Monthly markets podcast India September 2022
In this month’s podcast, Narayan Shroff is joined by Maanas Agarwal and Manoj Bajpai to discuss the key issues facing investors in the coming months.
Join us for our latest India-focused podcast on all things private markets. The sector has evolved at a rapid pace in recent times. We explore what’s driving the biggest trends and the reasons why private markets are rising in popularity – both in India and globally. Our host Narayan Shroff, Investment Director for Barclays Private Clients India, discusses this and more with colleagues Andre Portelli, Global Co-Head of Investments of our Strategic Solutions Group and Saloni Vaish, Director of our Strategic Solutions Group, India.
You can also stream this podcast on the following channels:
Narayan Shroff (NS): Hello, and welcome everyone to our monthly podcast for Barclays Private Clients India. I am Narayan Shroff, part of the India Investments team, and I will be your host for this podcast.
This month we have two of our in-house guests, Andre Portelli – Global Co-head of Investments at Barclays Private Bank and Saloni Vaish – Director, Strategic Solutions Group at Barclays Private Clients India. In the next few minutes, we will dig into the recent developments and market insights on Private Markets, both globally and in India.
Thank you both for joining us today. Andre, let me start with you first.
While listed equity markets have witnessed sharp corrections from recent peaks, do you see similar trends in private markets? Is price discovery an issue in absence of follow-on funding rounds?
Andre Portelli (AP): When public valuation multiples rapidly rise or decline, an investor may expect private valuation multiples to move similarly. However, we are not seeing the level of correction in the private markets compared to what we have seen in public markets this year. While public and private markets are correlated, private valuations typically adjust more slowly and more modestly, and this is the case for a few reasons:
Private markets focus on making investments and holding onto them for multiple years to create value, and so they are less focused on the current public equity valuation environment when valuing businesses. If an owner is able to execute their value creation plan successfully and create a quality asset, the company will command a premium to market valuations. This is particularly common when Managers are looking for quality assets in periods of uncertainty and volatility.
This dynamic is also supported by the supply and demand of private capital in the market. Over recent years Managers have increased the size of their funds considerably with some funds even doubling in size for their next vintage.
According to Pitchbook, as of 30 June 2022, there is over $3.2 trillion of dry powder in private markets, which needs to be allocated over the coming quarters and years. This supply of capital will dampen the impact in private markets.
The volume of companies entering fundraising and sales processes will also naturally decline in this environment. This slowdown will make price discovery is harder and as a result we would expect to see fewer momentum trades and less significant collapses in valuations.
NS: Let me flip that over to you, Saloni. How do you see this playing out in Indian Private Markets?
Saloni Vaish (SV): We do see a somewhat similar trend in private markets as in public markets. Last year, as you know, there was a strong sense of fear of missing out and that translated into faster up rounds and a strong pick-up in investor demand, especially for the well-known and late stage names. That type of demand has almost evaporated.
Price discovery is harder since deal activity levels have fallen significantly. According to a Private Equity database that we track, the number of deals in private equity fell ~40% in the last quarter compared to the same quarter last year. This is likely a combination of more muted investor sentiment and companies postponing equity rounds in order to avoid down rounds.
NS: Andre, do you see any systemic risk emerging in the institutional exposure to private markets?
AP: No, we don’t see any systemic risk emerging from institutional exposure to private markets, however one could argue that the recent headlines in fact create an opportunity for private individuals and investors in private markets. In recent years, some Fund managers have started to diversify their client base from solely institutional limited partners to including a portion of private wealth capital in new fundraises.
Over the last few months, we have seen that some institutional investors are over exposed to private markets and as a result we may see a lower participation or allocation in the near term.
Private individuals are generally under exposed to private markets within their investment portfolios and the recent headlines may just accelerate the diversification of the LP base for Fund Managers as more turn to private wealth channels for their upcoming fundraises.
NS: Andre, are there opportunities and themes emerging out of these extreme market uncertainties and volatility? For the current vintage, where would you add within a private market portfolio?
AP: There are a number of themes we are currently exploring and we are really excited about the opportunities we are seeing in the market.
