How can investors uncover the best opportunities in private equity?

Private equity remains an attractive option for investors seeking higher returns and diversification compared to public markets. Private equity also offers access to emerging industries, and the potential for significant growth.

David Nowak, President of Brookfield’s Private Equity Group, explains the private equity landscape and where opportunities exist.

How has the private equity market evolved?

David Nowak: The private equity market has grown significantly — in large part because the returns have outperformed public equities benchmarks. As a result, there are more managers and investors that are allocating more capital to the asset class. Over the last 15 years, private equity returns have benefitted from a near-zero rate debt environment, which has led to multiple expansion and higher valuations.

What’s your perspective on today’s private equity market?

DN: We’re bullish because our strategy doesn’t depend on cheap leverage. We look for companies and industries that are misunderstood and where we can improve performance through operational improvements.

There are three parts to our strategy. First, we find essential products and services businesses that are misunderstood and underappreciated. We don’t acquire a business just because it may be for sale. We look for situations where we have an expertise or an information advantage that lets us see an opportunity that others may not. This often comes from insights from other Brookfield investments across our $1 trillion of AUM where we own businesses across the globe in a wide array of industries. In essence, we look for situations where we might be a logical owner of a business.

Second, we look for businesses that may have been underinvested or those that could benefit from operational efficiencies. We have built our operational improvement playbook over many years that enables us to transform businesses, leading to earnings growth and expanded EBITDA margins. Over 50% of our returns have come from this.

Third, our information insights and operating improvement skills allow us to take contrarian views, which often facilitates acquiring businesses for value.

“Whether you’re a conservative or a growth investor, CLO ETFs are an attractive way to provide fixed income diversification.”

Can you provide an example of an opportunity you found?

DN: Chemelex is the leading provider of electric heat trace solutions. It provides wiring that sits alongside piping, keeping pipes warm in commercial and industrial buildings, as well as energy plants and date centers. We love the business because it’s an essential product, and it’s a small part of the construction cost for our customers’ overall operations. Without Chemelex’s product, our customers’ pipes could freeze, which would be very disruptive to manufacturing production lines and a company’s profitability. Insights from our real estate and infrastructure teams highlighted the importance of this product and helped us see the opportunity that Chemelex was providing as an essential product in a growing area.

What gives private equity managers an edge in capturing opportunities?

DN: Managers parse through information, trying to glean insights on businesses. In our case, we focus on how a business might operate better. Previously, this was done through Excel and other tools that analyze structured data. We now have tools that help us gain insights from unstructured data, like voice recordings, so there is much more information at our disposal.

AI tools also allow us to process this expanded universe of data faster, and with variability, supporting better insights and faster decision making.

What’s something that private equity investors should watch out for?

DN: When evaluating businesses, one of the things you have to prepare is disruption. You have to ask whether the business you’re considering buying will exist in the future and, if so, how do you prepare it to take advantage of a shifting landscape that can lead to disruption. For instance, be mindful of AI; you don’t want to buy a business that’s going to be displaced by AI.

What makes private equity an important part of a diversified portfolio?

DN: Private equity returns have outperformed public markets. Also the correlation between bonds and public equities since 2020 has strengthened, so you might not be getting the diversification you think you’re getting through a traditional portfolio. The size of the private equity market provides additional diversification and access to names unavailable to public investors.

What makes Brookfield’s private equity business unique?

DN: Our strategy of finding misunderstood businesses and driving returns through operational transformation is something that we have been doing for 25 years, and is effective in all cycles. We are also the largest investor in each of our deals. We invest our capital alongside our investors, providing alignment of interest.

---