An inflationary investment environment and higher interest rates have caused significant rethinks on asset allocation decisions in the past year, while last year’s gilts crisis has increased the need for liquidity for many investors. Meanwhile, the recent events at Silicon Valley Bank and Credit Suisse will have consequences yet to be revealed for lending and financing, as well as the valuations of many private companies.
These challenges will frame how investors consider investment opportunities going forward. We believe private market investments represent an important set of asset classes during times of uncertainty and investors that shun them could miss out on long term opportunities. Here are our key considerations for investors considering their private market allocations:
When public market valuations fall and the proportion of an investor's portfolio that private markets represents increases, this results in an overall portfolio rebalancing challenge. Investors must ask themselves if they still have tolerance to commit capital to continue to build their private markets program or do they need to pull back for governance and liquidity budget reasons?
Historically, during periods of overall market stress, private markets have delivered some of their best vintages as investors take advantage of more attractive entry points – due to distressed valuations – and the possibility of above-average returns. So, we believe those investors that can stay the course with private markets through challenging periods could reap rewards, and we would encourage our clients to continue allocating to them where horizons allow.
Volatility in the public markets is also creating challenges around exits from private market investments, whether it be around IPOs or uncertainty in the valuations underpinning private assets, which are typically marked to market less frequently.
These market conditions could make exits and IPOs from some investments less attractive. We think this could give rise to higher demand for fund extensions as private market managers look to extend the time horizons or launch continuation funds. This may create liquidity challenges for some investors but could offer interesting opportunities for investors who wish to remain invested for longer and ride through the market volatility.
Another opportunity for investors comes from the substantial dry powder in the system following record levels of fundraising.
Periods of market stress can lead to increased M&A activity, as strategic acquisitions make greater sense when valuations are under pressure. As the cost of financing rises due to higher interest rates and the exit of players such as SVB, companies may turn to private markets for more attractive debt financing, potentially giving rise to more opportunities for investors.
Lots of capital available from an equity and a credit perspective means there will likely be pressures on new fundraising for GPs as they come to the market again.
This could have long-term consequences for how much they can raise and the long-term results for their next round of investor portfolio considerations – something for private market investors to consider as they look ahead.
Since the UK gilts crisis, some investors have needed to be very careful of liquidity risks and budgets, particularly UK pension plans. It will therefore likely be harder for them to continue to build their private markets program through typical private market closed-end fund structures.
However, we think this will lead to innovation around how private markets are offered to institutional investors. We could see the emergence of new vehicle structures that are sensitive towards the liquidity needs of investors such as semi-liquid funds and open-ended structures.