This year has brought a crisis that’s unlike anything the world has experienced before because it brought the world’s economy to a shuttering halt, but that doesn’t mean there haven’t been investment opportunities this year. Private equity, in particular, is turning out to be one of the big winners this year alongside technology, of course.
During CNBC’s Institutional Investor Delivering Alpha conference, H.E. Yasir Al-Rumayyan of Saudi Arabia’s sovereign wealth fund, Blackstone BX Chairman and CEO Stephen Schwarzman and Vista Equity Partners Chairman and CEO Robert Smith talked about strategies for achieving alpha with investments.
Al-Rumayyan was asked about whether he still holds any of the positions he held during the pandemic. He said they saw the crisis as similar to most of the other problems that have occurred in the financial markets throughout the decades. They were prepared and had plenty of cash waiting on the sidelines because they thought this year could bring the end of the longest bull market ever. He said they looked at the market in three ways, to take some strategic positions, some opportunistic positions and rescue finance.
The markets have rebounded since the beginning of the pandemic, and he does believe some sectors have “outgrown themselves,” so they reduced their exposure to some companies and sectors. However, he sees the potential for some go even higher than they are now.
Public versus private markets
Private equity has become more and more popular in recent years, and Smith sees more opportunity in private equity than he does in the public markets. He was asked if it’s becoming difficult to find something to buy because some go-private companies are trading at multiples to sales that we haven’t seen in a long time.
Smith specializes in enterprise software, and he said many software companies are maturing, which creates more buying opportunities. He said 20 years ago, there were fewer investors in the space, but there are many more now. He pointed out an interesting difference between the public and private markets in terms of software.
“From our perspective, really interesting, the public markets continue to focus on what we call hardware and consumer technology, consumer software, whereas the private markets, private equity, we focus mainly on enterprise and I.T. services,” he said. “As a result of that, there’s actually a little bit of a dislocation of opportunity, because again 98 percent of software companies, enterprise software companies are private. So in order to participate in this market, you really need to be in a private marketplace.”
Smith also said they see better valuations in the private market right now than in the public market. He said PE-backed software companies have been doing better than their public peers.
“The private equity-backed software companies have actually performed better from our analysis than others, and I think it’s because we do a good job of actually building infrastructure so these businesses have some sustainability once they get into the marketplace,” he said. “And again, there’s just demand for public market enterprise software companies, and they’re just are very few relative to the private markets, so I think that trend and that momentum is going to carry forward for quite some time.”
Schwarzman was asked about valuations, and he believes tech is at very high valuations, while other parts of the economy are undervalued.
“And the indexes, of course, have done great, but they are way overweighted to technology, and so not all companies have recovered their valuations,” he said. “So it gives you a chance, on the one hand, to play some type of technology things because the power of what’s going on in that area, as the world is going digital at a much faster rate, exists. And it also is possible to buy other companies that haven’t rebounded to the same degree.”
Schwarzman added that the way to make money isn’t just by buying something, but rather by improving operations as well, which is the focus of private equity.
“And that’s one reason why the returns historically have averaged somewhere for the good firms 500 basis points or more over the stock market,” he said. “It’s not a surprise if you buy things at a good price and accelerate the growth, have some leverage on it, the company will be safe, and the returns will be significantly in excess of alternative things you could own.”
Much was discussed at the conference. You can view notes from the presentations here.