Investors should underweight "many parts of later-stage venture capital and early-stage growth," and prepare for repeats of "the WeWork Cos. Inc. situation," according to KKR & Co. Inc.'s 2020 global macro trends report, Play Your Game.
The report, penned by head of global macro and asset allocation Henry McVey, said there are currently "too many companies with high fixed costs and less marginal revenue dollar per purchase" that are securing funding, but that a more skeptical investment community will expose these flaws in 2020, particularly as unprofitable companies seek out IPOs.
The firm is currently seeing better value in the public markets relative to many private markets, in China and the U.S. for example, and the firm believes some private market valuations have run "too far and too fast" to be supported through an IPO. But the report added that in the long term, recent disappointment in performance will turn into an opportunity, and it expects to shift its significant underweight in private growth back to equal or overweight.
The report recommended an overweight in international private equity strategies. While they won't consistently outperform the U.S. and Asia, the firm believes European private equity can outperform the region's public benchmark. European public markets are "compositionally flawed," overweight financials and underweight technology, which "creates an incredibly attractive arbitrage" for the asset class. Logistics, consumer experiences and payments are identified as key sectors for private equity investment.
In Asia too, private equity has the potential to outperform public equity indexes, according to the report. Indonesia, for example is experiencing significant GDP growth per capita, but has no public technology companies, while traditional financial services accounts for half of total market capitalization. Healthcare environmental services, and travel and leisure are also attractive target sectors.
The firm continues to champion the pursuit of corporate complexity, particularly corporate carve outs, a strategy that has enticed the considerable interest of private equity firms in recent years, and said that there will continue to be plenty of opportunities of this kind in Europe. It suggests considering mediocre companies "where the market is pricing in something akin to Armageddon when it comes to cash flow generation" as well as high-quality companies trading at a discount.
KKR has been linked to the ongoing thyssenkrupp AG elevators corporate carve out, and bought out Australia's Arnott's Biscuits Ltd. from Campbell Soup Co. in December 2019. It also sold its stake in copper foils and flexible copper clad laminates producer KCF Technologies, Inc. to SKC Co. Ltd. in June 2019. The firm carved the business out of South Korean diversified corporation LS Group.