Topic Tags: Private Equity

2018 Market Preview

Each year, investors face numerous questions that can impact their portfolios, and 2018 is no different. How will tax reform further impact the capital markets? How much – and often – will the Fed raise rates in the coming year? Can international equities continue to outperform their U.S. counterparts?  Should we be concerned about the levels of dry powder in the private equity market? These topics among many others are covered in the following articles as we offer our annual market preview newsletters. In the links below, readers will find a preview newsletter for each asset class that we cover, as well as a general U.S. economic preview. Each article contains insightful analysis and key themes to monitor over the coming year, themes which will underlie the actual performance of the asset classes covered. We hope that this set of articles can assist you and your committees as you plan for 2018. Should you have any questions about any of the content, please feel free to contact myself or any of the authors or consultants here at Marquette. We also have a webinar recording available by request if you would like to hear a high-level presentation of the topics presented in these articles. Happy New Year!

U.S. Economy by Jeffrey Hoffmeyer, CFA, Lead Analyst, Asset Allocation

Fixed Income by Ben Mohr, CFA, Senior Research Analyst, Fixed Income

U.S. Equities by Samantha T. Grant, CFA, CAIA, Senior Research Analyst, U.S. Equities & Rob Britenbach, CIPM, Research Analyst, U.S. Equities

Non-U.S. Equities by David Hernandez, CFA, Senior Research Analyst, International Equities

Real Estate by Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets

Infrastructure by Jeremy Zirin, CAIA, Senior Research Analyst, Real Assets

Hedge Funds by Joe McGuane, Senior Research Analyst, Alternatives

Private Equity by Derek Schmidt, CFA, CAIA, Senior Research Analyst, Private Equity

How Will Tax Reform Impact Asset Class Returns?

On December 20, 2017, Congress passed the final version of the Tax Cut and Jobs Act (H.R. 1).  This tax reform bill is estimated to be a $1.5 trillion tax cut and represents the most significant reform to the U.S. tax code since the 1986 tax cut passed under President Reagan.  This newsletter will address the most important changes as it relates to the economy, markets, and our client portfolios.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice nor 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.

Is the Private Equity Market Overvalued?

Most institutional investors generally expect lower future returns at this point of the economic cycle as valuations remain inflated across all asset classes. Nevertheless, investors still seek attractive opportunities which provide potential for stronger relative returns.  We continue to see robust fundraising in the private equity industry as investors are attracted to the current fundamentals as well as the long-term excess returns the industry has generated.

Valuations have continued to increase across the private equity industry, partly as a result of improving fundamentals of small businesses in the U.S., and partly as a result of an increasingly attractive sellers’ market, with strategic and financial buyers anticipated to deploy capital over the next few years. These valuations, now averaging 10.5x EBITDA, still remain well below the public markets. Throughout this growth cycle private valuations have not inflated as significantly as they have in the public markets. As seen in the chart, over the last decade valuations in private equity have ranged between a 20-40% discount to the Russell 2000.  We believe this persistently lower valuation in a relatively expensive market should continue to attract capital from valuation sensitive investors as they rebalance portfolios heading into 2018.

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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.

Increased Appetite for Private Equity

Over the past two decades there has been a steady decline in the number of companies listed on U.S. stock exchanges. In 1996, during the dot-com peak there were more than 8,000 public companies, but this has declined to just over 4,300 as increased regulation and consolidation has more than offset the number of IPOs and corporate spinouts. Over 2,000 companies were delisted between 1997-2003 as the maturity, composition, and fundamentals of these businesses were not able to attract institutional capital and thus failed to meet the listing standards of U.S. exchanges.

Meanwhile, the perception of the private equity industry continues to evolve as more capital and managers gravitate towards the space. There are over 7 million businesses in the U.S. and the number of private equity-backed companies has steadily increased to now over 7,100 companies. Investors continue to be attracted to the return potential, alignment, and innovation within the private markets. With nearly $1 trillion of dry powder in the private equity industry and near record fundraising we are almost certain to see the number of private equity-backed companies increase over the next decade.

Furthermore, it will not be surprising to see investors shift more of their allocations into private equity. Private markets offer a larger and growing opportunity set, and further upside than the fully valued equity markets. With both the number of managers and investment options increasing, we are likely to see a widening range of returns produced by the industry which will make manager selection even more critical for investors.

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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.

Will 2017 Bring a Surge of IPOs?

Snapchat (SNAP) — which went public in early March — was the first venture-backed technology company to do so in 2017. The firm sold 200 million shares to raise approximately $3.4 billion, making it the largest tech IPO after Alibaba Group in 2014. As private companies like Uber, Airbnb, and Pinterest continue to use private markets to raise capital, how much longer can they wait before turning to the public markets?

This week’s chart shows total global IPOs going back to 2008. Compared to 2015, 2016 saw 32% fewer global companies entering public markets. As accelerated growth continues among private companies, many market participants expect lower corporate taxes and fewer regulations. These potential changes would likely lead to more IPOs in 2017. According to Renaissance Capital, U.S. IPOs were off to a solid start in the first quarter with 25 companies going public and raising $10 billion. If in fact IPOs do pick up globally in 2017, it will become a much stronger year for venture and private equity investment firms. These firms will be able to monetize investments following the IPOs, creating a financial windfall for investors. A broad market sell-off in 2017 could be the only thing standing in the way of a record setting year for IPOs.

