Topic Tags: Private Equity

The SPAC Explained

The SPAC once again rose to prominence in 2020 and momentum has continued to build this year. By mid-March 2021, the number of SPACs raised had already eclipsed the total raised in 2020. SPACs, special-purpose acquisition companies, are shell companies set up to raise money to acquire another, existing company. SPAC vehicles have been around for decades but have recently risen in popularity as experienced investors and management teams have chosen this route to decrease the risks associated with a traditional initial public offering (IPO).

In this newsletter, we explain how SPACs work and are structured, typical attributes of SPAC sponsors, who benefits from the SPAC structure, why SPACs have seen such exponential growth recently, and how private equity interacts with and influences the SPAC industry.

Read > The SPAC Explained

For more Marquette coverage on SPACs, reference our recent research, What’s Next for SPACs? and The Year of SPACs.

 

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.

What’s Next for SPACs?

The ferocious appetite for Special Purpose Acquisition Companies (SPACs) continued its momentum throughout the first quarter of 2021. Investors could not get enough of this asset class as a record amount of capital flowed into the space. Through March, 2021 has already seen more SPAC IPOs than all of 2020, with over 300 new deals coming to market. Similarly, gross proceeds thus far through April are already over $100B, well past the $83B that was raised throughout 2020. The space has gotten so hot that sports celebrities like Shaquille O’Neal, Colin Kaepernick, and Alex Rodriguez have all put their names on SPACs that have recently hit the market.

Can this momentum continue? The Securities and Exchange Commission (SEC) might have something to say about it. Earlier this month, the SEC issued new accounting guidance that would classify SPAC warrants as liabilities instead of as equity instruments, as they are currently classified. Warrants are given to capital providers like hedge funds that put up the capital for SPACs before an IPO, to offer the capital provider more upside once the company goes public. SPAC IPOs have since slowed, as affected SPACs would have to restate their financials if this becomes law. With this risk on the table, investors may begin to look elsewhere to put their capital to work, dampening this SPAC market frenzy.

Print PDF > What’s Next for SPACs?

 

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.

One Year Later, What’s Next?

Welcome to our inaugural quarterly client newsletter! As a way of introduction, I am Greg Leonberger, Director of Research here at Marquette. I have had the privilege of meeting many of you over the years, and for those that I have not worked with previously, please accept this virtual introduction; my hope is to meet many more of you in person once in-person meetings resume. As I embark on this newsletter series, the goal each quarter is relatively simple: provide you with our views on capital markets, the economy, emerging risks as well as opportunities, and hopefully stitch in a few anecdotes to make for a more engaging connection with our readers.

Highlights from this edition:

  • One year anniversary of the equity market trough in 2020
  • COVID-19: lingering uncertainty, vaccine progress, economic recovery
  • Equities update: value and small-cap outperformance, valuations, TINA
  • Fixed income: reflation trade and interest rates, spreads
  • Alternatives: opportunities in real estate, hedge funds, and private markets
  • Inflation worries: money supply and commodity prices

Read > One Year Later, What’s Next?

 

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.

Q1 2021 Market Insights Video

This video features an in-depth analysis of the first quarter’s performance by Marquette’s research analysts and directors, reviewing general themes from the quarter and risks and opportunities to monitor in the coming months.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Sign up for research alerts to be notified when we publish new videos here.
For more information, questions, or feedback, please send us an email.

PE Pursues Buy-and-Build

Add-on investments, a company acquired by a private equity firm to be added to one of its platform companies, have steadily increased in importance and popularity over the past two decades. In 2020, 71.7% of U.S. PE deals were add-ons, compared with 43.2% in 2002. After a dip in total deal count in 2020 amid the COVID-19 pandemic, we expect 2021 will see the highest number of add-on deals on record. These buy-and-build strategies can take different forms. Some involve large-scale roll-ups in which a platform company acquires a large number of smaller, often founder-owned companies. Others include more opportunistic M&A transactions that allow portfolio companies to pursue specific product or operational goals. The growth of add-ons across two decades of various market cycles can be attributed to a number of advantages: multiple arbitrage, giving larger firms access to out-of-reach market segments, helping portfolio companies enter new geographical markets, and doubling down on more profitable end markets.

