Preet Chawla, CFA

Is the U.S. Economy Stronger Than We Think? At Yale's recent CEO Caucus, 84% of top CEOs expressed optimism, predicting a "soft landing" for the U.S. economy. Surprisingly, 81% were taken aback by the economy’s resilience, despite widespread pessimism in public polls. With inflation dropping and unemployment at historic lows, real wages are growing, and GDP surpassed expectations. CEOs agree: the economy is outperforming the gloomy forecasts. What’s your take on that? Source: https://bit.ly/47Sds0i

21

There is a lot of talk about the PE industry not delivering the exits they promised. PitchBook succinctly put it with the title “Behind the J-curve” in its recent in-depth analysis of distribution activity in private market funds. Another side of that story, particularly relevant for secondary buyers like us, is that many private market funds hold their assets at seemingly inflated valuations. TVPI numbers look great for most funds, but they can’t monetize their holdings anywhere near their current NAV, indicating their estimate of “fair market value” is way too optimistic. There is always a market, the price may just not be where you wish it. To a large degree, the reluctance to exit companies results from having them marked too high. Assets were aggressively written up to look good in the short-term, impressing LPs with “paper gains” to raise the next, much bigger fund. #secondaries #privatemarkets

59

2 Comments

Private Equity’s Deal Engines Roar Back: Buyout and infrastructure firms see artificial intelligence driving demand for data-center investing. Private equity’s dealmaking machinery upshifted in recent months, easing fundraising strains and paving the way for an accelerated pace over this year’s second half. With the market getting back in gear, private-equity firms are taking on billion-dollar investments in data centers—the warehouse-size buildings that house racks stuffed with computer servers used to crunch and transmit streams of information—and related projects to capitalize on a cloud-computing and artificial-intelligence boom that is boosting expectations for productivity gains. “AI is widely acknowledged as having the potential to be one of the greatest drivers of transformation in a generation,” Stephen A. Schwarzman, Blackstone’s chairman and chief executive, said on an earnings call last month. As he has before, he likened the potential impact of generative AI to the epochal effects of the invention of electric lights. Blackstone invested nearly $34 billion in the three months through June, the most for any quarter in two years, with $19 billion more committed to deals currently in the works, firm executives said. Blackstone’s second-quarter transactions included $4.5 billion of a $7.5 billion debt package for CoreWeave, an AI-focused cloud services provider and data-center operator, Schwarzman said. He described the financing as the largest in the firm’s history.  Similarly, Ares Management invested some $26 billion in the just-ended period, putting the quarter in the top two for capital deployment by the firm, CEO Michael Arougheti said during an Aug. 2 earnings call. Ares has invested nearly $5 billion over the past five years combined in digital infrastructure, including data centers and fiber-optic networks, he said. While AI drives demand for data-center capacity, “what is increasingly important to underscore is that the bottleneck for AI development is, increasingly, access to power,” Connor Teskey, president of Toronto-based Brookfield Asset Management, said on an earnings call Wednesday. He pointed to a recent deal with Microsoft that calls for Brookfield to invest more than $10 billion in renewable energy to support data centers as an example of this dynamic. “Renewable power, transmission and distributed generation are critical infrastructures that are currently insufficient but essential for supporting AI’s expansion,” Teskey said.  Investors with deep pockets have flooded the sector in recent years. In 2022, for example, private equity accounted for roughly 91%, or $44 billion, of global data-center deals, according to Synergy Research Group. The pace of dealmaking in the sector has picked up after ebbing last year, according to John Dinsdale, chief analyst and managing director at Synergy. Capital Innovations, LLC #InfrastructureInvesting

