DEER ISLE: Insights, Flows & Investment Trends
Welcome to 2023!
Hopefully a year that brings peace and prosperity to the capital markets. It seems likely that the US will go into a recession, which should bring down interest rates, and the question is whether growth slows a lot or a little and for how long. We are hearing that most market participants believe a short, mild recession is most likely scenario.
There seems to be plenty of capital on the sidelines waiting for a signal to invest.
From our discussions, wealth management firms’ model portfolios are significantly overweight cash and cash equivalents (up to 40% of their asset allocations).
In addition, there is over $2 Trillion of Private Capital dry powder according to S&P1. This ability to invest is highly concentrated with the 25 largest Private Equity, Venture Capital groups accounting for approx. 25% of dry powder with number 25 (Lexington Partners) having $9.5 billion of dry powder and the firm with the largest amount of dry powder is Blackstone with $43.9 billion.
The number of transactions in 2022 from this group of firms varies from 1 transaction to 202 transactions with the average number of transactions per organization being 41 if the 3 organizations that have done more than 100 transactions in the year are included and 20 transactions per organization if they are not included.
Even though there is a great deal of dry powder, there is also a lot of capital market uncertainty and we do not expect capital deployment to pick up from 2022 second quarter until the uncertainty has decreased and the “bid/offer” between capital seekers and capital providers has narrowed.
Please contact us at info@deerislegroup.com if you or someone you know would like to learn more about how we can help them with their capital sourcing. We believe that the earlier, especially when capital markets are tough, an organization receives professional help defining their investment proposition, the better the results will be.
Capital Provider Interest – We have demand for complex Private Credit Opportunities that provide a Capital Provider yield between 12 and 15+%. The demand includes asset backed as well as receivable backed transactions.
Corporate Response to Market Conditions – Concentrate on Liquidity Management: Corporations, large and small are focused on liquidity management and conserving cash. The advice is to speak to creditors early and often so that if forbearance is needed, there is time to properly negotiate. And, if additional capital is required, start the capital raising process early.
Venture Capital Response to Market Conditions – Focus on Cash Flow Break – Even: Both capital providers and companies are assessing the ability to be cash flow break even. Even though Capital Providers have dry powder, they are conserving it to be able to provide follow-on capital to their portfolio companies, but they want to spread the risk. Capital providers and venture companies should focus on realistic business development goals/milestones and, if additional capital investment will be needed – start the process early.
Private Equity Response to Market Conditions – GP/LP Secondaries: In order to balance dry powder with potential company liquidity needs, many capital providers are analyzing capital needs in order to maintain portfolio valuations. This has, more and more, meant that GP’s are using portfolio secondary sales to provide LPs with liquidity while trying to maintain valuations.
PRIVATE FUND PLACEMENT AGENTS – Effective or Not?
The process for sourcing capital for funds has changed dramatically in the last 15 years while the Placement Agent process has essentially remained the same over this time period.
Deer Isle believes that, in current market conditions, successful fund capital sourcing requires the fund manager to have a broad set of their own relationships and for the fund manager to build a successful brand (much like success requirements for most other products).
Therefore, the value of “relationship transfer” from a Placement Agent to a successful capital raise is reasonably low while a process for the fund manager to build their own relationships and build their own brand has a much higher value and success rate. Learn More
PROPRIETARY PRIVATE DEALS: How Valuable?
In an age of sophisticated fund managers and information overload, Deer Isle believes that the way to maximize sale, merger, or investment valuations and capital markets outcomes is for a company to run a proprietary capital markets process while engaging “as needed” preparation and closing support. The reason for this approach is that most capital providers want “proprietary deals”. Learn More
We welcome article submissions from our readers. Please contact us at info@deerislegroup.com.
