Private Markets 360° | Episode 54: From Efficiency to Resilience: Navigating a New Era in Private Markets

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Jocelyn Lewis [00:00:00]:

Welcome to Private Markets 360, your insider's guide to the world of private investments. Today, we're honored to have Thomas Friedberger, Deputy CEO and CIO of Tikehau Capital, joining us. Thomas is a thought leader whose insights into the macro environment in private markets are shaping investment strategies globally. His perspective highlights a crucial shift from efficiency to resilience, signaling a new paradigm for value creation. With concerns ranging from long cycles of low growth to the evolving role of capital expenditure, Thomas offers a compelling view on how private markets must adapt to these profound changes. Thomas, welcome to Private Markets 360. It's a pleasure to have you with us today. How are you?

 

Thomas Friedberger [00:00:50]:

Thank you very much for having me. I'm very fine, thank you.

 

Jocelyn Lewis [00:00:53]:

Excellent.

 

Chris Sparenberg [00:00:54]:

We're so glad you're joining us, Thomas. And to begin, we'd love to talk about Tikehau Capital and how it operates at the forefront of private markets. Against that backdrop, could you outline your strongest conviction regarding the current macro environment and particularly the shift from efficiency to resilience and what implications that has for private equity?

 

Thomas Friedberger [00:01:15]:

Sure. So, Tikehau is an investment firm managing €53 billion of assets, and we invest across asset classes like private equity, private credit, liquid assets, and real estate. And indeed, our largest conviction for the last few years, actually since COVID has been that the world is switching from being led with regards to the growth dynamics by a generation of resilience. And it changes a lot of things because in order to gain in resilience, the whole economic systems in this world need a lot of investments, a lot of CapEx, capital expenditure, that will be financed on one side by massive fiscal expansion that we are witnessing all over the world and especially in the Western part of this world. And on the other side, by private financing, which implies also a paradigm shift, which is that for 40 years, probably during the period where interest rates were on the down path between 1982, 20% interest rates in the US for the short-term rates at the Fed, and 2022, 0% interest rates. So 2,000 basis points of rate cuts over 40 years. The companies all over the world did not necessarily need a lot of capital. And so, we have more returning capital than anything else, but the need for a huge capital expenditure to build this resilience is actually making the companies in the world demand capital.

 

Thomas Friedberger [00:02:38]:

So we are seeing a massive capital increase. The one from Google is a good example recently, but also massive needs to issue debt on the capital markets,and the hyperscalers are also a good example there. I would say that all of this is reflationary ofthe world,and that's also something which is new. Massive fiscal expansion is inflationary,the fact that the growth will be probably less optimized to be more resilient is inflationary.

 

Thomas Friedberger [00:03:05]:

When a company needs to produce closer to the consumer, it's more expensive. Also, companies need to contract new types of insurance against climate risk or against cyber risk. Also, restrictive immigration policies in some countries can be inflationary. AI, there are some very deflationary long-term dynamics for AI, which are quite obvious, but short-term, it's probably a little bit inflationary, putting pressure on the price of semiconductors or electricity, for example. So, we are living in a world now that is probably driven by growth, which is a little bit less driven by consumption, a little bit more by CapEx. So, a slower growth and more concentrated on a couple of sectors, and also a slightly more inflationary world, which implies for companies a challenge because when you have less growth, probably it puts pressure on your revenues. When you have a bit more inflation, it puts pressure on your costs. And so just to finish on this front, the last time this environment was at play in the world was in the '70s.

 

Thomas Friedberger [00:04:07]:

In the '70s, there was no private equity, but there were smart investors in this world and they were pretty much all saying the same thing, which is to survive in this kind of environment, when you invest, you have to invest with a margin of safety. And if you look at what happens today, it's the exact opposite, meaning that a lot of capital is being deployed in sectors that are extremely expensive. It's not only about AI, it's also some segments of the fixed income sector, for example. And so, at Tikehau Capital, our main conviction is that the FOMO play, so investing in very expensive things just because you fear of missing out, is not necessarily the best play long term. And investing in this world requires a lot of discipline and a lot of financial fundamental analysis.