23

1 Comment

Equity Distributions with High Cash Flow CLO Equity is having another stellar year. Reported IRRs for CLO Equity: ~15% YTD for many of the top CLO managers. CLOs start with a warehouse line allowing CLO managers to accumulate/ramp their BSL portfolio of performing & highly diversified loans (~200 BSLs when CLO is priced). The most favorable CLO warehouse lines have non-marked-to-market facilities with roughly 4x leverage. Bank facilities provided with favorable terms are about SOFR +125 to +150bp range. During the warehouse ramp, equity seeks to earn 20-30% IRR, but this can vary widely, however it’s for a short period (~3 – 6 months), so the MOIC is low as it’s just a component that drives the overall CLO equity return. The BSL market is performing well. I expect the credit markets to perform well in this environment with default rates for BSL declining in the coming year, which should prove positive for CLOs debt and equity. AAA CLO tranches represent about 60% of the CLO cap stack and AAA’s have tightened to ~+130 from its wide earlier this year of S+150. The CLO equity arb is driven by the difference between the rate earned on the BSL portfolio vs. the liability costs (and admin costs). Holding all things constant, tighter liability costs are accretive for CLO equity investors. Credit selection and asset management is critical to performance as the best CLO managers employ dedicated teams of investment professional’s expert in loan underwriting, building, and managing highly diversified CLO portfolios. Strong credit profile is key to maintain low default rates, and its best to avoid CCCs, as mitigating risk is critical to performance. CLO equity also benefits from reinvestment during the investment period, active management that can add alpha via relative value, and repricing/extensions of CLO liabilities later in the CLO life span. CLO equity holders earn strong current cash distributions for well performing deals, with the potential to earn mid-teens IRRs, strong DPI and MOICs. The added kick is when the CLO manager shares a portion (10-20%) of its management fees they earn from managing the CLO (~40 bps) with the CLO equity investors. This fee sharing arrangement was first introduced post-GFC when CLO managers raised CLO equity funds required under risk-retention requirements as The Volcker Rule was introduced. Since the Volker rule no longer applies to U.S. CLOs, fee sharing arrangements are less prevalent today, but available from select managers. For these reasons and more, I am a proponent of CLO Equity and believe there is a place within in broader portfolio to hold these high yielding assets. Big shout out to Marathon Asset Management's CLO team who just closed Bryant Park 2024-24, a $405M CLO yesterday, bringing Marathon’s CLO capital market transactions to $2.4B YTD.

204

3 Comments

New or smaller VC, PE or HF manager? AUM less than $50 million? Great Performance? Trying to raise assets? Struggling and failing?   Sounds all too familiar: It’s due to poor or non-existent marketing Let’s get real about raising assets for “sub-institutional” managers, those with AUM between $0 and $50 million. IT’S HARD AND A STRUGGLE.   Raising assets in a crowded, hyper-competitive, complex and complicated market from investors that are risk averse, stringently selective and idiosyncratically demanding is more challenging and difficult than most new and sub-institutional managers understand. The fact is the majority of sub-institutional managers fail to get AUM beyond personal capital long with small amounts from family and friends even when they have exceptional performance. Plainly speaking: There is a lot of BS, hype, propaganda and completely wrong information about marketing and fundraising for small managers with AUM less than $50 million Since 2011, Johnson & Company has specialized in meeting the marketing challenges for "sub-institutional" managers. 25+ years experience, expertise and skill uniquely equips a new or smaller manager with the FACTS and proven structured, disciplined and focused PROCESS supported by independent high-integrity data and research, accurate information, objective insight, expert instruction and frontline intelligence that optimizes marketing process execution to maximize the success, efficiency, economy, expedience and effectiveness of raising assets. If you’re a new or smaller manager, with AUM less than $50 million struggling and failing to raise assets, first get the facts: https://johnsn.com/facts If after your review of the “FACTS”, you’d like a candid, no-nonsense conversation about marketing and raising assets, contact me, I welcome the opportunity. [email protected]

7

Generalist funds are outpacing specialist funds with returning cash in this market cycle per PitchBook. While the outlook is brighter, we are realistically still in a down cycle for private markets. My guess is that there has not been a lot of cash returned to LPs over the last few years. However, funds and companies with greater exit optionality are currently carrying the day. From the article: "The turnabout in relative positions is a result of specialists being restricted to established exit routes including IPOs and strategic or corporate acquisitions, while generalists have more options for exits and may have exposure to different market regions and sectors, giving a higher probability for distributions." This will be a growing issue as many funds begin to push up against their 10-year mandate. Endeavor Colorado #privateequity #venturecapital #entrepreneurship #founders #startups #investing #innovation https://lnkd.in/ghH9CYhG

