Who Are The Best Investment Managers for Private Equity?

Three quarters of Web 2.0 companies did not exist on Web 1.0. Can this data point be extrapolated into Web 3.0? And if so , why is the Metaverse so important to investors? Let's first, walk through the evolution of the web to understand how the investment case has changed.

What is Web 1.0?

Web 1.0 refers to the early days of the World Wide Web (WWW) when the web was primarily used as a static information resource, primarily by means of simple HTML pages, with limited interactivity and user-created content.

What is Web 2.0?

Web 2.0 is a term used to describe the second stage of the World Wide Web, characterized by increased user-generated content, greater collaboration and interactivity, and the development of social media, blogs, wikis, and other new forms of online communication. The transition from Web 1.0 to Web 2.0 is marked by the rise of dynamic, interactive websites and the growth of web-based communities and applications.

What is Web 3.0?

Web 3.0 refers to the next generation of the World Wide Web, characterized by the use of advanced technologies such as Artificial Intelligence, the Semantic Web, and the Internet of Things, to create a more intelligent and interconnected web. Web 3.0 aims to create a more seamless and intuitive user experience, with a greater emphasis on personalization and user control, and the ability to seamlessly integrate and process vast amounts of data. The Web 3.0 vision includes a more intelligent web that can understand and interpret the context and meaning of information, enabling new applications and services that were not possible with earlier generations of the web.

What is the Metaverse?

The metaverse refers to a virtual world or an interconnected network of virtual worlds, usually accessed via the internet and often through virtual reality devices, that can be experienced and interacted with in a similar way to the physical world. It is a hypothetical future version of the internet that merges physical and virtual reality, creating a fully immersive and interactive online experience. The metaverse is often portrayed as a shared space where people can interact with each other, participate in activities, and experience a range of environments and events, just like in the physical world. It is expected to encompass a wide range of virtual environments, from social media and gaming to commerce, education, and entertainment.

Who will be the winners and losers of Web 3.0 and why is the Metaverse important?

Web 3.0 and the metaverse are related but distinct concepts. Web 3.0 refers to the next generation of the World Wide Web, characterized by the use of advanced technologies such as Artificial Intelligence, the Semantic Web, and the Internet of Things, to create a more intelligent and interconnected web. The metaverse, on the other hand, refers to a virtual world or interconnected network of virtual worlds, that can be experienced and interacted with in a similar way to the physical world. While Web 3.0 is a crucial building block for the development of the metaverse, the metaverse goes beyond the capabilities of Web 3.0 and aims to create a fully immersive and interactive online experience that merges physical and virtual reality.

The question on Private Equity investor's minds today is who will be the winners and losers of Web 3.0 and the Metaverse? The investment case for both is complex and inextricably linked. At least, that is what private equity investment managers are discussing inside RFPnetworks.

Private Equity Secondaries exhibit 4 key characteristics that are gaining attention with professional investors, at this stage of the economic cycle:

1. J-curve mitigation.

2. Cash flow predictability.

3. Shorter durations.

4. Enhanced downside protection.

The bigger question is how to select a Private Equity secondaries manager that can capture all these potential benefits?

GP-Led Secondaries fill an important space in the Private Equity spectrum, that augments the expected investment return, risk and time horizon. For professional investors they are becoming a more widely used entry, continuation or liquidity facility, accounting for almost half of secondary transactions in 2021, double the volumes seen in 2017.

Professional investor access to Private Equity has evolved over the past 20 years. They have traversed the universe as traditional LP's in Funds, or Fund-of-Funds. Or as participants in existing or maturing funds, purchased at a discount from from other LP's looking for liquidity. And many of the larger institutions have established direct and/or co-investor teams, who source evaluate and invest in companies themselves.

GP-Led secondaries take a seat in the middle of this risk-return & investment-duration spectrum. They solve multiple issues for both GP's and LP's. And the transactions can be housed in different vehicles.

However, the motivation for entering into a GP-Led secondary varies from GP to LP. And along with the benefits come multiple risks and potential conflicts of interest that can be clouded in complexity, given the unique nature of each deal. Decisions on individual transactions requires in-depth due diligence, or the use of investment managers specialised in GP-leds.

What Is A DAO? What Are The Risks? What Are The Opportunities?

From global networks of stakeholders to Special Purpose Vehicles, a DAO is arguably the next iteration of the corporate structure. It has the potential to revolutionise industries on a scale not seen since the shift from unlimited liability to limited liability companies.

But how can it can be facilitated? What are the risks? And which companies are at forefront of this structural paradigm?

Investing in Blockchain

Blockchain technology can fundamentally change how economic value is stored, exchanged or even created via market places. Yet the full potential of the application of blockchain technology is still in its infancy.

Gaining exposure to the blockchain technology investment opportunity was initially driven by innovative early stage venture capital driven companies. Typically facilitating a specific application within a niche, albeit potentially global market. But that is changing fast.

As the potential of the technology has become more widely understood, the number of potential applications has also widened. And importantly, the number of investment managers that are identifying innovative private and public companies that provide exposure to the long term potential of blockchain technology has grown substantially.

In an environment of "no more easy money", rising rates, cost-push inflation, and a breakdown in just-in-time supply chains, public equity valuations have readjusted sharply. But are investors in the illiquid world of Private Equity feeling the same pain?

With rising rates mechanically reducing todays value of future expected cashflows, both private equity and venture capital fuelled firms are no longer immune from the potential of a future down round. An argument that is supported by public companies that are rumoured to be considering shifting to take-private mode.

The question on investors minds is whether public market multiples are a good proxy for private markets? If they are, private market portfolios will also start to feel the same pain, as the next official fund NAV is released.

Or are valuations dependent on company specific factors such as stage of development. Fast growing disruptive start-ups may warrant a valuation premium.

And beyond discounted cashflows and industry comparables, will valuations be given indirect support from other deals that are struck today at above public market multiples?

This last question will depend on supply and demand dynamics. There may be ample dry powder available from the COVID fundraising period, that needs to be invested and returned to investors with a target IRR. But how attractive is it for new companies to seek funding given multiples in public markets? How much capital is being taken today?

The answers to all these questions are what potential investors are asking.

In calm markets, the reported NAV of a private equity fund is generally accepted as a useful gauge of the intrinsic value of the underlying companies in the portfolio. But what happens when volatility spikes and markets are less predictable?

Volatile markets can delay potential exits resulting in GP-led sales, or create 'forced' LP sellers looking to raise liquidity or de-risk.

At this juncture, seasoned long term private market investors are increasing their time allocated to deal flow sourcing. As informed investors, they recognise that volatile markets can shift the NAV away from intrinsic value, and create interesting opportunities in secondaries.