This is Chris, on the Wire for this chilly Thursday.
Lots of good market intel at the Global Private Capital/IFC conference way down in the wilds of Battery Park City this week. I always find it valuable to get a sense of how private equity pros in the rest of the world are thinking about the market and opportunities.
Lot of chatter at the conference about recession – that one is coming, and a few people made the point that they’d like to see it happen sooner than later. The economy is going to have to live through the pain and slow down to get rising prices under control (that’s the belief, at least). And it should be sooner rather than later, so the economy can avoid a harder fall.
Recall, if you will, the 1970s when a succession of Keynesian economic and political leaders did everything in their power to push growth in the fear of stoking unemployment, fueling inflation.
Private equity has enjoyed a decade or more of low interest rates, which has fueled dealmaking and exit activities, kept distributions flowing and fundraising strong. High rates and persistent inflation, not to mention rising geopolitical tensions between the world’s two largest economies, have created an environment of uncertainty and slower demand.
The transition from the prior market into the new one will determine winners and losers in private markets, according to one speaker. Some investors continue to operate under the assumption that, after a short period of pain, things will get back to where they were in 2021. But that may not be the case – something fundamental is changing; the bull market run is over and it may be detrimental to believe the market will snap back at some point instead of adjusting to the new reality.
Supply chain: Accel-KKR recently backed Loftware, which provides cloud-based enterprise software to manage companies’ labeling.
Loftware’s software stores information in barcodes, which helps shippers, carriers, manufacturers, warehouse inventory managers, grocery stores and other stakeholders in the supply chain ecosystem move goods accurately and in a timely fashion, Park Durrett, managing director with Accel-KKR, told PE Hub reporter Obey Martin Manayiti.
In the past, shippers sent out goods with no means to trace them until they reached their destination. But the modern supply chain ecosystem demands more. “Being able to track the exact cargo shipments, including highly regulated or sensitive goods, such as in pharmaceutical life sciences, is becoming increasingly important in this day and age,” Durrett explained.
M&A impacts: I chatted recently with an M&A lawyer about what’s changing with transactional activity. A year or more ago, GPs were rushing to get portfolio companies prepped for sales in anticipation of the market decline. Now, managers are telling portfolio companies to hunker down, pay attention to operations and cash flows and don’t get distracted by a potential sale.
What this means is transactions are taking longer. “People will take time to run full processes and get it absolutely baked instead of looking for things like preempts,” the lawyer said.
“GPs are saying, ‘we don’t want to overly burden you. We want to launch [a sale] in a manner that shows we’re totally ready to sell’. Buyers that turn up in half-baked processes in this market will run a mile,” the attorney said.
Signs n’ signals: There’s been ominous signs in the market that things are changing for the worse. Recently, I wrote that TA Associates paused fundraising on one of its ancillary funds to focus on its flagship pool.
Now comes this: Drama erupted at a Marin County pension investment committee meeting over what is usually a routine fund term extension request.
Abbott Capital had requested a two-year extension on its 2008 flagship fund-of-funds. Such requests are generally rubber-stamped, though they also may lead to negotiations around fees.
This time, however, the investment committee denied the request, citing uncertainty around valuations. The fund-of-funds had performed well – Marin County committed $100 million and received $154 million in distributions so far.
Abbott told LPs the fund still had material value in its unrealized assets and unloading the stakes on the secondary market would reduce that value. Seventeen of the underlying funds in the pool had requested extensions of their own to Abbott, a consultant said at the Marin County investment committee meeting.
“This is unfortunately one of the things you see at the back end of fund lives. There tend to be more extension requests than you’d like to see,” James Callahan, president of consultancy Callan, told the committee.
What used to be routine only a year or so ago, has now become the subject of intense debate, review and even suspicion. We’ve indeed entered a new phase.
That’s it for me! Hit me up with tips n’ gossip, feedback or book recommendations at firstname.lastname@example.org or find me on LinkedIn.