13

One of the most exciting questions from this interview was "what key attributes do private equity firms seek in targeting healthcare, biotech, and life science companies for acquisition?". Private equity firms are increasingly attracted to the healthcare, biotech and life sciences industries due to their resilience against economic cycles. Attributes that PE firms prioritize include: Stability and Growth Potential: Companies that demonstrate consistent revenue growth and have a solid track record of performance are highly attractive. The ability to withstand economic downturns and maintain steady growth is a crucial factor. Service and Software Focus: Companies that provide essential services and software solutions within the healthcare ecosystem are less vulnerable to regulatory changes and scrutiny, making them reliable investment targets. Regulatory Compliance and Low Risk: PE firms typically avoid companies with high science risk. Instead, they favor businesses with well-established products, services and technology. Specialization and Expertise: Many PE firms seek companies with specialized knowledge and capabilities that align with their strategic focus areas, ensuring they can add value and drive growth post-acquisition. Thank you to the Los Angeles Times for inviting me to participate in this issue! I am honored to be able to contribute to this piece. If you'd like to discuss any of the insights from this issue, reach out to me directly. #privateequity #lifesciences #healthcareservices #biotech #investmentbanking #businessvaluation

20

𝗜 𝗳𝗼𝘂𝗻𝗱𝗲𝗱 𝗮 𝗻𝗲𝘄 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗳𝗶𝗿𝗺 𝗰𝗮𝗹𝗹𝗲𝗱 Nodem Capital! Nodem will manage funds offering fast liquidity to LPs and GPs holding portfolios of “Next Wave” companies. We see the global adoption of technology as a force for good and will strive to be a genuine ecosystem-ally, unlocking capital for recycling and growth. Subject to FCA approvals, we intend to start investing in Q125. Thanks again to those who helped me design and set up Nodem. Special shout-outs to Alexis Koumoudos, Olivia Hamilton-Russell, Michael Joyce, Philipp von dem Knesebeck, Tien Leong Tan, CFA, James Fournier, Roman Fuzaylov and Steve Chaves. Thanks also to Robert Eke for his support in creating our innovative deal structuring playbook. I have transitioned to an advisory role at the amazing Sturgeon Capital. I want to thank Kiyan Zandiyeh and Robin Butler CFA Butler for their understanding and support in my new endeavour. 𝗟𝗼𝗼𝗸𝗶𝗻𝗴 𝗳𝗼𝗿 𝗹𝗶𝗾𝘂𝗶𝗱𝗶𝘁𝘆? Sourcing is now live. Schedule an intro call through the website (nodem.com). 𝗠𝗲𝗲𝘁 𝗺𝗲 𝗼𝗻 𝘁𝗵𝗲 𝗿𝗼𝗮𝗱: East Coast from Nov 10-17, West Coast Nov 18-23, Europe/MENA in mid-December. I have two open slots: focusing on LPs and/or co-inventors. #emergingmarkets #NextWavemarkets #Brazil #Mexico #SoutheastAsia #India #EasternEurope #Baltics #Indonesia #Vienam #secondaries #venturecapital #preferredequity #LPs #GPs #liquidity https://lnkd.in/ejXtekaQ

297

42 Comments

We're proud to celebrate Sector Lead, Matt Witheiler's fourth consecutive naming to Forbes’ ‘The Midas List: The World’s Best Venture Capital Investors in 2024'. Kudos Matthew Witheiler - this is testament to your enduring impact on the late-stage VC industry. https://lnkd.in/eBdHwBG4 Wellington Management did not pay a fee to be considered. Winners were selected by a data-driven approach, the Midas List is produced from a combination of public data sources and the submissions of hundreds of investment partners across hundreds of firms each year. This award was announced on June 4, 2024, a submission made in January 2024 and is based on 5 years of trailing data. The award may not be representative of any one client’s experience. The award is not indicative of Wellington Management’s future performance. Past performance is no guarantee of future results.

