TOL - 26th Nov, 2024
This asset class has been growing at 20% a year for the last 5 years
How has COVID and the steepest interest rate hiking cycle in decades impacted private equity? Find out in this episode of The Pitch.
Note: This video was taped on Thursday 31 October 2024.
The COVID-19 pandemic followed by the steepest interest rate hiking cycle in more than four decades created an unprecedented environment for PE secondaries, even for Barry Miller of Ares Management, who has been investing in this space for over 25 years.
"What it did do, is it elongated the time between fundraising because you went through a period of time when markets just froze up. So what did that mean? That meant that distribution slowed down in certain cases and contributions increased. And what did that mean for investors? That meant that they needed to seek liquidity," Miller told me in this episode of The Pitch.
And where do they find that liquidity? The private equity secondaries market.
This market is the subject of this episode of The Pitch. In this episode, you'll learn whether Miller thinks the golden age for private equity secondaries has finally come, how the return generation process has changed over the last few years, and what he sees coming for this market over the next 25 years.
EDITED TRANSCRIPT
Barry, as someone who has been investing in this space for 25 years, how does this environment compare to past cycles?
I think from a cycle standpoint, as we look at it today, we see a lot of similarities to the Global Financial Crisis [GFC]. We are seeing forced sellers in this market as opposed to just opportunistic sellers. We are seeing sellers today selling high-quality assets where historically, we've seen periods when the secondary market has contracted and when the quality of the assets was not really in the same positioning as we are today.
I think, as we look at the overall market, what is most attractive is the growth in the market compared to the available capital or, said differently, the ability to be highly selective.
As we look at the market from today going forward, we see growth, we see opportunity and we see the ability to buy high-quality assets at competitive prices.
Did COVID and the steepest interest rate hiking cycle for 40 years leave any positive impacts on private markets? If so, what?
It's interesting. COVID was a period in time where I think if we went back to February/March 2020, we would've suggested that this was going to be part of the golden age of secondary private equity, the ability to have forced sellers heavily distressed sellers.
We still see force in distressed sellers, but we didn't see it to the magnitude that we anticipated. What it did do, is it elongated the time between fundraising because you went through a period of time when markets just froze up. So what did that mean? That meant that distribution slowed down in certain cases and contributions increased. And what did that mean for investors? That meant that they needed to seek liquidity, and we believe one of the best ways to seek liquidity in the private markets is through secondaries.
Managers didn't have the capital to distribute back to the investors, but they were able to be synthetically created using the secondary market.
You mentioned the idea of a "golden age" for this asset class. Are we finally in one now?
We would suggest that irrespective of the market cycles, that is, in general, we believe it is a good time to invest in secondaries when there are opportunities for sellers and distressed sellers. We believe it's a great buying opportunity when distributions continue to grow from underlying sponsors and it's a great period for liquidity.
The challenging time in secondaries remains when it's an attractive time to invest but an unattractive time to raise capital.
In the market today, with the shifting from the traditional drawdown funds to the perpetual funds being less concerned about having to raise money every two and a half or three years, we do believe that we can call it the golden age of private equity secondaries. It's not a specific time: it's not a day we would pinpoint, but we would suggest it is an attractive time to invest in secondaries.
How has the return generation process changed since these two major events?
So I think when you look at any return profile for a secondary, there are three bars or three levers that are part of it.
One is the purchase price discount that you have for any individual asset, the growth in that asset from the point you purchased it to going forward, and then financial engineering or, said differently, leverage. Those are the three pieces.
What is interesting about it is there's always movement in those three categories, but our targeted rates of return remain generally consistent. We are looking to deliver a spread to the market. If we were to look in our crystal ball at what the market would be, it would be difficult to answer. But in general, people look at private markets with a 300 to 500 basis point illiquidity premium. As we think about the market today, we can't suggest that X% is going to come from a purchase price discount and Y is going to come from the growth of the NAV.
But what we do look forward to is to be able to generate meaningful returns above the market indices.
One of the transformational changes, as an industry, that we are seeing is the proliferation of the perpetual, open-ended - again, we have to come up with a name that everyone's going to use - semi-liquid fund. But we do believe that that is going to take away market share from traditional drawdown funds irrespective of what the strategy is, buyout, venture, growth, or secondaries. That would be one.
I think the second piece here is that the market continues to grow globally. We continue to see more global funds, and we continue to see larger funds. And I think if we look at the industry, we do believe there will be a further consolidation going forward where the larger managers will get larger and larger. That doesn't necessarily mean returns will come down. What that means is that there are more synergies between the various parts of the platform and growth would suggest [more] power for the larger platforms versus being a smaller independent firm.
Purpose-built solutions to make private markets accessible to investors
Ares is one of the largest and most experienced investors in acquiring secondary private fund ownership stakes in the alternative asset management industry. We seek to generate risk adjusted returns through leading industry analytics and research, robust deal origination, underwriting and portfolio management activities. Find out how to access this opportunity here.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew McCaffery, JPMorgan Asset Management Global CEO George Gatch, and Lazard Chief Market Strategist Ron Temple just to name a few. He has a double degree in economics and journalism.
........
Livewire gives readers access to information and educational content provided by financial services professionals and companies (“Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.
1 topic
Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew...
Expertise
Hans is one of Livewire's senior editors. He is the creator and moderator of Livewire's economics series "Signal or Noise". Since joining Livewire in April 2022, his interview record includes such names as Fidelity International Global CIO Andrew...
Expertise
Comments
Comments
Sign In or Join Free to comment
most popular
Equities
Why "buy and manage" is the better way to invest in stocks
Livewire Markets
