Trends Watch: Mid-Market Private Equity

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Andrew Bernstein, Head of Private Equity, Capital Dynamics.  

What is your outlook for mid-market private equity? 

We don’t attempt to forecast the vicissitudes of the macroeconomy or the private equity market in general. Instead, we believe an all-weather approach to investing and portfolio construction is best poised to flourish regardless of what is happening more broadly in the market (such as investing across sectors, vintages, lead investors and regions). Over the past 30 years, mid-market private equity has delivered consistently strong returns, and we see no reason for that to change, provided investments are made with appropriate diversification.    

Where do you see the greatest opportunities and why? 

In the current market, we see very strong opportunities to co-invest alongside top-flight lead investors. Because of the scarcity of distributions from private equity funds over the past couple years, many limited partners (LPs) have slowed their investment pace, and this has caused a supply/demand imbalance vis-à-vis co-investments. Supply is up because many strong performing general partners (GPs) are taking longer to raise their latest funds, necessitating a greater need for co-investment in order to close deals while they are fundraising. At the same time, demand for co-investments is down because many of the same LPs that have slowed their investment commitment pace to new private equity funds have also done so with regard to making new co-investments. The combined effect has led to a significant widening of new deal opportunities from which co-investors who remain active can choose. 

What are the greatest challenges you face and why? 

One of the greatest challenges we face is from fellow co-investors that don’t take as rigorous of an approach. We frequently hear from lead investors that Capital Dynamics is the only co-investor asking deeper due diligence questions beyond what is available in the provided data room, and that other co-investors do not have any comments on the draft legal documents. The presence of such passive co-investors in the market makes it more difficult for us to complete our rigorous due diligence process and to ensure that we have the essential minority investor protection rights in place. Nevertheless, we are steadfast in our approach, and we will sooner pass on a deal than compromise our standards.   

What keeps you up at night? 

What keeps me up at night is the immense responsibility we have to effectively manage capital that is critical to sustaining the livelihoods of our investors. We are trusted to invest on behalf of pension funds, endowments, foundations, individual retirement accounts, and individuals’ private wealth which we take great care in making sure we do so responsibly. We are obsessed with avoiding the loss of capital. Nobody bats 1.000, but we pay exceptional attention to downside protection, avoiding investments with binary outcome potential. And we construct well-diversified portfolios such that should we suffer the inevitable loss in an investment, it does not have an outsized impact on the portfolio. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.