Archive for the ‘Uncategorized’ Category

10 Biggest Trends Shaping the Next 3 Decades, According to Big Investors


Institutional investors and family offices in a recent survey cite digitization, aging population and climate change as the most important trends that will shape the global economic landscape in the coming decades, and are investing across these trends through both private and public markets.

Investcorp, a provider and manager of alternative investment products, conducted the survey in partnership with Mercury Capital Advisors, an institutional capital raising and investment advisory firm; IMD Business School; and Banque Pâris Bertrand, a Swiss-regulated private bank.

“Institutional investors’ view of the major trends that are to shape the global economic landscape over the next three decades can give us significant insight into where capital is likely to flow in both the near- and long-term,” Rishi Kapoor, Investcorp’s co-chief executive officer, said in a statement.

“In this year’s survey, we see digitization and AI as an area ripe for investment. An aging global population and ongoing concerns with climate change also provide ample opportunities for these investors to capture the economic upside associated with these mega trends either through direct investment or, more commonly, by allocating to external managers.”

Top Trends

Automation, digitization and AI boosted its position as investors’ top trend, shooting up 26 points from the inaugural survey in 2019 to 95% of investors. Fifty-three percent said they were likely to invest in this trend through a combination of public and private markets.

The majority of investors expect the automation, digitization and AI trend to be significant over the next two decades, with meaningful progress in key industry segments such as digital infrastructure, robotics and specialized chips occurring seven years from now, according to Investcorp.

But they are also cautious in their expectations, mindful of cyber risk, national data privacy laws and societal debate on the ethics of AI as factors that may disrupt developments in this trend.

Sixty-nine percent of investors in the poll again named an aging population as the second most important long-term trend, albeit down 9 percentage points from the 2019 survey. They expect it to remain important until at least 2050, perhaps indicative of both the large funding gap that exists today and the equally attractive investment opportunity it presents over the long term, Investcorp said.

They expect opportunities in health care services and retirement homes/medical centers to be meaningful in about 10 years. At the same time, investors believe that developments in local immigration laws, black swan events such as pandemics, natural disasters or war, or even a change in life expectancy or birthrates could all influence their investment outlooks.

Climate change ranked as the third most significant trend, cited by 65% of survey participants, unchanged from 2019. Investcorp said it was notable that nearly all investors expect climate change to significantly shape the global economy over the next two decades, consistent with global developments in addressing climate change risks and opportunities.

Sixty-three percent of participants said they were likely to invest in the impact of climate change through both public and private markets, as opposed to favoring one over the other.

About half of investors expect meaningful developments across several industry segments this decade, with the biggest opportunities occurring in the renewable energy and clean technology segments.

However, they cited changes to global political will and technological advances in battery storage or hydrogen as two key factors that may disrupt their current thinking on the significance of climate change as an investment opportunity over the very long term.

Furthermore, some investors specifically noted that changes in the condition of the Gulf Stream — one of Earth’s major climate-regulating ocean currents, which influences weather patterns and sea levels on both sides of the Atlantic — could disrupt the timeline and capital requirements, as well as the risks associated with climate-related investment opportunities.

The following round out the surveyed investors’ top 10 megatrends:

Two of these trends are new to the list this year: China’s growing dominance and cryptocurrencies. Investcorp said this demonstrates that a significant portion of respondents see them not as short-term trends, but ones that are here to stay and deserving of significant attention and capital allocation.

It also pointed out that urbanization and smart cities and redefining global trade, two of the top five trends in the first survey, both decreased in significance this year to eighth and 10th places, replaced by autonomous and electric vehicles and personalized health care in fourth and fifth places.

Fund Allocation and Returns

According to the survey, investors continue to prefer allocating funds to external managers, the choice of 38.6% of respondents, regardless of whether the investment strategy is exclusively private, exclusively public or mixed. This compared with 21.8% who prefer direct investing and 18.4% who combine the approaches.

Twenty-one percent said they do not allocate to trends they see as important. They are not doing so mainly because of a lack of expertise, or they think it is too soon or they have not yet found credible investment opportunities.

