Private Markets Newsletter - September Edition
Industry Trends
Are you harnessing the growth and resilience of private capital?
The appeal of remaining private has grown for many large private companies, partly due to increased confidence in private company governance models and higher regulatory standards. Public market conditions, such as rising costs and frequent disclosure requirements, have also contributed to this trend. In EMEIA, the number of de-listings has decreased, but a decline in IPOs has led to a significant reduction in total listed companies. The Americas have seen little change in the number of listed companies since the beginning of the century, with more large businesses choosing to stay or become private. EMEIA now has 40% fewer publicly listed companies than in 2002. Macroeconomic uncertainty and recession fears have dampened VC investment in 2023, especially in the US. However, substantial capital raised in recent years allows investors to invest more selectively. Despite a challenging external environment, areas like generative AI have attracted strong investor interest in 2023. Meanwhile, global equities have seen a double-digit decline in value, with both developed and developing markets experiencing sell-offs.
Source: EY
Navigating Change: Pivotal trends in the Secondaries Market
Growth in the industry is being driven by greater acceptance and increasingly diverse liquidity options and here are the key trends that are moving the secondaries market:
1.????? Secondaries strategies are rising in prominence
2.????? Private investors today have access to a nuanced liquidity toolkit
3.????? Specialisation is trending
4.????? Investors with strong primary relationships may have an edge
5.????? Even in the challenging market, good deals will get done
Source: Private Equity International
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Q2 2023/ Midyear Review
Surprises from the first half of 2023: In Private Credit, steady issuance despite challenging conditions
The private fixed income market experienced typical levels of issuance in the first half of 2023 despite interest rate increases and market uncertainty. Distinct issuance trends were observed among subsectors of the private placement market. Financials faced challenges after the Silicon Valley Bank collapse, leading to a price-discovery market. Three trends that could drive market share growth for alternative lenders in 2023 include regional banks tightening lending, growth of private asset-backed securities in specialty finance, and the convergence of public and private markets. However, credit conditions remain challenging for some borrowers, and lenders should maintain rigorous credit underwriting standards and focus on negotiating attractive covenant packages to prepare for potential defaults.
Source: Advisor Perspectives
Fintech Frontiers: Riding the digital wave
The first half of 2023 was challenging for the global fintech market due to factors like inflation, rising interest rates, geopolitical conflicts, and bank collapses. Key trends included a focus on operational efficiency, resilience in the payments space, declining crypto funding, and growing interest in generative AI use cases. Market challenges are expected to continue in the second half of 2023, with AI being a hot topic for funding. Payments, insurtech, and wealthtech are well-positioned for funding growth, and M&A activity may increase if market conditions improve. The Pulse of Fintech report encourages CEOs and founders to consider sustainable and profitable growth strategies in these uncertain times.
Source: KPMG
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Market Sentiments
Private Credit is hot. But has it gone silly?
Private credit has emerged as a popular asset class alongside the Federal Reserve's rate hikes, attracting interest from various investors. Asset managers and private-equity firms are capitalizing on this trend, with companies like BlackRock Inc. expanding their operations. The appeal of private credit lies in its higher borrowing costs and strong loan demand as banks retreat. While the US economy seems to be heading for a soft landing, private lenders are viewed as shock absorbers rather than systemic risks. However, concerns arise over whether fund managers will lower lending standards to secure deals and generate management fees. Although private debt details remain undisclosed, there is some evidence that the sector remains cautious. Experienced managers are raising larger funds, while first-time fundraisers struggle. Investors are cautious, seeking experienced managers to handle default risks and navigate distressed firms. While the EU plans to impose restrictions on private-credit funds, the US remains unconcerned, allowing the private credit party to continue with the hope that it won't end badly.
