“Only when the tide goes out do you discover who’s been swimming naked.”
– Warren Buffett, Chairman & CEO Berkshire Hathaway
Executive Summary
Private Equity is navigating a complex landscape that presents both challenges and opportunities in critical areas like fundraising, deal execution, and the successful selling of assets (exits). Despite these hurdles, industry experts are optimistic about a potential market stabilization over the next 12 to 24 months. Challenging periods like these tend to separate the best managers from the pack – underscoring the importance of manager selection. Today we are seeing the top-tier managers continue to raise capital and create value in their portfolio companies.
Venture Capital has been slow to recover from its downturn in 2022. Managers have faced reduced deal-making opportunities, a scarcity of fundraising, and a frozen IPO market, resulting in tumbling portfolio company valuations.
Private Credit has emerged as a highly appealing option for businesses seeking capital, as traditional banks have become more stringent in their lending criteria. This trend has been gaining momentum, making private debt an increasingly mainstream funding alternative, and also attractive for investment as well given the tendency for floating rate loans. The reduced bureaucracy, flexibility, and quicker decision-making in private debt are also fueling its popularity.
Real Estate is in a transitional phase, marked by shifts in property valuations due to multiple influencing factors such as evolving tenant requirements and increased financing costs. These changes are widening the gap between sectors that are thriving, such as multifamily and industrial, and those that are not, such as high-rise office. Underlying these sectoral shifts are more fundamental changes in how and where people choose to live, work, and spend their leisure time, which are, in turn, influencing property demand and value.
Private Equity
Private Equity has recently faced a blend of challenges, particularly in fundraising, deal-making, and successful exits. These elements are closely linked.
The private market is a well-oiled machine, but any disruption in one component can trigger a ripple effect throughout the system. With this analogy in mind, let’s take a closer look at those key components and their current state.
The market consensus is for a return to normalized levels of deal activity, exit activity and fundraising to occur in the next 12 – 24 months as the economy and public markets settle. Challenging periods like these tend to separate the best managers from the pack – underscoring the importance of manager selection. Today, leading managers work to sustain harmony in these four elements of a healthy cycle by leaning on their experience and talent. The managers our team partners with are evaluated based on their proficiency in navigating challenging circumstances such as the present.
Venture Capital
The venture capital market continues to struggle to recover from its sharp decline in 2022, when the number of initial public offerings (IPOs) fell to their lowest level since 2009. So far, 2023 has shown little improvement. The frequency of IPOs (greater than $1 billion) began to decline in late 2021, with 45 such IPOs in the fourth quarter of 2021. In 2022, we saw 36 IPOs, as the slowdown took hold. The total for 2023, so far, is just 13.1
This ongoing slump has led to fewer deals and difficulties in fundraising for startups and venture funds alike. History may suggest, however, that tough times breed stronger companies. Current conditions are forcing entrepreneurs to operate more efficiently, perhaps ultimately making them more resilient business leaders.
Private Credit
In the face of rising interest rates and inflation, private lenders find a silver lining: businesses always need capital to grow. Private debt has gained favor as a reliable and popular funding source, particularly as traditional banks have continued lending less to small and medium-sized businesses. Increasingly, businesses are turning to private markets for funding, a trend that’s likely to continue, fueling the growth of the private debt market for the foreseeable future.
Top-tier managers in this space will be defined as those who demonstrate discipline and sound judgment in their lending practices. While some credit defaults have begun to occur in 2023, investors in high-quality private credit funds have been rewarded since interest rates began to rise in 2022. Many of these private loans are structured with a floating interest rate, which means higher interest rates have benefited investors, further contributing to demand.
Real Estate
The market is currently in a state of adjustment, with property valuations fluctuating due to changing tenant needs and higher financing costs. This is creating a divide between successful and struggling sectors. A key question is whether we’ll see a long-term change in where people choose to live, work, and socialize.
Industrial Sector: This area remains promising, driven by the sustained demand for ever-faster delivery of goods. This is pushing companies to maintain larger inventories and build more resilient supply chains, resulting in robust, long-term growth.
Multi-Family Housing: Apartments have held up well, particularly in regions experiencing population growth. Trends such as increasing demand for specialized housing — like student residences, childcare facilities, and senior living centers — are also helping strengthen the market.
Commercial/Office Space: The future is somewhat uncertain due to continued work-from-home trends causing high vacancy rates, particularly in big cities. However, premium Class A office spaces, with the amenities to attract an in-office workforce, are still seeing strong demand.
Retail: Traditional brick-and-mortar stores have faced challenges, but there are bright spots. “Necessity-based” retail, like grocery stores, continues to perform well. Additionally, mixed-use concepts that combine living, working, and leisure activities are gaining traction.
Sourcing Information
1 Wilhelm, Alex and Heim, Anna. 2023. https://techcrunch.com/2023/08/29/ipo-drought-2023/. Accessed August 2023.
Important Disclosures and Information
© 2023 The Finerty Team
All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Exposure to an asset class represented by an index may be available through investable instruments based on that index. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change.
Investment Advisory services offered through Moneta Group Investment Advisors LLC, an SEC-registered investment adviser. Registration does not imply any skill or training.