 

Jocelyn Lewis [00:04:52]:

Certainly makes sense that when we're in this period of higher costs and more CapEx spending, you need to be disciplined as an investor because you really need to focus on what is going to be the driver of those cash flows that are available, not only to create value in a company, but also to repay any debt that you borrow in order to do so. Thomas, you suggest that this new environment will necessitate a change in how private equity invests, moving towards more asset-heavy, Warren Buffett-style approach to investing as opposed to the traditional asset-light, heavily leveraged model. So could you please elaborate on this transformation and the drivers of it?

 

Thomas Friedberger [00:05:42]:

Sure. So indeed, this new dynamic of corporate world, if I may say, needing a lot of capital to build those CapEx of resilience, bringing the resilience and the sovereignty for states. It's the same thing. Sovereignty for states and resilience for companies is probably leading to companies being more asset heavy, as you just said. And in parallel, the higher interest rate environment in which we are living is also, of course, making more expensive the cost of financing. And so all in all, the private equity world will probably need to adapt to that. Multiple expansion will be much more challenging in that kind of environment on one side. And when you have to deal with more asset heavy companies, you probably have to hold them for longer with less leverage, and you have to operate much more, I would say, portfolio management at a company level.

 

Thomas Friedberger [00:06:31]:

Also, the criteria of selection for companies are changing slightly because of course, when companies have to perform CapEx, what counts is the, I would say, return on capital invested. So, the way the management of the company allocates the free cash flow of the company, do they buy the right plant at the right place at the right time? It's very different from just looking at that growth on asset-light companies. And even in the tech sector, which has by definition historically been an asset-light environment, an asset-light business, especially in the software sector. If you look at companies like Microsoft today, they're much more asset-heavy than before. They own data centers. Some of them are even building electricity production capabilities to feed those data centers. So, I think the quality of the allocation of capital performed by the management, which was exactly what Warren Buffett was looking at when he was investing in the market, will be much more, I would say, a key differentiator in the asset selection than before. So that's why I'm saying that kind of private equity 2.0 in this new reflationary environment should look like what he was doing at the top.

 

Chris Sparenberg [00:07:37]:

Yeah, it's certainly clear that these significant macro shifts are changing the state of play, changing what it takes to win. With that in mind, can you tell us how Tikehau Capital is positioning itself to navigate in this new era you're describing? Could you highlight your approach and particularly, I think within that, the leverage and types of companies that you're targeting now?

 

Thomas Friedberger [00:08:00]:

Yeah, so historically we've been investing at least on the private equity side in sectors that are a little bit more asset heavy than others, like we, for example, we are not very present in the consumer sector. We are more present in industrial sectors. And so, we're used to investing with less leverage historically, but I would say in this new world, you would need first and foremost, a very clear investment discipline. You need to, to be extremely selective in the assets you will invest in because with higher interest rates, and I would say a less easy environment with regard to the ability for corporates to optimize a lot of things from the capital structure to the supply chain. to, do their taxes. You need to be, the dispersion is going, to rise tremendously inside sectors, between sectors, between geographies, inside geographies. And so, as an investor, you need to be extremely disciplined. And two, you need to be local.

 

Thomas Friedberger [00:08:55]:

Flying in, flying out to, do transactions was already not necessarily a good idea when the world was globalized with a high visibility, but it's even less a good idea today. And three, we believe a lot in developing sector expertise. In partnership with corporates from the sector, which is something that we have done extensively at Tikehau Capital. So, we invest in 2 main verticals in private equity, which are on one side electrification and on the other side aerospace, defense, and cybersecurity. And on both sides, we've partnered with corporates to build a very strong sector expertise. And that actually, we think, allows us to navigate better in this environment of high dispersion

 

Jocelyn Lewis [00:09:35]:

And a theme that's coming through clearly is certainly your focus on resilience and whether that's maintaining the lower leverage levels or investing in businesses that can perform through different market cycles. And that same discipline seems to extend to how you're thinking about the broader investment landscape today, particularly around interest rates and duration risk. So, let's turn to credit because it appears to be an area where you're definitely seeing opportunity. And if we zoom in on the current interest rate environment and the importance of being selective on duration risk, as well as the importance of credit in this context due to duration risk, could you expand on why credit is an attractive asset class for Tikehau Capital right now?

