AGM Alts Weekly | 7.09.23
AGM Alts Weekly #9: Making private markets more public, every week.
👋 Hi, I’m Michael and welcome to my weekly newsletter, the AGM Alts Weekly. Every Sunday, I cover news, trends, and insights on the continuing evolution and innovation in private markets. I share relevant news articles, commentary, an Index of publicly traded alternative asset managers, job openings at private markets firms, and recent podcasts and thought pieces from Alt Goes Mainstream.
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Talk about private market infrastructure now seems to be front and center in conversations about the future of private markets. That’s a good thing — because it will take a market structure evolution to transform private markets. We’ve covered this theme for quite sometime on Alt Goes Mainstream because we believe that evolutions are what power revolutions.
Market structure evolution is core to the development of private markets. I wrote about the importance of market structure innovation in a post in June 2022. These experiences have underpinned much of our investment thesis in alts at Broadhaven Ventures:
“A well-functioning market works when there is efficient and effective data and technology across the lifecycle of a trade or investment. As new markets are built, market structure requires technology innovation to create transactional efficiencies. A functioning market structure enables investors to have price discovery, invest or trade efficiently, and process, custody, and value trades and investments.
As market structure evolves, so too does liquidity. More participants come into a market that functions better. Liquidity begets liquidity and the market grows. It happened in equities. It happened with listed derivatives.”
It’s now happening with alts.
Bain & Co. published a great report this week on the importance of continued innovation in market infrastructure for private markets. They chronicled the rise of individual investor demand for alts, citing that while individuals hold roughly 50% of global wealth, they only account for 16% of private assets under management. This demand must be met with corresponding technology innovation that makes it possible for both funds and investors (and their intermediaries, wealth managers) to easily handle the administrative and structural burdens currently present in private markets.
The alts evolution is happening in phases. Back in 2014, both alternative asset managers and individual investors were just beginning to wrap their heads around how and why they should work together. At iCapital, we had to educate investors on both the merits of private markets and the ways in which they could allocate to alts. There was no industry standard. There was very little talk about feeder funds that limited capital call requirements and had exceedingly low minimums (a trend that has recently become quite popular with GPs and platforms). And there were a host of challenges with distributing investment products, enabling investors to subscribe to private funds, processing and reporting on investments, and creating the connective tissue between funds, investors, custodians, and other market data providers.
Fast forward to 2023 and the industry’s stakeholders are focused on how they can move towards a standardized, digital model. The race to be the platform in the middle of distribution of product is still being fought over, but it’s more or less controlled by a few large players, some of whom are significantly bigger in size and scale than others. iCapital, with ~$160B in assets, has put itself at the epicenter of private markets distribution to the wealth channel as both a technology provider and distribution platform. With the crystallization of market leaders in the pre-investment discovery, infrastructure, and execution of private asset investments, the next area for innovation is post-investment data solutions. Innovations that emerge from managing, tracking, and analyzing private markets data is a huge opportunity and one where we have been focused on for some time now at Broadhaven Ventures.
It’s great that founders, investors, and industry players are bringing market structure front and center to conversations about the future of private markets. Revolutions in markets take time — and it’s the evolutionary drumbeat of innovation that will enable it to happen.
AGM has created an Index to track the leading publicly traded alternative asset managers.
Some of the industry’s largest alternative asset managers are publicly traded — and their net inflows can serve as a window into how private markets are being perceived by investors and allocators who are allocating capital into alternative investments.
This week, we’ve included Man Group’s acquisition of $11.8B AUM US middle market private credit firm Varagon Capital Partners. Man’s controlling majority stake now values Varagon at $378.1M.
Varagon has delivered compound AUM growth of 13% over the three years to 31 December 2022. In 2022, Varagon generated total revenues of $116.3m and profit before tax of $30.9m.
AGM News of the Week
Articles we are reading
📝 The private credit ‘golden moment’ | Robin Wigglesworth, Financial Times
💡Alternative asset managers are looking to private credit as an area for growth. Hedge fund manager Man Group is the latest platform to make a foray into private credit, buying a controlling stake in Varagon Capital Partners, an $11.8B credit fund. The FT’s Robin Wigglesworth dives into how private credit has gone from a relative cottage industry over the past 12 years mainly focused on distressed debt (sub-$50B of capital raised on a yearly basis by private credit funds according to Preqin, Goldman Sachs Investment Research data) to a booming business that now raises over $250B annually in fresh capital. Morgan Stanley estimates that overall AUM in private credit has hit $1.5T. Why the growth? For investors, it’s the promise of smoother and stronger returns, with high single-digit or double-digit returns occurring over the past 10 years. However, there are risks lurking in private credit. Default rates are expected to rise, leading to limited recoveries and potential challenges to private credit portfolios. The linkage between private credit, private equity, and broader debt markets call into question how long the private credit party might last.
