Flexstone Partners sees value in mission-critical opportunities

Flexstone Partners’ Nitin Gupta avoids tech and venture firms, favouring cashflow-positive businesses.

Flexstone Partners' US investment team lead Nitin Gupta, pictured in the Sydney CBD. Picture: NCA NewsWire / Damian Shaw

Record levels of dry powder, alongside a more certain inflation and rates outlook, will drive a further pick up in the private equity market this year, according to Flexstone Partners’ Nitin Gupta, who favours investing in “mission critical” businesses over the crowded technology space.

New York-based Mr Gupta, in Australia this month to meet with some of the nation’s largest institutional investors, including super funds, said the need for PE firms to deploy cash was helping to boost the sector. It follows a sluggish 2023 for PE firms.

“There’s a lot of capital in private equity, a lot of dry powder, and most of that is in the funds that have been raised in the last three years. All of these funds have a typical investment period of four or five years, so there is a need to deploy capital,” Mr Gupta said in an interview.

“We’ve seen over the last six months, deal activity has really picked up and it’s done that because there’s more certainty on interest rates,” he added. “There’s also, I think, better alignment (on prices) now between buyers and sellers. As well as that, credit markets are very liquid. Last year, it was basically the private lenders that were allocating funds, but a lot of the syndicate market has now come back, the traditional bank market has come back.”

Global investment firm Flexstone, an affiliate of Natixis, has $US10bn in assets under management and focuses on the lower and mid-market in dealflow. While the top end of the market, with the likes of KKR, Apollo, Blackstone and The Carlyle Group, gets all the attention, the lower, lesser-known end can deliver better returns and provides a point of diversification for investors, Mr Gupta said.

“You can really outperform if you pick and choose the right funds to partner with on the lower middle market … it’s a great alpha driver,” he said.

For its direct investments, Flexstone invests in companies with an enterprise value of less than $US1bn – the vast majority are smaller, with an EV of $US500m or less.

It doesn’t do venture capital and typically avoids the crowded technology sector, instead favouring cashflow-positive businesses, most of which are family-owned companies, where private equity may be the first institutional capital involved.

“We tend to focus more on businesses that are ‘mission critical’. They’re not technology firms, but they’re still mission-critical businesses because they have a low cost for the value that they’re providing to the end customer,” Mr Gupta said.

“Or we’re investing a lot in fragmented markets because even in this market, where it’s tougher, you can do small acquisitions at great value, and they’re very accretive.”

After a year to forget in 2023, PE is enjoying somewhat of a revival.

Super giant AustralianSuper this month said PE and infrastructure were among the better investment opportunities in the market right now.

“Both private equity and infrastructure to some extent, and even some private debt, in those markets the pricing hasn’t gone up as much as listed markets, and they represent pretty good opportunities,” the $300bn super fund’s chief investment officer, Mark Delaney said on Bloomberg TV.

The investing landscape has changed from a couple of years ago, when competition was more heated, he added.

“Now is a better time to put money into private markets than two or three years ago, when valuations were more expensive, and deals were quite scarce, with a massive amount of capital going in,” Mr Delaney said.

Pressure to sell ageing portfolio assets will act as a push to get deals over the line, while the fundraising cycle will be an increasingly important driver of exit momentum, a recent report by consultancy Bain found.

At the same time, the timing and pace of PE exits will depend on confidence in the broader economy and conviction that interest rates have peaked.

For his part, Mr Gupta sees rates as moving only in one direction.

“We now have certainty on interest rates; they’re no longer going up, they’re going to be coming down. I don’t know if it’s two interest rate cuts or three or four. But we invest for the long term so we’re not as impacted by these quarter-to-quarter movements.”