Fastest growing area of private investing?
Fellow monkeys:
Which area of private investing do you think will see the strongest secular growth in the next 10 years? My own thoughts are:
- Infrastructure
- Alterantive credit
- LMM PE
Thoughts?
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Can you provide your rationale?
I see leveraged growth equity as a high performing asset class (many management teams see the recent spate of IPOs as a cautionary tale)
Would you mind expanding on this? What does "leveraged" growth equity mean (pardon my ignorance)?
No pardon required - leveraged growth equity is the type of growth equity firms you see more traditional investors like CVC getting into.
These are fast growing companies but not “rocketship” “hockey stick” “venture-backable” companies (very infrequently consumer). They are often software or tech-adjacent / tech-enabled services, but will grow at a healthy double-digit clip and be able to sustain a couple of turns of debt.
My own two cents: the market here is nowhere near matured and there are many diamonds left to be found. Many companies are going to be entering this stage, I believe.
Now, right back at you. Can you please explain your 1-3 list? Thanks very much.
100% direct lending and private credit. The asset class has exploded the last ~10 years
What about the next 10 years though? I feels like we might have hit the peak in the DL space, but I don't know much about it.
Private credit without a doubt. Particularly with PE returns coming down significantly / the level of financial engineering required now to get to a 12-15% net return for most funds.
Why would I be on the equity side with the risk there fighting for a 15% return when I can lend money to a similar quality company (or the same company), have fixed annual cash flows reducing my exposure, a higher position in the capital structure in the case of any downturn or liquidation, and participate in the upside through an equity linked scheme.
Of course it isn't as simple as I've put it above, but I think this as an asset class has a lot of room to grow / should see a lot of momentum over the next 5-10 years. The risk reward profile vs. pure equity is too attractive for it to not.
This.
Great analysis
GP stakes would be my vote. Definitely emerging in popularity and as more and more fund managers age, they'll be looking for liquidity options not predicated on having to go public. Endowments and family offices are looking for more sources of higher octane returns too and this is a good way to do so w/ returns compressing in like standard PE.
Whats GP sorry?
General partner. So you're buying a stake in an actual PE firm or other asset manager. Dyal for example is a big player in the space.
Definitely picking up what you're lying down, NuclearPenguins. My only reservation about this growth area would be that there are only a finite number of high-quality GPs in which a GP-minority-stakes investor might want to take a position. There is definitely the fact that private markets GPs have matured a lot in the last decade, but the GP-stakes-invetsing strategy may have grown quicker.
I noticed Dyal has been growing like gangbusters, and that Blackstone is hiring for their GP stakes program... on LinkedIn! Nothing says can't grow fast enough like hiring on LinkedIn...
Following up on a point I read above, what are the biggest funds in the private credit space?
Ares and Golub come to mind. Most mega funds have a lending arm as well.
Yep, these are big ones. HPS is another which does a lot in this segment
I think we will keep seeing independent sponsors & micro-funds in general grow. High IRR but low capacity.
It's not as hard as it once was to raise $10MM - $25MM as an experienced ex-operator or investor with a track record around the VP level.
High IRR, low multiple. Bane of my existence.
MOIC is still meaningful but the #s are just too small for most institutional investors.
Private Credit & Alternative Equity/Lending Solutions for sure. Flexible structures with really solid returns. Ability to protect downside without having to do day-to-day mgmt. of the portco as that will fall on the lead sponsor. Also many have the option to put in some equity.
Very interesting space to be in. Especially those who can get comfortable in the LMM market space as there are so many deals out there compared to traditional / UMM where there is more fierce lending competition and less assets.
For everyone’s who is saying DL/private credit, how do you think this crisis will play out for this asset class and affect interest in it going forward? On one hand, I could see people saying that decent full-cycle returns with lower risk than PE are attractive. On the other hand, if your 2L is basically equity in a downside case but without the huge upside (even if there are some warrants attached, it’s nothing like the PE upside) the equity sponsor gets, maybe allocators will back away from private credit in mezzanine and also structures that take a senior position but lever it like a BDC. Interested in everyone’s thoughts on this.
Infrastructure.
Pretty widely accepted that the world needs to switch to low-carbon sources of energy generation. Infrastructure PE will play a large part in this alongside banks, project finance debt, and governments.
I'm bullish on digital infrastructure. The need for more compute power and connectivity is only going to increase over the coming decades w/ increasing data demands and autonomous vehicles.
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