Given uncertainty around the economy as well a high interest rates, does this affect whether growth or buyout areas of PE are more or less attractive relative to each other?
Buyout by nature uses leverage whereas most growth investments are pure equity due to not wanting to put an interest burden on a business that has not yet reached the point of strong cash flows.
Does this make growth more attractive than buyout or is the LBO resilient enough and the returns will come down slightly? What am I missing?
Based on the most helpful WSO content, both growth and buyout areas of PE have their own unique advantages and challenges, especially in the face of economic uncertainty and high interest rates.
Growth PE, which typically involves pure equity investments in businesses that are yet to reach strong cash flows, could potentially be more attractive in a high interest rate environment. This is because these businesses are not burdened with interest payments, which can be particularly challenging when rates are high.
On the other hand, buyout PE, which often involves leveraged buyouts (LBOs), could face challenges in a high interest rate environment due to the increased cost of borrowing. However, LBOs have proven to be resilient over time, and while returns may be slightly lower in a high interest rate environment, they can still be substantial.
However, it's important to note that the attractiveness of growth vs. buyout PE can also depend on other factors, such as the specific opportunities available in the market, the skill and expertise of the PE firm, and the overall economic and market conditions.
In terms of the outlook for the next 5-10 years, it's difficult to predict with certainty. However, given the current trends and market conditions, it's possible that we could see increased interest in growth PE, particularly in sectors such as tech and healthcare that are experiencing significant growth. At the same time, buyout PE is likely to remain a key strategy for many PE firms, despite the potential challenges posed by high interest rates.
Remember, the PE landscape is dynamic and things can change quickly. It's always important to stay informed and adaptable.
Sources: PE Outlook over the next decade, https://www.wallstreetoasis.com/forum/investing/recession-in-2019-the-great-recession-20?customgpt=1, PE long-term attractivity: Is the trodden path "broken"? Quo vadis gen Y?
I think both are similar in terms of outlook and as you mentioned, both are probably headed for tougher times (relative to the last 10+ years). Obviously both still great career paths but I don’t know if they’ll ever be where we were for the past 10 years again.
Growth doesn’t use leverage but is generally more tech-skewed. Tech taking a beating now of course and who knows if that will ever come back / what it will look like. At the end of the day, if you’re doing a tech growth deal you eventually need to either sell it to a strategic, go public, or sell it to a PE firm, so tough times in PE due to interest rates definitely still trickles down. Also, at the TA / Summit style growth shops leverage is very much still a factor - even if the original deal is all equity you’re often doing add ons with debt, so they’re not immune from interest rates either
Growth will be dead for at least a decade. Credit will be a much better investment
I don't necessarily think that is true. Warburg just closed a 17B fund a few days ago. Sure it will be more frugal for a while, but I think "dead" is hyperbolic. 2021 is over. I think (well at least hope) we can expect some more sensible but not nonexistent deal execution ahead.
Warburg isn't what people are referring to when they say growth these days. Warburg will be fine.
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