Private Markets Investing

A rebound in public markets has eased downward pressure on PE fund valuations. However, key challenges persist including high interest rates and uncertainty around growth. A few observations across specific asset classes: We continue to favor #secondaries, where we expect to see a pickup in activity for the second half of the year. The bid-ask price gap for secondaries has narrowed, but the 16% discount to NAV is still attractive. Leveraged loan #yields have outpaced high yield bond yields in 2023, causing many issuers to turn to the high yield market to refinance maturing loans. As a result, private credit has emerged as an important financing alternative, financing 94% of buyouts in 1Q23. The continued upward move in real and nominal yields continues to pressure private real estate returns and weigh on transaction volumes, although recent #valuation and return data point to a potential bottoming in value for many property types. Read more in our full private markets quarterly report.

😳 US pension funds in limbo due to private equity zombie funds 🧟♂️ The Wall Street Journal providing the latest coverage on a sector under siege: "Private-equity (PE) and pension funds seemed like a match made in heaven. Now the honeymoon is over. The payouts have dried up, creating an expensive problem for investment managers overseeing the savings of workers retired from big corporations and state & city governments. To keep benefit checks coming on time, those managers are unloading investments on the cheap or turning to borrowing—costly measures that eat into returns. California’s worker pension, the nation’s largest, will be paying more money into its PE portfolio than it receives from those investments for 8 years in a row. The engine maker Cummins Inc. took a 4.4% loss in its U.K. pension last year, in large part because it sold private assets at a discount. It is the latest cash crunch to befall retirement funds that have piled into hard-to-sell investments in search of high returns, and spotlights the risks as Wall Street is trying to sell those investments to wealthy households. U.S. companies and state & local governments manage around $5 trillion in pension money. Large public pension funds have an average 1️⃣4️⃣% of their assets in PE, while large corporate pensions have almost 1️⃣3️⃣% in PE and other illiquid assets such as private loans & infrastructure, according to data from Boston College and JPMorgan Chase & Co. But as PE has grown, its lead over traditional stocks has narrowed. And during the decade before the investments pay out, it can be hard to trust interim estimates provided by fee-seeking managers. Pensions, sovereign-wealth funds, university endowments & other institutions often promise their money to PE managers for a decade or so. Over that time, the managers draw down the cash and use it to buy companies, then overhaul and sell them. Those sales and the resulting cash distributions to investors have slowed markedly as high interest rates have made buying and owning companies more complicated and expensive. Unable to sell without denting returns, PE managers are keeping workers’ retirement savings locked up for longer—sometimes past the promised maturity date. Nearly half of PE investors surveyed by the investment firm Coller Capital earlier this year said they had money tied up in so-called zombie 🧟♂️ funds—PE funds that didn’t pay out on the expected timetable, leaving investors in limbo. So pension funds are selling PE fund stakes secondhand—often taking a financial hit in the process. Anton Orlich is supervising an expansion of the $502 billion CalPERS PE portfolio to 17%. Orlich told Calpers’s board Monday that the cash demands of the PE portfolio have dwarfed payouts for 4 years and would continue to do so for about another 4 years." (+++Opinions are my own. Not investment advice. Do your own research.+++) Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