To begin with, Secondaries is a really interesting thematic right now. The secondary market has proven resilient over various market cycles and today the opportunities in the secondary market have never been greater. According to Pitchbook, around $8.6 trillion of capital was raised from 2009 to 2019 and there is approximately ~$500bn of assets in tail-end funds, creating an abundant supply of opportunities for secondary funds. In addition, the current environment has led to some investors selling their stakes in funds to manage their overall allocation to private capital and free up capacity to invest in upcoming opportunities. For example, this year we saw the largest ever record investor portfolio sale of $6bn complete, when Calpers unloaded their private equity portfolio and this was at a discount.
Special Situations strategies also seem quite interesting from our perspective. As the broader macro environment impacts economies and businesses, we are likely to see companies becoming stressed or distressed for various reasons and a strategy specially focused on turnaround investing, with an expertise in restructuring, could be very opportunistic for investors.
Finally, and one which may not seem obvious initially, is Early Stage Venture Capital. History has shown that many of the best Venture Capital investments were made in challenging market environment. Companies such as Airbnb, Groupon and Uber were all created during the Global Financial Crisis in 2008-9. We believe there is an attractive opportunity to be investing in new seed and venture companies over the coming quarters at a more attractive entry point to what we have seen in recent times.
NS: Thanks Andre. Saloni, what are opportunities and themes we see in Indian Private Markets?
SV: Segmenting it by type of investments, I see three areas:
First is venture debt. With equity rounds being postponed, we find that venture debt players are seeing great deal flow even from well-funded companies that want to further shore up their runway without taking equity at this stage.
Second is diversified, mid-market PE funds. While there are uncertainties with crossover funds at the moment that rely on IPOs, but diversified, mid-market PE plays, with at least 3 to 4 years of exit horizon per deal, seem more interesting. For example, a diversified mid-market fund manager invested in a eComm logistics company in 2020, but then had the ability to stay away from tech investments in 2021 amid the euphoria. This is playing out well for them. So a sector agnostic play has worked well.
Third area, as Andre highlighted, is in Secondaries. However, one needs a fund manager that has the ability to get access to such opportunities and at the right pricing. At the moment, some global fund managers have proven themselves to do this well. So, if Indian investors can get access to these global plays, that may be a good deployment strategy.
There are also sector specific opportunities that look promising:
Real estate debt is an interesting theme at this point. There is good revival in sales with housing sales exceeding pre-pandemic levels, and in fact, exceeding the 2013 sales level, which was one of the best years for Indian real estate in the past decade. Additionally, NBFCs have reduced their exposure to real estate debt and that has created a current vacuum of capital in the sector. We are seeing managers getting access to even marquee real estate backed debt at high yield levels.
Another sector that we are finding compelling is Industrial lease assets, especially warehousing. There is an overall unorganized to organized segment at play here. This sector has been relatively insulated both from aggressive valuation mark-ups in 2021 and also from corrections in 2022. Cap rates have been relatively stable and rentals have grown. The key issue in this sector has been to get access to high quality, well managed asset pools and managers in the country.
NS: Sounds exciting! Andre, coming back to you. What private market strategies and asset classes can investors look at in a high inflation and interest rates environment?
AP: We view Real Assets as an interesting asset class to provide resilience in the current rising rate and high inflation macroeconomic environment. The fundamental structural reason for this resilience is the ability to increase revenues along with inflation. Real Estate provides a hedge against inflation and certain sectors like residential or hospitality, with shorter lease durations and more frequent price resets, means the asset’s revenues are inflation protected. In addition, the longer anticipated recovery from global economic weakness is expected to continue to produce attractive opportunities with real estate.
Infrastructure, as an asset class, has been in existence for about 15 years and has become more mainstream in the past 5 or so years. Over time, the asset class has evolved in terms of underlying sectors as well as the approach to investing, shifting from fairly passive investing in traditional areas (such as transportation, utilities and energy midstream) to more active investing in new areas such as energy transition and digital infrastructure today.
There is an increased need for infrastructure investing today, particularly in the areas of energy transition and digital infrastructure spending. With public capital alone unable to fulfil that need despite commitments from the public sector, the market has seen the rise in demand for private capital to support the asset class and complement public spending where possible.
There is a lot of appetite from private investors for infrastructure as an asset class due to its resilient nature and attractive yield profile offering attractive returns on an absolute and risk-adjusted basis.
