“Taste Matters”
Peter Teneriello, Director
There’s a concept in filmmaking called auteur theory: that moviegoers should recognize the director’s touch onscreen. In fact, the best movies should be inseparable from their directors—no one else could have executed on those visions.
This extends beyond film: music, paintings, even food. Why do we love what we love? The best showcases their artist’s vision. Lower quality art may provide a sugar high, but we’re drawn to the brilliant and unique. Investing is no different, but few invest like artists, with creativity and conviction.
How do we find such investors? Taste. Honed by experience, letting us separate what doesn’t matter from what actually does: finding investing styles differentiated from everything else, and ultimately vindicated by their performance. Styles that wouldn’t exist without their artist.
Finding artists now doesn’t just require experience—as our observations should demonstrate, this market environment requires taste to succeed.
Fundraising is at its most challenging since the aftermath of the Global Financial Crisis
The song has remained the same across close to 100 meetings and countless conversations we’ve had within our global network of fund managers in 2023: this fundraising environment is extremely challenging, especially for smaller and newer funds. Institutional investors are facing pressure to reduce their alternative investment exposure, in turn reducing the amount of dry powder available for both new commitments and re-ups. The charts below bear this out—global alternatives fundraising was already falling, and we wouldn’t be surprised to see 2023 fall well behind 2022’s pace.
Our outlook – Fund managers that don’t need to fundraise are avoiding it at all costs, stretching their dry powder as far as they can. This may lead to 1) many managers delaying their fundraises from 2023 to 2024, but also 2) opportunities to invest with access-constrained managers who typically work with endowments/pensions/etc. rather than RIAs. Fund managers have to be flexible with their fundraising timelines now.
Sentiment is very negative among venture capital investors
Even before SVB’s collapse and UBS’ acquisition of Credit Suisse, venture capital transaction volumes were already sinking back towards pre-COVID levels. Those broader financial system events have negatively affected sentiment among venture investors—there may not be “blood in the streets” yet, but the feeling during SVB’s collapse was intensely negative, even more so than during March 2020. That’s because more so than private equity, venture in particular was extremely impacted by the FDIC shutting down SVB, given the many banking/lending relationships SVB held with VC firms and portfolio companies.
Our outlook – Directly related to the SVB collapse, SVB did have a number of balance sheet assets that will likely be of interest to the broader investment world. At a higher level though, this may create a lending gap for venture-backed companies and present opportunities for investors with opportunistic mandates, some of whom have already been active.
New deals and exits continue to slow down
The current environment remains challenging for buyers and sellers across the alternative asset class, given the uncertainty surrounding the rise in interest rates and the subsequent impact to lenders. It’s too early to tell for 2023 but as the charts below show, private equity exits fell off a cliff in 2022 to the lowest levels since 2013, and new private equity deals have also fallen significantly.
Our outlook – Holding periods should continue extending even further out for private assets. Longer holding periods, combined with slowing deal volume as investors conserve dry powder, should further compound the industry’s slowing fundraising pace. That said, these factors may give investors like ourselves more leverage in fundraising conversations.
The dispersion between the best and worst managers has persisted
Over the past 10 years, a very large dispersion between the top and bottom quartile managers has continued to persist in the alternative asset classes (as opposed to other more-accessible ones). What’s driving this dispersion, even as capital inflows increased over this time period? Active manager selection in the alternative asset classes done well is resource-intensive, and not every investor can dedicate the resources necessary for consistently finding the best managers.
Our outlook – As capital inflows grow and more managers target RIAs in fundraising, returns may compress in the alternative asset classes. However, we’re avoiding where the return dispersion may compress the most: less-differentiated, lower-performing mega-cap funds. Why wouldn’t they compress as much elsewhere? Many investors want the return potential that alternative investments can provide, but not everyone can build the machine to unlock that potential—the structural and behavioral barriers to investing in smaller funds are real (but surmountable).
In closing (and with more brevity than the preceding paragraphs), this is what we’re seeing in the alternative asset classes:
- Sentiment is very negative among venture capital investors
- Fundraising is at its most challenging since the aftermath of the Global Financial Crisis
- New deals and exits continue to slow down
- The dispersion between the best and worst managers has persisted
Though these observations and the news headlines may seem negative, we don’t consider this environment un-investable. There’s always a trade, and if a trade intersects with the fund managers who meet our bar, an investment opportunity will bloom. The artists are already on offense though, and investors with dry powder will join them on the playing field shortly—it’s our job to find them now.
Sources:
- PitchBook (alts fundraising chart): https://files.pitchbook.com/website/files/pdf/2022_Annual_Global_Private_Market_Fundraising_Report.pdf
- PitchBook (VC transaction volume chart): https://files.pitchbook.com/website/files/pdf/Q4_2022_PitchBook-NVCA_Venture_Monitor.pdf
- PitchBook (PE transaction volume chart): https://files.pitchbook.com/website/files/pdf/2022_Annual_US_PE_Breakdown.pd
- PitchBook (alts return dispersion chart): https://files.pitchbook.com/website/files/pdf/2022_Global_Fund_Performance_Report_as_of_Q2_2022_with_Preliminary_Q3_2022_Data.pdf
Risk Disclosure