𝗘𝘂𝗿𝗼𝗽𝗲’𝘀 𝗹𝗮𝗴𝗴𝗶𝗻𝗴 𝗽𝗿𝗼𝗱𝘂𝗰𝘁𝗶𝘃𝗶𝘁𝘆 𝗮𝗻𝗱 𝗥&𝗗: 𝗠𝘂𝗰𝗵 𝗺𝗼𝗿𝗲 𝗿𝗶𝘀𝗸 𝗰𝗮𝗽𝗶𝘁𝗮𝗹 𝗻𝗲𝗲𝗱𝗲𝗱 ‼️ Last week the International Monetary Fund published a very interesting and comprehensive paper about the need for more venture capital in Europe to tackle our continents challenges. To name a few: ✔️productivity per hour worked is app 30% lower in 🇪🇺compared to the 🇺🇸 ✔️R&D investments are still way below the target of 3% per annum ✔️Within the top 100 tech companies worldwide merely a handful are European Is it all about 💶 I here you say? No it is about keeping up our welfare for future generations. And about a liveable planet. And increasing our innovation and competitiveness are crucial to do so. Which is also the key message of Mr. Draghi’s report I hope. The IMF report takes a deeper dive into the underlying issues: ✔️ VC investments are only 0,4% of GDP. In the US it is 3x as much ✔️Europeans park their savings in bank accounts. And banks are very risk aversie when it comes to financing hightech startups. ✔️Long term savings go primarily via pension funds, who hardly invest in VC in Europe (despite some positive signs recently) ✔️The EU has fewer and smaller VC funds leading to smaller rounds, less opportunities for scale-up financing and limited exit options ✔️ European scale-ups end up listing in the US instead of Europe itself ✔️ National fragmentation within the EU leads to a lot of barriers for scaling What has to be done? ✅ Increase efforts on a real single European market, for example by consolidating stock market exchanges and diminishing cross border red tape ✅ Make it more attractive for pension funds and insurers to step into VC ✅ Enhance the capacity of European Investment Bank (EIB), European Investment Fund (EIF) and national promotional institutes, like Invest-NL ✅ Implement preferential tax treatments for equity investments in startups and VC funds ✅ Encourage more funds-of-funds And I would like to ad to the findings in the report two things: 1️⃣ We need a cultural mind shift, more urgency and embracing true entrepreneurship 2️⃣ We have to step up our game when it comes to tech transfer. Transforming our high quality academic knowledge into economic and societal impact via startups.

Let’s Dance: Private Equity plays a major part in the music ecosystem paying 15-25x annual cash flow for royalties. Since 2020, several billion dollars have been invested in music royalities led by the largest PE sponsors in the world, including Blackstone, Apollo Global Management, Inc., KKR, & The Carlyle Group. Francisco Partners the brilliant technology-software focused PE firm, led by Dipanjan Deb purchased a controlling stake in the best PE music specialty asset manager, Kobalt Music. Kobalt recently sold a catalogue comprised of Weeknd, Lorde and others for $1.1 billion to a KKR-led team, with another sponsor selling its music royalties (Shakira & Nelly) for $465 million. The music business has always been big business, but the original creative mind who revolutionized the monetization of music rights was Mr. Space Oddity himself, David Bowie. Bowie Bonds were the first music-backed bond sold in the capital markets, allowing the artist to receive a windfall in the 1990’s when Moody’s, S&P and Fitch rated his music-backed bonds. The bonds matured 10-years after issuance, and the rights to the income reverted to David Bowie. Thanks to the demise of Napster, and the business models of Spotify and Apple Music, top recording artists receive payment for every song played. Music royalties are classified as Master or Composition, whereby the Master is the IP or rights to reproduce or distribute the sound recording that belongs to the recording artist or record label; whereas the Composition represents the rights based on the lyrics, harmonies, or melodies of the song that belongs to the songwriter or publisher. As Prince famously said in a Rolling Stones article “if you don’t own your own masters, the master owns you”. Taylor Swift’s Eras Tour has topped $4 Billion, the most profitable in history, which comes after her legal battle with a promoter who purchased her music rights from her producer. Given the steady cashflows for royalties, financing is based on an LTV attachment point and DSCR. Financing costs have soared over the past two years, so returns are now upside down for some of the PE sponsors, with creditors earning more interest income than the royalty stream earned by equity, a condition that is not particularly favorable at this current juncture. This explains why there has been very few transactions in 2023 given costly financing. During the past two years, as interest rates have risen, the price paid for music royalty cash flow streams has fallen nearly 20%. For instance, if a buyer were to pay 20x cash flow expecting to earn a 5% return (unleveraged), and the newly adjusted multiple subsequently traded at 16x, then the value would decline by ~20% as the new buyer requires ~100bp higher yield. A publicly listed UK listed music royalty company trades at a discount to its NAV as its share price has declined 50% from 2021.

