AGM Alts Weekly | 7.23.23
AGM Alts Weekly #11: 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.
Join us to understand what’s going on in alts so you and your firm can stay up to date on the latest trends and navigate this rapidly changing landscape.
Good morning from Washington, D.C., where I’ve just returned from a trip to Mexico City for the Clocktower Technology Ventures annual meeting and LatAm Portfolio Summit. Clocktower, which has built a global FinTech VC fund (with 39 LatAm investments) alongside a global macro consulting firm, brought together a great group of LPs, LatAm founders, and VCs active in the region for interesting and thought-provoking discussions about the future of Latin American tech.
Latin America represents a compelling opportunity both for VCs and founders, particularly in FinTech (according to LAVCA, 43% of total investment dollars in 2022 in the region went to FinTech companies) who are building investing and building in the region as well as for global investment firms seeking to attract capital from Latin American LPs.
On the startup side, the region has had its share of ups and downs over the past few years, tracking both the exuberant rise of venture funding in the past few years as well as the precipitous decline in funding in the past year as markets and valuations turned. Perhaps Crunchbase’s Q1 2023 report on funding trends from 2021-2023 put it best: Latin America, which in 2022 ranked as the fastest-growing startup investment region in the world, was also the fastest shrinking in 2023.
Every market goes through cycles — and LatAm has been no stranger to pullbacks in VC funding. Founders have been accustomed to doing more with less and this cycle will likely be no different. Gone are the days in the region of jumbo-sized $100M+ rounds. 2022 saw SoftBank Latin America Ventures alone participate in six $100M+ rounds. In Q1 2023, no single venture round of $100M or more was closed, according to Crunchbase data. But that doesn’t mean the region lacks promise. In fact, far from it. Nubank, arguably LatAm tech’s biggest success alongside MercadoLibre ($61B market cap), is still going strong after its 2022 IPO and sits at a $37.3B market cap. And success in FinTech didn’t stop there — Visa recently acquired payments infrastructure company Pismo for $1B. The talent in the region is overflowing, and many of the most talented individuals in the region (including some in our LatAm portfolio) are choosing to go into the startup and tech world right out of university or shortly thereafter.
Large scale problems often represent large market opportunities — and LatAm is certainly not lacking here. It may take a few more years to realize its promise and for VCs and LPs to see exits from the region, but it won’t be surprising when some of tech’s biggest wins emerge from the region despite a dearth of growth capital at the present moment. And those who are willing to take the risk or have the dry powder to be active at growth stage, like regional brand names such as Kaszek, Monashees, and new entrant Bicycle, as well as global players with a focus on the region such as QED, will no doubt benefit handsomely from having the ganas to stick with the region through its ups and downs.
The LP ecosystem in LatAm also represents an interesting opportunity for global alternatives funds. Preqin released a fantastic report on Latin America’s LP landscape a few weeks ago, finding data to state that alternative investments could reach, and possibly surpass, pre-pandemic levels due to changes in regulatory limits, needs for higher returns, and an increase in accessibility of alternatives in the region.
Total allocation to alternatives tracked by Preqin from all Latin America-based investors hit $100.7B at the end of 2022, up from $96.4B in 2021.
LatAm pension funds and private wealth represent a large — and growing — opportunity for GPs. Pension funds are a key source of capital for international fund managers, with Mexican pensions representing an opportunity for GPs due to their relatively low allocations to alternatives and favorable demographics that are leading to healthy inflows. Private wealth represents another opportunity for fund managers looking to access the region. iCapital’s partnership with Unicorn Strategic Partners in late 2022 is indicative of growing interest and distribution infrastructure in LatAm. But, as Preqin states, brand matters in the region, a regional presence is important, and an investment in educating investors on the merits of alternatives will be critical to growing their allocations.
I’m excited to see what comes next for a promising region in the startup and alts ecosystem. Vamonos!
This week’s poll question:
Last week, we asked readers for their thoughts on private credit. Is this private credit’s “golden moment?” 65% of respondents believe that “Yes, this is private credit’s golden moment.”
