SuperReturn International 2018: Global temperature of the private markets

3.21.2018

SuperReturn International 2018: Global temperature of the private markets
By Taz Katira, Principal

The 2018 SuperReturn International conference, which took place in Berlin at the end of February, drew great attendance from GPs, LPs, placement agents and reporters from around the world. It was literally a cast of thousands and could have doubled as a game of private markets who’s who. 

A great time to be in the private markets… for most

The general mood of the event was quite positive, since 2017 was another great year for fundraising numbers, which came in around $800 billion. Many private market participants benefitted from the dynamic fundraising environment including the experienced and proven managers that we saw raise some of their largest funds yet.

For those at the other end of the spectrum, the tone was arguably more subdued. Newer managers without a differentiated story, and managers from emerging markets, seemed to have had a harder year fundraising on average; the former suffering from LPs trying to consolidate relationships and focus on alpha at the smaller, newer manager end, the latter battling the damage done by currency volatility and undifferentiated dollar-returns in the last few years.

There also were mixed feelings amongst the placement agents. Fundraising ebullience has certainly benefited them over the last few years, but competition continues to heat up, driving down margins. Though it is still early in the year, there doesn’t seem to be an obvious way to get around those dynamics in 2018 either. 

Limited partners juggling ever more

With the ever-increasing volume of funds and opportunities, it wouldn't have surprised me to hear LPs’ discussion around workload this year: not only because of more funds, but more data needs, more diligence, more monitoring, more reporting, more frogs to kiss, more placement agents to see. More, more, more.

The state of play has expanded rapidly of late, with LPs having to evaluate and manage around new developments such as late primaries, secondary restructurings and strips, currency-hedge side pools, lines of credit and traditionally buyout-oriented GPs expanding into credit (or vice versa).

As the asset class continues to grow and become more complex, this appears to be the new world for limited partners.

General partners’ evolving playbooks

For the GPs, a consistent headline was that pricing continues to be high. The only difference from last year, is that GPs seem to have accepted this as a fact of life. The mantra has evolved from “Be wary” to “Keep calm and carry on, with discipline.” And indeed, for the most part, we see that GPs continue to exert relative caution. 

What we’ve also seen is how they continue to tighten their playbooks, focusing keenly on where to make moves in order to minimize losses if the market turns. They’re looking for pockets of secular growth and places where the market is mispricing the cycle. And, they are casting an inward eye to assess whether they are well-positioned in certain sectors or geographies or how they can internationalize and digitalize their businesses. GPs are also considering M&A at the portfolio company-level for scale and to bring down “creation multiples,” as well as looking for ways to add streams of recurring revenues and increase customer stickiness.

It seems GPs and LPs alike are challenged with a growing and complex private markets environment, and are being forced to get creative with their strategies.

Debt

Not surprisingly, private credit continues to be a fan favourite for LPs and was discussed at length throughout the program. Attitudes and observations around the debt market during SuperReturn were varied, ranging from no to low covenants, with debt funds fighting to do deals. 

Attendees felt that pricing is at a notable low – which is great if you are a buyout manager. (Kudos to buyout managers, by the way, for the general discipline shown in how much leverage they take at a time like this). But, this is not so good if you are the debt fund doing the lending. Many of these managers have not seen a recession in Europe, and with low covenants and tightening margins, the question is, what’s Plan B?

Taking all of this into account – a strong fundraising environment and generally sensible investing behaviour amongst private market participants – we can also subscribe to the mantra of “Keep calm and carry on, with discipline.”


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