AgTech Ecosystem - below is an article about the potential for private equity to get (more) involved in ag and AgTech over the next couple of years. With the big drop in venture capital and AgriFoodTech VC, combined with a lack of exits (IPO and M&A) and a lack of grower capital which means the usual suspects for making acquisitions (OEMs like Deere, chemical inputs manufacturers like Bayer) are in a tough revenue position for at least a while. Given this backdrop of a major capital shortage, it's easy to see private equity investors getting involved in two potential scenarios: (1) continuing and possibly increasing investment in farmland and farming operations; (2) investing in individual AgTech startups and/or roll-up strategies. The first scenario has four potential investment theses: (1) farmland appreciation; (2) groundwater appreciation; (3) operational efficiency; (4) crop rotation. The second scenario involves buying startups - many of which do not fit standard profiles because they are often pre-revenue and even more often not cash-flow positive so additional capital is required post-acquisition. With $200B over the past 7-10 years in AgriFoodTech VC investment and 700 startups in automation and 1,300 startups in biologicals, there are likely to be 1,900 distressed startups just in those two categories. But with many of them not having revenue, they will not be good portfolio fits for PE investors as individual investments or roll-ups. The far more likely scenario is that private equity continues to see farm land and operations as a more attractive investment portfolio. And if you think about it this could be the best result for AgTech startups because the best way to PE investments to deliver a solid ROI is to help increase the farm land value, the groundwater value, the operational efficiency, or the crop rotation. The two items that can most commonly be improved through solid strategy and operations are groundwater via water efficiency and/or treatment tools and operational efficiency via automation and other solutions. The key to delivering growth is either capital to drive product and revenue growth or growth more directly - from revenue growth through sales. And this turns out to be the key reason why the agriculture ecosystem should root for continued private equity investment in farming operations over PE investments in AgTech startups. If PE comes to startups, it will still need sales revenue growth to really get those startups into a strong commercialization position. But if PE comes to farm land or farming operations, it then uses the capital it needs to support the investment to make AgTech purchases which is the best way for the PE to deliver solid financial returns and the best way for AgTech startups to grow. AgTech Alchemy Rhishi P. Sachi Desai Will Feliz Adam Bergman Rob Trice Steve Mantle

In the past 10 months at EY SaT, I have worked on numerous deals and dealt with around 3 Private Equity Firms. Across all the deals, one thing became clear - PE investors look at businesses through a very specific lens. In this post, let’s discuss the key factors they analyze, with real-world examples: 1] Sustainable & Scalable Business Model PE funds are not just looking for revenue growth - they want businesses with a model that can scale efficiently. Example: A D2C brand with ₹500 Cr revenue may seem attractive, but if its customer acquisition cost is high and repeat purchases are low, investors will think twice. Compare this to a SaaS company with predictable recurring revenue—investors would lean towards the latter. 2] Unit Economics & Profitability Cash burn is fine, but only if backed by strong unit economics. Example: A food delivery startup with ₹100 per order revenue but ₹150 cost per order (even after discounts) is a red flag. On the other hand, a logistics company with a clear path to breakeven per delivery is much more attractive. 3] Industry Tailwinds & Competitive Advantage PE investors assess whether the industry itself has strong growth potential and if the company has a sustainable edge over competitors. Example: Fintech lending is booming, but does the company have a unique underwriting model, regulatory approvals, or a sticky customer base? Without these, it’s just another player in a crowded space. 4] Governance & Compliance Risks A company with strong growth but weak compliance is a ticking time bomb for investors. Example: Many startups in the past have faced issues due to financial misreporting or governance lapses, leading to massive devaluations (WeWork being a classic case). A PE fund will conduct rigorous due diligence to avoid such risks. 5] Exit Potential & Value Creation PE investors don’t just invest—they need a clear plan for exiting with strong returns. Example: If a company has a strong IPO pipeline, potential M&A interest, or clear secondary sale opportunities, it becomes a far more attractive bet. CRUX At its core, PE investing is about value creation—identifying businesses that are fundamentally strong and helping them scale further. If you were a PE investor, what factors would matter the most to you? Let’s discuss in the comments!

