In this edition of the Private Market Report, we review developments throughout 2021 relating to private equity, venture capital, private debt, and real estate.
Our Research Spotlight features a high-level history of Private Equity and some key events from the beginning of the Industrial Revolution through World War II, the 1980s “Greed Decade,” the Tech Boom, and the Global Financial Crisis. All had a hand in shaping today’s landscape.
Executive Summary
- Private Equity valuations are at record highs. If interest rates continue to rise, a valuation correction (i.e. reduction) seems likely. Nonetheless, fundraising and opportunities remain strong going into 2022.
- Venture Capital was the headline winning category in 2021. The reemergence of IPO (Initial Public Offering) markets drove performance. Dry powder, an industry term for cash available to invest, is plentiful and performance has been noteworthy.
- Private Debt continues to attract yield-starved investors looking to supplement traditional fixed-income.
- Real Estate remains a mixed bag. The industrial and residential sectors continue to ride tailwinds while hospitality, retail, and certain portions of the office market face a more uncertain future.
Private Equity
Valuations
With valuations rising across most sectors, portfolio company growth targets are being achieved sooner than forecasted, and many funds are monetizing their assets more quickly (at attractive rates of returns). As a result, investors are receiving significant cash distributions at the same time managers are returning to market to raise capital for their subsequent fund. Elevated multiples in public and private markets mean many capital assumption models are predicting lower returns going forward. The prevailing thought that private buyout multiples will contract in the coming years, or at least not rise much higher, has led to many firms pursuing aggressive inorganic (merger & acquisition) growth for their platform portfolio companies.
Exit Environment
U.S. Private Equity exit activity (sale of companies) shattered prior annual records in terms of the number of exits closed and their total transaction value. In many cases, exits originally planned for 2020 were deferred until 2021, following concerns related to the Covid shutdown uncertainty. Healthy valuations and the abundance of capital flowing into the market were also crucial elements in the equation for 2021.
Fundraising
2021 was perhaps the best time in history to raise a private equity fund – based on demand and fundraising success – and early indications are that 2022 metrics could be even higher. The entire ecosystem is firing on all cylinders for buyout and growth equity funds coming to market. Institutional investors and family offices continue to increase their allocations to private markets. Many funds are raised in 18 months or less and capital is quickly deployed. It appears that the traditional five-year investment cycle has become a two-to-three-year cycle for now.
Looking Towards 2022
Today’s economic environment means that labor, rather than capital, has become a limiting growth factor for many companies. Supply chain issues are placing similar pressures on many companies. Technology adoption is also an area that is accelerating. Many argue that technology has become more like traditional infrastructure in that it is indispensable in the modern economy, especially software that boosts productivity for businesses faced with growing labor costs.
Nevertheless, as the coming quarters are expected to experience more normalization, the outlook for 2022 remains overwhelmingly positive, and with the abundance of private companies in existence, the opportunity set remains substantially larger than the public sector.
Venture Capital
Venture capital has been frequently featured in the news recently alongside phrases such as “record breaking!” and “unprecedented!”. “Dry powder” (cash available to invest) is plentiful and a fair portion of the new VC investment records in 2021 can be attributed to the record level of capital flooding the system. This deeper and wider pool of capital sources available is good news for many entrepreneurs looking to scale their startups, but the impact to investors chasing returns remains to be seen. Momentum is expected to continue in 2022 thanks in large part to the strong outperformance of venture capital portfolios in 2021. As such, investors continue to allocate capital at unprecedented rates, allowing VC firms to raise new funds with relative ease.
Private Debt
Market fundamentals are supportive of continued strength in the private credit market. Accommodative central bank policies and low rates globally fueled demand for income-producing assets. Compared to traditional fixed-income credit, private debt shields investors from certain risks in a rising rate environment with its floating-rate structure. For those willing and able to lock-up capital and accept the additional risk this entails, direct lending has been a popular enhanced income choice for many, while also acting as a hedge against inflation and interest rate risk. According to a recent Preqin survey, two-thirds of investors expect to increase their allocations to private debt by 2025.
Private Real Estate
The pandemic has undoubtedly accelerated the bifurcation of investor appetite, with capital flowing increasingly away from office and retail, and in favor of residential and industrial. The industrial sector continues to experience strong tailwinds, fueled particularly by e-commerce. Within the residential sector, key growth themes include multifamily assets with outdoor amenities and flexible space, and housing for middle income earners in expanding secondary cities. Overall, many believe high-quality office space centrally located within growth markets that prioritize tenant wellbeing and environmental sustainability will be relative winners in the post-pandemic environment. Traditional storefront retail continues to face challenges globally.
Sources of Information Cited for “Research Spotlight: A Brief History of Private Equity”:
- History.com Editors. “Transcontinental Railroad.” HISTORY, 20 Sept. 2018, www.history.com/topics/inventions/transcontinental-railroad.
- Playlist, Morgan. “J.P. Morgan.” Biography, 28 Apr. 2017, www.biography.com/business-figure/jp-morgan.
- Berry, John F. “Bessemer Trust: A Tradition of Conservative Cash Management.” The Washington Post, 1 Aug. 1982, www.washingtonpost.com/archive/business/1982/08/01/bessemer-trust-a-tradition-of-conservative-cash-management/.
- “Venture History 101.” Venture Forward, ventureforward.org/education/history-101/. Accessed 3 Mar. 2022.
- Wade, Thomas. “The Small Business Investment Company Program: A Primer.” AAF, 9 Mar. 2021, www.americanactionforum.org/insight/the-small-business-investment-company-program-a-primer/.
- Hagerty, James R. “Lewis Cullman Struck It Rich with Calendars and Pursued Philanthropy with Zeal.” Wall Street Journal, 14 June 2019, www.wsj.com/articles/lewis-cullman-struck-it-rich-with-calendars-and-pursued-philanthropy-with-zeal-11560522600.
- “Firm History | KKR.” Www.kkr.com, www.kkr.com/our-firm/firm-history.
- Janse, Ben. “Warren Buffett Biography, Quotes, Publications and Books | ToolsHero.” Toolshero, 16 Mar. 2019, www.toolshero.com/toolsheroes/warren-buffett/.
- Capital, Bain. “About Us.” Bain Capital, www.baincapital.com/about-us.
- Anderson, Jenny. “Blackstone Founders Prepare to Count Their Billions.” The New York Times, 12 June 2007, www.nytimes.com/2007/06/12/business/12blackstone.html.
- “Our Firm | Carlyle.” Www.carlyle.com, www.carlyle.com/our-firm. Accessed 16 Feb. 2022.
- Burrough, Bryan, and John Helyar. Barbarians at the Gate. Harperbusiness, 2005.
- Corporate Finance Institute. “Dotcom Bubble – Overview, Characteristics, Causes.” Corporate Finance Institute, corporatefinanceinstitute.com/resources/knowledge/trading-investing/dotcom-bubble/.
- Weinberg, John. “The Great Recession and Its Aftermath | Federal Reserve History.” Www.federalreservehistory.org, 22 Nov. 2013, www.federalreservehistory.org/essays/great-recession-and-its-aftermath.
- Canderle, Sebastien. “Modern Private Equity and the End of Creative Destruction.” CFA Institute Enterprising Investor, 13 May 2020, blogs.cfainstitute.org/investor/2020/05/13/modern-private-equity-and-the-end-of-creative-destruction/.
*S&P 500: The S&P 500 index is a free-float capitalization-weighted index of the prices of 500 large-cap common stocks actively traded in the United States.
© 2022 Moneta Group Investment Advisors, LLC. 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. You cannot invest directly in an 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.
