Colton Alexander Investment Banker, Alex Kramarchuk comments on his current thinking on the Private Capital Market and what is ahead, including a look some of the trends and ideas that impact today’s investors.
Major Trends in the Private Capital Market
Over the past eighteen years, the private equity universe has grown more than seven times in net asset values. Meanwhile, the number of private equity backed companies has doubled. Conversely, publicly listed companies have declined by forty-six percent over the last twenty-five years. Allocations to private markets assets are likely to continue to grow for the foreseeable future. Nearly two trillion dollars in dry powder is at the sidelines evaluating opportunities that are the new disruptive models and technologies. The indicator is that Qualified Institutional Buyers and Accredited Investors will continue to maintain or incrementally increase allocations to private equity and venture capital direct investments, co-investments, and fund structures.
The private market industry is rapidly evolving and can offer many avenues for investors to customize allocations and exposure. An expanding variety of product offerings make the industry more appealing to a range of investors. Greater depth of products and services gives investors the ability to tailor, not only by asset class and scale, but also by duration, price, risk and other factors. Investing based on values has taken on greater meaning with younger generations and going forward either through regulation or conscience, investors will increasingly consider the impacts of their decisions.
Much of the advancement in the Private Capital Markets is based on the an increase in digitization and artificial intelligence. Sponsors, investors, and fund managers are reshaping interactions to improve customer experiences. Outdated processes are being replaced by digitized capabilities across the value chain in order to provide enormous benefit to investors. Advanced analytics are being used to process mountains of data. This process is providing insight into new investment theses and value creation.
The Pandemic is a Gray Rhino
Today, there is not a conversation on any topic that does not involve coronavirus, and some have termed the pandemic a black swan event that could not have been anticipated. I disagree. Recently, I had the pleasure of reading The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore by Michelle Wucker. The title tells readers what to expect and, in my view, the pandemic is a Gray Rhino. We knew it, we were preparing for it, we saw it and we ignored it at the outset when it was most important to act. Coronavirus is here to stay. It will remain a danger to compromised populations until there is a proven vaccine and it will dwell among us in perpetuity like the flu and we will come to live with it understanding more of its nature and its devastating effects. We can only hope that common sense will prevail, and that fear and division will not overcome us. Rational opinions would have us think that the mandated guidelines will allow humankind to manage the crisis and over time come to accept its consequences as we have in the past with polio, rubella, ebola, influenza and every other malady that can afflict us.
The Private Capital Markets and the world in general will take time to heal and repair and while it could be quick, more likely it will take a two to five-year approach. The key to preservation and growth will be the ability to assess the inefficiency in the market(s) that will generate alpha returns within specified risk tolerances.
Alex Kramarchuk is a licensed investment banker and Managing Director of Colton Alexander, LLC. Colton Alexander provides strategic advisory services to public and private sector issuers through private placements of debt and equity, M&A, private markets research and advisory. Alex holds Series 7, 66 and 79 FINRA licenses. He is passionate about contributing to society through the formation of capital and its role as an engine of commerce in today’s market drive system. Colton Alexander, LLC is an affiliate of Weild & Co., broker-dealer.