For many companies, investors, and wealth creators, growth was the original goal because that was where the money was, with genuinely improving businesses boosted by multiple expansions. Private equity (PE) firms, venture capital (VC) funds, institutional investors, and family offices pursued companies capable of rapid expansion.

The era of growth uber alles prevailed between 2010 and 2021, as low interest rates and abundant liquidity encouraged investors to prioritise rapid expansion. Risk-free rates were historically low.

Many venture-backed companies focused on scaling quickly and capturing market share rather than achieving profitability. Of course, the high valuations were justified by the expectation that profits would eventually follow once businesses achieved scale.

Then, around 2022, the broader environment that had supported growth-focussed investing shifted dramatically. Inflation increased across developed economies, which prompted central banks to raise interest rates. Here is the twist; the higher rates significantly affected companies whose value was based primarily on future earnings. As discount rates increased, distant cash flows become less valuable, reducing valuations for high-growth firms.

Quality investments are typically characterised by strong cash flow generation, efficient operations and defensible competitive advantages – a protective combination often called a 'moat.' Just as a physical moat protects a castle, this technique is used to create a quality investment and is often used as a vehicle for compounding growth in the long term.

Popularised by the investor Warren Buffett, an economic moat represents a sustainable, structural competitive advantage that protects a company’s market share and profitability from competitors. Investors are increasingly looking for companies that employ these, particularly as they offer experienced leadership teams the ability to navigate uncertain economic environments.

Portfolio construction is becoming more selective, as investors are conducting deeper due diligence and focusing on businesses that demonstrate both growth potential and operational strength. The bar for new investments has risen, with increased scrutiny on revenue quality, customer retention, and capital efficiency.

This takes us into the realm of creating operating value. As borrowing costs have risen, PE and VC firms could no longer rely heavily on financial leverage to generate returns. Instead, they seek to create value through operational improvements such as productivity gains, pricing optimisation, technology upgrades and strategic expansion.

In the same way as F1 racing cars require the most suitable tyres to achieve optimal results on the track, this cornerstone of optimal, risk-adjusted portfolios has a direct impact on asset allocation and performance. This is reflective of the gradual and current shift in allocations.

This quiet shift, as we put it, from growth to quality represents a maturing of private market investing. While growth remains an important driver of innovation, investors now increasingly recognise that sustainable value creation requires strong fundamentals and disciplined operations that are supported resilient business models.

And in the current cycle, that is where the money is now going.