Source: The Washington Post
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Market Opportunity
How to play the private equity game without a fund
The concept of fundless sponsors, also known as independent sponsors, who are investors that pursue deals without the security of committed capital in a private equity (PE) fund. Independent sponsors bypass the stability of a commingled fund and take on a single or a handful of investors for a single deal. They have certain advantages in tough fundraising environments, such as raising smaller pools of capital. Investors who back independent sponsors gain a higher degree of control over the deal and asset than they would in a fund. However, independent sponsors face stiff competition for assets and potential challenges due to their lack of dry powder compared to established PE firms.
Source: Pitchbook
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ESG Trends
ESG reporting for private companies
There is a growing importance of environmental, social, and governance (ESG) issues and reporting for private companies. The recent regulatory developments, such as the SEC's proposed disclosure rules on climate risk and cybersecurity, and the Biden administration's proposed Federal Supplier Climate Risks and Resilience Rule. The role of stakeholders, including consumers, investors, and large companies, in driving ESG reporting. The steps for private companies to establish an ESG reporting program include determining the most important ESG information, developing an appropriate infrastructure for reporting, and deciding where and how to disclose the information. As a suggestion, the private companies can start with voluntary reporting on their corporate websites or specific ESG topics before developing more comprehensive reporting over time. In conclusion, despite the challenges and costs associated with ESG reporting, stakeholder demands, commercial considerations, and investor preferences make it important for private companies to consider establishing an ESG reporting program sooner rather than later.
Source: Fenwick
Climate Finance needs a push. Asset owners can supply one
There is an importance of asset owners in supporting the transition to a net-zero global economy and there are opportunities for climate-focused investments in private-market asset classes such as private equity, venture capital, real estate, and infrastructure. These investments can drive innovation, spur decarbonization, and make blended finance commercially viable. The article suggests six steps for asset owners to increase their climate-focused private-market investments, including 1) setting formal targets 2) developing expertise in climate solutions, 3) tackling due diligence challenges, 4) pursuing gray-to-green strategies, 5) supporting blended finance initiatives and 6) providing leadership, expertise, and connections, as well as capital. By doing so, asset owners can amplify their impact on climate challenges and build valuable expertise in the process.
Source: BCG
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Market Challenges
Chinese private equity navigates choppy waters
China has become a riskier bet for investors in Asia's private markets due to the latest US trade restrictions and other factors. President Joe Biden's executive order banning investment in certain tech sectors has consequences for both venture capitalists and private equity. China's appeal among investors in Asian private equity has diminished, and private equity fundraising in the country has dropped significantly. Foreign investment in China has also declined, partly due to US restrictions and China's own rules limiting foreign investment. Some investors are cutting ties with China, while others are focusing on sectors with less political risk or looking for opportunities in other Asian countries like India and Southeast Asia.
Source: Pitchbook
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Artificial Intelligence Scope/ Trends Private equity firms take tentative steps adopting AI for their own use
Private equity funds are exploring the potential impact of artificial intelligence (AI) on their portfolio companies but have made limited progress in using AI tools to improve their own operations. Some of the world's largest alternative asset managers, such as The Carlyle Group Inc. and Blackstone Inc., are expanding their AI capabilities. Potential uses of AI in private equity include advising on investment decisions, analyzing proprietary data, and automating labor-intensive tasks. However, concerns about risk governance and data privacy remain significant hurdles to widespread adoption. Currently, private equity firms are more focused on understanding how AI could impact their portfolio rather than developing AI tools for their own operations.
Source: S&P Global Market Intelligence
Expert Opinion BlackRock executive on why private debt is poised for further growth
Private debt has been the big growth story of recent years within private markets and has an impact on the European market. It highlights the decline in bank lending due to turbulent economic conditions, which has created a vacuum filled by private debt providers. However, private debt fundraising in Europe faced a slump last year due to market conditions and economic jitters. Stephan Caron, BlackRock's Head of Private Debt for Europe, the Middle East, and Africa, believes that growth prospects for the asset class remain healthy. The article also covers BlackRock's acquisition of venture debt firm Kreos and its focus on specific sectors like healthcare, software, technology, and professional services. Caron emphasizes the importance of avoiding covenant-lite deals and discusses the differences between private and public market defaults.
Source: Pitchbook
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