Higher rates, slower growth, volatility, and geopolitics to test private markets in 2024 – Churchill
Scale will give asset managers a ‘clear competitive advantage’ in US mid-market
Lower rates would see large-cap trade with banks return but ‘tide will never go back as high’
February 9, 2024 (Preqin News) – The gap between winners and losers in private capital will widen as the market adjusts to higher interest rates, slower economic growth, volatility, and geopolitical shocks, according to new research from Churchill Asset Management.
The US-based fund manager said conditions would favor the strongest asset managers, private equity firms, and portfolio companies, with ‘mediocre performers likely to diverge into more distinct camps of winners and losers.’
In Private Capital Themes: Four for ’24, Churchill said that 2024 ‘may usher in a new Goldilocks era of growth and opportunity in private capital’.
It said scale gave asset managers a clear competitive advantage in the US mid-market. ‘It’s a topic that’s come up a lot in the private capital space, particularly when you talk about gaining scale and what it means for execution capabilities,’ Jason Strife, Head of Junior Capital & Private Equity Solutions at Churchill, told Preqin News.
‘We have a diverse set of investment vehicles. We’ve got multiple pockets of capital and dry powder for each strategy. There’s permanency to the platform, so we can speak with consistency, year in and year out, to private equity firms. Middle-market GPs continue to give opportunities and wallet share to institutions that bring them a diverse set of capabilities and solutions across the capital structure and at scale.’
Large fund managers have driven growth across all private capital asset classes, with scale exerting a gravitational pull on investor capital.
In a Research Note published this week on Preqin Insights+, The concentration of private capital, analyst Michael Patterson calculates that the Gini coefficient (a measure of inequality where zero is perfect equality and one is perfect inequality) for private capital funds has risen from 0.67 in 2004 to 0.80 in 2023, indicating the steady increase in the pull of the largest funds.
Patterson said that the trend of rising inequality was not evident in 2023, largely because of the constrained fundraising market and investor caution on strategies that have raised larger amounts of capital, such as private equity megafunds, including large buyouts, infrastructure, and late-stage venture.
‘The 2023 downtrend seen in private equity, venture capital, and infrastructure is expected to be temporary, with concentration expected to continue to trend upward as fundraising markets recover,’ he said.
Churchill argues that the market conditions of the past few years have triggered a further shift in debt financing for middle market companies away from liquid public and bank loan markets towards private credit, accelerating the disintermediation coming out of the Global Financial Crisis.
‘As interest rates come down, we’ll start to see the large-cap trade with banks and CLOs coming back,’ said Randy Schwimmer, Co-Head of Senior Lending at Churchill. ‘We expect volume in the broadly syndicated loan market to slowly increase quarter to quarter. It’s likely not returning to the levels we saw in 2021, for example. The tide will likely not reach as high as it was because the largest private credit managers have staked out territory, with even more dry powder and hold capacity, that they’re not going to give back.’
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