Topic Tags: Private Equity

Alternatives 101 Video Series

Our Alternatives 101 video series covers each of the major alternatives asset classes, with guidance provided by several of Marquette’s research analysts and directors. In contrast to traditional investments, alternatives investing includes asset classes other than stocks, bonds, and cash (reference our Investing 101 series for more information about traditional investing concepts). This series aims to introduce trustees, staff, and other investors to the key terms and concepts they may encounter when investing in these typically less familiar asset classes.

The series covers:

View each talk in the player below— use the upper-right list icon to access a specific presentation.

For more information, questions, or feedback, please send us an email.

Private Equity Position Paper – 2019 Update

This position paper explores the fundamentals of private equity as an asset class. Particularly, we examine the subcategories of venture capital, growth equity, buyout, direct lending/ mezzanine debt, and distressed, and the investment styles within them; mechanics of investing in private equity including fund structure, commitment period, cash flow, and the J-curve; investor fees and performance; and recent trends. Recommendations and guidance towards the investment manager search process and making an allocation to the asset class are also included.

Download PDF > Private Equity Position Paper

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Third Quarter Review of Asset Allocation: Risks and Opportunities

The third quarter saw mixed results for financial markets. Economic fundamentals generally remain strong but signs of deterioration are starting to emerge. Unemployment currently hovers around 3.5%, and inflation is near the Fed’s target of 2%. However, 3Q GDP growth was under 2% (though the 1.9% figure exceeded the 1.7% estimate), and the PMI index has been below 50 since August (a reading under 50 is indicative of contraction in the manufacturing sector). Overall, the most important global trends we see are the following:

  • The U.S.-China trade conflict continues to weigh heavily on both countries as talks remain ongoing;
  • The Federal Reserve (“Fed”) reversed course by cutting interest rates and further cuts are still possible;
  • The U.S. Treasury yield curve inverted briefly, which historically has signaled a recession over the subsequent 12–24 months;
  • Brexit negotiations were extended to January 31, 2020, therefore further perpetuating the uncertainty around the UK’s exit from the EU;
  • Negative interest rates continue to grow in prevalence around the world.

The impact of these shifting dynamics is explored further in this newsletter as we review third quarter performance and expectations going forward for each of the major asset classes.

Read > Third Quarter Review of Asset Allocation: Risks and Opportunities

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

3Q 2019 Market Briefing

Live Webinar – Thursday, October 24, 2019 – 1:00-2:00 PM CT


Please join Marquette’s asset class analysts for a live webinar based on our 3Q 2019 Market Environment. This webinar series is designed to brief clients on the market as soon as possible after quarterly market data becomes available.

The overall U.S. economy will be discussed, along with fixed income, U.S./non-U.S. equity, hedge funds, private equity, real estate and infrastructure.

Featuring:
Greg Leonberger, FSA, EA, MAAA, Partner, Director of Research
Jeffrey Hoffmeyer, CFA, Lead Analyst, Asset Allocation
Ben Mohr, CFA, Director of Fixed Income
Samantha Grant, CFA, CAIA, Senior Research Analyst, U.S. Equities
David Hernandez, CFA, Senior Research Analyst, Non-U.S. Equities
Joe McGuane, CFA, Senior Research Analyst, Alternatives
Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets
Brett Graffy, CAIA, Research Analyst

Who should attend: Institutional investment stewards, private clients, investment managers

Live webinar attendees will be able to submit questions to the presenters and vote in audience polls during the event. Questions will be answered during the final 15 minutes of the webinar, as time allows.

If you are unable to attend the webinar live, you can also view it afterward on demand. Registrants will automatically receive a follow-up email shortly after the end of the webinar to notify them of webinar recording availability

The Growing Appeal of Co-Investment Funds

Co-investment funds are becoming an increasingly attractive area of deployment within private equity programs. The number of dedicated co-investment vehicles has risen dramatically over the past decade as many fund-of-funds managers have looked for product expansion and have responded to investor demand.

