Conference Presentation, Panel
Private Markets: Keeping Up with Moving Targets | Global Conference 2024
Milken InstituteYup S. Kim, Bennett Goodman, Andrew Milgram, Michael Rees, Anne Valentine Andrews, Matthew Wesley
- Global private market assets are projected to expand from $13 trillion to $26 trillion within the next five to six years, a trend driven by new client segments such as insurance, private wealth, and sovereign wealth, alongside entry into geographies like Australia and Japan.
- Private markets are expected to maintain their long-term growth trajectory and efficacy due to decarbonization needs, infrastructure rebuilding, and operating intervention capabilities, with their share of global equity market cap anticipated to rise over the subsequent decade.
- Industry consolidation is forecast to continue, concentrating the industry's growth within the top 200 to 300 firms as the market matures, with the number of required firms decreasing significantly from current levels due to LP demands for compliance and distribution capabilities.
- A divergence is expected where middle-market firms face significant fundraising challenges, with some unable to raise more than 50% of their prior fund sizes, while successful managers differentiate through specialization and a flywheel of capital deployment, deal monetization, and co-investments.
- The regulatory environment, currently considered benign, may persist but carries a risk of intensified scrutiny if market conditions deteriorate, particularly amid potential headwinds like fraud or idiosyncratic market failures.
- Valuation gaps between buyers and sellers are anticipated to resolve in favor of buyers willing to provide liquidity due to transaction scarcity, leading to seller capitulation potentially beginning in the latter half of the current year.
- A correction in the credit market is expected driven by a shift in the rate regime or debt-to-equity swaps, particularly for middle-market companies unable to absorb high coupon costs, resulting in higher defaults and lower recoveries rather than a catastrophic banking crisis.
- Interest rates are projected to decline over the next six to nine months, coinciding with a cooling labor market and rising unemployment, which is expected to lower the cost of capital and embolden private equity buyers to deploy dry powder.
- The business model of private equity is evolving from leveraged buyouts to operating-focused models, with technology and AI predicted to enhance predictive investment power and potentially reduce secondary market investment team sizes to one-quarter of current levels.
- The middle market is expected to endure K-shaped economic pressures, characterized by over 30% declines in EBITDA, collapsing margins, and interest coverage ratios averaging one times, while the venture growth market faces a prolonged period of sorting through excess allocations.
- Continuation funds are expected to remain a resilient exit avenue, having grown from 5% to 12% of exit volume between 2019 and 2023, with increasing acceptance by limited partners as a distinct asset class.
- The "reckoning" in the private credit market will distinguish winners from losers as the current low-default environment proves unsustainable, while the "pig in the python" of frozen investment in the venture sector is not expected to clear in the near future.
- Investors are cautioned against overpaying for assets based on hubris or pattern recognition, with success increasingly dependent on the quality of human capital and the "people business" aspect of the industry.