 

Thomas Friedberger [00:10:31]:

Sure. It's true that our conviction for the last 4 years, more or less since the end of the COVID crisis, has been that long-term interest rates are too low for the reasons I just explained. And I think that the fact that the massive fiscal expansion in the West is only accelerating is probably comforting us in this conviction that long-term interest rates are probably too, still too low. And so that's why we've been preferring credit risk to duration risk. So, there are several ways to play that in the fixed income world. In liquid assets,  you can go short duration or floating rate structures. In private credit, private direct lending is probably the ideal asset class, I would say, from that perspective, because 100% of the instruments we structure there are floating rate instruments. And so it's pure credit risk that you are taking.

 

Thomas Friedberger [00:11:20]:

So of course, with the condition of being extremely selective and prudent in the way you invest, we think that private credit is,  will continue to enjoy tailwinds. This is a market which is in expansion both in the US and in Europe. There are very strong dynamics on both sides of the Atlantic for different reasons. In Europe, where we've been one of the pioneers of this business because we've started private credit just before the great financial crisis. There is a real need to build European champions at an SME level, so small and medium-sized enterprises. So, financing acquisitions through private credit is a business which is in expansion. There are 3 times more LBOs financed by direct lending than leveraged loans today, and we think that will continue. Also, there is a convergence between private credit markets and more liquid markets, leveraged loans and high yield, and this private credit universe is also migrating towards the, towards investment grade in the US, and it's also coming in Europe.

 

Thomas Friedberger [00:12:19]:

So the market is growing. The risk reward is still attractive, again, with the condition of being extremely selective and extremely disciplined. But I think that at least when you operate in Europe, which is a more fragmented market with respect to North America, you need to be extremely local when you invest because it's also fair to say that defaults are on the rise everywhere. That's part of the business. Those instruments that restructure would be probably rated single B if they were rated. We are financing companies, let's say between 4 and 5 times EBITDA, so that, that's kind of single B rating. And so it's normal to have to manage defaults, but the thing is, probably going forward, there will be much more dispersion between the performance of asset managers for this, for the same asset class. And it's not necessarily the number of defaults that will make the difference, but the way those defaults are managed.

 

Thomas Friedberger [00:13:11]:

And we tend to experience, and we've been again doing this business for long enough to have fully exited a pretty decent number of defaulted positions, sometimes recovering, most of the times recovering actually more than par. But the 3 things that make a difference there are one, the size of the platform, because managing a default is extremely time-consuming. So if you have a team which is too small, it's going to probably affect the ability of the team to continue to invest while managing defaults. 2 is you need private equity skills. Because when you take the keys of the company, you take the control of the company. So you need the private equity teams and the private credit teams to work together. And so if you are just doing private credit and you don't have private equity expertise, this is an issue. And the third thing is you need to manage your defaults locally.

 

Thomas Friedberger [00:13:59]:

So managing the default in Madrid out of London is definitely not a good idea. And we've witnessed in our experience that having those 3 characteristics, large team, private equity skills, and being local. Makes a huge difference. And sometimes the boundary between zero recovery and positive returns, so more than 100% recovery, is actually linked to those 3 criteria. And maybe one last thing on private credit is we are also welcoming and witnessing strong development of private credit secondaries, especially in the US. We think there is a big opportunity also there with not only the emergence of forced sellers, but also a wide diversity in, I would say, the, the nature of the portfolios that are for sale with the development of the GP-led market. And also, more and more, at the LP level, the secondary market used by CIOs all over the world as a way to, to find liquidity. We think that again, with the condition of being extremely selective and extremely diligent in due diligencing the portfolios, the fact that you can build quickly, you can deploy capital quickly in highly diversified portfolios across sectors, geographies, vintages.

 

Thomas Friedberger [00:15:11]:

Portfolios that have a lot of cash flows between maturities and coupons, is actually not only a very good access product for people wanting to put a first step in private credit, but also a provider of potential attractive risk returns.