10

Great to see RSF Social Finance's flagship loan fund, the Social Investment Fund, in today's ImpactAlpha The List: Impact fund managers steer private credit to places equity fears to tread. #changemakers #socialinvestmentfund #regenerativefinance #impactinvesting #wealthmanagement

47

If you think portfolio risk management is just about diversification, think again. This article sheds light on some surprising strategies that challenge common perceptions. Here are some thought-provoking takeaways: - Did you know that reducing the number of investments in a portfolio can sometimes actually decrease risks? It's all about strategic selection. - Contrary to popular belief, actively managing risk doesn't necessarily mean more frequent trading. In fact, a hands-off approach can be a smart move. - One of the key points discussed is the importance of understanding the correlation between investments, a factor often overlooked in risk management strategies. - Asymmetric risk and the role it plays in portfolio management is explored, offering a fresh perspective on balancing risk and return. - Ever considered tail risk hedging? This article dives into this lesser-known strategy that can enhance risk management effectiveness. Share your thoughts and feelings on these unconventional risk management strategies. https://lnkd.in/ecgSpH93

Today, I published LVS Advisory's Q3 2024 investor letter which discusses our recent investment performance and an investment in Medpace $MEDP. https://lnkd.in/e67V2EZh

18

Kudos to Phil Bak. He's Toto the dog pulling back the curtain and exposing that the all-powerful Oz is a fake. In an unusually candid article filled with jaw dropping nuggets, here are four gems: - "The quarterly returns for private real estate investments are volatile, we just don’t see the volatility. Of course, you already knew that. The very notion that volatility ceases to exist simply because an investment is not traded in a liquid marketplace is silly. Just because an investment is not traded cannot possibly make it less volatile or less correlated, but smooth returns are very much part of the appeal; so much so that industry wag Cliff Asness humorously observed that ‘volatility laundering’ is not just a feature, it’s the main attraction." - "BREIT is the poster child for the "democratization of private assets" but the discounted deal with the University of California doesn't sound very democratic at all. If your fund manager has to lure investors with an 11.25% guarantee to invest alongside you, you should probably get out as soon as you can - or get your own 11.25% guarantee." - "What if Blackstone has been reporting inflated returns for years? What if it all ends with them saying, “Just kidding”? It might call everything into question. This space has been gaining market share at a rapid pace but if this doesn’t have a happy ending people might not trust these guys in polyester vests as much as they used to. And if you don’t trust PE guys, who do you trust?" - "...remember that it’s not an illiquidity premium that you want to pay for. It’s a liquidity premium. Because when liquidity matters, it suddenly matters the most." The time is ripe for a fresh perspective on public market equity implementation that is complementary to private assets' absolute return orientation. A perspective that focuses on satisfactory investment outcomes that align with an asset owner's actual spending needs and goals, rather than continuing the historically common practice – and expected future folly – of tethering one’s public equity beta to that of an equity benchmark whose performance from today’s elevated levels is widely expected to be sluggish and insufficient to fund minimum liabilities (ie: payout rates, actuarial hurdles, spending goals, etc.). Importantly, such a change in public equity perspective comes without ratcheting-up illiquidity, non-transparency, leverage or alts-like fees & expenses. .

23

2 Comments

The private credit strategy in private markets is one of the most active for fund manager deployments as well as limited partner commitments. The 22 team member exodus from one of the market leaders Barings to recently formed private credit specialist fund manager Corinthia Global Management Limited could be one of the more sizeable single team departures in private markets in this era, especially from a market leader. It looks like Japanese financial institution Nomura are an initial backer of Corinthia Global Management Limited. I would imagine other LPs have committed for this significant onboarding of staff. And again, 22 people departed a firm together! While players like Barings are well capitalized and have deep capital markets networks via their parent MassMutual, the allure of management company economics in a newly-established, specialized firm, versus the omission working at a larger multi-asset manager can and will likely cause further shifts out of the big firms in this overall market inflection period. But there is also no doubt the argument and vaildity of being part of a scaled and established platform to endure market challenges and uncertainty, and utilize economies of scale especially in fundraising and capital to endure as many smaller, independent players are closing shop. Tough decision either way - what would you do? Remain with a well-established market player for lower comp/upside, or join a new firm for the juicy management company upside but the higher risks of building a business in turbulent times for capital markets? Choices, choices.... #alternativeassets #privatecredit #fundmanagers #privatemarkets #hiring #compensation #equityincentives #ownership #credit #fundraising #institutionalinvestors #capitalmarkets