AGM Index
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, Blackstone crossed the $1T AUM threshold, marking the first alternative asset manager to reach this figure. Blackstone is but 38 years old, starting in 1985 with $400,000 in LP capital. With private markets at $11.7T of AUM (McKinsey), alts AUM has plenty of room to run as Blackstone and others continue to grow in size and scale, buffeted by increased private wealth interest in private markets.
AGM News of the Week
Articles we are reading
📝 Apollo Global Builds Team to Target World's Top Family Offices | Benjamin Stupples, Bloomberg
💡Apollo is forming a specialized team to target the world's top family offices, furthering the push from the world’s largest alternative asset managers into the wealth channel. The New York-based firm has already built a 10-person family office unit after bringing on former BlackRock executive Brian Feurtado to lead the business unit. This initiative is reflective of the trend of private equity firms looking beyond their traditional investor base of pension funds and endowments to focus on the ultra-wealthy as a source of capital amidst more challenging fundraising conditions and increased demand for alts from family offices. According to Apollo Partner Brian Feurtado, “the family office base has grown to a point where we decided to have a dedicated team” and “many wealthy families are still underweight in private assets.” Apollo aims to offer co-investments and direct deals to sophisticated family offices, and they have set up an educational hub for clients to learn about alternative assets.
AGM’s 2/20: Apollo’s continued push into the wealth channel comes after investments into both iCapital and CAIS. Apollo, like its counterparts, has dedicated meaningful resources — both investment dollars and human capital — to building out their capabilities in the wealth channel. As the large firms grow larger, they will need to continue to attract capital from the wealth channel as they look to grow. Apollo’s peers are also continuing to make headlines for their asset growth. Blackstone crossed the $1T AUM mark this week, marking a significant milestone for the alts industry. 25% of Blackstone’s AUM comes from the wealth channel, up from 10% just four short years ago. Apollo, at almost $450B of AUM, seems to be poised to grow its assets from the wealth channel. Could it make them next in line to cross the $1T AUM mark in a few years time? Another interesting quote from Feurtado in this article foreshadows the likes of Apollo and its peers continuing to look more like banks: “The most sophisticated family offices want direct access to co-investments and direct deals. This also goes both ways, as there are opportunities for Apollo to invest with our family office clients as a capital provider to them in debt, equity, or hybrid capacity.” What was once a more traditional buyout shop is now talking about how they can serve family offices both on the product side (enabling family offices to be LPs in their funds) and as a capital provider of debt, equity, or both. The likes of Apollo are increasingly encroaching on banks’ territories, who also work with family office clients as capital providers to their businesses, providing banking services, and wealth management services, to the point where one must wonder if the Apollo’s, Blackstone’s et al will launch a wealth management unit themselves. Surely, they won’t get into other banking activities, but a wealth management platform wouldn’t be far-fetched.
I’ll be sharing the stage with Apollo’s Partner & Chief Client & Product Development Officer, Stephanie Drescher, at Future Proof in Huntington Beach in September, where we’ll cover more about Apollo’s push into the wealth channel.
📝 Blackstone’s $1 Trillion Mark Ushers In New Era of Buyout Titans | Dawn Lim and Dave Merrill, Bloomberg
💡Blackstone, which was founded with $400,000 of initial capital in 1985, has crossed the $1T AUM mark just 38 years later. Blackstone achieved its current size and scale by venturing beyond its buyout roots, growing to a number of different business units, product offerings, and investment strategies. “We started with one private equity fund,” Chief Executive Officer Steve Schwarzman, Blackstone’s billionaire co-founder, said this year. “Now we do 60 different things.” Embedded in Blackstone’s growth is the fact that its investing activities touch much of the US economy. Blackstone is the largest owner of commercial real estate both in the US and globally — and they own many other consequential companies in the US. This coincides with the trend of companies staying private longer rather than entering public markets. Blackstone’s growth in AUM has been fueled in recent years by low interest rates and aggressive yet smart dealmaking. Since 2012, the firm has taken in $1T in net inflows from investors into its various products.
