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Why Private Market Professionals Never Left the Game

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November 15th, 2022




Alexander Antic

Inflation scares in late 2021 led central banks worldwide to start hiking interest rates, ending the free money bonanza public and private equity markets used to enjoy since the beginning of the COVID-19 pandemic. In addition, the geopolitical uncertainty around the Ukraine conflict accelerated a wide risk repricing that hit the public markets hard and impacted particular private equity and venture capital segments.

In this article, we observe that the recent re-valuations result in more opportunities at potentially attractive discounts. In addition, they allow investors to cherry-pick previously hard-to-get deals at more favorable terms. In that context, we must remind ourselves that while many non-traditional private market participants were scared away by recent developments, professionals never truly left the market.

Dreams are on hold

Particularly long-duration equity business models - a more palatable term for businesses that seemed to effortlessly raise money based on dreams and lofty ideas wrapped in PowerPoint – were struck by sobering risk valuations. While this risk repricing mainly affected the very early stages of venture capital, it also closed the window for public-private market arbitrage on the other end of the venture spectrum. As a result, some shiny pre-IPO deals were caught on the wrong foot and left the limelight somewhat clandestinely.

Sometimes, being stuck is a blessing..

Not being able to exit private market investments at a moment's notice, and accepting that even quarterly valuations are delayed by one or even two quarters, are often cited as a blessing for investors. While we believe these characteristics prevented knee-jerk liquidations of otherwise sound investments, lesser liquidity and delayed reporting are by no means why professionals never left the markets.

..but that never applied to professionals

Let's deal with the most prosaic stabilising factor first. After spectacularly successful fundraising in 2020 and 2021, many investment managers (a.k.a. General Partners or GPs) are still left with what the industry describes as a wall of dry powder. In other words, there are significant commitments by investors (a.k.a. Limited Partners, or LPs) that wait to be deployed. As a result, particularly first-time managers are pressured to deploy their capital swiftly. Many Limited Partnership Agreements (a.k.a. LPAs) stipulate that a GP may only start raising their next fund once 70% of commitments have been deployed). Failing to raise a second fund in due course often amounts to an early and unceremonious career end for a young investment team.

The tectonic shift from public to private markets as a tailwind

Industry insiders are unanimous that the tectonic shift from the public into private markets we witness won't be stopped by an economic cycle. Speaking of which: We also observe that much of the macro-economic uncertainty is already priced into the market. Most of the rapid rate increases could be over as central banks fear fueling a recession. And in some geographies, inflation may have already started to peak.

Downturns could become a 'buyer's market'

Incidentally, and powerfully illustrated by the chart below, some of the best-performing vintages (i.e., the year when a venture or private equity fund commits the first batch of capital) were those that started during or right after a downturn.

Source: Cambridge Associates, “Private Equity Index and Selected Benchmark Statistics 2019”

Often these downturn situations result in a diverse seller universe, ranging from pension plans to family offices, that are met by a relatively concentrated professional buyer group ready to pick up opportunities from distressed sales into the secondary market at significant discounts.

There are opportunities in both the secondary and primary market

For years, Stableton has focused on sourcing and securing exciting client opportunities. While we consider technical factors, our primary goals are to buy high-quality and high-potential companies at a discount to the primary market value and the company's intrinsic value.

In addition to benefiting from good deals in the secondary market, professionals with a systematic screening and sourcing approach continue to find opportunities in the primary market as well: Stableton's investment team has identified the B2B end of Software-as-a-Service, Consumer goods, Mobility, and specific segments within the Fintech space. In those segments, there is a good prospect of finding fundamentally sound, profit-generating companies.

That said, it will be prudent for some time to take recession, or even stagflation, as a base case when assessing the underlying macro environment for any deal.

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