Co-investment vehicles provide investors the ability to provide additional capital — alongside and aligned with private equity managers ­— at a significantly reduced fee (less than traditional private equity investing) and with quicker deployment (mitigating much of the j-curve). These factors have contributed to the higher net returns recorded by dedicated co-investment funds over this past decade.

As seen in the charts above, these dedicated co-investment funds have outperformed the broader private equity fund performance with a higher median net IRR of 18.9% (430 bps of outperformance over Preqin’s direct private equity median net IRR) and with 80% outperforming their median PE performance within their respective vintage years (2009–2016). We believe this past decade has really proven out many of these teams and strategies and that proven managers with strong and repeatable selection processes should continue to outperform private equity benchmarks in nearly all vintages throughout a full economic cycle.

We encourage investors to continue to allocate to these dedicated co-investment funds as an important allocation within their private equity programs. However, we caution investors must be selective as there is a very wide range of skill, sourcing, alignment, and access differential between managers within this area of the market.

Print PDF > The Growing Appeal of Co-Investment Funds

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Rise of Co-Investing

Much like the overall private equity ecosystem, the private equity co-investment landscape is undeniably growing and has yet to show any signs of slowing down. Historically, co-investing was implemented for one-off decisions to fill the gap in financing that GPs were unable to obtain. Now, GPs have come to embrace co-investment capital with a more recent phenomenon pushing its way to the forefront. We are now seeing GPs form dedicated co-investment vehicles, which eliminate the need for GPs and LPs to negotiate terms for each transaction. This structure gives co-investors access to a stream of co-investment opportunities with preferential economics.

Co-investing is beneficial to not only the GP, but also to the co-investors (LPs) who benefit from high-quality investment opportunities at favorable economics. Co-investing allows LPs to commit capital alongside preferred GPs and create tactical allocations to a pool of high-quality investments for their portfolios. Additionally, the more appealing fee structure of co-investments, which often have no management fee or carried interest, is fueling demand from institutional investors.

The value of co-investment deals has more than doubled since 2012 (totaling $104 billion in 2017) with the number of LPs making co-investments in PE rising from 42% to 55% over the past five years. In 2017, roughly 20% of the private equity market accounted for this volume. The volume of co-investment deal value in recent years has increased rapidly, illustrating the growing appetite investors have for this space.

Given the competitiveness of the co-investment market, having the right GP relationship is of utmost importance and a major determinant in the success of a program; however, given the size of the maturing private equity co-investment marketplace, we encourage investors to — at the very least — retain the option to pursue co-investments as even a modest allocation to the space can improve the return profile of a private investment program.

Print PDF > The Rise of Co-Investments

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Venture Capital Benefits from Mega IPOs

The first half of 2019 has produced a number of high profile IPOs including Uber, Slack, Pinterest, Zoom, Beyond Meat, and Lyft. These IPOs have made it a very successful year for U.S. venture capital exits. While the absolute number of exits has remained slightly below the pace of recent years, this year’s exits have been larger, generating nearly $190 billion through the first half of 2019. This year’s second-quarter exit value alone has exceeded the annual amounts for the venture industry going back to 2006. IPOs have accounted for nearly 83% of the cumulative exit value so far in 2019.

This strong exit environment is likely to allow U.S. venture capital to repeat 2018 as the strongest area of performance within the broadly defined private equity market. While we expect the first quarter to provide strong returns, the second quarter is where we will see a significant increase in performance as IPO offerings ramped up in the spring/early summer. With a robust remaining pipeline of potential IPOs scheduled for the second half of 2019 and 2020 including Airbnb, Palantir, Robinhood, Postmates, and WeWork, we do not see this market cooling off much in the near-term. Regardless of which of these remaining high profile IPOs materialize this year, 2019 is likely to be remembered by investors as the year of mega IPOs.