 

Chris Sparenberg [00:15:27]:

It's certainly an advantage to be capable on both the equity and the credit side and to have that flexibility and ability to move quickly and be opportunistic where maybe others can't. I want to talk a little bit about key growth drivers that you're seeing, and specifically, I think CapEx-led investments is an area that's core to your strategy. You have a point on CapEx-led growth driven by themes like defense, decarbonization, what you term economies of war even. Can you break down these areas for us and explain why they represent significant growth opportunities broadly for private capital?

 

Thomas Friedberger [00:16:05]:

Yes, I think the, so as I said earlier, we are transitioning from a world probably driven by growth led by consumption to a world where growth will be led more by CapEx. It means that the growth, at least the high growth areas, will be more concentrated on some sectors. And we have the conviction that those sectors will all be linked to the construction of resilience, meaning that the high growth areas should be with the enablers of the resilience, the sellers of picks and shovels of the resilience. And in that, that's what we call the 4 Ds. So defense, decarbonization, digitalization, deglobalization, and the companies involved one way or another in enabling this to happen, those 4 things to actually get stronger, will enjoy high growth in a world of lower growth. So, this is a little bit our thesis, and that's why we've taken pretty early in the cycle the decision to actually manage sector funds, or at least thematic funds in private equity, because we think that, for example, defense or decarbonization represent probably 2 of the, of the best investment opportunities of our generation.

 

Jocelyn Lewis [00:17:19]:

And you touched on a recurring theme where many of the biggest investment opportunities come from solving inefficiencies, whether that's transportation, supply chains, or industrial capacity. And one area you mentioned those inefficiencies are especially pronounced is energy transition. So let's dig into that because you've highlighted that Europe needs enormous levels of annual investment. Much of it may be considered low-tech businesses and focusing on that energy transition with Europe requiring that substantial annual investment, with the majority needing to be in these low-tech businesses to address inefficiencies. What makes low-tech energy transition opportunities particularly compelling?

 

Thomas Friedberger [00:18:09]:

Thank you for the question. And, and actually, right, but it's not only a European phenomenon, and that's actually what makes it interesting. I think this theme of energy transition, and we prefer to call it electrification now, is actually transitioning from a purely, I would say, environmental-led initiative before the political tension raised in Ukraine and in the Gulf to actually a problematic today completely linked to sovereignty. And that's very interesting because it means that major economic areas in this world are incentivized to decarbonize for different reasons. So Europe, of course, has been dependent on fossil fuels that they don't produce for a long time. And partially for this reason, the regulation has been tougher in Europe in trying to reduce the carbon footprint. That's probably the reason why the solution providers of energy efficiency of buildings, plants, supply chains are first and foremost European companies today. But what we've witnessed, and we launched almost 10 years ago, the first ever private equity fund fully dedicated to electrification and energy transition, which is a European-centric fund.

 

Thomas Friedberger [00:19:19]:

At the time, we bought 14 investment companies in this fund. Which business was essentially developed in Europe. So European-centric businesses for European companies. Now we are fast forward 10 years, we are finishing the fundraising of Fund 2, which will probably be one of the largest or the largest European private equity fund dedicated to this theme. And it's very interesting to notice that those European companies that we are buying today have a much more internationalized business. They develop business everywhere in the world. And the reason is probably that it's also in the interest of China to decarbonize, and they've done so very successfully and very quickly, probably to partially reduce their dependency on the US dollar, which we know, and they make no mystery about it, is one of the big priorities of their government. But the number of currently in construction in China , is a testimony of their ability to decarbonize fast.

 

Thomas Friedberger [00:20:11]:

They've built also 50,000 kilometers of high-speed train lines in 20 years, which is a record. For the record, in Europe, we only have 8,000 kilometers. 8,500 kilometers of high-speed train lines. And we think that China has come to a point where they now have not only the lowest cost of capital in the world because banks are lending to the Chinese priorities of the Chinese government extremely aggressively, but also the lowest cost of energy production, of electricity production in the developed world. And so, it'll probably also push North America to engage into a dynamic, and it's probably already the case. One of the things I like to observe and to highlight is that of  course, the absolute domination currently of the US on AI, can only probably continue if the US can produce abundant, cheap electricity,and probably that decarbonized source of electricity like nuclear, wind, solar, hydro are very good solutions to implement also in the US because it's not only an environmental issue. It's not about that anymore.

