IPEM Cannes 2024 – The Daily Spin – January, 25th
The shifting role of LPs was the overarching theme for the morning session of Day 2, at the 10th edition of IPEM in Cannes. After a full day of yoga,…
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IPEM Paris 2024: Inspiration Awaits!
If ever there were a city to inspire new ideas, there’s no better place than Paris. Which seems altogether appropriate as the global private markets industry gathers September 9th – 11th for the 2nd edition of IPEM Paris, where this year’s theme will be
“Forging Confidence”.
Building on the success of last year’s event, which welcomed over 6,000 delegates, IPEM will once again bring together a brain trust of global GPs and LPs at the Palais des Congrès. It is a key moment for the industry, as some investors look to increase their total private markets exposure, while others scale back. Fundraising has become much harder over the last 12 months, as private equity funds increasingly find themselves competing with private debt and infrastructure funds. Some GPs are more bullish on deal flow and exit opportunities than others, while ESG issues are becoming both more and less relevant, depending on the financial institution.
How then, to make sense of the divergence of views?
“It takes a lot of confidence to be an investor,” comments Antoine Colson, CEO and Managing Partner at IPEM. “In the last 12 months, confidence among private markets investors has dropped significantly. Hence this year’s theme. I want the industry to gather in September to compare notes and hopefully determine key angles on where and how the industry can rediscover its confidence.”
IPEM Paris will focus on GP views and insights in the main conference room on September 11th, where leading fund managers will debate topics including, Forging investment confidence through cycles, What it takes to be an “all weather” investor, Doubling down on tech investments, A new era for climate investors, Why mega deals are preparing a comeback and Forging ahead: the future of private capital.
Product innovation will also be an important part of the discussion framework. At Partners Group, Andrei Vaduva, Co-Head Portfolio Management, explains: “The traditional closed-end fund, a structure popularized in the 1980s, still represents the majority of the industry’s assets under management. While these structures have served institutional investors well, the same cannot be said for the private wealth segment. This imbalance has fuelled growing demand for the open-ended “evergreen” fund.”
“We are a firm believer in the potential for evergreens to democratize private markets. Their characteristics not only better address the investment profiles of individual investors, but increasingly offer institutional investors an appealing alternative to traditional structures.”
Bespoke solutions on the rise
Although traditional closed-ended funds will continue to have a place in portfolios, GPs like Partners Group are seeing a shift towards more bespoke solutions, such as evergreen funds and mandates. This partly reflects how a closed-end fund is not a great building block for steering a private market portfolio.
For example, if an investor wants to add secondaries, they have two options. One is to go the traditional route, investing in traditional secondary funds and making capital commitments over multiple years. The other is to use a mandate that allows the GP to start adding secondary exposure within months, allowing the LP to benefit from more dynamic management over time.
“Looking slightly deeper, we are seeing more evergreens focused on particular strategies, asset classes, and even regulation such as private credit in the US or the ELTIF regulations in Europe, and this specialization is also likely to continue,” adds Vaduva.
Infrastructure as an exit route
BlackRock’s $12.5 billion acquisition of Global Infrastructure Partners – the world’s largest independent infrastructure manager – at the start of 2024 was the perfect way for the industry to see brighter skies ahead for “mega deals”. In March, Cinven agreed to buy a majority stake in the fund administrator Alter Domus at a valuation of EUR4.9 billion.
The last 24 months have been challenging for PE dealmakers. However, according to the latest PE Pulse survey, 76% of GPs expect deployment to increase over the next six months, up from 63% in December.
IPEM Paris 2024 will explore how GPs are planning to put a record amount of dry powder to work, some $1.2 trillion of which has accumulated in buyout funds alone.
According to Elin Ljung, Managing Director, Head of Communications & Sustainability at Nordic Capital Advisors, “when it comes to bigger deals we see more of these on the infrastructure side. Nordic Capital doesn’t have funds investing in this asset class but we think that as an exit point, large infrastructure funds will become more and more important for buyout managers.”
“The exit of Consilium Safety Group, a fire safety technologies company, to an affiliate of Antin Infrastructure Partners’ Flagship Fund V is one such example.”
Ljung says that it seems like transaction activity is definitely picking up. “Nordic Capital has completed three investments in North America, which has been a more stable market than Europe over the last year. Our pipeline is building and we are also getting more inbounds on potential exit opportunities,” she says.
Macro conditions are a two-edged sword
While the macro conditions over the last two years have presented a headache for buyout managers, with higher rates impacting valuations, fundraising dynamics, and leverage levels in their funds, the same cannot be said of private credit. In the yin and yang of private markets investing, private credit funds have benefited from higher rates, allowing even senior secured direct lending strategies to generate double-digit returns. This is thanks to the floating rate nature of private credit loans.
But to think it has all been plain sailing would be too simplistic, inaccurate even. The fact is, macro conditions are a two-edged sword.
“If you’re an investor you benefit from higher interest rates,” comments Patrick Marshall, Head of Private Credit at Federated Hermes. “On the other hand, companies are paying more in financing costs, which means their credit risk is likely to have risen as well. Companies that are highly levered are facing a higher monetary burden.”
“The reason I would say we are comfortable (from a macro perspective) is because the leverage that we take on in a loan is far lower than our competitors. On average it is about three turns of leverage whereas our competitors are in the four to five range. We haven’t faced the same level of stress arising from high inflation, Suez Canal disruption, etc. We also usually require our borrowers to hedge at least 50% of their loans, which also protects our portfolio.”
The competitors Marshall refers to are unitranche funds, which combine senior and subordinated debt into a single loan with a blended interest rate. Their higher returns have proven popular with investors. However, companies today are more worried about costs than they are about flexibility or greater leverage. The fact that managers like Federated Hermes are partnering with banks, rather than positioning themselves as adversaries, is giving people like Marshall a confidence boost.
“The senior loan market has taken more market share because it is cheaper. Our deal flow and transaction flow has gone up. When you talk about confidence, our conviction comes from only looking at boring, stable, low levered businesses. Boring is sexy,” he remarks.
Climate warming (up)…on the investment side
“A new era of climate investing” will be part of the main conference room agenda on September 11th of IPEM Paris, as the event looks to deliver leading-edge insights on sustainability-related investing opportunities. When the markets were more benign a few years ago, it seemed everyone was claiming to be a sustainable investor. But in more challenging markets, sustainability is no longer quite as high a priority among some firms, while others continue to double down on their approach.
“We do see increased interest and allocations in climate investing,” asserts Ljung. “At Nordic Capital, we take the approach of backing companies focused on energy-enabled solutions in areas such as recycling (carbon avoidance), as well as technology companies enabling climate disclosure reporting.
“Three of our investments are addressing the importance of recycling, for example, issues such as IT waste – which is a huge global challenge – and reusing hardware from laptops, etc. We are doing the same with construction materials and recycling spare parts.”
Rather than use ESG ratchets to incentivize change, in a broader ESG context, some private credit managers are taking a more prescriptive approach using covenants in their loan documentation to instill confidence. “We put into the legal documentation required changes, which by not adhering to, could result in a default. We believe ESG is fundamental to managing the risk of a loan,” stresses Marshall.
The beauty of private markets is that every GP (and LP) has its own unique viewpoint. When markets look uncertain, partly in response to rising geopolitical instability, it is even more important that divergent views are freely discussed.
IPEM Paris should be the ideal milieu to find common agreements and foster a new period of confidence.
Get notified for IPEM Paris 2024 on September 9-11 at the Palais des Congrès
Over 6,000 delegates from 2,000 firms, including 1,000 LPs and 700 GPs, will be there, don’t miss the opportunity to connect with them!
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