Side Letter: Partners Group’s debt discipline; secondaries pricing plummets

Partners Group says it is resisting the urge to take the 'easy money' by leaning heavily into private debt. Plus: Global economic woes are feeding through into secondaries pricing; and Arizona State's valuations outlook. Here's today's brief, for our valued subscribers only.

Just happened

Taking the easy money?
As private equity fundraising becomes more of a challenge, some firms have found comfort in private credit. Case in point: Carlyle Group‘s global credit business overtook PE for the first time during the second quarter, with the former’s AUM increasing 57 percent year-on-year to $143 billion on the back of its Fortitude acquisition, as well as fundraising for credit strategies and several managed accounts. Blackstone, meanwhile, received permission to launch a private credit fund targeting wealthy European investors and wants its Asia credit unit to hit $5 billion in the near-term, per a Bloomberg report earlier this year.

Partners Group, for its part, intends to “maintain the balance” by not riding on the appeal of private debt markets. “It’s important to note, as you look at the fundraising we are doing right now, we are not taking the easy money and just raising debt money, which is what a lot of people are doing,” chief executive David Layton said during its interim results presentation on Tuesday. The firm’s PE inflows rose 51 percent over the first half, versus 25 percent for private debt.

Speaking to Side Letter on the sidelines of the presentation, Layton added: “It’s a tougher environment to sell complexity right now, and there is – with the rising yield – a trend for people to say, ‘OK, investors are going to want yield, let’s sell them debt.’” The firm intends to maintain discipline from a business model perspective and do the “right thing for its clients”, instead of disproportionately scaling debt AUM.

Layton’s view of debt as a quick win may not be shared by everyone. Private debt fundraising in the first half of this year was lower than seen during the height of the pandemic in H1 2020, according to our colleagues at Private Debt Investor (registration required). While North America-focused funds had strong activity, not many in Europe have seen a final close this year. Easy money for a select few, it seems.


Optical illusions
Global economic woes are starting to be reflected in pricing on the secondaries market, our colleagues at Secondaries Investor reported this week (registration required). The average price for a stake in a buyout fund was 88 percent of net asset value in the first half, compared with 97 percent for full-year 2021, according to investment bank Greenhill. This is the lowest level since the pandemic-racked first half of 2020, when pricing hit 85 percent of NAV, and not far off the lowest ever full-year average of 84 percent between 2010-2013 when the market was still struggling with the effects of the global financial crisis.

Drivers of lower pricing include a worsening economic outlook for the US and Europe; and the divergence between public market valuations and private market valuations, which have yet to reflect public declines. Secondaries deals tend to be priced off valuations that are a quarter or two old, further fuelling the divergence between what sellers expect and what buyers are willing to pay.

“Buyers applied a mark-to-market to stale Q4 2021 and Q1 2022 NAVs, resulting in larger optical discounts,” said Greenhill’s head of European secondary capital advisory, Bernhard Engelien. This drop in pricing is another challenge for overallocated limited partners that might have used the secondaries market to sell down some funds. It’s much easier to get the board to approve a portfolio sale priced at 97 percent of NAV than 88 percent, even if the difference is largely optical.

PE pricepoints
Arizona State Retirement System expects valuations to fall in the months ahead, our colleagues at Buyouts report (registration required). At the $51.2 billion system’s investment committee meeting on Monday, deputy CIO Samer Ghaddar noted that industry buyout deal multiples were at 9.8x for third-quarter results through July, compared with 12.6x in Q2 2022 and 13.6x in Q4 2021.

“We expect private markets will keep on going down and valuations will contract further,” said Ghaddar. “We see activity slowing across both buying and selling, especially with selling and exits, which are so dependent on IPOs.” Ghaddar said the system’s investment staff has become more selective when making new commitments, by “looking at top tier managers only”.

Today’s letter was prepared by Alex Lynn with Rod James and Carmela Mendoza.