CONTRIBUTORS
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
In the latest episode of the Alternative Allocations podcast series, I had the opportunity to sit down with Robert “Bobby” Stevenson to discuss private equity broadly, along with the opportunities in growth equity. We reflected on the changes in the market from peak valuations in 2021 to rising rates and inflation and our current market backdrop.
I asked Bobby about today’s market environment and the changes in valuations from their peak. He noted that the best companies still remain attractive. “What I would tell you is those companies are generating multiples of their revenue from 2021 today. So, by definition, their valuations are more reasonable from a multiple perspective today.”
We discussed the macro backdrop, with slowing exits (initial public offerings [IPOs] and merger and acquisitions activity), and the geopolitical and trade uncertainty. Exits have slowed dramatically from 2021. Bobby noted that, “We've seen some IPOs start to happen, particularly this summer, that have the market extremely excited.”
An increase in IPO activity should provide capital back to investors, which could be deployed elsewhere. The private equity ecosystem needs capital flowing in and distributions being returned to investors. This also helps in resetting valuations.
We discussed where Bobby is seeing the most attractive opportunities in growth equity. We discussed artificial intelligence (AI) broadly and then Bobby offered some specific areas of interest from robotics, to defense and software. He noted that, “We're seeing AI being brought to bear in the defense ecosystem with a number of companies being started that are really focused on autonomous capabilities across land, air and sea forces.”
Bobby also shared his views regarding opportunities in fintech. “The focus right now has really turned to stablecoins, and that's a really interesting opportunity for crypto at large.” Expanding on the fintech opportunities, Bobby suggested broader changes in the banking system. “We continue to think in the fintech space that there are going to be really interesting opportunities for next generation banks that are serving consumers in the way that they want to be served, which is clearly not walking into a bank and talking to a teller.”
Lastly, we discussed the challenges and opportunities in energy. “We think that there are going to be some incredibly interesting and different ways to generate, store and utilize energy over the next five to 10 years that really kind of 10 years ago were probably thought to be unnecessary to go figure out because there really was a view that there was not a lot of growth in baseline electricity demand.”
Bobby painted a constructive picture regarding putting private capital to work in the coming years. After several years of slowed exits, he believes we could begin to see a return to normalcy.
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WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. Diversification does not guarantee a profit or protect against a loss.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in the information technology (IT) and/or technology-related industries carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.
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