Although 85% of investors either lowered or kept return expectations the same over the past year, their net target return expectations — particularly for private market-focused investors — were still higher than those who expressed more optimism about future returns.

The survey found that institutional investors were tilted toward either private or public markets. Private market-tilted investors, who made up 35% of the sample, had the highest expectations in terms of future overall target returns, exceeding those of public market-tilted investors, 42%, by 400 basis points.

Source: ThinkAdvisor

Investcorp partners with 17Capital to structure portfolio of alternative assets

Posted by Muhammad Ibrahim Masudi

17Capital, the global go-to source of strategic financing for investors in private equity, and Investcorp, a leading global provider and manager of alternative investment products, are collaborating to structure a diversified portfolio of private equity, real estate, and credit assets in the US and Europe.

Mercury Capital Advisors, a leading private fund placement and secondary advisory firm, served as exclusive financial advisor to Investcorp on the transaction.

Augustin Duhamel, Managing Partner at 17Capital, said: “We have followed the growth and progress of Investcorp for many years. It is therefore tremendously exciting to enter a partnership with this pre-eminent and forward-thinking firm. We look forward to a strong and mutually beneficial relationship over the coming years.”

Rishi Kapoor, co-CEO at Investcorp, said: “Given the current economic climate, and our expectations over the coming years, we believe that there are significant opportunities to expand our alternative asset portfolios in private equity, real estate and credit. 17Capital is an established and successful capital platform that we believe will help us accomplish our goals”

Sabina Sammartino, Head of Secondary Advisory at Mercury Capital Advisors, said: “We are delighted to have advised Investcorp on this innovative and strategic partnership with 17Capital to further advance Investcorp’s global growth and broaden its institutional investor base”.


Investcorp is a global investment manager, specializing in alternative investments across private equity, real estate, credit, absolute return strategies, GP stakes and infrastructure. Since our inception in 1982, we have focused on generating attractive returns for our clients while creating long-term value in our investee companies and for our shareholders as a prudent and responsible investor.

We invest a meaningful portion of our own capital in products we offer to our clients, ensuring that our interests are aligned with our stakeholders, including the communities that we operate within, towards driving sustainable value creation. We take pride in partnering with our clients to deliver tailored solutions for their needs, utilizing a disciplined investment process, employing world-class talent and combining the resources of a global institution with an innovative, entrepreneurial approach.

Investcorp has today a presence in 12 countries across the US, Europe, GCC and Asia, including India, China and Singapore. As of March 31, 2021, Investcorp Group had US $35.4 billion in total AUM, including assets managed by third party managers, and employed over 430 people from 44 nationalities globally across its offices. For further information, visit and follow us @Investcorp on LinkedIn, Twitter and Instagram.

Mercury Capital Advisors

Mercury Capital Advisors is a leading global private fund placement and secondary advisory firm. Founded in 2009 as a spinoff from the Merrill Lynch Private Equity Funds Group, the firm assists general partners and limited partners in fundraising and secondary advisory, co-investment and direct deal placement. Mercury’s secondary advisory practice provides comprehensive solutions to managers and owners of alternative asset portfolios seeking to leverage the secondary market to achieve their objectives. Our dedicated secondaries team provides customized solutions including advice on strategic options and structuring alternatives, optimal sales strategy and offerings and complete management of the sale and closing process.

With offices in New York, London, Singapore, Tokyo, and New Delhi, the firm maintains strong relationships with a broad range of the world’s pre-eminent institutional investors, including sovereign wealth funds, corporate and public pension plans, insurance companies, endowments, family offices, foundations, secondary funds, funds of funds, and consultants.

Opportunity-Zone Funds Gaining Momentum


After a slow start, managers of opportunity-zone funds have been raising capital at an accelerated rate, according to Real Estate Alert’s second-annual review of the sector.

