PERSPECTIVE3-5 min to read

Rethinking the re-up in private equity

As we enter a new market paradigm, private equity investors should consider the replicability of past successes. Schroders Capital explores the most compelling opportunities in private equity currently.

China Fixed Income


Tim Boole
Head of Product Management
Verity Howells
Investment Research Manager Private Equity

Schroders’ 3D Reset framework, characterised by demographic change, decarbonisation, and deglobalisation, is reshaping long-term growth and inflation dynamics globally, creating a new market paradigm that will affect the spectrum of private markets investments. This includes re-up investing - making additional investments in a fund or company where an investor has previously invested.

Although today's inflation may abate, the 3D Reset is driving inflationary pressures in many Western economies, which will likely keep interest rates structurally higher. This environment challenges large private equity buyout strategies that depend on stimulative rates. In contrast, small-mid buyouts become more appealing as they are experiencing a more stable dry powder situation than large buyouts, resulting in less deal competition and lower entry multiples.

Investment opportunities in private equity in India and China

The 3D Reset will also create growth tailwinds in certain economies, particularly in Asia, driven by demographic advantages and growing disposable incomes, as opposed to the more export-orientated growth that was the primary driver in the past.

Considering these new market dynamics, investors should focus on opportunities that benefit from transformative trends, diversify private equity allocations, and concentrate on areas with healthy fundraising dynamics. Small-mid buyouts are expected to outperform large ones, and there are also promising prospects in India and China's onshore RMB-dominated market.

The attractions of the small-mid private equity segment

Over the last decade, fundraising by large private equity funds has far outpaced deal flow, resulting in greater competition for deals and higher entry valuations. From 2010 to 2022, large private equity funds saw fundraising increase by 11x, outpacing deal flow growth of just 4x. Meanwhile, small-mid funds experienced more stable capital supply-demand dynamics with just 3x growth in fundraising and 4x growth in deal flow over the same period. This has resulted in a consistent discount in small-mid buyouts relative to large ones, which today stands at around 5-6x EV/EBITDA.

Entry valuation discount in small-mid buyouts


Small-mid buyouts also benefit from an added exit strategy facilitated by strong fundraising among large buyout funds: selling their portfolio companies to large buyout funds.

Our analysis of Preqin data from over 49,000 private equity funds showed that small-mid funds typically yield higher returns in terms of net total value paid in (TVPI) basis and net internal rate of return (IRR) basis. The outperformance is also demonstrated across geographic regions and during recessionary periods.

Small-mid private equity funds have delivered higher net returns than large private equity funds


The domestic growth story in China and India continues to offer exciting private equity opportunities

China remains an attractive region for private equity, driven by domestic opportunities from import substitution and consumption upgrade themes. Onshore RMB funds are particularly compelling as they focus on small-mid deals and represent the largest pool of private equity capital in China. They are also better shielded from geopolitical factors that cloud the exit route for China USD funds.

Technology sectors, specifically advanced technology and manufacturing, as well as green technology, stand to benefit from import substitution. China's consumer sector also holds attractive opportunities. In 2020, Schroders Capital invested in a top Chinese designer toy brand, capitalising on the large Generation Z demographic and rising preference for local brands.

We also favour India for private equity as it is expected to become the third-largest global economy by 2028* thanks to its demographic advantages, strong digital adoption, thriving manufacturing base, and ability to serve as a key “China plus one” partner. Private equity offers unparalleled access to India's economic growth, with companies operating in the fastest-growing sectors – consumer, healthcare, and technology – being overwhelmingly privately held. In 2016, Schroders Capital directly invested in a leading eyewear company in India, thereby gaining exposure to growing disposable incomes and digital adoption.

*Source: IMF GDP estimates, Schroders Capital, 2024.

Fast-growing sectors dominate India's private equity market, while traditional sectors prevail in private markets


This article first appeared in Asian Private Banker on 15 March 2024

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Tim Boole
Head of Product Management
Verity Howells
Investment Research Manager Private Equity


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