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Schroders : Lower mid-PE market offers compelling co-investment opportunities

Schroders Capital : Lower mid- private equity market offers the most compelling co-investment opportunities

Jeremy Knox, Vahit Alili and David Bajada of Schroders Capital believe the lower mid- private equity market offers the most compelling co-investment opportunities at present.

How would you describe the volume and quality of co-investment opportunities you are currently seeing?

Vahit Alili: The current market environment is certainly more complex than the one we saw in the bullish years of 2021-22, but we are seeing strong and compelling dealflow nonetheless. There are two main reasons for this: first, when interest rates started to increase, dealflow slowed significantly. Initially the opportunities we did see were overpriced as valuations remained high. We consciously raised our bar as a result and moderated our investment pace. Since the second quarter of 2023, however, valuations have come down – in some sectors, quite substantially. In that repriced environment, we are seeing attractive opportunities and have accelerated our investment pace.

In co-investments, the quality of dealflow is also a function of transactional capabilities. We are benefiting from our historical investment in the area and our sector team set-up, which has made us a natural partner for GPs seeking a sophisticated co-investor who can efficiently co-underwrite investments.

Which parts of the market do you believe offer the most interesting co-investment opportunities?

David Bajada: We see the most exciting, and what we believe to be the highest potential, opportunities in the lower mid-market – for example, businesses with an enterprise value in the range of $100 million-$500 million. Historically, this segment has been less reliant on financial engineering and multiple expansion, and has focused primarily on implementing value creation initiatives that create true company transformation.

We believe today’s more challenging market environment will separate the best from the rest based on the ability to generate alpha through true transformational change.

In order to implement those value creation strategies, you need the right skill sets, of course – which is why we typically work with specialist managers over generalists.

Our co-investment strategy is consistent with our firm-wide approach across investment types, whereby we place a big emphasis on our Western buyout strategy complemented by Asia growth strategy. In the West, we see opportunities to build bridges between a family- or entrepreneur-owned business, transforming them through professionalisation or operational enhancements before selling them into the more competitive market segment. Here, we tend to see large-cap private equity funds competing with strategic buyers, resulting in premium exit valuations.

In contrast, in Asia we see fast-growing businesses with the potential to become market disrupters, capitalising on trends such as import substitution – where foreign brands are replaced by local ones – and demographic tailwinds.

India, in particular, is becoming an increasingly attractive investment destination as companies reconfigure their supply chains away from China.

While demographics across Asia are changing, India still has a relatively young population, with rapid urbanisation and digitalisation the main catalysts supporting its further strong growth.

What is the secret to successful co-investment?

JK: There are a number of factors that lead to successful co-investments: deep relationships with best-in-class GPs; having strong relationships led and covered by local investment professionals in local markets across global strategies; efficient and transparent investment processes with proven execution ability; sector expertise, which allows both parties to gain an understanding of opportunities quickly; and a large sourcing engine to enable high selectivity, rather than being compelled to proceed on a deal simply because it has come across your desk.

Ultimately, there are two crucial elements to co-investing: willingness and the ability to execute. We try and separate ourselves on execution. Successful co-investors need to be able to execute within the constraints of tight timelines and the natural evolutions of live deals. That ability to execute is paramount when it comes to getting the next call from a GP.

For further information, go to : Keynote Interview: Unlocking outsized returns in the lower mid-market