Twenty-two sponsors working independently and 12 others acting in partnerships have collected at least $2.8 billion of equity for 34 commingled vehicles targeting multiple development and redevelopment projects in opportunity zones, which offer tax breaks to investors (see listing on Page 9). The amount raised so far represents 17% of those vehicles’ overall fund-raising goal of $16.4 billion. Nearly half of the committed capital already has been invested, the survey found.

In its inaugural review a year ago, the newsletter found commingled funds with the capacity to invest in multiple deals had raised a mere $369 million, as many investors were holding back pending IRS guidance on the program. Instructions the agency issued in December went a long way toward clarifying the qualifications for managers and investors.

While hundreds of smaller investment shops are seeking to raise money to invest in individual properties, Real Estate Alert’s review focuses on diversified commingled funds sponsored by firms with experience managing institutional capital. The universe includes Bridge Investment (four vehicles), CIM Group, Origin Investments, RXR Realty and Starwood Capital. Cantor Fitzgerald and Silverstein Properties are jointly marketing a fund, as is a partnership between SkyBridge Capital and Westport Capital. Two vehicles are being raised by the team of Cresset Capital and Diversified Real Estate.

“Better-organized and more-professionally managed multi- property funds are starting to have a well-deserved advantage over single-property vehicles,” said veteran investor Tony Barkan, founder of Allagash Opportunity Zone Partners.

Because some of the fund managers surveyed declined to disclose complete details, the review understates the total amount of equity raised so far. Novogradac, a San Francisco consulting firm that tracks opportunity-zone funds, counts 17 multi-asset vehicles targeting at least $100 million of equity. To date, those funds have raised a combined $4.7 billion — or 38% of their overall goal of $12.2 billion.

Including hundreds of smaller funds set up to invest in a single project, the sector has attracted some $10.7 billion of equity, Novogradac estimates.

The numbers “show to me that this has turned out to be a remarkable success in terms of capital raising, and it’s only going to go higher,” he said. “And the big funds are a notable percentage,” said managing partner Mike Novogradac.

Jason Kaufman, who runs the opportunity zone business for Silverstein, said his pitch to investors is that placing money with a well-established operator gives them access to a high- quality pipeline and the expertise to manage projects in-house. Cantor Silverstein Opportunity Zone Trust is seeking to raise $500 million.

“What they [investors] understand is that the developer of the World Trade Center . . . is going to be representing their dollars,” Kaufman said. “We’re going to have access to the best deals.”

Novogradac identifies more than 600 opportunity-zone funds, but many are single-asset vehicles seeking to raise well less than $50 million. The average equity-raising goal among the funds identified by Real Estate Alert’s review is $512 million.

The federal program, created by the Tax Cuts and Jobs Act President Trump signed in 2017, is designed to spur economic development in low-income areas, which have been mapped out as 8,700 opportunity zones. To take advantage of the tax incentives, investments must be made through “qualified opportunity funds.”

The target audience for such vehicles includes wealthy individuals, family offices, broker- dealers, registered investment advisors, wealth managers, the private-capital groups of large banks and hedge fund managers. Pensions, endowments, foundations and other large investors generally don’t have a need to shelter investment gains, either because they’re tax-exempt or don’t have large-scale proceeds from capital gains.

Investors in opportunity-zone funds can reap tax benefits three ways. If capital gains from the sale of any assets are invested in a qualified fund within 180 days, the investor can defer taxes on those gains until the money is withdrawn from the fund — but no later than yearend 2026. An investor holding the opportunity- fund stake for five years also would benefit from a 10% step- up in the basis of their original investment — rising to 15% if it is held for seven years.

Additionally, any appreciation in the fund is free from federal and most state taxes if the investment is held for at least 10 years.

Investor demand for the funds has increased since the IRS issued its latest guidance in December, market pros said.

“A lot of people felt like once they’re in a fund, they’re stuck for 10 years,” said Libin Zhang, a partner at law firm Fried Frank. “That’s not true. You only stay 10 years if you want the full tax benefits, and even so there are tax-efficient ways of getting out and investing in a new fund within that period.”