Print PDF > Venture Capital Benefits From Mega IPOs

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Second Quarter Review of Asset Allocation: Risks and Opportunities

Overall, the second quarter was positive for financial markets, thanks to strong economic fundamentals and expected Fed stimulus. Unemployment remains low at 3.7% and inflation (1.8% year over year) is near the Fed’s long-term target of 2%. However, there are increasing concerns about a global economic slowdown and early forecasts for 2Q GDP growth are around 1.5%, far lower than what we’ve seen in recent quarters. Globally, the most important trends we see are the following:

  • The U.S.-China trade conflict remains ongoing as talks between the two countries resumed, but little progress has been made;
  • The Federal Reserve is expected to cut rates in July and markets are forecasting another one to two cuts by the end of the year;
  • Business sentiment is declining ­— most notably in the PMI manufacturing index, which is now dangerously close to falling below its growth threshold;
  • Britain continues to struggle with its Brexit and elected a new PM (Boris Johnson) on July 23rd;
  • China and Europe are expected in increase their stimulus measures to combat slow growth and overall global uncertainty;
  • Late-cycle dynamics in credit and equity markets.

The impact of these trends is explored further in this newsletter as we review second-quarter performance and expectations going forward for each of the major asset classes.

Read > Second Quarter Review of Asset Allocation: Risks and Opportunities

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Evolution of Private Credit

With roughly $48B of U.S. private credit fundraising taking place in 2018 ­­— surpassing 2008 levels of $42B — private credit has established itself as an up-and-coming leader within the alternative space. By 2023, private credit is estimated to reach $1.4T in AUM, becoming the 3rd largest alternative asset class. This kind of success has brought with it increased competition, robust inflows, rising pools of dry powder and an inflow of managers within the space, up from 31 managers in 2010 to more than 130 in 2018.

The growth of available capital in the private credit market has been substantial, but the growing demand for debt has kept the opportunity largely intact. Direct lending, which is more prevalent in the middle-market, has rapidly developed into a meaningful source of debt capital within the private equity (“PE”) ecosystem.

Since the global financial crisis, the leveraged loan market has become less accessible to middle-market companies as banks have generally stopped lending in this part of the market. The volume of leveraged loans held by banks reached roughly 30% in 2008 and has since declined sharply to less than 10% today. Coupled with a 48% drop in the total number of U.S. banks from 1998 to 2018, demand for direct lending has increased as U.S. banks have substantially withdrawn from the market.

In their relentless search for yield, institutional investors stepped up in a meaningful way vis-à-vis direct lenders, and while highly competitive right now, direct lending brings PE-style returns with heightened levels of downside protection. Because private credit investments can be approached in a defensive, risk-controlled way, private credit is especially well suited for late-cycle conditions, and with its higher coupons, robust cash flows, and lower risk profile, we can expect private credit to continue to grow at an accelerated pace and become a consistent component of an increasing number of institutional investors’ portfolios.

Print PDF > The Evolution of Private Credit

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

IPOs Are Coming

This year has seen a burst of unicorn IPOs paving the way for Uber’s IPO later this year. While Lyft, Zoom, and Pinterest shared Uber’s unicorn status, they have had very different rides post-IPO in the stock market.

The market’s appetite for IPOs appears strong after a bumpy end to 2018, but one of the most recent unicorns to go public, Lyft, has struggled. After going public on March 28, the stock is down 22%, and 28% from its peak. Some analysts have pointed out that Lyft may have misled investors by claiming it held 39% of market share, as another survey reported 29%. Though the IPO ‘pop’ is well known, this is usually followed by a slow decline, so Lyft’s stock price behavior is not shocking. Zoom and Pinterest took note regardless, pricing their IPOs a bit more conservatively. Lyft priced its IPO at over a 30% premium compared to its last pre-IPO valuation, while Pinterest and Zoom went with about 2% and 17%, respectively.

Performance aside, 2019 is off to a strong start for IPOs with many more either expected or suspected including Uber, Beyond Meat, Airbnb, Slack, and Poshmark. The rest of the year should bring its share of further IPO excitement as more large, private companies seek to bring their investors liquidity and raise additional capital.

Print PDF > IPOs Are Coming

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.