Disruptors Will be Crowned in Private Markets
Making Private Market Active Management Key to Capturing Value Creation
Given the current stress on the banking sector, we strongly feel that private credit funds, especially middle-market direct lending platforms, can potentially offer attractive investment opportunities for suitable investors.
Christian Salomone
Chief Investment Officer
christian.salomone@ballastrockpw.com
Disruptions create opportunities by driving innovation, causing economic realignments, and changing the way people live, work, and consume products and services. The adoption of automation technologies and faster computer processors have helped many businesses reduce costs, increase efficiency, and has led to the revolution in Artificial Intelligence. Likewise, the COVID-19 pandemic led to a surge in demand for online services, remote-work technologies, and an increase in e-commerce.
Short-term economic disruptions typically have a limited and temporary impact on the economy, usually lasting for a few quarters or up to a year. Conversely, long-term economic disruptions can last for several years -- or even decades -- and can have a profound impact on various industries, leading to significant structural changes in the economy. The companies that are developing the most innovative solutions to these changes are primarily still private and not widely known.
Active management of private investments is key to identifying, and capitalizing on, the emerging trends, industries, and technologies that will likely benefit the most from the disruptions. Though short-term market disruptions may allow investors to buy public securities at advantageous prices, the availability of such opportunities is often limited by the efficiency of the public markets and the speed at which information is disseminated.
On the other hand, in the private markets, economic disruptions create even greater long-term opportunities for investors in the private companies that are developing innovative solutions to the new problems created by the disruptions. Investors in private markets can also take advantage of a longer investment horizon and less-stringent regulatory requirements to generate better returns through value creation.
“Disruptions create opportunities by driving innovation, causing economic realignments, and changing the way people live, work, and consume products and services.
”
Currently, short-term market disruptions are having a significant impact on the asset allocation strategies of large institutional investors like pension funds and endowments as they strive to manage risk and optimize returns. Due to strict target asset allocations, a large shift in relative asset values, like we saw last year in both stocks and bonds, will cause these investors to rebalance their portfolios to bring their targets back in line. That means that many of these institutional investors are being forced to sell their illiquid private equity investments because their portfolio allocations are now overweight.
Additionally, market disruptions and increased volatility are prompting institutional investors to re-evaluate their fundamental asset allocations and risk appetites. This phenomenon creates opportunities for investors with dry powder who can now allocate capital to artificially undervalued assets or provide liquidity where traditionally none existed.
Secondary Private Equity Funds, which specialize in the purchase of shares in existing private equity funds, provide this liquidity at a price or discount to Net Asset Value. These funds are uniquely situated to take advantage of the phenomenon created by last year’s market disruption. Forced selling by large institutional investors have allowed these Secondary Funds to purchase investments at historically large discounts to NAV, delivering immediate value to their own investors. Actively selecting the top Secondary Fund managers is essential to maximizing long-term returns, as the difference between the top quartile and the median returns can be significant.
As we look towards the next decade, we anticipate significant changes in various industries, driven by technological advancements, demographic shifts, and social disruption. The exponential growth of AI and attempts to curb climate change will also play a critical role in reshaping our economy. These factors will bring about a level of disruption that will create both winners and losers. However, the winners are likely to emerge in the private markets, well before they go public. This makes active management in venture capital and private equity markets crucial to identifying and profiting from these opportunities.
The importance of picking the right managers, who have the expertise, access, and investment philosophy to spot and nurture these private companies, cannot be overstated.
The example of SpaceX, valued at $137 billion according to CNBC, highlights the enormous potential for private companies to create significant value before considering an IPO. Private markets provide a fertile ground for entrepreneurs to experiment and innovate without the constraints of public market scrutiny. This results in an environment that can facilitate rapid growth, transformative technologies, and significant value creation. To identify and invest in private companies that are best equipped to profit from these disruptions, it is imperative to take an active approach to private market investing and pick managers who have a deep understanding of the rapidly evolving landscape. The coming decade will bring about considerable disruptions, but those who can navigate this changing landscape and identify the winners in the private markets will be well-positioned to benefit from this paradigm shift.
Though challenging, disruptions can create opportunities for those who can adapt, innovate, and take advantage of the changing landscape.
Have questions? Contact your financial advisor or our team members at Ballast Rock Private Wealth at ir@ballastrockpw.com.
Disclosure: Past performance is not indicative of future results. The opinions expressed are those of Ballast Rock Private Wealth and should not be taken as financial advice or a recommendation to buy or sell any security. BRPW is a registered investment adviser. Registration does not imply a certain level of skill or training. Any forecasts, figures, opinions or investment techniques and strategies described are intended for informational purposes only. Past performance is not indicative of future results. Investing involves the risk of loss of principal. Investors should ensure that they obtain all current available information before making any investment. Indices cited in the information above are intended to support the opinions expressed and are shown as general examples of market trends. It is not possible to invest directly in an index and the volatility of the index may vary from that of an investor’s actual account. Note that index performance shown does not take into account management fees and is not intended to be indicative of future results. Additional information about our investment strategies, risks, fees, and objectives can be found in BRPW’s Form ADV Part 2. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions. There is no guarantee of the future performance of any Ballast Rock Private Wealth portfolio. Material presented has been derived from sources considered to be reliable. but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation, or an offer to buy. sell or hold any securities, other investments or to adopt any investment strategy or strategies.