Julie Bauch, head of real estate investment banking at New York placement agent Mercury Capital, said some of the big- gest investment managers are taking a wait-and-see approach to opportunity-zone funds. For the moment, they’re more focused on raising capital to pursue distressed opportunities amid the pandemic.

“If you look at the tone of the market right now, a focus on dislocation is what’s happening,” Bauch said. “The attention that will get paid to [opportunity-zone funds] on a relative basis is not necessarily going to grow now.”

But others said the financial-market turmoil triggered by the coronavirus outbreak could be a boon for opportunity- zone funds. As stock prices plunged in March, many wealthy individuals and family offices liquidated portfolios built up during a 10-year bull market. Rolling those proceeds into opportunity-zone funds could help them minimize capital- gains taxes.

Michael Episcope, a principal and co-founder of Origin Investments, said investors have to be careful, however, that the funds are targeting deals that make sense. “If you’re investing in real estate, you have to be prepared to invest through cycles,” he said. “When you have a 10-20 year time horizon and you pick the right neighborhoods, even the pandemic of today will be in the rearview mirror soon enough and is a blip we will get through.”

Barkan added that given the volatility of the stock market the past few months, investors have a new appreciation for longer-term strategies.

“Without taking a side with respect to over- or under-valuation in the stock market currently, from a pure volatility and downside-risk standpoint, people see a totally different outlook for the next few years,” he said.

Oaktree Leads Rush of New Distressed Funds Seeking $30B


A wave of distressed debt and special situations funds has hit the market in recent weeks in response to the Covid-19 pandemic downturn, jumpstarting a segment that had dwindled to almost an afterthought of private credit investing. Nearly a dozen new or expanded funds are seeking about $30 billion in capital, led by Oaktree Capital Management’s $15 billion effort that alone would bring in nearly as much as the entire distressed debt segment
raised all of last year.

Other big names jumping in the market or adding capacity to existing fundraising efforts include PIMCO, Fortress Investment Group, Highbridge Capital Management, Cerberus Capital Management, and Atlantic Park, a joint venture between General Atlantic and Iron Park Capital Partners that is raising $5 billion.

That’s a big change from a relatively sleepy 2019, which featured 19 funds closing with about $19.1 billion in aggregate capital, down from the recent high of 29 funds closed in 2017, according to data from Preqin. Distressed strategies were a small slice of the 151 private credit funds that closed last year with $104 billion in aggregate capital, most of that in direct lending vehicles, according to Preqin.

But the rush of new distressed strategies responding to the coronavirus economy may not be done yet, says Alan Pardee, a managing partner at Mercury Capital Advisors, a placement agent firm.
“Any fund platform that is credit-oriented is currently in the market or devising how to be in the market soon with a distressed debt version of themselves,” he says. “We’ve seen people who are still taking those steps, and would not be surprised to see other funds joining the present group.”

Limited partners and consultants are not surprised by the rapid shift, with many closely studying the new landscape for investing, says Andrew Angelico, v.p. at Wilshire Associates in its manager research group.

“It has been interesting to see how quickly the opportunity set has opened up or transitioned,” he says. “It was a less interesting area to be in for a couple of years, but with Covid-19 and the energy and oil disruptions, we’re seeing opportunity sets open up. We’re actively sharpening our pencils… as the dislocation, economic impact, and price realization rolls through the capital markets.”

Oaktree’s effort, the latest version of its distressed debt flagship fund, would be the largest ever raised in the category. The strategy aims to buy debt from struggling companies or launch takeovers through corporate restructuring efforts.

General Atlantic and Iron Park Capital – led by former GSO Capital founder Tripp Smith – are teaming up for their $5 billion effort, aiming to provide financing to companies facing distress during the downturn, according to the Wall Street Journal. Fortress is raising a new $3 billion pool aimed at downturn-created opportunities that will complement the $5 billion credit opportunities fund it closed last November, says a source familiar with the matter. Meanwhile, PIMCO is launching a new $3 billion distressed

vehicle, Highbridge is seeking $2.5 billion across two funds, and Cerberus is planning on raising $750 million, a target upped after the crisis began, as reported.

