Investors and fund managers continue to seek solutions to liquidity issues, private credit is in the spotlight, and the Fund pipeline is strong says Lorna Robertson.
As we move into the second half of 2024, I am pleased to note that the Funds portfolio is in good shape, with generally improved valuations in the underlying portfolio companies, emphasising the importance of our focus on manager selection and our identification of strong investment themes.
In an environment where lack of liquidity has been a topic for discussion, with drawdowns typically outstripping distributions, I am delighted that our fund investments have bucked the trend and continued to make strong distributions to our investors, totalling £7m so far this year.
However, elsewhere in investors’ portfolios, the ongoing challenge of the lack of liquidity, is leading to them turning attention towards strategies with shorter maturities and/or earlier or ongoing distributions, so that capital can be returned sooner.
In the last few months, I have also seen an increase in the number of ‘Evergreen’ or ‘open-ended’ fund structures appearing, addressing the demand from the growing private wealth sector and the attention being focused here by the larger managers. I view these with a degree of caution, a desire not to be tied in is understandable – but it’s especially important during periods of volatility to remain invested and trying to read the market rarely works, so knowing when the right time to ‘redeem’ could be a challenge. Generally, private markets investments with a medium to longer-term horizon will help to smooth returns, riding out short-term market disruptions and lead to higher risk-adjusted returns over time.
One of our investment themes throughout the last year has been the focus on addressing liquidity concerns, and with asset prices still under pressure and IPO markets remaining muted, private market fund managers (known as General Partners (‘GPs’)) are being forced to hold onto portfolio assets for longer.
This has triggered an upswing in GPs creating ‘continuation vehicles’, in which to roll over portfolio assets after the end of the fund term, replacing existing investors with new ones. This kind of liquidity solution continues to be attractive in the current climate. We’ve recently launched a private equity GP-led secondaries fund investing in a highly diversified portfolio of mid-market business, run by one of the most active investors in this sector, to take advantage.
An area that we have also placed in the spotlight this year is private credit, which is widely reported as experiencing a renaissance, especially the higher yielding more opportunistic credit funds rather than direct lending and this could be a vintage year for those who can lock in good deals now at attractive pricing. The sector has adapted to better meet the needs of borrowers and fund investors, and as inflation slows and interest rates fall, the market is likely to expand as non-bank lenders and specialist credit funds play a larger role.
From a private investor viewpoint, here too there’s a similar desire for shorter duration funds with contractual returns, liquidity options, credit like downside protection and the opportunity to participate in equity upside through the likes of equity warrant embedded in the loan structure at the outset. To play to this theme, we secured access for our clients to an opportunistic credit fund offering hybrid, flexible capital solutions to European mid-market companies: an underserved market niche. In addition to its appealing risk/return profile, the fund also offers accelerated distributions, addressing potential client liquidity requirements.
Private credit does pose some challenges in the current climate, however. Lower base rates could impact returns and increase refinancing risk. A lower rate environment may make it unattractive for borrowers to lock in rates on long-dated loans. And more competition could push prices up. Our focus was to pin-point the right manager who should be able to navigate all this, which is why it’s so important to choose a specialist with a track record of prudent risk management, stringent investment selection and underwriting discipline.
And finally, our pipeline of fund opportunities continues to be strong. In line with our belief that specialist managers typically outperform generalists, we plan to offer a flagship growth capital private equity fund from one of the most experienced software investors in the world, which will capture the theme of transformative impact of disruptive technologies, including Artificial Intelligence (AI).
We are also planning to offer another sector-focused private equity strategy later this summer managed by a lower mid-market specialist which takes a hands-on active management approach.
Creating maximum impact from driving operational change is crucial to the organic growth of portfolio companies right now, and this, for us, is a key area of focus to drive the potential for growth and ultimately strong fund performance. I look forward to sharing these with you over the coming months.