Alternative Investment Opportunities Through a Slowing Economy

The increasing cost and reducedavailability of leverage is also expected to exert downward pressure onprivate market valuationsover the comingquarters as private equityteams build these variables into their underwritingmodels. Therefore, an emphasis on fundamental operational improvement becomes the priority in buyout deal executionandwe are emphasizing middle-market buyoutmanagers with suchoperational focus. Buyout strategies witha deep operational attention that actively manage their companies to improve revenues and profitabilityare positioned to drive returns through the current landscape. Historically, buyout deal flowhas recorded reducedactivity levels during troubled times, as debt capital becomesscarce. However, buyout firms that have significant dry powder, have a structural advantage for newopportunitiesduringperiods ofmarket stress whenother investors are sidelined.Managers will then seek out and evaluate windowsof opportunityto take advantage of pocketsof capital scarcity. The upshot of lowerpotential entryvaluations driven by publicmarket weakness and financial stress is that buyout returns have historically trendedupward after publicmarkets have experienceddeclinesmore than 20% ( FIGURE 12 ). After these declines, buyout net internal rates of return (“IRRs”) have subsequentlytrended upward by an average of 558 basis points in the two years after the start of the last fourbear markets. Topmanagers withavailable capital may then be able to reinforce their market leading positions. The repricingof the public companies’multiples also has the potential to provide opportunities forbuyout funds active in the software sector, as public-to-private transactions may becomemore prevalent and lower entry levels may helpgenerate returns. FIGURE 12 : Global Buyout Returns After Bear Markets 0 5 10 15 20 25 30 35 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Net IRR % Vintage Year Black Monday Gulf War Dot-Com GFC Source: Cambridge Associates andBloomberg, asof September 30, 2022. Yellow lines show beginning of bear markets. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns are net of underlying fundmanagement fees, expenses and carry but do not include any additional expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. OPPORTUNITIES | WEALTH OUTLOOK 2023 | MID-YEAR EDITION │ ALTERNATIVE INVESTMENTS | 20