 

Thomas Friedberger [00:21:13]:

That's not the topic anymore. It's about sovereignty. And thankfully enough, the US has a lot of wind, a lot of space, a lot of water, nuclear expertise and decarbonization is also probably a theme that is and will continue to develop in the US. So the fact that on the hardware side, China is dominating between 65 and 95% of all the supply chains from wind turbines to batteries to solar panels, et cetera. But on the service provider side, so if you look at the IPCC report that CO2 emissions are mainly linked to 4 domains, which are industry, agriculture, transportation, and buildings. So anything linked to the energy efficiency of buildings, plants, industrial processes, the experts in those things are mostly European, and they're developing everywhere in the world. So that's why we think it's a huge investment opportunity.

 

Thomas Friedberger [00:22:05]:

And for once, Europe is a leader in this field.

 

Chris Sparenberg [00:22:08]:

It's a fascinating look at decarbonization and the energy transition opportunity set. An area that we'd love to deep dive with you is aerospace and defense. You manage one of the largest EMEA funds for aerospace and defense, and that sector's interesting because it has unique characteristics like 20-year programs to develop a plane and a full backlog providing high visibility. What makes this industry so attractive for long-term private equity investment and how do you navigate its specific challenges?

 

Thomas Friedberger [00:22:38]:

Yeah, it's an interesting topic because it's a sector that was completely ignored or mostly ignored by investors, at least in, I would sayuntil not long ago for several reasons. One reason, at least in Europe, is that it was excluded from ESG criteria, but it was also a sector that has been extremely challenged in, some way in the past, including during the COVID period, of course. The landscape has completely changed. And so of course the geopolitical tensions and the willingness expressed by pretty much all sovereign areas in this world to increase defense budget is providing some growth perspective for the sector. But it would be a mistake to think that all subsectors are equal in the defense space. The subsector we prefer is aerospace and defense, just because, at least in Europe, we think that on land defense or naval defense, you have only national players that are pure players in defense, while in aerospace, thanks to Airbus mostly, you have actually European champions that also enjoy a dual growth trajectory. So, in the supply chain of Airbus or Dassault in Europe, you do not have any single company only involved in defense. They are all involved in defense and commercial aerospace, and that provides a double growth trajectory.

 

Thomas Friedberger [00:24:04]:

On defense, it's pretty obvious. Defense budgets are increasing everywhere in the world. For NATO countries have taken the commitment to spend up to 5% of their GDP in defense and strategic infrastructure. If you look at the share of European companies for the, in the defense budget of European countries, it's only 18%. Most of the revenues go to US companies today. We know that European governments have taken not the commitment, but trying to have to make this number grow, probably to 20%, something like this. So not only the pie is growing, but the share of European companies should grow in that growing pie. of course, a nice growth opportunity.

 

Thomas Friedberger [00:24:42]:

But on the other side, on the commercial aerospace side, you have currently 24,000 planes flying in the world, commercial planes. 18,000 are up for replacement because the new generation coming to the market now is consuming 25% less fuel. So in terms of economic, I would say, attractiveness and carbon impact, it makes sense to replace the fleet. Actually, the replacement of the fleet Explains about 1/3 of the path to net zero that this industry has taken. And on top of this replacement of the fleet, you've got another probably about 20,000 planes in the order books to cope with the increase in air traffic. All it provides a massive growth opportunity for the sector and its supply chain, which translates into, for example, for our portfolio companies in this fund, about 12 years of backlog. Which is impressive. And so, if you add to that the fact that valuations are not that expensive because the sector has been out of interest for a very long time, and the fact that there are very strong barriers to entry in this aerospace and defense sector, just because suppliers are certified by their OEMs.

 

Thomas Friedberger [00:25:53]:

In an Airbus or in a Boeing plane, you have about 3 million pieces. If one is missing, the plane cannot fly. And so that's the reason why those 20-year programs necessitate an extreme, I would say, level of confidence between the OEMs and their suppliers. So the suppliers receive certification from the OEM. So if you combine high barriers to entry of certification, plus valuations that are acceptable, plus a very strong growth, both in military and commercial, you have a very attractive investment proposition. And that's what we are trying to actually capture.