Some firms have already finished their efforts, including Kayne Anderson Capital Advisors, which quickly raised and closed a $1.3 billion real estate opportunistic debt fund in recent weeks, building on its existing real estate debt strategy with a vehicle focused on distressed lending and buying opportunities, says a source familiar with the effort.

Others have just begun, with Angelo Gordon pivoting off of the $1.8 billion credit solutions fund it closed in February to now raise an “annex” to that strategy focusing on downturn-related investments, which has brought in about $650 million, along with two other new $750 million funds focused on real estate debt and structured credit, according to Bloomberg News. The San Mateo County Employees’ Retirement Association already committed $25 million to the annex fund earlier this month, according to MandateWire. And KKR has used the shell of its third special situations fund, which it began raising last year with a $1.5 billion target but later suspended, to launch a new dislocation opportunities fund that is aiming to invest in several areas, starting out with about $617 million that had been in the prior strategy, as reported.

Investors certainly will be evaluating distressed team experience as well as asking managers about their deal sourcing capabilities and how they will manage downside risk in this uncertain market, Angelico says.

“Are there structural protections in place?” he asks. “Is it cheap enough? How will you control the outcomes of difficult situations?”

Investors will want to see managers with specific skillsets, Pardee says.

“Who has the stressed, distressed, transitional skillsets?” he says. “Those are the ones that limited partners will spend more time with now. We expect limited partners to still do their homework.”

Wilshire sees one set of near-term “clear and present” opportunities, such as better pricing on leveraged loans and
corporate debt because of market dislocations, Angelico says. There is also a still-forming set of future investments in the structured credit markets in areas related to collateralized loan obligations (CLOs) and asset-backed or specialty finance lending, he says.

It’s also likely that consultants and investors scouting this new distressed debt and special situations market will tilt more toward existing managers rather than new relationships, and to experienced firms rather than outfits pivoting to add new strategies, Angelico says.

“The groups that we have had contact with on a more regular frequency are where more of our conversations are right now, given how fast it opened up,” he says. “The markets became dislocated so quickly that we have to have that capital in their control sooner rather than later.”

Crisis Sidetracks Fund Shops’ Equity Raises


The coronavirus chaos is taking its toll on fund managers’ capital campaigns.

Operators across the country are postponing initial and final closes, or discuss­ing doing so, as investors focus on the dire outlook for their own investment port­folios. Among the shops pushing off dates are Encore Capital of Boca Raton, Fla., Newport Capital of Chicago, and TerraCap Management of Estero, Fla.

In addition, market pros say they expect few managers to roll out new offerings right now — with the exception of opportunistic vehicles looking to capitalize on the market dislocation.

One fund executive said investors are “in triage mode. They don’t want to know about the next fund someone’s going to launch. They want to hear about their exist­ing portfolios.”

To be sure, some managers haven’t delayed or canceled capital raises. But closings have slowed noticeably, placement agents said.

“We have seen closings in the back part of March,” said Alan Pardee, co-founder of Mercury Capital, a New York advisory firm. “Few and far between, but they have occurred.”

Doug Weill, co-founder of New York-based Hodes Weill & Associates, said managers and institutional investors are in fre­quent conversations about market conditions, asset valuations and potential future fund-raising opportunities.

“We are counseling clients to limit marketing in the near term,” Weill said. “It’s not productive to be pitching an offer­ing to a new institutional relationship at this moment in time, when most institutions are prioritizing assessing their current portfolios.”

David Frank, chief executive of New York placement agent Stonehaven, said the situation is worst for an operator that already had an initial close for a fund and began deploying it before the coronavirus crisis. An investor putting in new capital would effec­tively be buying into assets at pre-crisis values, he said.

“It’s like entering the S&P 500 but at January’s level,” Frank said. “Why would anyone do that right now?”

Frank said it could make the most sense for a manager to stop raising money for a such a vehicle, and instead launch a new fund with an opportunistic strategy targeting the current market dislocation. However, that means going back to the original vehicle’s committed investors and letting them know they will be the only ones in that fund — meaning they have larger-than-expected exposure to those assets.

