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Private Markets Leaders at SuperReturn Share How They Plan to Navigate Choppy Waters Ahead

Ryan Smith  Follow

This June marked the largest gathering of the European private markets industry at the annual SuperReturn International Conference in Berlin. Industry leaders from around the globe congregated for the event’s first summer gathering, and second time in-person since the onset of Covid-19.

Against a backdrop of an increasingly challenging economic environment and with competition for talent, capital and deals greater than ever, here are six key themes that emerged from panel discussions and private meetings on the ground. Each will have significant implications for private markets firms – and how they communicate with their stakeholders – for the foreseeable future.

Heightened Visibility and Scrutiny

The industry’s growth has led to ever-increasing scrutiny from the wider financial and business media. With the economic slowdown already hitting valuations in certain sectors likely to continue and spread, many sponsors have increasingly been using secondaries transactions and continuation funds to hold on to prize assets to realise their full value at exit.

Each situation has its own merits and nuances, but GPs conducting these deals need to be prepared to be met with scepticism in some quarters. The onus will be on managers to demonstrate why these deals are in the best interests of the asset and LPs to avoid accusations of ‘pass the parcel’ financial engineering for the benefit of GPs. 

Democratisation of Private Markets

For some time, the industry has agreed that private wealth represents the next significant addressable fundraising market for GPs, with many predicting it will one day constitute a significant proportion of AUM. Hamilton Lane estimates HNW allocations to private markets could reach as high as $1.5tn by 2025.

As traditional asset managers are eyeing private markets and leveraging existing distribution capabilities to reach retail money, and new technology-driven platforms are emerging, many GPs find themselves playing catch-up in this area. However, these managers possess the longevity and track record as direct investors in these asset classes, in comparison with relative new entrants.

As these structural factors are being overcome by all types of managers, the industry must educate this new class of investor on the role private assets play in portfolios and its merits.

Balancing the Bull with the Bear

As we enter what will undoubtedly be challenging times economically, many private markets managers remain optimistic about the investment opportunities ahead, with locked-up capital and significant dry powder a distinct advantage in markets where capital is scarce.

This willingness to take advantage of dislocation needs to be balanced with existing portfolio management and it’s inevitable some portfolio companies will face significant difficulties.

GPs managing these challenges will have their communications responses marked on two scores – one by LPs and one by the wider public – and they must strike a balance while managing the two.

Investors will judge managers on their transparency regarding such issues and importantly, the steps being taken to manage them. Externally, firms will have to determine the extent to which they can keep their heads down but recognise that ultimately when issues arise, there is almost always a time where a more proactive communications approach is a vital part of issues management.

Telling the Buy-and-Build Story

PE M&A volume is increasingly being driven by add-on acquisitions as opposed to large-cap buyouts, particularly in Europe, where its fragmented nature offers significant roll-up opportunities.

With GPs increasingly looking to demonstrate their investment approach through portfolio companies, telling the growth story of these businesses can often be challenging over a several year span. Communicating the vision for platform companies at investment is crucial to ensuring a line can be drawn through the life of the investment to exit, particularly as antitrust concerns move up the agenda for many regulators.  

Credit’s Mixed Picture

Debt investors are often characterised as being glass half-empty in comparison to their equity counterparts and true to this, the Private Debt Summit had a more mixed tone than the boundless optimism of recent years.

While rising interest rates offer the chance for higher returns in this floating rate asset class, the growing cost of capital for borrowers raises the spectre of defaults in portfolios. Many proclaimed confidence in the traditional direct lending model in this environment, while others pointed towards opportunities in fixed-rate, but fundamentally solid credits in the liquid public markets. With a few exceptions, it was also clear that ESG has fallen slightly down the agenda for many GPs, with greater attention being given to the growth in large-cap club deals between lenders, particularly in Europe.

With an economic downturn likely to lead to issues at the portfolio company level, for even the most disciplined of lenders, managing crises will become paramount to preservation of reputation. At a higher level, the industry in Europe will need to demonstrate its resilience as it undergoes its first big test since its emergence following the GFC, with central government support helping lenders to mitigate and manage much of the pandemic’s impact.

Social Media Sourcing

GPs in all asset classes and strategies, from equity to credit and traditional LBOs to esoteric alternative lending, are facing levels of competition for deals never seen before. Understandably, much consideration was given to deal-sourcing across private markets.

Several firms highlighted the growing role that social media is playing on this front, both in helping them proactively scour for opportunities and embed themselves in verticals with less developed advisory ecosystems, and in generating inbound enquiries. This demonstrated what many have come to realise in recent years, which is a strong, visible digital presence is no longer a ‘nice to have’ but an essential part of any manager’s commercial strategy.

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