 

Jocelyn Lewis [00:26:27]:

You make it sound very compelling indeed. And Thomas, what's interesting is that many of the themes you've highlighted, whether it's defense, supply chain resilience, or industrial competitiveness, ultimately require massive investment in physical infrastructure and real-world assets. And energy transition is the perfect example of that. And you've mentioned that some of the most compelling opportunities may actually be found outside the typical high-tech narrative. And when we think beyond aerospace and defense, you mentioned real estate as an opportunity because it has been depressed for the last 3 or so years. What factors make real estate attractive now, and how do you approach real estate investments in the current environment?

 

Thomas Friedberger [00:27:21]:

Yes, it's true that real estate is probably the only asset class currently which has massively derated. There's been a crisis for several years, pretty much everywhere in the world with a high level of dispersion as well. If you look at offices, top-tier cities, central business district offices are still very expensive, but actually periphery offices in tier 2 cities have completely collapsed. And in pretty much every subsector of the real estate asset class, it has been the case. But you currently have a lot of investment opportunities, so volumes are very low. So we are hitting a bottom in terms of volume. The US market has already started to recover. Europe is about to do so, but you can invest today on valuations that are extremely attractive. Again, you need to be extremely selective.

 

Thomas Friedberger [00:28:08]:

So our motto in real estate is location, meaning that you can buy good assets in good locations and then you have probably, if you have an attractive yield, that's attractive. You can buy bad assets in good location and transform them, and then you have a value-add proposition. But never buy bad assets in bad locations because you will never be able to transform them, to convert them. And so you need to be extremely local and selective as well. But with this provision, it's true that we are witnessing currently extremely attractive investment opportunities in retail, for example, where we can acquire shopping malls and reconvert them into more mixed-use areas, let's say, or acquire shopping malls in the core real estate space at double-digit cap rates with vacation rates, which are extremely low. So, you know, we can also acquire hotels and actually upgrade them at very, very attractive prices. Residential real estate is also very attractive. We have been able to demonstrate a track record in acquiring large portfolios of real estate assets in Iberia, for example, Portugal, Spain, but also Germany.

 

Thomas Friedberger [00:29:13]:

I would say that it's the only asset class today that has massively derated, but the fact that interest rates are going higher is probably challenging. I would say valuations are still a bit depressed, and so you have extremely attractive investment opportunities in subsectors of real estate. from value-add to core plus, and also financing. So real estate financing, you can also finance extremely interesting assets at close to double-digit returns or above double-digit returns. One example, data centers, there is probably a sweet spot on both sides of the Atlantic of financing a data center that has secured its power, secured building permit. But if you take the construction risk and the commercialization risk, you can probably finance at more than double-digit returns. And you get probably refinanced pretty quickly in case the construction goes well and the data center finds its client by a bank at an aggressive level. So it's a rather short duration, high return value proposition that we like a lot.

 

Chris Sparenberg [00:30:09]:

We've covered so much ground here talking about investment strategies, areas of conviction, your macro outlook. I'd like to take a moment and gaze forward into the future here and thinking especially about AI disruption. When we think about the rapid advancements in technology, and I think AI disruption is definitely one of those, how do you see that shaping the landscape for the investment areas where you're active? Is that a factor that reinforces the need for resilience and careful asset selection? Are there other things that you think about as you ponder what lays ahead?

 

Thomas Friedberger [00:30:42]:

Yeah, I think it's a perfect, I would say, mirror of what's going on at a wider stage because it touches both the topics of sovereignty, of high growth in a low growth world and, and also demography. And it's very linked to the electrification theme also. So let me say a word about that. First of all, if you look at the demographic projections, demography is extremely reliable, unlike economic forecasts. So the new UN projections post-COVID are that the peak population in the world will be reached in 2080, not in the year 2100 anymore,at around 10 billion people on this planet instead of 11 billion. But 70% of this world population will be living in cities, which means that between now and 2080, the peak, the urban population in the world will probably double. And the thing here is that cities need electricity.