AGM’s 2/20: Private credit has become one of the hottest corners of private markets. Large platforms have acquired private credit shops to move into the category or bolster existing businesses. Even banks are scrambling to get involved. Goldman and JP Morgan are setting up dedicated private credit trading teams to capture a slice of the $1.4T private credit industry. LPs are expressing serious interest in private credit, with the credit space being one of the most popular products for investors. As the private equity industry has grown, so too has private credit. Wigglesworth astutely points out that private credit often works in tandem with private equity, with much of the lending done to private equity owned businesses. It’s hard to envision a world where private credit doesn’t continue to grow meaningfully over the next decade, particularly with the secular trends of bank retrenchment (and in some cases deposit leakage), capital market expansion (large alternative asset managers are now getting into capital markets transactions on their own, as Carlyle and KKR have done), and investors’ desire to invest in private markets. I’d expect private credit to continue to be in demand — and it is more efficient for non-bank lenders to fill the gap left by banks in certain cases. But it’s also worth noting that industry insiders and commentators are also aware of some of the challenges that private credit might face from a rapid ascent in AUM growth and a coinciding rise in interest rates, where the rising cost of debt could have a significant adverse impact on borrowers — and their lenders.
📝 The Private Equity Machine Will Be Tough to Unjam | Paul J. Davies, Bloomberg Opinion
💡 Is the golden age of the buyout industry over? A sharp rise in interest rates has led to a softer exit market for existing portfolio companies, as well as a more challenging fundraising environment for new funds in market. Liquidity is the operative word here — funds would like to exit on existing deals, but they want fair prices at exit. LPs want returns so that their distributions can fund new LP commitments for funds currently in market. Currently, the market is in a bit of a logjam. This chart from Burgiss (courtesy of this Altimeter’s Meghan Reynolds tweet) encapsulates the current market environment.
Liquidity is tough to come by for LPs and GPs alike in this market. Another issue is looming on the horizon (which is discussed above): many private equity-backed companies had loaded up on debt, much of which was done on floating interest rates. But that was before rates rose. Rates have now risen and these companies need to service their debt, which could pose challenges for private credit funds. The ripple effects are real. Davies reminds us to not forget the bankers either — as deals dry up, so too do investment bank mandates and the associated fees that came with work on private equity deals. At Goldman Sachs, over 30% of global investment banking fees came from private equity related work over the past few years, up from 20% a decade a go.
AGM’s 2/20: Private equity is certainly in an interesting spot. Liquidity has dried up in the current market environment, creating both a tougher exit environment and fundraising processes. But all is not lost. Lest not forget that the majority of companies are private companies, many of which will (1) go through generational transition, particularly in the middle market, and (2) will remain private. Challenges open up new opportunities. Yes, institutional LPs may be constrained in their future allocation to private markets, but the individual HNW channel is structurally underallocated to alternatives. Yes, liquidity may be hard to come by right now for funds and companies, but that opens up an opportunity for secondaries funds. We don’t know when interest rates will come back down — and private markets certainly shouldn’t hinge their hopes and business models on a low interest rate environment to grease the wheels of success. But markets go in cycles — and private markets will be no different. Long-term, I’m bullish on the growth of private markets both from a structural perspective thanks to market infrastructure innovation and the increasing desire and ability for more investors to access private markets.
📝 North American GPs look East for fundraising oasis | Madeline Shi, PitchBook
💡The fundraising slowdown in the US has led alternative asset managers to look further afield. GPs are zeroing in on the Asia-Pacific region as a place to raise capital. Firms such as Asia Heritage and Bonaccord Capital Partners have partnered to assist North American and European middle-market asset managers in expanding their reach to Asian investors. The trend is driven by a challenging fundraising environment in the US, as institutions face over-allocation to private market assets and slower distributions from managers. Asia offers significant opportunities for capital with growing pools of institutional and individual wealth and a thriving private banking ecosystem. Total assets managed by top Asia-Pacific pension funds increased by roughly 60% to $5.97T in 2020 from $3.73T in 2015, according to data from Thinking Ahead Institute, a research firm affiliated with Willis Towers Watson. The region has also witnessed a rapid growth of its superrich over the last five years. Credit Suisse estimated that Asia-Pacific was home to more than 67,000 ultra-high-net-worth individuals—those with more than $50M in net worth—at the end of 2021. That figure is expected to rise to 118,000 by 2026. The middle-market segment is particularly appealing to Asian investors looking to diversify portfolios and enhance yields. As with other regions of the world, education and awareness about private equity in the middle market remain important for Asian investors.
AGM’s 2/20: As private markets globalize, so too does investor interest from all corners of the globe. Alternative asset managers have taken notice and are making concerted efforts to build relationships with LPs in different geographies. It’s not surprising that Asia is a major area of focus for fundraisers. The opportunity for funds and platforms to partner with private banks in APAC appears to be quite promising. The number of Asian HNWIs is projected to increase by almost 2x over the next few years, so it’s quite possible that Asia will be a big driver of growth for private markets as the space looks to grow its overall AUM figure from $10T.
