MVision chief executive Mounir Guen, discusses how fundraising has remained buoyant despite macroeconomic headwinds, the outlook for single country mid-market managers and the importance of patience in a busy market.

In your view, what is going on in the market? How would you characterise it?

It is surreal. Whichever way you turn there is something to consider. Inflation is rising, there is severe pressure on the cost of living, there is a war, there are shortages, we are still dealing with Covid and there has been a large correction in technology stock market prices.

Yet, despite all of this, the private equity industry is flying. The large managers are sustaining high levels of deployment, returns performance has been exceptional and the LP re-up rate to existing relationships is incomprehensibly high. The market is rocketing.

How do you explain that? How has private equity been able to insulate itself from the challenging macro backdrop?

If you strip private equity back to its essence, it is about buying a good growing asset at a reasonable price, adding value through operational improvement and financial engineering, and exiting at a premium. That skill set, and the ability to apply the skill set, comes to the fore at times of uncertainty. If you look back at previous downturns, private equity has generally outperformed during periods of volatility.

There is also the seismic shift across all industries towards digitalisation that accelerated through the Covid lockdown period. Companies are embedding artificial intelligence, data analytics and automation into their operations at hyper speed and that is an incredibly powerful driver of growth. Private equity has become adept at identifying, capturing and facilitating that growth.

Finally, even though interest rates are now rising, they are still very low by historical standards and there is still significant liquidity available to private equity managers. Private equity also still has significant room to grow - the whole asset class still fits into Blackrock. Overall, the private equity industry has settled into a very efficient groove and the market just keeps on rolling.

Going back to just how busy the market is, how acute is LP indigestion and does the LP base have the bandwidth to see everyone as the market expands at such a rapid pace?

The fund due diligence process has become super-efficient and all the roadshows can be done online. For investors, it has become much easier to get all of the members of a GP together for a call, and for the GP, it is now possible to see between five to six investors a day and meet a deep bench of the investment professional at the same time.

As efficient as the process has become, however, the bottleneck is around LP time. LPs are just swamped at moment. They are in back-to-back meetings every day just trying to work through the re-ups. Finding time for meetings and dialogue is challenging and travel is still difficult for LPs that have to meet new managers to their programmes in person before committing.

The LPs will get there eventually, but as a manager you just have to wait your turn with them. It is like walking into the post office and pulling ticket 38 when ticket 12 has only just been served.

As the industry continues along its growth trajectory, where does that leave the single country mid-market fund, especially at this time when we see all the big global funds and pan-European funds out fundraising at the same time?

Fundraising has diverged into two tiers. There are investment programmes backing the big mega funds and large pan-regional managers, and a pool of investors backing smaller managers and very small funds. If you straddle those two investor pools and you are in the $500m to $2bn fund size zone, there is a squeeze on investor capital and investor time.

What is interesting to observe is that there are very few investors only interested in pure primary opportunities. Co-invest, secondaries and directs have become very attractive and make LPs look at opportunities in different ways. Lower carry and fee structures on co-invest deals mean that 2nd-quartile managers can end up delivering top quartile net returns. LPs are scoping the market for these kinds of opportunities.

How are managers coping with the explosive growth of the asset class? At what point do/should managers just slow down? Can they even afford to slowdown?

It is very difficult to slow down. A few years ago, as valuations climbed, some managers stepped back to see whether those pricing levels could be sustained, and they soon found themselves behind. If you hesitate, it is tough to make up lost ground because the industry is moving at such a rapid pace.

If you look at the speeds at which the private equity machine can operate, the last few years have shown that it can operate at F1 speeds. Running at that pace means you are building up your assets under management, and as a manager you do have to think about what that means for your business and current strategy. How do you absorb the growth?

One pathway is to diversify your offering by size and product. Many managers have very successfully launched smaller funds to retain a presence in market segments they are growing out of as they expand into new markets and take on bigger deals. We have also seen managers expanding into adjacent areas like private debt and real estate and there is also the growth in co-invest that we have already mentioned.

There are opportunities to grow a platform and build out new investment strategies, but it does require a careful governance check to make sure the expansion is in the right areas where a manager can continue to add value.