The early signs of recovery and growth are starting to emerge as inflation cools and interest rates decline says Lorna Robertson.
As we look back on the year so far, the early signs of recovery and growth are starting to emerge as inflation cools and interest rates decline. Public markets have risen, with valuations at attractive levels, as a result investment activity looks set to increase - a trend which is likely to be replicated in private markets too.
Long term, however, some experts including Prequin expect lower growth in public markets than we have historically seen, with a shift towards private market investing. As a consequence, diversifying portfolios by allocating a proportion to private markets will take on even more significance to drive returns in the macro environment ahead. No wonder alternative assets are forecast to grow by 9.7% year on year to the end of the decade to in excess of $29 trillion, according to Prequin. This quarter, our funds investment activity reflects this outlook, with the launch of several new strategies and some top-ups too.
So, does the Budget have any impact for us? In general, its contents are never going to materially impact the fund strategies we select as we always work within the context of the macro environment and do not invest in tax-driven structures that are dependent upon the vagaries of any government policy. Nor do we only invest in UK-focused funds: our flexible strategy can pivot across jurisdictions and market segments. Our mantra of seeking out risk-adjusted outperformance is core to our selection method.
As we move into the closing months of the year, I am pleased to report that our current funds portfolio is continuing to show solid performance and, in many cases, good portfolio valuation mark ups. To date, we have over £220m in committed capital with over 30 managers into 45 fund strategies, diversified across asset class, sector, geography and market segment. In the year to date, the portfolio has generated over 23% in net distributions from committed capital, at a time when the wider market is experiencing negative cash outflows. This is a very strong result, and we expect this to continue to improve as the exit environment stabilises and gains momentum.
Looking ahead to this quarter, we have some interesting new fund opportunities coming up and we are working with two new private equity managers, GHO Capital and Exponent, adding to the breadth of our network of GP relationships. Both are flagship funds (one is a healthcare specialist, the other offers a core allocation to the UK and Irish mid-market), and both fit our focus on active managers who drive growth through operational improvements to optimise the outcome for their portfolio businesses. As I have mentioned before, we’re not interested in the old private equity model of deleveraging and multiple expansion in the current environment: we prefer the active, value-adding approach, and the mid-market is where these transformational changes can have the highest impact.
Finally, due to the continued favourable environment for the strategy, we will be topping up our allocation originally made back in Q1 of this year, into the flagship private equity co-investment fund managed by Alpinvest, part of the Carlyle Group. It invests in a diversified selection of high-quality business at reduced fees alongside top-tier PE managers.
The lack of liquidity seems set to be an ongoing theme, with portfolio distributions market-wide falling more than 50% on average and negative annual net cash flows as a result, secondaries strategies and continuation vehicles remain an area of interest for us. With a likely allocation to a GP-led secondaries planned for early in the New Year.
Although the current environment has presented many challenges, on the converse, this has meant a continued strong supply of attractive and interesting fund strategies with a range of managers, taking advantage of the opportunity to acquire businesses at favourable valuations, and we do not see this trend abating anytime soon. This is the time for a more opportunistic outlook, where a hand-on manager can really make a difference. We look forward to sharing these new funds with our clients on the platform, over the coming months.