The view from the Co-investments team – Peter Knight Q1 2023

News: Insight & Opinion | 1 January 2023

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"We are expecting pent-up demand for deals to translate into a rebound in investment activity over the next three-six months", says Peter Knight, Head of Co-investments at Connection Capital.

Over the past few months, tough economic conditions have meant that transaction volumes in the market generally have dropped substantially, driven by significant valuation falls in public markets and uncertainty in the private debt arena.

The widening gap between buyer’s and seller’s pricing expectations has caused plenty of investment deals right across the market to be paused or cancelled altogether. We’ve decided to walk away from a couple of opportunities ourselves, on the basis that the deal on the table was no longer attractive. Moreover, many transactions had to be paused as lenders temporarily withdrew from the private debt space while they worked out how much to lend, and at what rates. However, we are now starting to see signs that lenders are re-entering the market in a more consistent way, albeit at higher rates than before.

As a result, we are expecting pent-up demand for deals to translate into a rebound in investment activity over the next three-six months.

Two trends especially stand out as positive from our point of view. One is that some fund managers have been completing deals off their own balance sheet during this recent period and are now looking to syndicate these down to co-investors, on the same terms as the original deal. These investment opportunities appeal strongly to us because we know exactly what we are investing in, and we also get a chance to look at investee companies’ recent trading history, to ensure they are performing in line with their business plans - or better. The opportunities we are currently looking to participate in have excellent deal dynamics: they are demonstrably robust businesses and the investment is being run by well-respected fund managers.

Having struggled to raise capital last year, many experienced fund managers now require additional sources of funding if they are to maintain their position in the market. New fund managers are also looking to build a track record of co-investments ahead of launching a fund, and some fund managers who have invested on a deal-by-deal basis in the past are now eschewing blind funds altogether. All of which should create a vibrant co-investment market.

The second trend is we are also seeing a steady stream of potentially attractive secondaries investments, especially in late-stage Venture Capital companies. Right now, it is possible to buy secondary stakes in high profile, rapidly expanding companies with established revenue streams and clear visibility around future growth, at a steep discount to previous fundraising rounds. However, to secure these deals it’s necessary to move fast: such opportunities do not hang around for long.

In the current climate, it is likely that a higher proportion of prospective deals than normal will fall by the wayside, but nonetheless, we still expect to be able to offer clients a healthy selection of opportunities in the months ahead. 2023 looks set to be a busy year.