AGM’s 2/20: Blackstone’s rise mirrors the rise of private markets. As Blackstone has grown, so too has the alts space. While they aren’t by any means the only firm to grow in size and scale, they are by far the largest at this point. I wouldn’t be shocked to see their peers, Apollo, KKR, and Brookfield, follow suit and grow AUM to close to the $1T mark over the coming years. What’s clear are two things: (1) the big are getting bigger. Size matters, particularly when it comes to private equity and private credit and (2) Blackstone’s growth has been buffeted by a focus on the wealth channel, where they’ve had a dedicated effort in this space since 2011. 12 years and three quarters of a trillion additional dollars later, it looks like they made the right call. The big question now: will growth continue or decline?
📝 Solid Opportunities in Secondaries | Franklin Templeton (sponsored article), Institutional Investor
💡Franklin Templeton chronicles how the secondaries market has experienced tremendous growth over the past two decades, with volumes starting at around $2B in 2002 and peaking at $132B in 2021. Due to market dynamics, secondaries markets are expected to grow from $135B in 2022 to over $160B in 2023. Since 2016, market volume has tripled. The secondary market has become larger, deeper, and more sophisticated. It has evolved beyond a way for LPs to sell illiquid positions, with GPs now using it to provide liquidity to their LPs while maintaining ownership of profitable portfolio companies. LPs are looking to secondaries for cash to solve the denominator effect and rebalance investments in the face of macro headwinds and market uncertainty. The denominator effect from public markets is creating tremendous opportunities for buyers. In 2022, the average discount on secondaries was around 19%, representing the largest average discount in almost a decade. Long-term prospects are favorable, with consistent growth rates in the mid-teens providing estimated volumes of $500B by 2030, and possibly hitting $1T. In 2023, supply is likely to outpace demand, driven by an increase in GP-led sales and LPs seeking liquidity due to market uncertainty. This creates an opportunity for buyers to acquire high-quality assets at a discount. The secondaries market also offers diversification and quicker access to assets compared to primary fund investments.
AGM’s 2/20: Secondaries represent one of the hottest — and most discussed — corners of private markets. Unsurprisingly so. Dynamics in private markets point favorably in the direction of secondaries to unlock the illiquidity present in the market. Many institutional LPs are impacted by the denominator effect, so they are looking to rebalance their portfolios that are overweight illiquids. This means selling some of their private investments. GPs, particularly those looking to fundraise in the current vintage or those earlier on in their fund’s history, are looking to show DPI, and therefore might look to sell some of their existing investments. These trends point to a buyer’s market. With discounts sitting at their highest figures in almost a decade and structural dynamics that make for forced sellers in certain cases, secondaries funds are surely licking their chops. It’s no surprise that secondaries funds are loading up on LP commitments and asset managers are looking to acquire or build secondaries investment strategies. Franklin Templeton’s $1.75B acquisition of $34B AUM secondaries firm Lexington Partners in 2021 was clearly a smart move — it put them in pole position to capture the opportunities present in the secondaries market that both firms saw coming as structural imbalances loomed large in private markets. LP interest in secondaries has persisted — Lexington recently closed on its largest fund to date ($18B) and Blackstone Strategic Partners ($25B) and Ardian ($20B) closed on their funds earlier this year. There’s certainly an opportunity in secondaries markets right now. The equally interesting question is — with all the dry powder present in secondaries markets as well as more private wealth entrants as LPs — will secondaries become a more common feature of private markets as alternatives heads towards a more liquid market in the future?
📝 EU tightens rules on leverage for private credit funds | Costas Mourselas and Will Louch, Financial Times
💡The European Union is taking measures to tighten regulations on the rapidly expanding private credit market, with over $1.5T of assets. The draft legislation, agreed upon by member states and European parliament negotiators, aims to mitigate risks to financial stability, citing concerns about the possibility of defaults in the face of a higher interest rate regime. Under the new rules, private debt funds will face restrictions on their leverage, and open-ended credit funds, which target retail investors, will also be subject to further limitations. The private credit market has grown markedly since the global financial crisis, with Wall Street firms like Apollo, Blackstone, Ares, Oaktree, and Carlyle Group amongst those dominating the industry. The regulations seek to address concerns about potential systemic risk and disorderly markets due to rapid fund withdrawals. Leverage limits will be set at 300% for funds without investor withdrawals until loan maturity and 175% for funds permitting redemptions. The legislation also pledges to prevent investor withdrawals before loan maturity unless certain criteria, to be outlined by EU regulators, are met. Blackstone and Goldman Sachs, among others, have launched "open-ended" funds to attract a wider range of investors and will need to comply with the new rules. While most funds already operate within the proposed limits, declining loan values could pose challenges, potentially necessitating asset sales or additional capital from investors. The legislation, once formally adopted, will harmonize the EU's approach to fund management and enhance economic integration among member states.
