What do fund of funds programs need to look like now?

The private debt market has grown globally from USD 32 billion in 2010 to USD 192 billion in 2021. An obvious evolu­tion of the market, as was the case in the PE market about 20 years ago and in the infra­struc­ture market about 8 years ago, is to provide some liqui­dity through secon­dary market tran­sac­tions. The global private debt market has also reached this thres­hold. We ther­e­fore expect this segment to conti­nue to deve­lop dyna­mi­cally in the coming years. We do not expect the increase in key inte­rest rates in the USA and Europe to slow this down. Private debt itself bene­fits from rising inte­rest rates, as most loans are struc­tu­red as so-called floa­ters. This means that the inte­rest rates of the loans auto­ma­ti­cally increase with the market.

The advan­tage of a private debt secon­dary market tran­sac­tion is the trans­pa­rency of the port­fo­lio and the broad diver­si­fi­ca­tion. Typi­cally, a secon­dary is acqui­red in year 3 or 4 of a private debt target fund’s life cycle. This means that the allo­ca­tion of loans to the target compa­nies has largely been comple­ted. As a result, there is a high degree of trans­pa­rency regar­ding the loans gran­ted and the credit­wort­hi­ness of the debtors. Another advan­tage of the alre­ady widely struc­tu­red secon­dary port­fo­lio is that the commit­ment is quickly retrie­ved and thus “gets to work”.

The private equity valua­tions show up in the 2nd quar­ter 2022 stable to slightly incre­asing. It is to be expec­ted that in the 3. and 4. valua­tions will fall in the fourth quar­ter due to the “market to market” approach, because the lower valua­tions of the stock exch­an­ges are taken into account. Howe­ver, we are not curr­ently obser­ving a decline in corpo­rate earnings.

After secon­dary tran­sac­tions had seen almost only single-digit discounts on the NAVs of the traded port­fo­lios since around 2014, the corona-indu­ced distor­ti­ons in the first half of 2020 resul­ted in some signi­fi­cantly higher discounts. Howe­ver, this effect largely dissi­pa­ted again in the course of 2021. We expect a simi­lar scena­rio and resul­ting oppor­tu­ni­ties towards the end of 2022. Curr­ently, sellers still have asking prices based on valua­tions at the end of 2021. These will not be main­tai­ned due to the slow­down in the economy as a result of the Ukraine crisis.

Our infra­struc­ture funds of funds are aimed at German and Austrian inves­tors due to simi­lar regu­la­tory regimes in these count­ries. The fourth gene­ra­tion of the succes­sor fund will be laun­ched in early 2023. Taking into account the EU taxo­nomy, this will be laun­ched as an Article 8 fund.

The stra­te­gic and geogra­phi­cal focus is on Europe and North America. The aim is to gene­rate current income for our inves­tors with low vola­ti­lity and a high level of risk protec­tion through broad diver­si­fi­ca­tion by segment and risk/return profile. Infra­struc­ture assets offer some infla­tion protec­tion as the regu­la­tory frame­work takes into account the gene­ral price trend.

About Robert Massing

As a member of the Execu­tive Board of Solu­tio AG in Grün­wald, Robert Massing is respon­si­ble for Inves­tor Rela­ti­ons, Busi­ness Deve­lo­p­ment, Marke­ting, Press and Human Resour­ces. Foun­ded in 1998, the company deve­lops invest­ment concepts for insti­tu­tio­nal inves­tors in the field of alter­na­tive assets and curr­ently mana­ges around EUR 6.6 billion in the asset clas­ses of private equity, infra­struc­ture, private debt and real estate. >massing@solutio.ag