As public markets face an unprecedented shrinkage in listed opportunities, how are fund managers adapting to this structural shift? Richard Staveley, portfolio manager of Rockwood Strategic at Harwood Capital, offers a compelling perspective on the forces reshaping equity markets and the urgent need for the fund management industry to rise to meet this challenge.
The great migration to private markets
The transformation has been dramatic and represents one of the most significant structural changes in capital markets in decades. ‘The rise of private equity has been huge during my career, from being seen as quite a niche sport 25 years ago with a couple of well-known names like KKR, to different types of private capital funds, huge amounts of assets and a structural permanent allocation from long-term investors’, explains Staveley.
This shift isn’t merely about fashion or trends – it represents a fundamental arbitrage of the advantages private markets can offer over public ones. Private equity has successfully exploited several key differentiators that make private ownership increasingly attractive to both management teams and investors, creating an existential challenge for traditional fund managers.
Exhibit 1: Global private capital raised, by fund type
Source: Preqin, Bain & Co. Note: Includes closed-end and commingled funds only; buyout category includes buyout, balanced, coinvestment, and coinvestment multimanager fund types; includes funds with final close and represents the year in which they held their final close; excludes SoftBank Vision Fund; other category includes fund of funds and mezzanine and excludes natural resources.
The leverage advantage
One of the most significant advantages lies in debt capacity. Public market investors typically become uncomfortable with companies carrying more than two times net debt to EBITDA, almost regardless of the underlying business quality or cash generation. Staveley illustrates this with reference to companies like Restore, a storage business in Rockwood Strategic’s portfolio: ‘A repeatable business where the cash keeps flowing in, it makes 30% margin in its primary division. You could theoretically gear that up. Yet public markets won’t tolerate such leverage.’ This conservative approach creates a structural disadvantage that drives quality companies towards private ownership. ‘Businesses are just going: what’s the point? I can run a 5x leveraged model that gives me a lot more capital, a lot more options to do what I want to speed up consolidation.’
Personal incentives and regulatory burdens
The compensation arbitrage is equally compelling for management teams. ‘You’ve got management thinking, I could make more money personally if I did it in private markets than public markets’, notes Staveley. Combined with favourable tax incentives for private equity participants, this creates a powerful pull away from public company roles. ‘UK fund managers need to have greater confidence to support and propose incentives linked to shareholder value where hard-working and successful executives can earn a lot of money, otherwise we’ll end up with third division coaches.’
Meanwhile, public companies face increasing regulatory and reporting burdens that add cost without necessarily adding value. Staveley points to environmental, social and governance reporting as a prime example: ‘The average ESG section of an annual report is now 20 pages long. There was a time when the whole financial statements were 20 pages, now there are another 20 pages of disclosures irrespective of the materiality of the business’s carbon footprint or size of employee base.’
Private companies can be more selective about which regulations to prioritise based on their medium-term plans, while public companies must comply with the full spectrum of requirements regardless of the relevance to their specific operations.
Cracks in the private equity model
However, Staveley identifies potential vulnerabilities in the private equity boom that could lead to a reallocation to public markets. Much of the sector’s impressive growth and returns have been built on accessing cheap debt during a period of ultra-low interest rates. ‘There’s plenty in their portfolios that they’d planned to have sold by now or exited which they’re sitting on where they’re paying a substantial amount more interest than they expected to be doing.’
The traditional exit strategies – selling to trade buyers or via IPOs – have become more challenging. Instead, private equity firms have increasingly sold assets to each other. Staveley questions the sustainability of this approach: ‘I wonder if in the fullness of time we will find some circularity and investors starting to lose confidence in the mark-ups. For sure a lot of valuations appear now on a different planet than public market ones.’
Exhibit 2: Global buyout capital raised ($bn)
Sources: Preqin, Bain & Co. Note: Includes closed-end and commingled funds only; buyout category includes buyout, balanced, coinvestment, and coinvestment multi manager fund types; includes funds with final close and represents the year in which they held their final close; excludes SoftBank Vision Fund; other category includes fund of funds, mezzanine, natural resources, and others; data as at 16 May 2025.
Portfolio insights: Capitalising on market inefficiencies
Staveley’s approach at Rockwood Strategic demonstrates how skilled managers can exploit these market dynamics. The fund targets companies trading at significant discounts to intrinsic value, often because they’ve been overlooked or misunderstood by the market.
Take RM Education, the fund’s largest holding at 13.9% of NAV. This educational services company supplies resources to 90% of UK primary schools and operates a high-margin international assessment business that Staveley calls the ‘jewel in the crown’. The company had been recovering from operational challenges including ERP system implementation issues and elevated debt levels. Harwood Capital took a 15.7% stake and introduced a non-executive director to RM’s board. Staveley’s sum-of-the-parts net valuation of £130m significantly exceeds the current market capitalisation of around £80m, illustrating the value creation potential when public market inefficiencies are properly exploited.
Similarly, Vanquis Banking Group, representing 8% of NAV, was formerly Provident Financial. This lender to the UK’s sub-prime market operates a highly profitable lending model and is well capitalised, yet trades at what Staveley considers an attractive valuation and discount to book value due to sector and historical prejudices.
The entrepreneurship paradox
Despite concerns about risk appetite in British markets, Staveley argues that the underlying entrepreneurial spirit remains strong. ‘If you look at all the entrepreneurship in the UK economy, actually we’re a world leader, we’ve got lots of unicorns, more than any other country in Europe, a vibrant start-up culture and an enviable history of invention and risk taking. What we need is more capital inflows to help scale up small British listed businesses.’
The risk-taking behaviour hasn’t disappeared – it has simply migrated to different asset classes. Young people who historically might have invested in stocks are now ‘trading crypto’ and ‘speculating on sports and gambling’. The challenge for the fund management industry is to ‘pivot it to be something interesting and have the product to promote which is attractive, and that kind of behaviour could migrate liquidity to the stock market as well and eventually mature into a genuine long-term investment culture’. Even more important to Staveley is making public markets genuinely attractive – a place for the UK’s successful entrepreneurs to list their businesses – not for an exit, but as a platform for further growth.
Rising to the challenge
For fund managers operating in this environment, the shrinking universe of quality public companies presents both an urgent challenge and a significant opportunity. Those who can successfully navigate these structural changes – identifying undervalued public companies while understanding the competitive dynamics in private markets – may find themselves well positioned as market cycles inevitably turn.
The fund management industry cannot afford to be complacent about these trends. The migration to private markets represents a fundamental shift that requires active adaptation. Success will increasingly depend on demonstrating clear value-add through superior stock selection, deeper company engagement and the ability to identify opportunities that private equity has missed or cannot access.
As Staveley’s approach demonstrates, there remain compelling opportunities for skilled practitioners who can exploit market inefficiencies and think differently about value creation in public markets. The key question is whether the broader industry will rise to meet this challenge or continue to see its opportunity set eroded by the relentless growth of private capital.
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We would like to thank Richard Staveley for sharing his views in this edition of Inside the Mind of the Investor.
Richard Staveley is portfolio manager of Rockwood Strategic. More information about Harwood Capital can be found at www.harwoodcapital.co.uk.
