News - Armstrong International

Credit

By Dinah Cencig

2023 has been an interesting year for credit on the buy side with lots of hiring activity in Q1 and Q2, especially across special situations credit investing, both in public and private markets. That activity came to a near standstill in Q3 with funds struggling to put performance up and the investment landscape looking unattractive. This has now significantly changed in Q4, especially across private special situations investing, where the consensus is that there is now better refinancing credit to be had and European investing opportunities look more attractive going into 2024.

From a returns perspective, there is a wide schism across European credit in 2023. Some European credit funds – such as Varde and Sculptor – are up in the mid-teens YTD, whereas others are performing in the low single digits. From a compensation perspective we anticipate 2023 to be a muted message even if the fund has performed well, due the global macro-outlook and the fact that even if European credit has done well, US performance has been lacklustre in most funds.

Performing credit strategies are particularly expected to pay down on 2022 given low CLO issuances throughout 2023. Special situations credit is likely to play flat / up for the mid-level as this layer is thinnest on the ground and will need most protection from a ‘pyramid point of view’. Associates who have seen multiple years of steep increases are likely to remain flat / if not down. However, given that credit remains an active recruitment market, managers will have to think of their compensation messaging carefully as there is ample opportunities for strong credit talent to find a home at the competition.

Looking into 2024, speciality finance and energy / hard asset investing are looking to have a busy year ahead. We have also seen NAV financing to become a buzz word in the US with Alliance Bernstein building out a team in Austin. In Europe, HPS have built a significant NAV presence. For most of the sizable direct lending players, NAV is becoming increasingly important as an offering, and we anticipate a continuing hiring need in this area. Multi strategy credit investing has also seen a hiring revival in Q3 2023 with various credit funds being receptive to add a more liquid credit PM to their offering.

Looking ahead into 2024 we see credit hiring to be more ad hoc and less strategic than 2023. Given the pickup in deployment though, we believe that there will be a good amount of movement after bonus payments: funds will struggle to continue their strong pay message given this year’s overall credit performance and the struggle to raise assets (most funds where down a third on their AUM target). That means that top performers are likely to put their head above the parapet, more so than they’ll have done in previous years.

Real Estate

By Ben Ingram & Samantha Williams

The European Real Estate investment market remains slow. Corrections in valuations are happening at different rates in different countries with the UK the quickest to respond and Germany one of the slowest. Attention has naturally turned to ‘sweating’ portfolios and assets – enhancing AUM through strategic asset management. Whilst this has seen a demand for senior and experienced Asset Managers and an increase in compensation amongst these professionals (although a dubious gap remains between their pay and those of investment and fund managers), there has been a transition of resource with investment managers (with time on their hands) taking on asset management responsibility. This is following lessons learnt during the GFC that over culling of staff in challenging times can be expensive later when you need to rehire for the ‘uptick’ and an increasing trend that deal doers are needing to understand, and be involved with, ongoing asset management in any case.

Some of the long-term vogue asset classes are defying the market head winds with ‘living’ the most popular amongst investors but also competitive bidding for life sciences, storage, and datacentres. Those real estate professionals with a track record, a network amongst occupiers and a granular understanding of these sectors remain in demand – albeit the recruitment processes are slow and cautious.

With the banks continuing to withdraw from CRE lending, the gap in the debt market is being filled by established businesses starting or growing Real Estate Debt teams and independent Funds popping up across Europe. There has been a frenzy around those with CRE lending experience for a while, particularly at the mezzanine and pref equity levels, and with a lot of the experienced talent now settled (or resettled), clients are looking at pivoting some for equity over to debt.

The demand for talent in this space has been led by the requirement of candidates able to invest across both the equity and credit space, particularly straddling the opportunistic equity / credit-type return levels. There remains an appetite across MD levels and stand out Associates in the space.

Iberia (Real Estate)

By Ana Hernando Hueros

The macroeconomic situation together with the mismatch between buyer and seller has led to a recession in Spanish investment activity in 2023, with special attention in the last quarter of the year. A 60% decrease in institutional investment is estimated compared to 2022. This puts the focus on asset management and revaluation, with measures to make assets more sustainable (through, for example, ESG and decarbonization initiatives), flexible, and able to change their use when sales have not occurred this year.

From a talent perspective, this translates to increased demand for project management, management, and ESG specialists. Family offices have compensated for the decrease in the activity of some international funds this year as an additional investor.

The forecast for next year is that investor appetite will be reactivated from Q3. It is generally shared that it will be a good year for value-add/opportunistic products, and in terms of asset typology, it will be a good year for residential products (on top of logistics which will maintain investment interest). Some newly created teams will seek to anticipate this investment window by strengthening and growing their teams before this time with investment and asset management hiring, while other consolidated teams will be more cautious and hire once purchases have been closed.

