – four or five is too many - that you really think are going to create value and make sure everybody buys into them and give them the resources and authority to make decisions. Do this, and you will see results much more quickly than you see in the large cap companies because these are not aircraft carriers, these are small boats that you can turn around."

Quinn Morgan, Managing Director and Co-Founder, Centre Lane Partners

What is most important for mid-market growth?

Focused value creation (2-3 initiatives)
Management team experience
Resource allocation

On investing in people

"As a large global wealth and asset manager, we've been thinking a lot about financial inequality and financial insecurity. It's not a new issue, but there are changes coming that could amplify it. When we think about our business as long-term global investors, the potential impacts of technology and geopolitics, are going to affect the labour force, human capital, and society. If economically and financially, we continue to apply a model where we bifurcate society so that a very small group of people has wealth and the vast majority of people increasingly has no wealth at all, we will be forced to ask the question, where will our future clients come from? There's a lot of value and future upside, as a business and investor, that we can create by being more thoughtful about how we develop human capital, how we bring people along the ride of wealth creation with us as we build companies, as we invest money."

Walter Viguiliouk, Managing Director and Chief of Staff, Sustainable Investing, Manulife Investment Management

On interest rates

"Private equity borrowed at zero rates, capital formation was fantastic and a significant portion of exits were sponsor to sponsor. If you think rates don't matter, I would disabuse yourself of that notion. If you look at the big picture, though, if you have middle-market companies bought at 16x or 17x EBITDA, financed at six turns, 400bps of rate increase shouldn't affect IRRs too much. It's not so bad to make a mistake if you're borrowing at 6%; it's very different if you're borrowing at 12%. You also have to sharpen your pencil because a 12% rate affects your ability to buy platforms, M&A and financial manoeuvring. High rates are a shackle."

David Lyon, Head of Capital Solutions, Neuberger Berman