Credit
By Dinah Cencig & Georgia Mernagh
With banks pulling back from lending there is a clear opportunity for private debt funds to lend to corporates who are looking to sustain their businesses. Direct lenders are increasingly looking to the lower mid-market due to the volume of opportunities; we have seen the likes of Eurazeo and Pictet build their teams in London to focus on this. Higher interest rates and inflation are hitting portfolio companies, however, uncertain conditions favour private credit over other forms of leveraged finance as they can close deals more quickly and with greater certainty. This is positive for the growth of private debt as companies need more flexible capital structures to navigate cycles. With yields for unitranche reaching double digit levels for performing strategies, the next 12-18 months could bring more opportunities within private debt. Another hot topic continues to be claims and litigations, specifically within a US context as well as fund financing with some of the larger credit players such as HPS establishing new teams in London.
Fundraising has been difficult across private markets including in credit and it’s more important than ever to be perceived as a credible lender with a good reputation in order to raise capital. Institutional investors have increased their allocation to private credit as they are growing and need scale. They are looking for large direct lenders who have the ability to do larger deals or ones that can take advantage of lower mid-market opportunities in Europe. LPs have increased their interest in evergreen funds as many have overinvested in locked up capital. Asset raising has been favourable for hedge funds which focus on multi strategy credit and restructuring mandates whereas loan to own strategies have been abandoned by most credit players.
In general, only BlackRock and CVC have managed to raise AUM for their corporate credit strategies in 2023. After a busy 2022, CLOs had a strong start to the year from mid-January to March before the market was spooked by the collapse of SVB and Credit Suisse. This meant there was a lack of new issues from mid-March to the end of April and even some of the largest CLO players haven’t managed to issue a new CLO so far in 2023. However, despite CLO new issuance volumes being down year-on-year, CVC has been able to price three new CLOs in 2023 and there have also been new entrants into the market such as Signal Capital who priced their first CLO in May this year.
Real Estate
By Ben Ingram and Samantha Williams
The real estate investment market remains hesitant with minimal activity as investors wait for further valuation corrections and distressed fall out from increased finance costs. The UK has typically corrected quicker than European markets. However, all are on ‘hold’ and we wait to see who are the ‘Braveheart’ that call the bottom.
The slight exception are the vogue assets classes as major investors and developers seek to diversify or pivot from the traditional and get exposure to the various living asset classes, in particular, but also the likes of life sciences, data centres (and the sub sector ‘edge’) and logistics (and its sub sector ‘last mile’). To make any meaningful and timely impact, though, it takes specialist team pull outs or niche corporate acquisitions.
In terms of talent, attention has turned to those who can enhance the value of properties under management through strategic asset management; those who have investor relations in places that are able/likely to deploy capital; those who can set up and originate European CRE debt; and those who can navigate businesses through the long term challenges of ESG and data management/usage.
Infrastructure & Energy Transition
By Hugo Clark
The first half of 2023 will be remembered as one of the toughest fundraising markets ever for infrastructure. Q1 was the worst quarter on record (since 2009) with $3.6bn of capital raised. In comparison, $65.2bn was raised in Q1 2022. The contributing factors to this massive shift in the market are multi-faceted, including LPs being oversubscribed to alternatives, regulatory uncertainties and macro market volatility. However, despite all the negativity, the global machine that is infrastructure continues to churn and there hasn’t been a slow down in new fund vintages and strategies coming to market. I Squared have launched a $2bn energy transition vehicle, Harrison Street went to market with their first ever energy transition vehicle targeting $750m, Capital Dynamics are back in the market for a £600m UK focused clean energy fund, TPG are raising for their third Rise Climate vintage ($3bn target), and Swiss Life are seeking €1bn for their second value-add fund.
The list of new fund launches goes on, more interestingly though are the challenges being faced by these private equity managers. The need to showcase strong track records, demonstrate their ability to navigate regulatory complexities, and provide compelling investment strategies that address investor concerns has never been more important. The competitive landscape has intensified. Not only are competing firms launching near identical fund strategies (especially in energy transition), but LPs are putting increasing pressure on firms to generate higher returns, which is exaggerated by high inflation rates.