Private Equity (Data & Digital)

By Oliver Blaydon

Investment may be slowing down in many areas but not for digital transformation. It's hard for CEOs to feel the absence of something they've never had, but as the EBITDA increases at other firms through adopting new technologies, it makes it harder to keep pushing the decision into the next quarter. In the last six months we've been invited to more pitches and been retained more often than any other period since we started in this space in 2015.

We're working with GPs ranging from Carlyle to Oakley and portfolio companies across sectors. The common thread is hiring very experienced, hands-on leaders from traditional company backgrounds who use data and digital technologies to increase profit. The real trick though is not the technical capability or domain expertise; it's cultural sensitivity and an innate ability to intuit the psychology of a company.

Our analysis suggests that the first person hired to lead digital transformation is more likely to fail than succeed. In each case the reasons are complex but in general it's because the process of making that first hire is poorly managed. The hiring company doesn't really understand what they're interviewing for, but the candidates assume they do and therefore don't ask fundamental questions: what is the budget? What resources will I be able to access/use? How can we assess data/digital maturity before we commit? Does Management really understand how this will affect them and their teams?

Successful digital transformations (outside technology companies) are led by people who believe people and culture are more important than data and technology and the only outcomes to pursue are profit-driven (excluding cyber). This is why long-term engineers et al from big tech firms repeatedly fail to transform traditional companies. They lead with cutting-edge technologies and bring a 'move fast and break things' mentality which just doesn't work in highly established, successful businesses.

Venture Capital & Growth

By Hugh Barran

There have been a couple of notable investor hires recently, such as Julie Bek joining Sequoia and Bryan Gartner making the switch from Khosla Ventures in the valley to Hoxton Ventures, here in London. However, on the most part, investment team hiring across the market appears to be quiet. Except for anyone well versed in AI, it appears to be very much a wait-and-see approach from firms as the macro picture appears bleak. With interest rates staying higher for longer, it is a tough market to be capital raising in and that has led to the increased demand for skilled investor relations and fundraising talent.

We have never a seen a market more active than for these positions for firms across Europe. There was one notable hire on the platform side of venture and growth funds with Abhishek Lahoti joining Highland Europe from Sapphire Ventures. Overall, the market seems subdued from a hiring perspective, however, given the power law nature of VC, it is apparent firms are still being opportunistic should fantastic talent come available. With the impending closure of some venture firms – if not already in the case of OMERS European team – we could see some great people enter the market which could cause a spike of activity in 2024.

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.

Infrastructure & Energy Transition

By Hugo Clark

The infrastructure market in 2023 will be remembered for two things: consolidation and the rise of infrastructure debt. Our previous newsletter in July covered the reasons behind the fundraising woes spread across the industry and broader private markets. Whilst there are positive signs that the market is picking up, it is still one of the toughest environments to raise capital in, ever. There have been some notable success stories, such as Omnes who have secured over €1 billion in commitments in less than a year since the start of fundraising. CIP successfully closed their green credit fund at $1bn, DigitalBridge raised $1.2bn for their 3rd flagship vintage (only launched in Q1 2023), and Just Climate raised $1.5bn for their 1st vintage.

These examples aside, the fundraising slowdown has impacted all firms from small to large cap, but those in the market with the ‘first time fund’ tag have felt the squeeze most of all. This has certainly been a factor in the rise of mergers this year. As firms look to diversify into new strategies such as debt and energy transition (or even core), it makes the proposition far easier if you’re coming to market with an established team & track record. Take CVC & DIF, Bridgepoint & ECP, Searchlight & Gresham House, Vantage Infrastructure & Capital Four. As we look ahead to 2024, I expect we will see more and more of the mid-market snapped up by either large-cap infrastructure specialists, or private equity funds looking to capitalise on the economic proof area of energy transition.

Whilst the equity market has been reasonably quiet (especially in comparison to the last few years), the same cannot be said for infrastructure debt. As interest rates rise, debt becomes an even more attractive proposition with returns up and risks down. This has led to a flurry of activity in senior hiring. Earlier this year, Power Sustainable established a European strategy, with LGIM replacing Will Devenney with John Carey. AEW have also started building a team, led by Jonathan Stevens. Rivage brought in Alessandro Merlo to focus on strategic initiatives, and Vantage have ended their equity fundraise to focus on debt going forwards. We will see more similar activity as we build up to Christmas and move into 2024, with next year earmarked to be a very competitive period for both fundraising, and top-level talent.