This, together with making sense of the number of private equity investment strategies now available, represented the two most significant eight challenges identified by Altius in its annual review: “Key Challenges Facing Private Markets in 2016.”
Here are the other six pinpointed challenges:
(1) Europe – generating good returns
In Europe, Altius highlighted the challenge of generating good returns in today’s environment, where deal volumes are back to the level last witnessed in 2007/8. With distributions outweighing drawdowns in 2015 and access to top performing funds becoming increasing difficult for investors, Altius warned investors to avoid being tempted to invest in funds that are not top tier in order to reach their desired allocation.
(2) Asia – the haves and have-nots
Turning to Asia, Altius explored the growing division in fund raising, which it claimed was resulting in large amounts of capital placed with fewer proven winners, “which are typically larger scale regional buyout and control-oriented funds”. This trend, it said, had placed added pressure on the smaller end of the market, which, in Altius’ view, “remains highly attractive and offers diversification and the potential for outsized returns”.
(3) Private credit strategies – impact of rate rises
Looking at private credit strategies, Altius considerd what would happen to the sector when interest rates rise over 2016 and beyond. It explored the impact of rate rises on legacy portfolios, new issuances and the borrowing cost differential. While private credit will remain an important sub-asset class for investors, Altius believed that there could be a partial reallocation of capital away from the private credit illiquid space to more traditional fixed income strategies.
(4) Regulatory environment – impact on private equity
Altius examined the ongoing impact of regulation on the private equity industry, in particular the review by the European Securities and Markets Authority (ESMA) of the AIFMD marketing passport for non-EU entities. It also discussed the review carried out by the SEC into fees and expenses and the Fee Transparency Initiative conducted by the Institutional Limited Partners Association (ILPA). Altius believed “these regulatory developments will result in cost implications, which may affect the small private equity managers lacking the resources to implement the changes.”
(5) Commodities – are we at the bottom?
After reviewing how investors should respond to current pricing and how they may potentially generate outsized returns in the years ahead, the report argued that the current situation, where prices of commodities can be at or below the cost of much of the world’s production, is unsustainable. As such, it claimed investors who are not exposed to the private energy and mining sectors may miss out on “one of the most exciting and contrarian investment opportunities of the decade”.
(6) Secondaries – a buyer’s or seller’s market?
In the Secondaries market, Altius asked whether 2016 would be a good time to be a buyer, seller or both. In the firm’s view, the cases for buyers and sellers are equally compelling. “Sellers are utilising the market’s abundant liquidity by seizing the opportunity to sell at attractive headline pricing while buyers continue to seek the traditional attributes of secondaries and are accessing the less efficient areas of the private equity market,” it said.
Commenting on the outlook for the private equity market in 2016, Brad Young co-CEO at Altius, said: “Recognising that private markets face a constantly evolving set of opportunities and challenges, Altius continues to identify and analyse specific areas of interest for clients and investors. We believe that the private market opportunity will remain robust in 2016 and we look forward to working with investors to build long-term value in their private market portfolios.”
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