This has led to the development of two hiring trends. First, renewables funds are having to consider taking more risk, primarily by investing in assets at an earlier stage of the value cycle i.e. taking on construction and development risk. Secondly, the emergence of higher yielding infrastructure private credit strategies. Whether it’s Apollo’s preferred equity and convertibles mid-market strategy, or Macquarie spin-out FitzWalter Capital, firms are having to look at funkier, more exotic transactions targeting private equity style returns.
Looking forward to the rest of the year, we will continue to see some sporadic hiring, either through churn or with firms continuing to press forward on new strategy launches. However, the market in general will remain reasonably quiet (comparatively to 2021 and 2022) with the first half of 2024 signalled to be another period of extreme activity and tough competition for high-quality talent.
Private Equity
By Oliver Blaydon
- AI dominates many conversations in the C-suite so here goes:If you don’t have someone who can articulate the value (or otherwise) of generative AI, you’re not ready and should focus on data foundations (engineering and analytics).
- Unless you are a professional or financial services company, large language models are probably a distraction for now.
- Anything you’re being advised to build is probably being baked-in to the technology you already have (CRM, ERP etc).
- AI is going to change the world and your company will have to adopt it and adapt to it, but not yet.
Private markets investors are increasingly keen to create or grow digital capabilities to benefit them internally and their portfolio but the economic headwinds are delaying the final decision.
Venture Capital
By Hugh Barran
With the news of both Tiger Global and Insight Partners struggling to raise behemoth growth equity vehicles, it is unsurprising that hiring senior investor relations professionals across venture capital and growth equity is a huge topic of conversation. We would predict that one in three funds we meet will mention they are thinking about either adding to or hiring a senior professional to lead their asset raising function.
On the investment side, it feels as though the market is beginning to slow bar one area, AI and technical investors. VCs are seeing a huge amount of deal flow and having someone on the investment team who has either spent time as a software engineer or has a machine learning background is a large area of demand. It is an interesting time for the market with many struggling to raise their next vehicle and one imagines to see a number of funds wiped out over the next 18-24 months.
That being said, we are also in a time of fierce innovation with the democratisation of AI prompting Roelof Botha to say: “this reminds me of the early days of the Internet.”. For one thing it is certainly not dull and we should expect to see some category leaders born out of this downturn as founders are forced to build with much less capital.
Distribution
By Roger Threlfall
2023 has been a very tough year for fundraising in private markets. Fundraising totals are lower today than they were a year ago. Investment funds across the broad private markets spectrum (private equity, venture capital, infrastructure, real estate and private credit) raised anywhere from 15% to 50% less than what those strategies raised in 2022.
Since a drop in the public markets kickstarted the denominator effect in 2022, followed by a rapidly increasing interest rate environment and a continued uncertain macroeconomic environment, LPs have held back from making commitments to private markets strategies.
LPs search for liquidity following this denominator effect has meant the secondaries market has experienced huge demand in the last 12 months. According to Prequin, secondaries funds raised nearly 40% more year-over-year in the 12-month period ending in March. Blackstone's secondaries fund that closed in January 2023 raised nearly $25 billion, 75% of all the secondaries funds raised globally in all of Q1.
In these uncertain times, the likelihood of LPs re-upping with their existing GPs is even more pronounced, so new managers have an even more difficult challenge raising their first funds. However, even the mega funds have still found fundraising in this environment tough. Where once they have comfortably relied on existing LPs to re-up, some have now turned to placement agents for additional support.
Across EMEA, the Middle East is by far the most active recruitment market hiring fundraisers. We have discussed in previous articles the interest in private markets firms targeting the private wealth channel and this continues. In the last 6 months, we have had more discussions with clients about how they best cover insurers, given their appetite for private markets.
The overall consensus is that many firms do not expect the macro-economic environment to change significantly in H2 2023 and so the fundraising environment will continue to remain challenging.
