Flexstone sees value in mission-critical opportunities

New York-based Mr Gupta, in Australia this month to meet with some of the country’s largest institutional investors, including super funds, said the need for PE firms to deploy cash was boosting the sector. It follows a slow 2023 for PE firms.

“There is a lot of capital in private equity, a lot of dry powder, and most of it is in the funds raised in the last three years. All these funds have a typical investment period of four or five years, so there is a need for capital deployment,” Gupta said in an interview.

“We have seen over the last six months that deal activity has really increased and that has happened because there is more certainty around interest rates,” he added. “I think there is now also better coordination (in terms of prices) between buyers and sellers. Moreover, the credit markets are very liquid. Last year it was mainly private lenders allocating money, but a lot of the syndicate market has now come back, the traditional banking market has come back.”

Global investment firm Flexstone, a subsidiary of Natixis, has $10 billion in assets under management and focuses on the lower and middle market in terms of deal flow. While the top end of the market, including KKR, Apollo, Blackstone and The Carlyle Group, gets all the attention, the lower, lesser-known side can deliver better returns and provide a point of diversification for investors, Mr. Gupta said. .

“You can really outperform if you pick and choose the right funds to work with in the lower middle market… it’s a great alpha driver,” he said.

For its direct investments, Flexstone invests in companies with an enterprise value of less than $1 billion – the vast majority are smaller, with an EV of $500 million or less.

The firm does not dabble in venture capital and typically avoids the crowded technology sector, preferring cash flow positive businesses, most of which are family-owned, where private equity may be the first institutional capital involved.

“We focus more on companies that are ‘mission critical’. They are not technology companies, but they are still mission critical companies because they have low costs for the value they provide to the end customer,” said Mr. Gupta.

“Or we invest a lot in fragmented markets, because even in this market, where it is more difficult, you can make small acquisitions at great value, and they are very valuable.”

After a year to forget in 2023, PE is experiencing something of a revival.

Supergiant AustralianSuper said this month that PE and infrastructure are among the better investment opportunities on the market right now.

“Both private equity and infrastructure to some extent, and even some of the private debt, in those markets prices haven’t risen as much as in listed markets, and they represent quite good opportunities,” says Mark. Delaney said on Bloomberg TV.

The investment landscape has changed from a few years ago when competition was fiercer, he added.

“Now is a better time to put money into private markets than it was two or three years ago, when valuations were higher and deals were quite scarce, and there was a huge amount of capital coming in,” Delaney said.

The pressure to sell aging portfolio assets will act as an incentive to get deals over the line, while the fundraising cycle will be an increasingly important driver of exit momentum, according to a recent report from consultancy Bain.

At the same time, the timing and pace of PE exits will depend on confidence in the broader economy and the belief that interest rates have peaked.

For his part, Mr. Gupta sees interest rates moving in only one direction.

“We now have certainty about interest rates; they no longer go up, they go down. I don’t know if it’s two interest rate cuts, or three or four. But we invest for the long term, so we are not as affected by these quarter-to-quarter movements.”