Private Markets Newsletter

Industry Trends

Private markets - Navigating uncertainties and embracing alternative investing strategies in 2023

This article discusses the private market landscape in 2023, highlighting the slowdown in the second half due to lower availability of debt, rising cost of debt, and dislocation in asset prices. It also mentions the focus on portfolio value creation, excitement around infrastructure, ESG topics, and energy transition in Asia, and the influence of banking on the private-market sector. In North America, there is interest in aerospace, defense, healthcare, life sciences, consumer goods, and financial services. The article also covers the strong year for ESG topics in Europe, with sustainability-related deals increasing by 7 percent to a record of nearly $200 billion.

Source: McKinsey & Company

Private Credit is poised for a multi-trillion-dollar boom, but it could get ugly soon

The private credit market has grown significantly since 2015, reaching $1.5 trillion, attracting various investors such as debt specialists, private equity firms, and hedge funds. Factors like higher rates and banks' lending retreat have contributed to this growth. Major firms like DWS Group and Fidelity International are entering the market, while established players like Oaktree Capital Management continue to raise funds. The market includes strategies like direct lending, buyout financing, and real estate debt. However, there are potential pitfalls and challenges ahead.

Source: BNN Bloomberg

Q1 2023 Review

Take - Private deals take center stage amid continued macro volatility

The report states that PE firms are better at managing volatility due to their extensive operating toolkit. They face challenges from macro headwinds and banking system instability, focusing on investing in companies with strong long-term growth potential in a limited financing environment. The market is barbell-shaped, with smaller transactions and take-private deals dominating large-scale transactions. In Q1 2023, PE firms announced deals worth $92 billion, a significant drop from the previous year but similar to Q4. Deal activity increased throughout the quarter, driven by large-scale take-private deals, with March witnessing over $62 billion in PE deals announced compared to $12 billion in January.

Source: EY

Rise in distressed and mid-market deals, addressing divergent valuation expectations, and capitalizing on private credit prospects

The article discusses the slowdown in deal-making activity and volume in Q1 2023 due to macroeconomic factors and uncertainty. The M&A market is characterized by increased caution and difficult access

to traditional financing, leading to more distressed buyout and private credit opportunities. Key points include:

1) More distressed deals due to rising inflation, decreased consumer demand, and increasing interest rates

2) Finding a bright spot in mid-market deals, a shift towards mid-market deals as big-ticket exposures decrease

3) Bridging the gap between seller and buyer expectations using creative tools like earn-outs and vendor financing

4) The rise of private credit as banks retreat from the commercial lending market

The article concludes with the hope that direct lending activity will contribute to a reignition of M&A activity towards the last quarter of 2023.

Source: Loyens & Loeff

Market Sentiments

Big 4 private equity firms project optimism even as fundraising, deals slow

During their Q1 earnings calls, the top four publicly traded alternative asset managers - Apollo Global Management Inc., Blackstone Inc., The Carlyle Group Inc., and KKR & Co. Inc. - maintained a positive outlook despite a slowdown in private equity fundraising and dealmaking. Their average net positivity score increased for the second consecutive quarter, surpassing the S&P 500 companies' average. This optimism was present even with underwhelming private equity results, as they experienced growth in private credit and secondaries funds. Assets under management for these firms continued to grow in Q1, partly due to investor interest in other investment strategies, especially private credit.

Source: S&P Global Market Intelligence

Milken gathering checks Private Credit optimism as defaults loom

Investor caution is increasing due to defaults, downgrades, and banking turmoil, leading to acquisition activities. The US private credit market, a $1.4 trillion industry, is facing its biggest challenge since growing from $500 billion in 2015. Factors such as an expected recession and the Federal Reserve's liquidity withdrawal are affecting all financial assets.

Source: Bloomberg

Market Opportunity

Private Debt delivers calm waters in storm of volatility

Private debt offers stable income and has performed well in recent times, making it an attractive investment option. Its appeal comes from predictable returns, seniority, contractual cash flows, and downside protection. Private debt funds achieved a one-year IRR of 5.3% through Q3 2022, outperforming the MSCI World Index. Preliminary data shows a 0.4% gain in Q4 2022, making it the third best- performing private capital strategy alongside real estate. Tighter lending conditions have increased demand for debt financing, creating more opportunities for private debt managers to deploy capital.

Source: Pitchbook

Are alternative investments representing potential for the economy of the future?

The global investment landscape is evolving, with alternative investments gaining popularity due to investors seeking diversification and attractive risk-adjusted returns. Despite challenges like the Covid- 19 pandemic, the market remains active, driven by factors such as market volatility and increased confidence from institutional investors. Venture capital, in particular, has grown as an investment option, offering access to early-stage companies and the potential for significant profits. The market is expected to continue growing and innovating.

Source: Contxto

ESG Trends

ESG or nothing – The sustainable finance transformation in private markets

The report "GPs’ Global ESG Strategies: Disclosure Standards, Data Requirements & Strategic Options" is part of PwC's European Sustainable Finance Series and examines the impact of regulation on ESG uptake in various regions. Based on a survey of 300 GPs and 300 LPs, it highlights the importance of ESG in the global PM landscape and the willingness of LPs to pay more for improved ESG data reporting. The report urges GPs to embed sustainability data and capabilities into their corporate culture and investment processes to meet regulatory developments, investor expectations, and use the sustainable transition as a differentiating factor.

Source: PWC

Sector Update

Private Equity investments in AI, machine learning tick up in Q1

The global private equity market for AI and machine learning companies is recovering in 2023 after reaching its lowest point in Q4 2022. From January 1 to May 14, $10.34 billion was invested across 342 deals in the sector. In Q1, $5.81 billion was raised through 247 deals, a 49.7% increase from the previous quarter but still down 60.6% from the same period in 2022. The US and Canada led with 147 deals worth $5.05 billion, followed by Europe with 94 deals totaling $4.54 billion.