The latest insights from the private markets specialists at Armstrong.
Credit
Distressed credit expertise is becoming more in demand. Whilst most alternative credit funds have senior distressed credit individuals in place, there is a rush across the market to hire execution professionals, especially at the Associate level. Within that, French language skills are most in demand. There is the sentiment that out of the current coronavirus situation the biggest distressed credit opportunity in a generation could arise. That view is balanced by the fact that a lot of investor money is still flooding the system so it is not clear that investments will fall below 85 cents to the dollar before investors will rush to buy them, which in turn would indicate that the current distressed credit opportunity will naturally have limits.
Despite the uncertainty, direct lending continues to be a hot topic – specifically with US businesses still eager to establish their global footprint with a presence in London. European CLOs, which have been in growth mode for years up to 2019, are finding the market challenging as loans are most obviously hit by the coronavirus. The fact that primary CLO businesses are facing headwinds is now accounting for a renewed interest to hire secondary CLO specialists that can help funds ‘profit’ from the fallout in the primary markets.
Real Estate
After a sluggish 2019, in which new initiative launches were more limited with key strategic decisions being held off (probably with Brexit and minority government concerns), 2020 kicked off with a huge increase in the desire to expand into new areas. Major investors are keen to offer a much broader suite of products, being far more comfortable to move in areas they have never been before. This is often in response to pressure from LPs who are eager to support a major brand with additional capital, subject of course to being presented with key people / team that have credibility and track record. We are seeing, and are very involved, with equity players setting up debt funds, credit businesses creating equity strategies, and others going further up or down the risk curve, whether core-plus vehicles for value-add / opportunistic investors or vice versa.
Whilst many businesses set out years ago to have a global four quadrant offering – equity / debt, public / private – others decided to focus on where they had built their reputation and extend only into alternative sectors, such as PRS/BTR, student accommodation and hotels. That has now largely changed. The much broader product expansion is leading to a significant premium suddenly being put on those candidates who are open to a new challenge and looking to better monetise their experience / profile, which in turn is having pressures on businesses to keep existing teams together. The advent of coronavirus has on the one hand made private markets generally even more attractive, but on the other the real estate industry like all others is facing a strain on maintaining cashflow in the short and medium term, with investors putting most deals on hold for the time being. We have not yet, however, seen any postponement of numerous key initiatives, hopefully reflecting a commitment to longer-term objectives.
Distribution
LP interest in private markets stayed strong in early 2020 with their continued appetite for yield. However, due to the Coronavirus outbreak LP focus in the last few weeks has been on their current portfolios. Business development professionals, with the travel restrictions imposed on them, will find their pipeline for the year gets moved back at least 3 to 6 months. Aside from the current situation, the challenges remain that most capital goes to the largest, more established managers and fund-raising is much tougher for first-time funds.
The established GPs have not been growing their sales teams given the high Re-Up rate of existing investors into new funds. The established GPs are thinking of how best to diversify their client base from pure institutional into the wholesale client base (global private banks, family offices, discretionary fund managers) which in some cases means offering a more liquid version of their products. This is probably the biggest growth area for these businesses. As traditional asset management firms acquire or develop internally a private markets capability, we see them thinking how best to distribute / raise money for these strategies. This often requires hiring in dedicated alternative salespeople rather than upskilling the traditional country focused salespeople, whose knowledge is more biased to long-only products.
Data Science in Private Equity
Digital transformation teams in private equity have grown over 100% year-on-year, and we are involved in a number of these projects. This growth is largely from the few (mainly mid-market) firms, which established these functions in 2017 and 2018, and have decided to increase their investment. In the last nine months alone, many of the most prominent houses have hired a Chief Digital/Data Officer. Many of our discretionary fund clients are increasingly keen to meet experienced data scientists to lead more statistically driven research teams. They are starting to appreciate that proven statisticians from outside the investment industry do have the ability to increase conviction and generate profit from data. This is supported by evidence from JP Morgan (still the benchmark for digital transformation in investment banking): the majority of their new hires in Analytics and Data Science came from outside finance in 2019.
Most institutional asset managers, meanwhile, are still undecided over whether to start growing organised data science teams or keep hiring individuals and moving their quants into small, centralised groups supporting the various Research and Portfolio Management functions. Coronovirus has, in many ways, shown the investment industry's weakness in using data to help performance. Blue Dot's NLP engines picked the outbreak days before the WHO and CDC issued any warning. Cloud-powered machine learning systems are understanding Covid-19 proteins generating potential vaccines at astonishing speed. Governments are able to predict infection rates due to the quality of their data science teams. Sophisticated companies can adjust staffing levels, production and logistics proactively and closely monitor productivity changes across entire workforces working remotely.