The holding period for add-ons has also evolved. Historically, private equity has held platform investments that included add-ons longer than other portfolio companies. In recent years, the median exit times for portfolio companies with and without add-ons have converged to roughly five years. We attribute this to both private equity becoming more skilled at executing these buy-and-build strategies as well as buyers being increasingly willing to pay for the unrealized potential of recently-completed add-on acquisitions.

Print PDF > PE Pursues Buy-and-Build

 

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.

What Is the Most Attractive Segment of the Private Equity Market?

As private equity matures further as an asset class, median private equity returns will continue to move closer to the public markets. Nevertheless, as a result of active management and private market inefficiencies, the top quartile to median spread for private equity is still more than 2x greater than it is for public market-oriented managers. When we take a closer look at fund performance within private equity, there is significantly more upside as well as performance variability for smaller buyout funds as compared to larger buyout funds. As seen in this week’s chart, funds that are less than $1B in size had a median Net IRR of 13%, a 1st quartile range of 21–37%, and a 4th quartile range of -10–6% whereas funds greater than $6B in size had a median Net IRR of 9%, a 1st quartile range of 17–23%, and a 4th quartile range of 2–8%.

This performance dispersion is largely driven by smaller funds sourcing opportunities outside of intermediated processes, leveraging a repeatable and focused operational playbook to professionalize and grow portfolio companies quickly, and a growing list of paths to liquidity, including larger funds with an increasing amount of dry powder that are sourcing investments out of smaller managers’ funds. With that said, larger funds buy companies that are typically more mature, have built-out teams, and are capable of weathering business shocks with greater success, which accounts for the tighter band of outcomes at the larger end of the market.

Due to COVID and an inability to meet with potential investors in person, first-time funds and emerging managers which typically fall in the “small” fund size had difficulty raising capital in 2020. This dynamic is expected to have two significant effects on the 2021 private equity ecosystem: 1) first-time funds and emerging managers fundraising is likely to be more active in 2021 and 2) dry powder has been further concentrated in larger funds, which should create an increasingly attractive exit environment for smaller funds.

Given the compelling upside opportunity of investing in smaller funds and an expected increase in the number of these funds raising capital in 2021, these managers represent an attractive area of the private equity market to be allocating capital towards. Given the greater performance variability of smaller funds, allocations to funds at this size should be focused within a program that allows for a number of high-quality commitments, such as those provided by fund-of-funds.

Print PDF > What Is the Most Attractive Segment of the Private Equity Market

 

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. Opinions, estimates, projections, and comments on financial market trends constitute our judgment and are subject to change without notice. Past performance does not guarantee future results. 

2021 Market Preview

2020 was a year like no other and has left investors across the world wondering what the future looks like. Will vaccines prove effective in halting a pandemic that spread like wildfire across the globe? What will the impact of a new administration in Washington be on economies and markets? How much additional stimulus will be injected into the economy? And most broadly, will things ever get back to “normal”? While there are no easy answers to these questions, 2021 promises to be another volatile year, most especially until there has been sufficient roll-out and distribution of vaccines to contain the COVID-19 outbreak that continues to haunt economic growth across the globe.

Remarkably, 2020 ended up as a positive year for financial markets despite a massive sell-off in the equity and credit markets during February and March. Paradoxically, 2021 may be a less eventful year but at the same time a lower overall return environment, given that much of the optimism about economic re-openings and stimulus has already been priced into the markets. Nonetheless, there are a variety of factors worth monitoring over the next year which will directly impact market returns. Similar to past years, we offer our 2021 market preview newsletters for each of the primary asset classes we cover, with in-depth analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2021.

