Written by Parabellum Investments
29 Nov
• Rami Cassis, CEO and founder of Parabellum Investments, is calling on private equity general partners to increase their investment from 1% to 10% if they are to overcome challenges resulting from high interest rates
• Cassis believes there’s currently a chronic lack of personal investment from general partners in the industry
• The intervention follows the introduction of more costly reporting requirements in the US, declining deal flow, and pressure on fundraising for firms
• Cassis, who mainly deploys his own funds when acquiring controlling stakes in operating companies, thinks this would help smaller firms see out a possible recession
29 November 2023 – Private equity partners must commit more of their own personal capital to help overcome critical challenges in the sector, says a leading private equity investor.
Rami Cassis, founder and CEO of Parabellum Investments, is calling on private equity firms struggling to raise funds to look inwards if they are to offset these challenges and avoid collapse in the face of a possible recession.
High interest rates have suppressed expected returns for private equity firms, making it more difficult to raise funds from external sources and leading to declining deal flow in the sector.
Private equity fundraising slipped for the third straight quarter to end-June 2023, according to PEI Media. Some sectors have been hit particularly hard, with PERE reporting that fundraising in private equity real estate in the first three quarters of 2023 was the lowest for 10 years.
This follows a period of low interest rates and has been compounded by increasing regulatory and reporting requirements in the US.
Rami Cassis said: “There needs to be a push for greater personal investment in private equity. Typically, general partners commit about 1% of their own capital into investments, but this should be around 10%. General partners can be reluctant to take on more risk themselves when the going gets tough, but that psyche has to change as high interest rates are reshaping the private equity industry.”
General partners (GPs) are private equity professionals who make investment decisions within a firm, while limited partners (LPs) invest capital for these ventures.
Smaller funds are finding it particularly hard to raise funds and secure new deals, driving speculation by some industry commentators that there will be a wave of consolidation in the sector.
But Cassis, who operates in the mid-market and mainly deploys his own funds when acquiring controlling stakes in companies, believes reports of consolidation are overstated.
Cassis continued: “Naturally there will be some consolidation in the sector and many institutional investors are preferring to commit to a few large investments instead of several smaller ones.
“This leaves a funding gap to fill for smaller private equity firms and this may force their hand to front up with their own money. If you manage a $100m fund, then I would expect the partners of a PE firm to invest $10m between them, but this is very rarely the case. Those who don’t up their own investment will be the first to be swallowed up by larger firms.”
A challenging IPO market and low valuations have led some private equity firms to buy back companies they recently took public, while other firms are employing mechanisms to weather tough operating conditions such as NAV loans, earn-outs, and co-investments. However, Cassis insists these are short-term solutions that don’t address the core issue.
Cassis continued: “Committing your own money for investments doesn’t change the structure of deals or create possible pitfalls down the track – it simply means general partners are filling funding gaps with their own money, not other people’s.
“Increasing GP investment will also help to build confidence amongst outside investors and would help level the risk-exposure between LPs and GPs. High interest rates have added a degree of tension between LPs and GPs, and we’re seeing more disagreements on things like hurdle rates.”
The high interest rate environment has also led some firms to solely focus on improving their portfolio companies instead of making new deals, and Cassis believes this trend has exposed problems in the sector.
Cassis continued: “The low interest environment enabled private equity firms to achieve healthy returns without committing to actively improving their investments. It shouldn’t take an industry crisis for firms to invest in their portfolio companies.”
Cassis also believes US firms are better placed to pull themselves through the crisis as they have a healthier attitude to risk, and says firms with a conservative attitude will struggle to survive.
Cassis concluded: “The worst of high interest rates are behind us, but we’re by no means out of the choppy waters. But now is not the time for GPs to batten the hatches and tighten the purse strings – they must instead commit more of their personal capital if they are to see out the challenging environment we’re in.”
About Rami Cassis
Rami Cassis is an international growth investor and CEO of Parabellum Investments. In 2012, he founded Parabellum Investments, his family office, which invests his own capital to acquire, build, and grow businesses, with a focus on the technology and life sciences sectors. He usually seeks to take a controlling position in his investments, and he has led complex transactions in every continent except Latin America. Known for his hands-on approach, he usually acts as Executive Chairman, although he sometimes steps in as interim CEO. He has a robust background in business operations, having worked in leadership positions at both Schlumberger and Atos. Further information can be found at www.ramicassis.com
About Parabellum Investments
Parabellum Investments is a family office operating as a global private equity firm, deploying its capital to acquire companies which can be located anywhere in the world. Under the leadership of founder and CEO, Rami Cassis, Parabellum Investments has a strong track record of growing companies operating within various sectors, including enterprise software, business and IT services, and pharmaceuticals and life sciences. Further information can be found at www.parabelluminvestments.com