AGM’s 2/20: Private credit may be going through its “golden moment,” but the industry’s rapid ascent doesn’t come without risks. Rising interest rates present the opportunity for higher returns, attracting investors to the strategy. But it could also lead to greater default risk. The nuances of private credit are coming into the crosshairs of the regulators, which is probably a good thing as the industry continues to grow. As we discussed last week, private credit is far from the cottage industry it recently was. With over $1.5T of assets in the strategy, private credit has become a mainstream part of investors alternatives allocations, and its features have made it popular with the wealth and retail channels. Therefore, regulators setting limits on leverage and preventing withdrawals for open-ended funds is probably a good thing for the space in the long-term. There’s less of a question as to whether or not private credit should face more scrutiny from regulators given its scope and size within private markets — as the strategy grows, so too will its oversight. But a bigger question remains: do regulators know something we don’t about the risks of private credit?
📝 HighVista’s Deal With Abrdn Illustrates the Current Moment in Asset Management | Julie Segal, Institutional Investor
💡Boston-based alternative investment manager, HighVista Strategies, has acquired the U.S. private markets business of abrdn in a deal that will almost double its size. HighVista, currently managing $4.8B in assets, expects to gain $4B in private equity and venture capital assets in the acquisition, along with a 30-person team. The transaction, set to close later this year, exemplifies the ongoing popularity of alternatives among institutions, even as many limited partners grapple with funds locked up in private equity after last year’s market downturn. HighVista's focus on inefficient markets to find alpha aligns with its belief that "the lower middle market part of the private markets is the juiciest part – the most opportunities are there," as stated by Raphael Schorr, deputy CIO and partner at HighVista. The deal highlights the continued interest from both large and small firms in seeking higher-fee alternatives and adding niche capabilities to their portfolios.
AGM’s 2/20: HighVista’s acquisition of abrdn’s private markets business shows that asset managers are looking to alts as a way to expand their business and their relationships with customers. Similar to how Franklin Templeton’s acquisition of secondaries firm, Lexington Partners, added additional private markets capabilities to the broad-based asset manager, other firms are looking to do the same as they look to grow their footprint in private markets. Other recent notable deals (Man’s acquisition of Varagon and TPG’s acquisition of Angelo Gordon) further support this trend. Given investor demand for alternatives, I’d expect to see more asset managers look for ways to add to their capabilities so they can continue to grow in breadth and depth.
📝 Blackstone predicts end of deal drought as US inflation fades | Antoine Gara, Financial Times
💡Blackstone, the world's largest alternative asset manager, predicts that the recent surge in inflation has peaked and that the year-long deal drought may soon come to an end. Blackstone President Jon Gray told the FT that the markets have absorbed the impact of higher interest rates, signaling a possible return of deal activity. As US inflation fell sharply to 3%, financial conditions have started to ease, with the benchmark S&P 500 index up 13.6% this year. Blackstone's assets under management exceeded $1T for the first time, which Gray called "an important milestone" and "a marker" of investors' increasing interest in private markets. "We believe the potential for alternatives is far greater than most people realize," Gray stated, highlighting the untapped opportunities in the alternative investment landscape. Generating $1.2B in distributable earnings in the second quarter, the firm has attracted considerable attention, managing diverse investment strategies and expanding its target market beyond large investors to include individual investors and financial institutions seeking exposure to unlisted investments.
