Industry Trends
How private equity strategies are changing amid higher-for-longer rates
It highlights how private equity strategies are changing due to higher-for-longer interest rates. The future is expected to be characterized by slower economic growth, shrinking labor forces, and higher inflation, which will create challenges for revenue growth, margin compression, and a higher cost of capital. Private equity, however, can still create value for investors, but the path to value creation will be different than in the past. The main determinants of success in the new regime are expected to be operational initiatives such as revenue growth and margin expansion. Leverage and multiple expansion are unlikely to contribute as much to value creation as they have in the past. Technology, including data science, AI, robotics, and automation, is providing tools for transformation, but technology alone won't be enough to drive returns. Private equity still has advantages over public market investing for large-scale transformation, including a long-term time horizon, a streamlined governance model, and additional resources that can be deployed over time.
Source: Goldman Sachs
Private Market talks: Private Equity fundraising
In the episode of Private Market Talks, Fraser van Rensburg, Co-Founder and Managing Partner of Asante Capital, discusses the current private equity (PE) fundraising environment, the impact of rising interest rates, the "denominator effect", and the rise of continuation funds and private credit funds. Asante Capital is a leading advisory and private market placement firm that has advised on over $100 billion of successful private capital raisings. Fraser explains that the decline in public markets impacts PE fundraising as it affects the valuation comparables of private equity managers. He also explains the "denominator effect" where private equity portfolios are made up of a mix of public and private markets. He also discusses the shift towards perpetual capital and the impact of geopolitical risks on investment decisions. Fraser identifies the most common mistake in fundraising as going to market too early and the top concern from LPs as not seeing enough exit activity. He also shares his outlook for 2024, predicting an improvement in the M&A market.
Source: Proskauer
Market Sentiments
How long can the 'golden age' of private credit last?
The current state of the private credit market, which has been experiencing a 'golden age' with high yields and increased capital raised for private credit strategies. However, there are concerns about the sustainability of these returns, especially with base rates not expected to remain at 5.5% for the life of a private credit fund or individual loan. There are also concerns about weakening fundamental outlooks, lack of stringent covenant protections, and the potential impact of an economic downturn. Despite these concerns, yields on private credit loans remain high, with those issued in the direct lending market yielding between 11% to 13%. It concludes by noting that while this is a favourable moment for private credit, its resilience hasn't been tested during a real downturn.
Source: Pitchbook
Everything everywhere all at once: North American asset management 2023
The asset management industry has faced significant disruptions over the past 18 months due to surging inflation, interest rates, market downturn, banking turmoil, and geopolitical upheaval. Despite these challenges, the industry has shown resilience. The disruptions have accelerated long-term shifts in the industry structure, such as the rise of platform business models and the adoption of new investment vehicles. The industry is now adjusting to a higher-for-longer interest rate environment, which is affecting business models that rely on high leverage, complex liabilities, or significant liquidity and duration mismatches. This adjustment presents an opportunity for asset managers to expand their roles as financial intermediaries. The industry needs to focus on growth, operating effectiveness, and productivity. In 2022, global assets under management declined by 10% and industry revenues for North American asset managers fell by 11%. The industry's cost base grew by $24 billion, or 19%, during the pandemic era of 2019–21. The industry is now experiencing a lower-margin recovery. The performance gap between leading and laggard firms has widened, driven by factors such as a difficult environment for active management, customer adoption of new investment vehicles, growth of platform-based business models, and differences in the effectiveness of firms’ operating models. The industry is also seeing opportunities in areas such as liquidity services, fixed income, and private markets.
Source: McKinsey & Company
Market Opportunity/Challenges
The challenges in fund financing
It highlights the challenges faced by alternative asset investors in securing fund finance due to a reduction in providers and higher interest rates. Ben Griffiths, Global Head of Fund Financing at MUFG Investor Services, explains that the demand for private equity and similar illiquid assets is increasing due to the return and diversification needs of institutional investors. However, the retreat of many banks from offering credit facilities like subscription lines due to greater capital requirements has made it difficult for fund managers to access funding. Subscription finance is a facility used to provide operational efficiency during a capital call. Griffiths also mentions that smaller and newer funds are finding it more difficult to raise financing. MUFG Investor Services, a global leader in asset servicing, administration, banking, and fund financing, is developing fund finance services to support fund managers and asset owners.
Source: Funds Europe
An age of agility: Investment themes and opportunities in 2024 and beyond
The long-term upheaval across global markets, economies, and society, highlighting the normalization of monetary policy, escalating conflict risk, a disorganized transition to cleaner technologies, and the rapid socialization of generative AI. It draws parallels between the current situation and the 1970s, a period characterized by inflation volatility, conflict, and sustainability issues. It emphasizes the importance of agility and understanding key trends for investors. It identifies three investment themes for 2024: heightened geopolitical risk, inflation volatility, and transition risks. It also discusses the impact of interest rate increases, structural inflationary pressures, the role of AI, and the need for energy security. It concludes by offering various investment solutions, including implementation and OCIO, sustainable investments, alternative investments, strategic research, asset manager research, and managing investment risk.
Source: Mercer
Playing the long game in private assets
It highlights the current state of private assets and investment strategies in the evolving economic environment and impact of long-term trends such as decarbonisation, deglobalisation, demographics, and the AI revolution on investment opportunities. It suggests focusing on less correlated investments and being selective in re-upping with general partners. It also discusses the potential of private equity, private debt, and infrastructure investments, emphasizing the importance of being highly selective and aligning with market trends. It identifies healthcare, North America, Western Europe, China, and India as attractive sectors and regions. It also mentions the resilience of leveraged loan markets and the diversification value of insurance-linked securities and concludes by highlighting the importance of sustainability and impact considerations in investment strategies.
Source: Asian Investor
Artificial Intelligence Scope/ Trends
The AI Imperative in Institutional ESG Investing
It discusses the growth of ESG (Environmental, Social, and Governance) investing and the challenges faced by portfolio managers and ESG analysts in accessing reliable company specific ESG performance data. It highlights the role of AI in improving the accuracy of ESG ratings by analysing large amounts of unstructured data. It also mentions the complexities of ESG rating and the need for a model that allows investors to configure data and analysis to suit their unique perspectives and investing strategies. It further discusses how AI solutions, particularly GenAI and NLP, can transform ESG investing by enabling firms to analyse diverse data formats and obtain a reliable ESG score based on their customized weighting. It concludes by stating that AI will be instrumental in ESG lending and insurance and will enable companies to more accurately measure their own ESG impacts.
Source: Wipro