We hope these materials can assist you and your committees as you plan for the coming year and beyond. We have also produced a 2021 Market Preview video if you would like to hear a high-level summary of the market previews. Should you have any questions about anything related to these materials, please feel free to reach out to any of us for further assistance. Here’s to a return to normalcy in 2021!

U.S. Economy: Are Better Days Ahead?
by Brandon Von Feldt, CFA, Research Analyst

Fixed Income: Poised for Further Recovery with Undertones of Exuberance
by Ben Mohr, CFA, Director of Fixed Income

U.S. Equities: Birth of a New Market
by Samantha T. Grant, CFA, CAIA, Assistant Vice President,
Colleen Flannery, Research Analyst, U.S. Equities, and
Evan Frazier, CAIA, Research Analyst, U.S. Equities

Non-U.S. Equities: Constructive but Cautious
by David Hernandez, CFA, Senior Research Analyst, Non-U.S. Equities, and
Nicole Johnson-Barnes, CFA, Senior Research Analyst, Global Equities

Hedge Funds: Poised for Another Record Year?
by Joe McGuane, CFA, Senior Research Analyst, Alternatives
and Jessica Noviskis, CFA, Senior Research Analyst, Hedge Funds

Real Estate: Finding the New Normal
by Will DuPree, Senior Research Analyst, Real Assets

Infrastructure: An Evolving Opportunity Set, but an Essential Allocation
by Will DuPree, Senior Research Analyst, Real Assets

Private Equity: Both Quality and Growth Shine Brightly in 2020
by Derek Schmidt, CFA, CAIA, Director of Private Equity

Private Credit: Two Steps Forward, One Step Back
by Brett Graffy, CAIA, Research Analyst

Download the combined files > Traditional and Alternatives

 

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.

2021 Market Preview Video

This video coincides with our 2021 Market Preview newsletters and provides a high-level summary of each, including analysis of last year’s performance as well as trends, themes, opportunities, and risks to watch for in 2021.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Sign up for research alerts to be notified when we publish new videos here.
For more information, questions, or feedback, please send us an email.

Third Quarter Review of Asset Allocation: Risks and Opportunities

The third quarter of 2020 featured a major rebound in economic data amid an intense battle for the presidency and an uncertain future for COVID-19 cases as some states are seeing higher positivity rates. GDP growth for the quarter is expected to come in at +35.2% YoY, higher than analyst expectations, which helped to propel equity markets higher during the quarter. In addition, the unemployment rate dropped to 7.9% but is expected to remain elevated until additional clarity regarding COVID-19 becomes available. Below are some highlights from the quarter:

  • Biden is favored over Trump in the election race, as mail-in ballots and virtual town halls instead of debates have proven that this election will be unlike any before it.
  • The country has widely reopened, though concerns in some larger states of increased positivity rates have caused some rollbacks ahead of the winter season.
  • A vaccine is in the works and anticipated to be ready by April 2021, with widespread vaccinations likely around mid-2021.
  • Schools have moved to a hybrid model of in-person and online classes, causing logistical problems for parents as many balance jobs and at-home learning.

The election is sure to bring additional volatility through the end of the year. Biden and Trump have vastly different tax plans and a Democratic sweep could drive a sell-off in equity markets. Economic data is still pending through 3Q, though most forecasts show large rebounds in data as states reopened from COVID-19 closures. Big questions regarding vaccines and if the winter will see a resurgence in coronavirus cases remain. We analyze what all of this means for each asset class in the remainder of this newsletter.

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.

Q3 2020 Market Insights Video

This video features an in-depth analysis of the third quarter’s performance, coinciding with our 3Q Asset Allocation Update newsletter reviewing risks and opportunities heading into the final quarter of the year.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Sign up for research alerts to be notified when we publish new videos here.
For more information, questions, or feedback, please send us an email.