AGM’s 2/20: Public markets can certainly impact activity and sentiment in private markets. Could a better than expected result with US inflation, strong stock market performance, and some promising financial conditions signal an opening of the IPO and exit window? If so, then private markets may be in for increased deal activity in the back half of 2023 and 2024. There are signs of things picking up. Morgan Stanley CFO Sharon Yeshaya told analysts this past week that the bank is expected to benefit from a backlog of deals. If indeed markets start to open up, then private markets should benefit. Illiquidity could be unlocked and the dominator effect might rebalance a bit, greasing the wheels for more LP commitments to private markets strategies and increased deal activity by funds.
Reports we are reading
📝 Stuck in Place: Private Equity Midyear Report 2023 | Bain & Company
💡 Bain & Company’s Private Equity Midyear Report reveals that PE activity in the first half of 2023 remained sluggish due to continued macro uncertainty, resulting in stalled dealmaking, exits, and fundraising. Investments in buyout funds saw a significant decline, generating $202B in deal value, a 58% drop from the same period in the previous year. The exit environment has been exceedingly challenging, with buyout-backed exits falling to $131B, a 65% decline from a year ago. Fundraising also suffered, with global private capital raised at $517B, a 35% decline from the previous year. The industry is facing pressure to return capital to limited partners, with buyout funds holding a record $2.8T in unexited assets, creating a liquidity crunch for LPs and leading to a slower deployment schedule for LPs on a go-forward basis. The need for liquidity solutions has increased, with LPs more inclined to cash out of investments to fund capital calls. According to the report, most PE investors would rather cash out than wait for the possibility that valuations will rise further in continuation funds. This statistic is particularly interesting in light of reporting of some GP’s desires to create continuation funds in the current environment. PE funds are encouraged to review portfolios, refresh value creation plans and focus on margin improvement to navigate the challenging environment and restart the capital flywheel.
Videos we are watching
📝 A Conversation with LocalGlobe’s Saul Klein | Ross Morrison, Adams Street Partners
💡 Saul Klein, Co-Founder of Phoenix Court, home to a multi-stage family of funds that include LocalGlobe, Latitude, Solar, Basecamp, and Phoenix Court Works, discusses the development of the venture capital business in Europe with Ross Morrison, Partner, Primary Investments at Adams Street Partners, and why the continent needs to help its technology companies develop from the IPO stage into megacaps. The conversation took place at the Adams Street EMEA Investor Conference in London on May 11, 2023. Klein reflected on his 30 years in venture capital investing in Europe. He spoke about adapting the Silicon Valley risk-reward mindset to European VC, shifts in the ecosystem that helped Europe to develop as an incubator of tech unicorns, tech as a force for good and Europe’s need to scale its tech companies. He took audience questions on the need for scale-up capital, wins, misses, exciting innovations, and blockchain.
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.
🔍 73 Strings (Valuation and portfolio monitoring for alternatives funds) - Senior Sales Representative. Contact me or 73 Strings to learn more.
🔍 bunch (Private markets infrastructure investment platform & SPV infrastructure) - Head of Growth. Click here to learn more.
🔍 iCapital (Private markets infrastructure investment platform) - West, Regional Director, Vice President / Senior Vice President. Click here to learn more.
🔍 Allocate (VC infrastructure investment platform) - Managing Director, Alternatives (Sales). Click here to learn more.
🔍 Republic (Multi-strategy alternative investment platform) - Chief Technology Officer. Click here to learn more.
🔍 Isomer Capital (European VC fund of funds) - Investor, Secondaries. Click here to learn more.
The latest on Alt Goes Mainstream
Recent episodes and blog posts on Alt Goes Mainstream:
🎙 Hear Alto CEO Eric Satz discuss how anyone can invest in alternatives through their IRA. Listen here.
📝 Read how 73 Strings CEO & Co-Founder Yann Magnan and team are leveraging AI to build a modern and holistic monitoring and valuation platform for private markets in The AGM Q&A. Read here.
🎥 Watch Lawrence Calcano, Chairman & CEO at iCapital, and I take the pulse of private markets on the second episode of our monthly show, the Monthly Alts Pulse. Watch here.
🎙 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.
🎙 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.
Subscribe below and follow me on LinkedIn or Twitter (@michaelsidgmore) to stay up to date on all things 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.