CAMRADATA’s new whitepaper on Private Markets asks two key questions: how far the substitution of traditional bank financing by private markets has left to run, and how far private equity remains distinct from public equity.
The whitepaper includes insights from firms including Northleaf, Union Bancaire Privee (UBP), Unigestion, Cambridge Associates, Giants’ Shoulders Capital and Redington who attended a virtual roundtable hosted by CAMRADATA in November.
The report highlights that with repeated reassurance from Central Banks, securities markets have spent the last twelve years rediscovering and reshaping risk.
Commercial banks may have reduced the ambition of both their lending and brokerage, but their retreat has left space open for private equity and private debt houses to fill.
Asset owners such as pension funds have followed the private equity and debt specialists, funding their acquisitions with capital that traditionally would have been lent to sovereign lenders and blue-chip corporates.
Natasha Silva, Managing Director, Client Relations, CAMRADATA said, “The fashion among large private equity houses is to cash in by going public. Some giants already have a public listing but more recently we’ve seen the IPO of Bridgepoint in the UK; the planned equity-raising of Antin in France; and the Special Purpose Acquisition Company (SPAC) phenomenon on Wall Street.
“All these trends however remain dwarfed by and somewhat dependent on the accommodative policies of Central Banks. The feeling is that opportunities via private financing will continue for the foreseeable future, albeit at high prices. Our whitepaper explores these trends and the opportunities for investors in private markets.”
The event began by gauging asset owners’ current allocation to Private Markets and their likely appetite for the years ahead, before turning to the managers on the panel who were asked how much of their firm’s total assets under management were in Private Markets.
The panel then turned their attention to the biggest risks asset owners face when investing in their preferred sections of Private Markets. The panel also covered the distinction between ESG and impact, growth in the private debt market, liquidity and leverage, and how to select a resilient manager.
The event ended with a discussion around the housing crisis and how financing development and constructions of new homes is the ‘S’ in ESG.
Key takeaway points were:
- One panellist said there is a trend among some clients to reduce exposure to private equity in preference for private debt, owing to approaching buyout and/ or clients looking for increased income rather than growth. This is also in the context of rapid growth and maturity of the private credit markets during the past decade
- Another said there had been a ramp-up in interest as clients’ perspective had changed and both the depth and breadth of Private Markets had grown. That meant greater diversification and less need to explore other asset classes.
- In the discussion on risk, one panellist said that pension funds’ fundamental risk is not having enough money to meet liabilities or needing to sell to pay.
- Even more important though they said is the fact Defined Contribution (DC) pension schemes are not going to deliver enough for a comfortable retirement. They added “this is going to be a government problem. Climate Change is a huge challenge we are tackling but we are completely blind on DC.”
- ESG alignment is an investment evaluation framework that can be applied to all asset classes and is not an investment strategy. Impact identifies investments with a clear intention to directly benefit the community or environment.
- The private debt market has grown tremendously in the last ten years. The largest, best known section has been direct lending and it is strongly linked to private equity sponsors and leveraged buyouts. Direct lenders have stepped into the place vacated by investment banks in leveraged finance.
- The measurement of risk should be the single biggest area of focus for private credit managers going forward. Private Market’s managers are myopic about single assets. They never talk about fund risk. This would never be tolerated in a public markets discussion.
- When it comes to financing the development and construction of new homes, a panellist said: “It is hard to find better social impact than adding housing.”
- Distinguishing between capacity for development and construction finance from operating finance, they added, “There is no shortage of institutional investors and banks and individuals willing to finance the purchase of completed homes and apartments. But there is a shortage of financing to build them in the first place.”
- The panel ended with one panellist summarising: “Covid-19 has given folk time to think. Maybe even in January 2020, raising ESG issues with trustee boards would not have been engaging. Now pension funds know they need to do something, it’s the most dynamic time we have lived in.”
- Another agreed and made the final point: “This is a call to action for all of us. It’s down to people like us in finance to support growing capital meeting the sustainability challenge.”