Why the future is ripe for private equity investments

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Private equity had a challenging year because of the softening economy and increased interest rate environment. Steve Balaban, chief investment officer at Toronto-based Mink Capital, says in this scenario, private equity valuations aren’t as high, which will most likely lead to more defaults.

But the sector isn’t all doom and gloom. Globe Advisor spoke with Mr. Balaban, who has taught a new private equity course at the University of Waterloo for the past decade, recently about his overall outlook for private equity and how it needs to be regulated.

Looking ahead to 2024, where do you see private equity headed?

Most of the world’s companies are private. There’s a lot of money that has been raised and not yet spent.

Private debt has actually benefited from this environment. In a private debt transaction, you have the ability to take over the asset, which you don’t have as much in private equity. Private debt has been able to mitigate that downside when there’s a default as opposed to just being in private equity, where the returns would go down because you have higher interest rates to pay when it comes to buyouts.

Looking ahead, we might see more unique structures with private equity … more specialty and tactical opportunities type deals. For example, we may see structures based on the interest rate and on what’s going on in the economy.

There isn’t a regulation standard for private equity. What are the key issues here?

The industry needs to get investors to understand fully what they’re investing in. More education and more transparency are needed. With private equity, you can’t buy a company right away because it’s private. So, in private equity funds, you have committed capital and invested capital, and it’s really how to translate that into an actual return for an investor. The U.S. Securities Exchange Commission (SEC) is trying.

What changes does the SEC propose for private equity regulation?

In August, the SEC came out with a 600-page document on private-equity regulation. I’ll zero in on three main things in the document.

One is the requirement for more disclosure. And it’s going to be interesting how this is going to play out because, with more disclosure, there are more costs for private equity firms. Over the long term, this will benefit larger firms versus smaller firms. So, you’ll see fewer people leaving private equity firms to start up their own, which might hurt the bargaining power of investors.

The second issue is the side letters in the industry, which give preferential treatment to certain investors about what information they share. That has been a challenge in the industry and the SEC has been trying to level the playing field.

The third part was about getting an extra independent opinion when it comes to secondary transactions. The challenge with these independent opinions and these valuations of private equity funds is they are hired by the private equity firm. So, we need more details on how this is going to work in practice.

– Deanne Gage, Globe Advisor reporter

This interview has been edited and condensed.

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– Globe Advisor Staff

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