“If you’re caught in that, it’s a wedge,” Frank said. “You bet­ter have very good [limited-partner] relationships.” He added managers may also turn

to offering individual deals to inves­tors to quickly raise capital for specific investments.

Pardee said that investors seem to have fallen into three camps. Many are continuing to schedule meetings, albeit via video-conferencing, and moving toward making commit­ments. Others are sitting out for a few months as they take stock of the initial damage to their portfolios. And a third group is still putting money out — but only to managers they already have longstanding relationships with.

“Some managers that are about to close are seeing inves­tors increase their allocation to a fund, as they want to have capital available for investment, particularly with a manager they know and trust,” said William Thompson, senior managing director in Evercore’s private-capital advisory group.

Managers that have already held an initial equity close also face a timing issue. After that first close, operators usually have a time-stamped deadline of 1-2 years to hold a final close. Given the current market pause, some managers could run out of time to raise more money, or have to ask their initial inves­tors for an extension.

“We’re fortunate in that the clock’s not ticking on us,” said one manager pushing off an initial close. He added investors won’t necessarily be willing to grant more time. “They aren’t always that nice. They think about their returns and what’s best for them. I’ve seen that in the past.”

Investors, meanwhile, are grappling with the “denomina­tor effect.” As the values of their securities portfolios decline, some institutions’ real estate holdings suddenly account for a larger percentage of their total assets. Take Ohio School Employ­ees. The pension system last week reported that due to falling values of other investments, its real-assets portfolio has hit its allocation cap of 17% of total assets, up from 14.7% at yearend.

Market pros say the denominator effect may prove to be tem­porary, however, since property values eventually will have to be written down to reflect the economic effects of the virus.

Another potential fear for managers is that institutions might fail to fund capital calls — although market pros say that’s unlikely to happen soon in more than a handful of cases. More likely, they say, fund shops and their backers would have conversations about waiting to draw down capital, to avoid such defaults.

Looking ahead, the market disruption could prompt limited partners to prioritize funding their biggest managers, partic­ularly ones raising capital for strategies that will look to take advantage of distressed assets.

“There was a haves and have-nots market before,” Mercury’s Pardee said. “Now the haves will have a little more and have-nots will have a little less.”

PE giants eyeing 2 opportunities amidst COVID


We talked to 14 private-equity insiders about how they’re planning to play the coronavirus turmoil. They identified 2 huge opportunities. Market chaos is creating crises and opportunities. Private-equity firms are scrambling to manage both.

As the stock market crashes, and the global spread of coronavirus delivers a blow to sales from plane tickets to draft beer, private-equity firms — the giant managers of companies such as the bookseller Barnes & Noble and the dating app Bumble — are scoping out new investments.

But they’re looking to ramp up in just about everything but actual private-equity stakes.

Firms like Apollo Global Management, Oaktree Capital, Blackstone, and Ares Management are staffed to buy debt in troubled companies. Others like KKR and Silver Lake have divisions focused on something not as closely associated with private investing: minority stakes in public companies.

These two areas of investing are expected to play a crucial role in deciding who owns what when the dust settles. And private-equity shops, which are equipped with hundreds of billions in unused investor dollars, are well-positioned to snap up their selection of distressed assets while also offering liquidity to companies in need of support, according to bankers, lawyers, and consultants.

But with deals paused because of economic turmoil, a near-term challenge for private-equity firms is putting out fires at their own businesses.

Private-equity firms are busy communicating with their existing portfolio companies about how to maneuver the fluid situation, assessing business repercussions and suggesting when they should draw down on credit lines, private-equity execs, consultants, and bankers said.

“The pandemic has spurred a period of greater focus by PE firms on portfolio companies — partly because of the challenges they’re facing of both supply and demand and partly because the current uncertainty has caused many deal and fundraising processes to stumble or pause,” Bryce Klempner, a partner with McKinsey & Co. who advises private-equity firms, said.