 

Thomas Friedberger [00:31:35]:

They need electricity for transportation, for cooling, for heating, and for— so AI users are mostly people living in cities. The use of data centers, I  think it's pretty much like 25% short videos, social networks, 25% long videos, Netflix, 25% gaming, and 25% business. So those uses are mostly asked by people living in cities. So the trend is there. Now, if you look at, if we look at the massive CapEx need in AI, so we all know the numbers, $700 billion of CapEx probably in 2026, going to $1 trillion in 1 or 2 years. In order to justify those CapEx, the companies performing those CapEx probably need to generate around $2 trillion of revenues pretty quickly. And this is a massive number. This is, if I'm not wrong, twice the global advertising market.

 

Thomas Friedberger [00:32:32]:

So we are not there yet. And I think there are 3 scenarios there. One is those productivity gains are coming quickly. And in that perspective, the providers of AI solutions can have a massive pricing power and can increase their revenues quickly by increasing the price of their service. And in that case, probably valuations are justified. Or it doesn't happen and there is a problem. But the third thing is, which is probably a little bit mispriced by the market, is that it happens, but Chinese AI companies take a share of this pie. And there we don't really know what can go on.

 

Thomas Friedberger [00:33:09]:

But I think that this perspective, whatever happens, doesn't challenge the fact that AI is a massive growth trend. Probably linked to electrification as well, because again, in order to remain dominant in AI, the US will need to have access to cheap and abundant electricity. And so that's why at Tikehau, we have, maybe we have been a little bit more shy in investing in this, in high-tech companies taking technological risk and disruption risk at very expensive valuations. And we prefer to go the route of, I would say, more low-tech businesses linked to the sellers of picks and shovels, especially in electrification. I'll give you one or two examples. We acquired through our electrification fund a company in Germany, which is a leader in the design of data centers with a good expertise in the use of water and the use of energy. So it's fully feeling the assist of energy transition. But by buying this company at single-digit EBITDA multiple, we think that it's a nice way also to play the AI And same with a company involved in the maintenance, for example, of power cables, the same kind of valuation.

 

Thomas Friedberger [00:34:20]:

So this is a company that has participated in the construction of data centers in Europe. And so on the top of being a play, which is low-tech because it's, it has proof of concept, the technology of maintaining power cables is not very, is not very complicated. So the name of the game is to scale the business, internationalize it and reposition it so that they can benefit from this megatrend of AI. By doing that, we have probably a better risk reward than them going for the most expensive AI solution providers at 40, 50 times ARR. That's our take. We might be wrong, but we think that's a smarter way of playing the theme.

 

Chris Sparenberg [00:34:59]:

Really interesting for us to follow in the months and years ahead.

 

Thomas Friedberger [00:35:03]:

We see also many other investment opportunities in other areas, but I think that as a conclusion, I would say that again, in that kind of environment where you have a little bit less growth, a little bit more inflation, so challenging the, I would say, EBITDA growth of companies on both sides, revenues and costs, performing value investing or investing with a margin of safety is actually something which is possible. And it's possible, but it's possible only if you have a certain investment mindset, a certain level of alignment of interest as well with your LPs, a certain setup help of being local and having large platforms and a certain investment culture. But if you have that, you already have a lot of opportunities across asset classes of assets that are not that expensive and benefiting from this nice combination of minimizing the technological risk, the disruption risk you are taking because disruption is everywhere, enjoying high growth trends on reasonable valuations. So that would be my conclusion. It's an exciting world to invest And I think that even though there is a lot of uncertainty and, a lot of bad news in this world, globally speaking, on the investment side, there are very good things to do and actually things that finance the real economy as well.

 

Chris Sparenberg [00:36:20]:

Thank you for joining us for this episode of Private Markets 360. We were privileged to have Thomas Friedberger, Deputy CEO and Co-CIO of Tikehau Capital, sharing his profound, compelling vision of a market shifting from efficiency to resilience, demanding a new approach to private equity that acknowledges the long cycle of low growth and necessitates CapEx-led investment. Thomas also shared why Tikehau's low-leverage approach and focus on enablers of resilience matter, particularly across energy transition and aerospace and defense, and highlighted opportunities in credit and debt. He also outlined how PE is shifting toward more asset-heavy models. We hope you found this conversation as informative and engaging as we did. Be sure to subscribe to Private Markets 360 for more expert insights and the latest trends in private investments. Until next time!