Can private capital respond to the Covid-19 crisis with a new high? New ‘Private Markets’ whitepaper from CAMRADATA

CAMRADATA has published a new whitepaper on Private Markets, which asks if ‘Peak PE’ has been reached following a record level of private equity investments in 2019.  It also explores the opportunities and key challenges for private markets investments as a result of the Covid-19 crisis.

The whitepaper includes expert insight from guests who attended CAMRADATA’s second virtual roundtable held in June, where participants included Benefit Street Partners, Qbera Capital LLP, bfinance, Cartwright and Nationwide Pension Scheme.

CAMRADATA highlights that private equity in Europe had another vintage year in 2019. Investments reached a record €94bn – a 10% increase over 2018, according to trade body Invest Europe.

Similar results can be expected for other private markets investments, such as private debt, which over recent years has grown to partly replace vanilla fixed income allocations in institutional portfolios.

It was during this period the term ‘Peak PE’ came about – the notion that the top of the market had been reached after a decade that saw money flooding private markets as investors chased higher yields and diversification, while interest rates remained chronically low.

Sean Thompson, Managing Director, CAMRADATA said, “Some evidence exists that in the current crisis, many private-markets investors will look to stabilise the health of their portfolio companies. However, some private equity professionals have suggested that the availability of attractive assets at lower prices would be a key driver shaping their 2020 activities.

“Even though fund raising is predicted to be difficult, some appear keen to acquire new investments at lower valuations resulting from the Covid situation. Our panel therefore considered if ‘Peak PE’ really has been reached and if private capital can respond to the Covid crisis with a new record.”

Key discussion points included lending and private debt price setting; COVID-19’s ramifications and the challenge of determining a borrower’s creditworthiness; the battle between private equity sponsors and lenders over who makes and who takes prices; and the differences between private credit and trade finance.

Key takeaway points were:

  • With the onset of economic lockdown, opportunities have arisen as finance – like the rest of economy – has been shocked. One panellist said, “I don’t have a crystal ball but now is an attractive time to deploy capital.”
  • In these times of dislocation, lenders have more bargaining power when it comes to who they finance and at what terms.
  • A fundamental difference between private credit and trade finance is the underlying loan tenor. The latter operates on a sub-180-day basis.
  • With loans self-liquidating every four to five months, the challenge of trade financing is the constant re-investment of capital rather than the illiquidity of private debt. Trade finance is arguably ‘too liquid’: money has to frequently be recycled into new deals.
  • But some panellist saw possibilities for trade finance as a way to earn an interim return while looking for more illiquid opportunities. In an era where yields on money market funds and debt all the way out to fifty years have eroded to unprecedented lows, alternatives of all sorts come into consideration.
  • It was noted though that smaller pension funds would typically have neither the scale nor the governance necessary to access niche parts of the market like trade finance directly but there are multi-strategy funds that can include an allocation to it as part of a basket of private credit strategies.
  • The discussion ended with a final bit of advice that investors should keep steady and commit through the cycle: private markets was not an area that suited tactical entry and exit, not least because of the time periods between commitment and deployment.

Along with highlights of the roundtable discussion, the whitepaper features two articles from the sponsors offering valuable additional insight. These are:

  • Benefit Street Partners: ‘Middle Market Direct Lending: Benefits of Pursuing Both Sponsored and Non-Sponsored Transactions’
  • Qbera Capital: ‘Trade Finance – An Asset Class that Underpins Economies & Socio-Economic Development’

To download the Private Markets white paper click here