Private markets are booming – but it’s the late stage in the market cycle and fundraising may become more challenging. Funds Europe joined the specialist fund administrator IQ-EQ in New York City to hear if US practitioners agree.
Say what you like about Donald Trump, but the US president is linked by one industry practitioner to an increase in US private markets activity.
“Between 2008 right up to the Trump election, there were some mega-private equity fund launches, but frankly private equity fund launches were in the doldrums. Then, immediately after the Trump election, the floodgates opened and we saw a deluge of new work. The phone was ringing again and the emails were flying in with managers wanting to set up new private equity funds. People were finally doing business again and it hasn’t stopped.”
This is the experience of Cayman Islands-based lawyer Ian Gobin, of Harneys, whose clients are predominantly in the US. He was speaking on a private markets panel hosted by fund administration firm IQ-EQ in New York City recently. Nick Fitzpatrick, Funds Europe editor, moderated the panel.
The climate for private markets investment in the US was described by the five-strong panel as buoyant. It was a view that may contrast with the findings of an IQ-EQ survey that canvassed private investor opinions more globally earlier this year.
IQ-EQ’s survey – ‘Private equity outlook 2019’ – sought answers from 122 respondents. The top concern, cited by nearly a quarter of them, was that fundraising would be the main challenge of 2019.
Hugh Stacey, executive director, investor solutions at IQ-EQ, said the market remained resilient overall, but managers were preparing for a correction in public equities.
Most relevant to the New York panel was that just 5% of survey respondents indicated they saw interesting private equity investment opportunities in the US – lower than in previous years and lower than in other geographies.
But Tim Lewis, partner at private equity firm Southfield Capital, said: “Anecdotally I would say the market is still very strong. We’re not hearing about limitations, we’re hearing a lot of enthusiasm for our strategy and for private equity in general.”
In part, fuelling opportunities is the eagerness by owners of small to mid-sized businesses – which Southfield specialises in – to sell stakes to private equity firms “maybe earlier than they would have done five to ten years ago”. This is down to the success these businesses have seen peers achieve after inviting private capital onboard in the past decade. But it also means that the difference between investment opportunities today and five years ago “is not in the number, but possibly in the quality” as firms come to market quicker. This did not lead to poorer investments, said Lewis, but did make due diligence more challenging.
Sunil Vaswani, managing director at Intermediate Capital Group (ICG), said that if investors did perceive fewer opportunities in the US, it was perhaps a sign of diversification and not of lower confidence or reduced opportunity.
“Given that the US is already the world’s largest market by far, you might have investors who are now looking for further diversification outside of the US because they’ve already made their bets in the US. So, I don’t think it reflects the opportunity in the market as a whole.”
His point is supported by the IQ-EQ survey, in which 41% of respondents felt the US had seen the most investment deals in 2018. This was the highest by far compared to most other regions.
Matthew Epstein, managing director at investment bank DC Advisory, was confident that private markets still have “a long way to go” as an investment proposition, even if the “easy money” of the early 1990s has gone.
“There are a couple of big trends in the industry and one of them is the overall decline in yields – which I believe is permanent – so this means people are looking for incremental yields elsewhere.”
The number-one asset class
If the appetite for private equity is as strong as suggested and the opportunities still in some abundance, then appetite is arguably even stronger for private debt.
“Private credit has been the number-one asset class,” said Harney’s Gobin – adding: “We are beginning to hear that allocators are thinking it is overheating, that there may be too many people in the market, and they are starting to review their portfolios.”
Ron Geffner, an attorney with New York law firm Sadis & Goldberg, said the Volcker Rule – part of the post-crisis set of Wall Street reforms known as Dodd-Frank – indirectly boosted private debt markets by limiting the extent of bank lending to private equity vehicles.
“It took banks out of picture on the debt side. At the time, shadow banking was around 70% [of lending] but we’ve seen an increase in the number of debt-related funds from private equity firms post-2008 and, to my surprise, these seem to have been hitting Europe in the past two years, too.”
ICG’s Vaswani said the European experience with private lending stemmed from 2012 with the “birth of the senior debt market, which is really the bank-replacement market”. At the time, non-bank lending was around 20% of total lending but by some estimates, he said, it is 35% today and close to €200 billion.
With the now well-known build-up of ‘dry powder’ in private equity, caused partly by the institutionalisation of the industry in the past decade, and the “overheating” in private lending, Geffner said some private capital managers were deviating into more specialised strategies. None are more frontier than cannabis, though it is wealthy individuals and family offices making the first foray into this area.
“We are seeing that fund managers are not having as much problems now raising capital from high-net-worth individuals and family offices. There is still a disparity in laws between federal approval and state approval of cannabis and so institutional assets have yet to hit this space, but when federal laws conform to state laws, you’re going to see some of the larger asset managers focus on it.”
Technology, unsurprisingly, is another area of interest. Epstein, who heads DC Advisory’s fintech group, said: “People are looking for returns and technology is cutting a swathe through the global economy like a hot knife through butter – and it’s still early days because technology offers sustainable, longer-term investments.”
Looking ahead. Way ahead…
The panel discussion on private markets took place against a backdrop of concerns about a market correction and more difficult fundraising. Yet the stockpiles of dry powder mean appetite for private markets is only growing.
Appetite is not the only thing growing in private markets: the timeline along which funds plan their capital commitments is expanding, too.
Geffner, of Sadis, said: “There are more permanent capital funds being discussed where duration of portfolio construction is unlimited. That’s probably one of the bigger trends in the past few years.”
Similarly, Epstein noted that some funds were departing from the standard five-to-ten-year investment period. “There is less emphasis on exit. We are seeing funds with long durations and no end date. Some of them will invest for 30 years,” he said.
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