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2017 Market Preview

January 2017

Similar to past market preview newsletters, we enter the year with a new set of questions. What shape will Trump’s policies take and how will they impact the market? Will the formal start of the Brexit have an impact on portfolios? To what degree and pace will the Fed increase interest rates? These topics among many others are covered in the following articles as we offer our annual market preview newsletter. Each year presents new challenges to our clients, and other headlines will emerge as the year goes on; it is critical to understand how asset classes will react to each new development and what such reactions will mean to investors. The following articles contain insightful analysis and key themes to monitor over the coming year, themes which will underlie the actual performance of the asset classes covered. Recognizing that many of our clients may not have time to cover the following 30 pages of material, we offer the primary conclusions for each asset class heading into 2017.

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Time to Buy Biotech?

The biotech industry has taken a beating and dropped about 35% since its peak last summer as many investors have come to regard it as too speculative and risky. However, a contrarian view indicates that the Nasdaq Biotech Index is trading at a discount relative to its historical price-to-earnings and price-to-book ratios, and now may be an attractive buying opportunity.

The biotech industry has taken a beating and dropped about 35% since its peak last summer as many investors have come to regard it as too speculative and risky. However, a contrarian view indicates that the Nasdaq Biotech Index is trading at a discount relative to its historical price-to-earnings and price-to-book ratios, and now may be an attractive buying opportunity.

Charted, we see the recent dip in Nasdaq-listed biotechs, though earnings have recently recovered and book value has steadily grown since the beginning of the biotech rally. The majority of the book value growth has been in intangible assets indicating that companies are expanding their patent arsenal. This buildup of intellectual property is a positive sign given the increased expenditures in research & development. Though only a few of these advancements will come to fruition in the marketplace, the thought is that those that make it will pay off handsomely for investors.

While fundamentals appear steady, investor skepticism is beginning to impact fundraising. Only $483 million has been raised via 8 biotech IPOs through May of 2016 while over $2 billion was raised via 17 IPOs during the same time period in 2015. Larger and more financially stable firms, such as Celgene, have capitalized on lower valuations through share buybacks. Smaller firms seeking cash to develop their pipelines, however, may begin to suffer if the sentiment of investors does not change. For now, the current ratio of this index has remained stable, indicating that there is no near-term liquidity problem for the industry.

Ultimately, the industry retains great potential. Drugs are shifting from blanket treatments that may only be partially effective for a mass population to specialized approaches for smaller populations with significantly increased efficacy. This increases revenue opportunities as a few specialized treatments are now regularly combined for a more potent approach. In an age when manipulating a genome is commonplace, revenue and earnings growth potential is seemingly unbounded. Though many of these technologies may prove unviable, investor sentiment for the industry may be overly negative given current valuations, stable fundamentals, and the sea of promising advancements available in the field.

2016 Market Preview

January 2016

Similar to previous years, we offer our annual market preview newsletter. Each year presents new challenges to our clients, and 2016 is off to a volatile start with equity markets down significantly, oil dropping below $30, the Fed poised to further increase interest rates, and fears of a China slowdown rippling through the markets. However, other headlines will emerge as the year goes on, and it is critical to understand how asset classes will react to each new development and what such reactions will mean to investors. The following articles contain insightful analysis and key themes to monitor over the coming year, themes which will underlie the actual performance of the asset classes covered.

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2015 Market Preview

January 2015

Similar to previous years, we offer our annual market preview newsletter. Each year presents new challenges to our clients, and 2015 is no different: U.S. equities are at all-time highs, uncertainty reigns for international equities, and to everyone’s surprise, interest rates fell dramatically in 2014…but are poised to rise from historic lows over the next year. In the alternative space, real estate remains a solid contributor to portfolio returns, and private equity delivered on return expectations, though dry powder is on the rise. Hedge fund results were mixed, but have shown to add value in past rising interest rate environments. Further macroeconomic items that bear watching for their potential impact on capital markets include the precipitous fall in oil prices, the strengthening U.S. dollar, job growth, and international conflicts.

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Growth of Liquid Alternatives

This week’s chart looks at the recent fund flows and the trailing twelve month (“TTM”) percentage growth rate of liquid alternatives as of March 31, 2014. Over the past decade, private investment managers, traditionally associated with less liquid investments such as hedge funds, private equity, and real estate, have expanded their investment focus towards the creation of liquid alternative products that comply with the 1940 Investment Company Act in order to meet the demands of the rapidly growing defined contribution market.

This week’s chart looks at the recent fund flows and the trailing twelve-month (“TTM”) percentage growth rate of liquid alternatives as of March 31, 2014. Over the past decade, private investment managers, traditionally associated with less liquid investments such as hedge funds, private equity, and real estate, have expanded their investment focus towards the creation of liquid alternative products that comply with the 1940 Investment Company Act in order to meet the demands of the rapidly growing defined contribution market.

Within the open-ended mutual fund universe, liquid alternatives have once again topped all other asset classes with the highest organic growth rate over the TTM period, up 39.5% as of March 31, 2014. Although this growth rate is impressive, liquid alternative assets only represent 1.3% ($149B) of the U.S. mutual fund universe, which has over $11 trillion in assets.

As the trend toward liquid alternatives continues to grow, investors should consider the potential implications and effectiveness of the newly designed strategies. ’40 Act funds must comply with restrictions not required by traditional hedge funds such as leverage limits, short-selling, and liquidity. In addition, the standard 1.5% and 20% hedge fund fee structure has to be adjusted within the ’40 Act universe; currently, the average management fee for liquid alternative funds is around 1.5%. Since the significant rise in the formation of liquid alternative products has taken off within the past few years, investors should be cautious before diving into the space as the next decade will be a testing ground for these strategies as to whether or not they deliver on their performance expectations, in terms of both return and diversification.