Why growth equity (Series C/D/E) is in a tough place and what it means. Public software cos are valued at <10x trailing ARR while private pre-IPO company multiples are often at 70-100x! So.. why are growth investors pumping private valuations? Well, management fees. 🧵 In a classic 2/20 model, VC / PE investors take 2%/yr of the assets they manage as "management fees" and 20% of the profits, or carry. If you want to make more money, the math is simple — raise and return a bigger fund! If your fund has had a good track record, you can always raise a bigger fund, but mo money, mo problems. a) It's harder to return and actually get carry b) You need to invest larger amounts to deploy it a) It's harder to return. Say you raise a $5B fund. To achieve a 4x, ignoring fees, it needs to be $20B. Assuming ~10% ownership at exit, you must be in cos worth a total of $200B.. in a fund deployment cycle of ~3yrs! The fund needs an Alibaba / OpenAI in 3yrs to return! b) You need to invest larger amounts to deploy it. Deploying $5B in $15M Series As would mean 300+ rounds which is infeasible. You need to do the bigger growth rounds — C/D/E — with $100M+ checks. But there's simply not that many good growth startups. So what happens? Every half-good growth round is oversubscribed (I've heard 3-4x on $100M+), and all the growth funds want to deploy capital there. Investors can't keep drawing fees without deploying. This inter-firm competition drives up the valuation! What happens to these companies? High valuations means crazy growth expectations. Like Bolt or Byju's, some will completely collapse. Others will need to take down rounds. It's too $$ to be acquired and they'll struggle to IPO cuz the public markets wont pay that price! Only a select few will make it. As it is, in the last 2yrs, public markets have been dry. Rubrik and Klaviyo, that IPO'd recently have ~$600M ARR at a $6B valuation, with a ~10x multiple. Exits are sparse, and the 2021 era vintage is overvalued. Many of these funds will not return. Who wins? Investors will rake in the sweet sweet fees. 2% of $5B is $100M /yr! When they realize they won't see their carry, they'll leave. Founders will often do secondary sales along the way, and be fine. Who loses? LPs will be good, not great. Liquidation preference means unless it goes to 0, investors get 1x+ back. Employees may be okay to bad. Their equity will go to 0, or worse, debt. They may have taken a loan to buy their options at a ridiculous price.

African Private Equity faces a major challenge with exits #Africa PE´s exit problems are exacerbating. According to AVCA - The African Private Capital Association the number of exits until Q3 23 fell to 25 from 82 for the full year 2022. Exits to strategic buyers and PE firms/financial buyers, the dominant exit routes, declined significantly to 14 from 39 and to 8 from 19 respectively. AVCA reports that 71% of Limited Partners rank exit issues as their biggest concern, to my surprise ahead of macroeconomic risks. Incidentally, although for different reasons, developed market PE is also struggling with exits in 2023, according to a recent report by Bain & Co. This has many implications. 1️⃣ The pressure on selling prices is significant. DPIs (Distributed to Paid in Capital) are falling and many funds are unable to exit portfolios within the 10-year fund term or even the 1+1 year extension. Obviously, getting money back late at lower IRRs is unsatisfactory for investors. 2️⃣ Fund-to-fund sales are very frequent. Whereas this is very legitimate, the secondary buyer must demonstrate a viable strategy and the ability to create additional value. The market is more critical of fund sales to a successor fund managed by the same GP due to conflicts. 3️⃣ Although dividends recaps provide some liquidity, they do not solve the problem and high interest rates make recaps less viable. 4️⃣ Some practices of developed markets, like collateralized Net Asset Value borrowing against portfolios for good reasons do not play a role in Africa.   Unfortunately, I do not see an easy or short-term solution. Since waiting is never a good strategy, some financial engineering to make exits happen is useful. Increased focus on a credible narrative for the next investor also helps. Beyond that, attracting more liquidity is key. The investor universe in Africa is currently too small and focused on regional strategic and African PE buyers. 1️⃣ Attracting more commercial funding from international strategic and financial investors to generate liquidity is crucial. 2️⃣ Local and regional public and private markets are shallow. Africa should focus on developing these markets to increase own resource mobilization. Local institutional investors should invest more in PE; public markets need greater depth to absorb IPOs. 3️⃣ Perceptions of Africa are often unfairly negative and over-generalized. A new narrative needs to focus on the enormous opportunities of a continent where investors can generate significant returns. The flipside: Africa must improve on economic and political issues to become more attractive. I believe that private equity can be a powerful driver of change with significant positive development impact. DFIs such as DEG, which have been critical for the industry since its inception, will continue to provide liquidity and catalyse private capital. #impactinvesting #sustainableinvestment #sustainabledevelopment #AfricaVC, #AfricaPE #privateequity DEG Impulse