For Real Assets, the impact of the current rising rates environment comes down to the projected holding period of the respective asset: to those investors with a truly long-term perspective, the short-term impact may not matter at all given that cash flows can be expected to eventually rise and make up for rates-related reduction in headline-value in the near term.
NS: Thanks Andre. Saloni, anything you would like to add from an Indian markets perspective, apart from the Real Assets part you already covered?
SV: So Narayan, apart from the Real Assets piece, I feel the high quality, low leverage businesses with ability to pass on pricing pressure and asset light, high gross margin businesses may be able to navigate this environment better.
Due Diligence and selection of companies that can navigate such cycles and pressures, especially in the mid-market private equity space, therefore becomes critical. So, exposure via experienced fund managers, either through funds or co-investments they can offer, is ideal.
NS: Andre, investors are facing delays in liquidity from existing private assets portfolio, even from their late stage, pre-listing and Secondaries positions. What should investors do during such phases?
AP: Our message is to be remain calm and be patient. These investments are long term and illiquid and so we believe investors should be investing with a long term outlook.
Some funds may be extended further by the Manager due to the delay in liquidity, however, this will only affect the tail end of the fund and the bulk of the return would have already been distributed back to investors.
Manager Selection is especially important as the best managers will usually be able to generate liquidity and exits in the market even though it may take slightly longer than normal.
For late stage/pre-IPO investments, the narrative that companies are staying private for longer is not a new saying and the current environment only confirms this statement. Managers and Founders have multiple avenues to create liquidity and if the public markets are less attractive, they can look elsewhere in the private markets for liquidity.
NS: Thanks Andre. Saloni, any other observations from India perspective?
SV: Narayan, as you know, in our client portfolios, the VC funds that have mature portfolios, where winners have emerged, have seen some companies grow substantially with changes in consumer behaviour during Covid-19. However, with the current valuation pressures, exits have been delayed. So investors, who were excited to see what was happening with these funds last year, are disappointed with the delays in exits.
On the real estate debt side, we are seeing positive movement. There were several funds that had 1 or 2 projects stuck for the past few years. These are now progressing well towards exits.
I would just re-iterate the importance of staying calm in this illiquid asset class. At the same time, we would suggest that investors should take into consideration the fact that the exits usually happen during buoyant market conditions, which may not provide the best valuations to invest further.
NS: So, my final one to both of you. Do private assets fund of funds have a role in building an investment portfolio? Andre?
AP: A fund of funds acts as a limited partner for private equity firms and can provide investors with a diversified exposure to private markets. It provides access and convenience for individual investors who may not typically be able to access opportunities themselves. For some, it can be an entry point to private markets.
However, there are considerations such as an extra layer between a private capital firm and the investor and importantly the double layer of fees for investors.
There are other alternatives to building a diversified exposure to private markets that individuals can take advantage of. For example, here at Barclays, we have created a private assets programme where we help our clients build a diversified portfolio to private markets through 4-5 opportunities each year across Private Equity, Private Debt, Real Estate and Infrastructure. We work with our clients to build a bespoke portfolio that is tailored to their needs and objectives and will eventually become self-funding over time.
NS: Thanks Andre. Saloni, it’s still very nascent in India, but do you think private assets fund of funds have a role in building an investment portfolio?
SV: The short answer is yes. Two reasons for that: They provide you with diversification and access.
This is especially important since there is a wide dispersion between good and bad performing managers in private markets in every vintage. There is no index hugging that comes up like in public markets. And often the best performing managers may raise only institutional capital. So access is important.
However, one has to be careful on the type of fees levied by the fund of funds. Also the fund of funds don’t always solve for vintage. Different vintage of funds provide very different outcomes.
Since there may be pressure to deploy quickly in order to keep the overall fund of fund life palatable to investors, they may not be able to solve for vintage. But they can solve for diversification and access within a particular vintage.
NS: Andre, Saloni, thanks once again for joining us today.
With this, we come to an end of our podcast. Thank you for listening to us. Stay safe and healthy, and happy investing.
In this month’s podcast, Narayan Shroff is joined by Maanas Agarwal and Manoj Bajpai to discuss the key issues facing investors in the coming months.
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