Private Markets: The next Ouroboros? Or 'To infinity and beyond'?
Private market returns have significantly exceeded those available in public markets for an extended period, despite their attendant illiquidity, valuation, and volatility issues, which partly explains their attraction to asset allocators in recent years. Although many Long Term Return Forecasts continue to suggest that the asset class may continue to deliver superior returns, some commentators believe that on many valuation metrics, prices for PE deals look rich in historical terms. However, the sheer weight of money (almost $900bn raised across over 1,000 private capital funds in 2019) and with an estimated $1.5 - $3 trillion already in 'dry powder' looking for opportunities tends to suggest that the deals will keep coming, at least for some time.
Many buyout funds had their genesis just after the financial crisis and with a typical lifespan of around ten years, are now looking for exits. Some managers are selling stakes in portfolio companies held in the more mature funds to those newer, cash-rich funds. Is this a sign that the market may devour itself or that the wheels may stop spinning sometime soon? This collection of papers covers a wide range of topics, including the prospects for private markets, the variation in fund returns, fees and how the alternatives industry may have to adapt its business models going forward as investors become more demanding.
LONG TERM INSIGHTS
This annual review of private investing from McKinsey offers new insights and reveals new trends within the industry.
For compliance reasons, this paper is only accessible in certain geographies
Manulife IM identifies five ways in which private equity investing can continue to play a positive role in the future, in which it contributes to the betterment of a wide range of stakeholders.
EY's latest Survey of the global private equity industry notes the challenges that lie ahead, and the increasingly important role that PE CFO's play in the success and future direction of firms and funds.
Probitas Partners investigates the state of private equity investing in different regions around the globe.
For compliance reasons, this paper is only accessible in the United States
This interesting academic report finds that different US public pensions investing in the same private-market fund can experience very different returns (with the best earning potentially between 8% -15% more); primarily down to the effects of fees. Public pensions seemingly fail to opitimize when choosing fees. As a result, they should be very aware of the contracting terms they receive across all forms of investment mangement.
Meketa describes, in this primer, the most common fee and profit-sharing arrangements associated with private market investments.
Nuveen notes that private credit has historically offered investors attractive returns. More recently, relatively stable performance and a wider, more knowledgeable investor base have allocated additional capital into the asset class, bringing with it extra challenges and the need to find practical solutions.
Podcast: Private Credit - Opportunities to generate alpha above public debt (JP Morgan AM, Feb 2020)
Jonathan Segal, Co-Chief Investment Officer of Highbridge Capital Management, discusses the investment implications of low yields on private credit in this podcast by JP Morgan AM.
Bain & Company's 11th Annual Report finds the private equity industry in robust health, with returns soaring and unprecedented levels of interest from potential investors. However, a note of caution needs to be sounded as asset prices soar and public market 10-year returns match PE returns for the first time.
This second annual edition of its Global Alternatives report by JP Morgan AM offers a 12-18 month outlook for a wide range of alternative asset classes. The authors also explore how alternative asset allocation can assist in building more resilient portfolios while also reducing risk and satisfying investor demand for both income and alpha.
Wells Fargo Investment Institute explores the alternative investment scene, but caveat that there are potential risks in the credit cycle that will require careful monitoring.
James Redgrave, State Street's Head of EMEA Insights, discusses the themes identified in a survey of more than 200 alternative asset managers conducted by State Street and Mercatus. He explains what they mean for alternative managers' business models and strategies, as well as their relationships with investors.
RISK, PERFORMANCE AND PORTFOLIO RETURNS
In this twelfth annual report, EY report on the performance of large, private equity-owned, mainly UK companies. The report presents independently prepared information and aims to inform the broader business, regulatory, and public debate about the impact of private equity ownership.
The BVCA, in conjunction with PwC and Capital Dynamics, publishes the Performance Measurement Survey each year which compares private equity and venture capital's performance with other asset classes over different time periods. This latest Report for 2018 finds that the UK’s private equity and venture capital industry has continued to demonstrate its resilience by returning substantial amounts of cash distributions to investors. Over the longer term, venture capital and private equity continue to outperform public markets comfortably.
The authors examine the impact of including private investment funds in diversified, defined contribution (DC) portfolios and finds that inclusion invariably increases overall portfolio returns and reliably increases Sharpe ratios. This is despite the higher fee levels often associated with private funds.
State Street provides a ground-breaking framework for estimating both the systematic and idiosyncratic risk of private equity programs. In a world of stretched public equity valuations and negative interest rates, sizing the allocation and resolving the different valuation volatility and liquidity characteristics of public vs private equity has been ain issue for asset allocators.
Pantheon investigates whether a PE manager's track record is a reliable indicator of future performance and finds with limitations, that persistence does appear to pay off.
Responsible Venture Capital: Integrating ESG approaches in early-stage investing (CDC Group/FMO, 2020)
The CDC and the FMO outlines a potential framework for VC investors in emerging markets to consider and manage the ESG risks and opportunities that are most applicable. With capital come responsibilities!