Displaying items by tag: private equity

The 2006 vintage of buyout funds remains etched in the memory of private equity investors who endured the global financial crisis (GFC), despite eventual recovery. Unlike typical fund vintages following a predictable "J curve," 2006 saw a deviation, marked by record capital investment before the financial markets' collapse. 

Recent fund vintages show alarming parallels to 2006 according to a report by Bain & Co, sparking concerns among limited partners about trapped capital and delayed returns. While historical challenges offer valuable lessons, today's private equity portfolios differ, with varied exit strategies and market conditions. 

Nonetheless, fund managers must proactively manage portfolios to generate distributions, prioritizing liquidity to satisfy investor expectations and secure future allocations.

Finsum: Lower interest rates could begin to free up capital for return distribution in 2024.

Fidelity recently conducted a survey of advisors and found that only 26% currently have exposure to alternative investments. In contrast, 86% of institutional investors have exposure to the asset class. 

The survey also revealed that many advisors are looking for more resources to help them evaluate various alternative offerings before they feel comfortable recommending them to clients. This is despite other surveys showing that many advisors would like to increase allocation to alternatives due to their benefits such as diversification and non-correlated returns. 

Specifically, advisors cited the need for more due diligence on strategies and managers in addition to concerns about liquidity as obstacles to adoption. Many also indicated the difficulty of communicating with clients about these products given the number of options and complexities.

Adding to the challenge is that each clients’ appropriate exposure to alternatives depends on factors like time horizon, liquidity needs, and eligibility. This level of customization increases the burden on advisors to understand various options in a comprehensive manner. 

In order to address these problems, Fidelity is expanding research on various alternative investment strategies. Initially, the research will focus on private credit, private real assets, and private equity funds. According to the company, these types of tools and resources will accelerate adoption of alternatives by advisors. 

Finsum: A recent survey by Fidelity showed that many advisors have been slow to adopt alternatives. A primary reason is that advisors have a need for more due diligence on the various products and strategies before they feel comfortable recommending them to clients.

According to recent SEC filings from LPL Financial and Cambridge Investment Research, it’s clear that M&A activity remains robust. Lately, it’s the independent broker-dealers that have been the most aggressive in terms of dealmaking. 

For instance, LPL Financial revealed that it made 19 acquisitions in 2023 using its ‘liquidity and succession’ program for a total of $190 million although this could rise as high as $297 million depending if certain criteria is met. Currently, LPL is a leading broker-dealer with over 21,000 advisors. 

Previously, broker-dealers offered succession plans for retiring financial advisors. A new development is that these broker-dealers are buying up their own advisors’ books. The most notable recent example is LPL buying one of its own branches, Financial Resources Group Investment Services which managed $40 billion in assets. 

The catalyst for this trend is the entry of private equity buyers into the marketplace which is increasing pressure on independent broker-dealers to retain the books of their existing advisors. According to Carolyn Armitage, an industry consultant, “Private equity buyers are willing to pay more for those assets. A firm like LPL also has a big advantage since they self-clear and that’s a more diversified way to earn money on those assets.”

Finsum: The M&A market for financial advisors’ practices remains heated. Private equity buyers are a new force and willing to pay large multiples. It’s forcing independent broker-dealers like LPL to be aggressive in order to ensure that existing advisors’ assets don’t migrate to a different platform. 

2023 was a unique year as nearly every asset rallied due to positive news on inflation, an economy that remained resilient, and expectations that the Fed is ready to pivot on monetary policy. Looking ahead, 2024 is certainly going to be more challenging for equities and fixed income.

JPMorgan believes that investors should have exposure to private market as they offer steady returns and can increase diversification. The bank notes that private equity has outperformed public markets over multi-year periods regardless of economic conditions. The asset class has recently faced headwinds due to interest rates increasing the cost of capital. It recommends focusing on private equity funds that less leveraged and focused on higher-quality companies with durable growth characteristics.

While the monetary environment poses some challenges, it also creates opportunities for investors to lock in attractive yields in private credit. Commensurately, many banks have pulled back from lending, following the regional banking crisis, while public market debt issuance has also been constrained. Private credit has stepped into the vacuum to provide capital for these borrowers while also structuring loans to provide more protection in the event of a default. The bank notes attractive opportunities in commercial real estate, floating rate debt, and leveraged loans.

Finsum: JPMorgan anticipates more volatility and a more challenging environment in 2024 than last year. It sees upside in alternative investments to boost returns and diversification.

Pacific Investment Management Co. (PIMCO) has been quite pessimistic on private credit and sees major downside if rates don’t fall as expected. This is contrary to many in the industry embracing private credit like Blackstone and Apollo Global. 

In contrast, PIMCO is looking to take advantage of the crisis that it’s forecasting. It also has larger implications for the economy and markets given that private credit has taken the bulk of risky lending which used to come from investment banks. 

PIMCO’s thesis rests on the US economy slowing in 2024 and a hard landing in Europe and the UK. If the economy remains resilient, then rates are unlikely to fall as much as expected. This would put stress on private markets where there is less transparency and price discovery. The firm believes that many borrowers are quite risky and quite exposed to a decline in revenues. They believe that about a quarter of private credit portfolios could face difficulties if rates don’t fall or are less than expected. 

PIMCO spies an opportunity if private lenders face pressure from its creditors based on portfolio values dropping. This would allow PIMCO to squeeze out other lenders by buying into debt at a discount. It would also continue a trend of the firm moving away from its roots of fixed income investing and increasingly into alternative assets. This segment has grown from $32 billion in 2016 to $170 billion in the first half of 2023. 

Finsum: PIMCO is bearish on private credit due to concerns about balance sheet risk with risky borrowers, bearishness on the economy in 2024, and the market pre-emptively pricing in a dovish Fed.