📝 European tech investors need to up their ambitions | John Thornhill, The Financial Times
💡Sifted Founder John Thornhill shares his opinions on how Europe can continue its growth as a thriving tech ecosystem. Europe has developed a vibrant early-stage startup ecosystem — and Thornhill highlights the arrival of top US funds like Sequoia, Bessemer Venture Partners, and others as a signal of the growing global interest in the region. But he also believes that European institutional investors can do more. Thornhill cites French financier Philippe Tibi’s 2019 scheme to bring government support to the French startup ecosystem. Tibi’s initiative called for 23 of France’s leading institutional investors to commit €6B of late-stage funding over three years to the tech sectors. The government then set a target of mobilizing €30B of capital, including additional third-party investors. The initiative was successful enough to pave the way for Tibi 2 to launch, aiming for an addition €7B of capital to support the French startup ecosystem. The Tibi initiative has not gone unnoticed in Europe. Other European countries are having conversations about how to entice local institutional investors to commit to VC funds. The UK is an example — overseas pension funds currently invest 16x more capital than their British counterparts in UK VC and PE funds. There’s a gap for European institutional capital to fill and Thornhill calls on European institutions to commit.
AGM’s 2/20: Europe has made tremendous strides over the past decade as a startup ecosystem and is very much poised to continue its rise in my view. There are certainly demographic, financial, and geopolitical challenges at the moment, but there’s also promise. Some of Europe’s biggest investors are well-aware: “the opportunity set in Europe has massively grown. And valuations are more attractive in Europe than in the US,” according to Nathalie Kornhoff-Brüls, Managing Director of Eurazeo’s growth team. It’s great to see European governments have conversations about how to continue to support their respective country’s startup ecosystems. Mr. Thornhill’s commentary only serves to aid this conversation. He’s right to note that further participation from European institutions, particularly in the UK, can mobilize growth capital across the region. That’s a net positive. The onus is on European institutions to commit to a future that channels the region’s promising features into a thriving global tech hub. If they do, they — and the region’s inhabitants — could very well be richly rewarded for their efforts.
Reports we are reading
📝 Private Asset Investing Desperately Needs New Market Infrastructure | Thomas Olsen, Daniel Jones, Antonio Rodrigues, Brenda Rainey, and Markus Habbel, Bain & Company
💡 Bain & Company covers a critical topic that’s at the forefront of ushering in change in private markets: how the market infrastructure needs to evolve to meet the growing demand of individual investor interest in alts. Wealthy investors want to increase their holdings of private alternative assets — and with over $8-12T in household funds available for investing into private assets, fund managers are focused on enabling individual investors to access private markets. In order for private markets AUM to grow, the current model most evolve from a fragmented, manual market structure to a standardized, digital market structure to support investor demand at scale. Bain highlights five business archetypes that are emerging to overcome the current barriers where innovation needs to occur in private markets: high administrative costs, illiquidity, a difficult collateral process for lending, and high minimum investment size. Ultimately, Bain believes that private markets will evolve from an intermediated feeder fund model to an open architecture, industry-level market infrastructure and standards that enables efficiencies across the value chain of a private markets investment. The prize is large — and Bain believes that the largest wealth and asset managers will likely capitalize on first-mover advantage to gather assets from individual investors.
Who is hiring?
In order for alts to continue to go mainstream, we need the best talent to go into the space. Here are some openings at private markets firms. If you’d like to connect with any of these teams, let me know and I’m happy to facilitate an introduction if appropriate. If you’re a company or fund in private markets, feel free to reach out to share a job description you’d like to be listed here to highlight for the Alt Goes Mainstream community.
The latest on Alt Goes Mainstream
Recent episodes and blog posts on Alt Goes Mainstream:
🎙 Hear $18B AUM Savant Wealth’s award-winning CIO Phil Huber talk about how LPs can build a strategy for investing in private markets. Listen here.
🎙 Hear Avlok Kohli, AngelList’s CEO, talk about how they are building the company of companies that is powering private markets. Listen here.
🎙 Hear John Avery, VP Digital Assets, Tokenization, Web3 at fintech giant FIS talk about how evolutionary changes can lead to revolutionary changes in private markets. Listen here.
🎥 Watch Lawrence Calcano, Chairman & CEO at iCapital, and I take the pulse of private markets on the first episode of our monthly show, the Monthly Alts Pulse. Watch here.
🎙 Hear Seyonne Kang, Partner and member of the private equity team at $134B AUM StepStone, discuss how the VC industry is dealing with today’s venture market. Listen here.
🎙 Hear Chris Ailman, the CIO of $307B CalSTRS, discuss how he manages a portfolio with ~40% exposure to private markets. Listen here.
🎙 Hear 44th Vice President of the United States and Chairman of Cerberus Global Investments Dan Quayle share his insights on geopolitics and investing. Listen here.
Thank you for reading. If you like the Alts Weekly, please share it with your friends, colleagues, and anyone interested in private markets.
If you have any suggestions, would like me to feature an article, research, or would like to recommend a guest or topic for the Alt Goes Mainstream podcast, reach out! I’d love to include it in my next post or on a future podcast.
Special thanks to Riley Robinette for his contribution to the newsletter.
Join thought leaders from top private markets firms like Blackstone, Goldman Sachs, Apollo, Fidelity, iCapital, Franklin Templeton, and more.