28

Party on, dude! Blowout jobs number at 272k gets the headline, but there is an interesting story about the innovation economy worth noting. Corporate margins have been at record highs without significant labor force reductions. Declining costs relative to sales is likely a product of corporate investment in areas like automation and digitalization. Many of the companies tied to those themes continue to deliver strong performance. Check out Global X ETFs recent Inflection Points, The Fed vs. the Innovation Economy for more on the topic: https://lnkd.in/dTWqbrD7

16

Hot off the press from my Cliffwater colleague William Dornbrook: Startups on Sale: The Opportunity in VC Secondaries This paper outlines our perspectives on venture capital secondaries, an asset class at an important inflection point for future growth. Structural changes in private markets, a growing need for liquidity from LPs, and near-term headwinds in the IPO market have led to increased investor interest in VC Secondaries. Amid this backdrop of highly motivated sellers and improving metrics for startup quality, we believe VC Secondaries are priced attractively.

79

2 Comments

This FT article has a fancy graphic illustrating the layers of debt in private equity, but -- despite my prior post warning about the risks of debt layering in PE -- this article is inaccurate scaremongering. Here’s the key line: “Much of this lending is ultimately underpinned by the financial health of a fund’s portfolio companies. Yet every transaction ends up adding more leverage to heavily indebted businesses, which can make them more vulnerable in a downturn.” This statement is fundamentally incorrect. From the leverage used by General Partners or Limited Partners on their overall private equity portfolios to the use of subscription lines, secondary fund leverage, and leverage by funds purchasing GP stakes—none of these add leverage to the individual businesses or increase their susceptibility to economic downturns. The only mechanism that does add leverage to a business is a dividend recapitalization. However, the alternative is typically the PE firm selling the business to realize its investment, where the acquirer, especially if it’s another PE firm, would likely employ the same amount of leverage. Net Asset Value (NAV) loans may represent leverage on leverage from an LP’s perspective, but they do not increase the portfolio company’s debt or its bankruptcy risk during a downturn. Instead, they merely increase the possibility that the GP might need to sell sooner than desired to repay fund-level debt. Therefore, the only factor impacting a portfolio company’s failure probability is dividend recapitalization. The bank’s expertise is to assess the risk of its debt investment in the company. Whether a GP sells a stake in their management company, an LP sells a stake to a secondary fund, or the fund uses a subscription loan (a short-term loan backed by LP capital commitments to optimize investment IRR by delaying capital calls) to purchase the company—none of these scenarios affect the portfolio company’s ability to weather a downturn. “There should not be a pocket of the market that touches on so much of the economy in such a sizeable way, where we can say, ‘oh there’s leverage,’ and then very few of us can explain what that leverage means and why it might—or might not—be risky,” said Victoria Ivashina, a professor at Harvard Business School specializing in private capital. I can only assume Professor Victoria Ivashina was either unaware of the article’s specifics or, as a private markets expert, she is 'one of a few' (?) who could have alleviated the author’s concerns about this ‘web of debt.’ Moreover, where is the causality here? There is no indication (other than the title of the article) that PE firms are coercing banks into making these loans. The title could just as easily have been “How Banks Have Mired PE Shops in Potentially Depression-Inducing Debt.” Both parties willingly engage in these transactions, and as new debt products emerge, banks are as proactive in marketing them to PE firms as the firms are in seeking them out.

3

I spoke with Bilal Jafar at Financial News about the FTCs recent ban on non-competes. While senior PMs can make as much as $120MM, they often have to sign straight non-competes to not join rivals or launch their own fund, sometimes for years after leaving their current firm. “The FTC’s announcement will not only increase the flow of talent and growth of newer funds, it could also force firms to be more competitive with retention strategies instead of the threat of sitting out for 18 months,” said Max Heppleston, managing director at hedge fund recruitment and consultancy firm Fredriks. “This could be massive for newer funds as top portfolio managers, analysts, and teams will be able to move more smoothly, and startup hedge funds can get going quicker, which can be so important to their success,” he added. Obviously, as a headhunter I am slightly biased, but the unrestricted flow of talent is core to a free market, I believe this will drive healthy competitiveness in the space and could help reverse the trend of declining launches of new funds.

33

1 Comment

Good perspective on what it takes to be a CEO.

5