🔥 CalPERS - the US biggest pension fund - will increase its private markets exposure by $30b. Why are the CIOs of multi-asset portfolios increasing their allocation to alternatives? 👇 Directly or indirectly, they are all following the footsteps of David Swensen and the "Yale Endowment Model" he pioneered.   “Market participants willing to accept illiquidity achieve a significant edge in seeking high risk-adjusted returns. Because market players routinely overpay for liquidity, serious investors benefit by avoiding overpriced liquid securities and by embracing less liquid alternatives.”   👇 Here are 6 must reads about the Endowment Model:   • Pioneering portfolio management: An unconventional approach to institutional investing - Swensen (2000) - https://lnkd.in/deXekRfr - A detailed description of the endowment model by Swensen himself   • Lerner et al (2008) - Secrets of the academy: The drivers of university endowment success - https://lnkd.in/dZMQ8frP - An empirical study of endowment performance outcomes and drivers   • Asset allocation and portfolio performance: Evidence from university endowment funds - Brown et al (2010) - https://lnkd.in/du9jAk2f - Empirical analysis that traces endowment alphas back to active management   • Background risk and university endowment funds - Dimmock (2012) -https://lnkd.in/dSRgWYJk - Analysis of the factors that influence the propensity of endowments to make risky allocations   • Do (some) university endowments earn alpha? - Barber and Wang (2013) - https://lnkd.in/d3dWHx9d - Empirical paper showing that allocations to alternatives are key to the success of the endowment model   • Investment beliefs of endowments - Ang et al (2018) - https://lnkd.in/dreqRGDe - Interesting framework to extract capital market assumptions across liquids and alternatives based from observed asset allocation policies #assetAllocation #alternativeInvestments #investing #PrivateEquity Picture source: FT

I recently caught up with an old family friend whose distribution firm advises ≥ ₹5,000 crore in AUM for HNI clients in India. He had one interesting observation to share: Over a decade ago, he had to push hard to convince his former life insurance clients to invest in the public market (stocks & mutual funds). He convinced my mom to begin MFs in 2008, AIFs in 2015 etc. Today, the equation is very different: Zepto raised $350M from domestic family offices, Swiggy shares were bought pre-IPO by HNIs, public market legend Ashish Kacholia is writing $5M+ cheques into startups. According to him, both new & old money clients are aggressively deploying capital into both public & private markets. His team has to ask clients to steady (”slow down”) their deployment pace — what was a “push” business is now a “pull” business. 💡His observation: There is a newfound fascination with private markets (i.e. angel investing) and the word “family office”. He is seeing individual UHNIs allocate > 5% of liquid net worth to private investments. ✅It is quite common to see investors who have made fortunes elsewhere begin private market investing — even the legend late Mr Jhunjunwala did private transactions BUT these were more PE / buyout transactions (e.g. Star Health in 2018). But this time, it is different: Investors are going early stage (i.e. writing angel cheques, Seed cheques etc). What we know from the data ⤵️ (1) Successful public market investors have diversified into privates: Madhu Kela’s alternative investment fund - Singularity AMC - has over ₹2,100 crore in committed capital. (2) Indian HNIs are making portfolio investments too (i.e. taking LP positions in VC funds); 40% of Blume Ventures Fund IV (size ~ ₹2,500) was domestic capital (3) Indian HNIs are investing in private markets beyond equity — private credit is an attractive asset class (e.g. 85% of Trifecta Capital’s ₹1850 crore Fund III was domestic capital) ❓Why is everyone running to privates — according to him, after booking profits in public markets & seeing 100%+ ‘pops’ on listing — investors have higher risk appetite to take on illiquidity & capital erosion risk in private markets. And how is this manifesting? Every 3rd person in my gym in Mumbai is an “Angel investor” or “LP”. And, this is NOT the Shark Tank effect 😂 This is the Wealth Effect. ➡️ It will be interesting to see how many of the new crop of Angel investors can stomach the capital loss — it hits in year 2 when you get your 1st shutdowns. Brutal but best of luck to everyone who does this 👍 #startups #india #venturecapital