Peter Martenson, a partner at the fund-placement firm Eaton Partners, said private-equity firms, along with growth-equity and venture-capital companies, were “triaging their portfolio aggressively” and that he expected private-equity shops to hold their assets longer to ride out the downturn.

The comments came from conversations Business Insider had with more than a dozen bankers, lawyers, private-equity execs, and consultants since Monday to better understand how private-equity shops are planning their next moves.

The coming weeks and months will demonstrate how businesses weather the downturn, but private-equity shops are already scrambling to aid companies in industries such as travel, leisure, and hospitality, creating loans directed at carrying them through the period with their employee bases relatively intact and without a bankruptcy filing.

On the investing front, one private-equity executive told Business Insider there wasn’t much available to invest in at the moment outside public equities — and that his firm, which is one of the largest, was increasingly focused on liquid investments like loans, bonds, and public stock. He spoke on condition of anonymity because he was not authorized to speak publicly, but Business Insider confirmed his identity.

Meanwhile, one sponsor banker said private-equity execs were busy managing their portfolio companies and advising them on new policies in light of the coronavirus. But he said they expected to be called upon in the near future to provide creative liquidity solutions for large, including public, companies grappling with a slowdown as a result of the coronavirus.

This person, whose identity Business Insider confirmed, spoke on condition of anonymity to preserve private-equity relationships.

Firms positioned for the downturn

Preqin data, along with bankers and lawyers, pointed to a handful of firms, such as Apollo Global Management, Oaktree Capital, Blackstone GSO Partners, and Ares Management, as players whose distressed-debt divisions are positioned to pounce on the downturn.

These firms have not yet made big announcements about distressed investments related to the recent downturn. In the 2008 financial crisis, Apollo deployed more than $50 billion in four months, according to Leon Black’s comments at a private-equity conference in February.

“A downturn would not be a bad thing for Apollo,” he said at the SuperReturn conference, which was held while the spread of the coronavirus was just starting to ramp up and it was still unclear how it would affect the global economy.

Now senior credit professionals are seeking out lending opportunities in businesses directly affected by the downturn, though they would not share specific deals or companies.

Cruise lines, bars and restaurants, live-entertainment companies, and airlines have all seen revenue plunge as a result of the coronavirus and are considered some of the most obvious areas of opportunity, private-equity executives and bankers said.

At the same time, portfolio companies under management of some of the same firms are taking a beating as a result of the coronavirus.
Hospitality names are taking a big hit

For one, Blackstone has poured billions of investment dollars into businesses that are now getting slammed by the coronavirus.

One deal was the copurchase of Merlin Entertainment, the large visitor-attraction operator that controls the amusement park Legoland in Florida. Legoland said on Friday that it would join other amusement parks in shutting down its theme and water parks through the end of the month to ride out the coronavirus.

Blackstone also bought a controlling stake in Great Wolf Resorts, the owner and operator of family-oriented entertainment resorts such as Great Wolf Lodge, in October. On Monday, Great Wolf announced it had closed all of its 19 resorts in 13 states because of coronavirus concerns, with plans to reopen on April 2.

Two other large investments it made in 2019 were the purchases of the Bellagio from MGM Resorts International and US warehouse properties from the logistics company GLP in an $18.7 billion deal.

MGM announced Sunday it would close all of its resorts, including the Bellagio, because of the coronavirus. The effect of the coronavirus on Blackstone’s US warehouse properties could not be immediately determined.

A Blackstone spokesman on Tuesday said the firm’s investors “are and always have been long-term investors.”

He also said the firm had successfully weathered many crises in the past, including 9/11 and the 2007-09 global financial crisis, and still delivered outstanding performance for clients. “Our confidence in this approach remains stronger than ever,” the spokesman said.

A private-equity firm typically holds on to investments for five or so years, so a monthslong slowdown doesn’t necessarily translate to a financial loss for private-equity firms, but it will likely cause firms to change up how they manage their assets, including recapitalizing investments by selling stakes, experts said.

Fundraising put on pause

The uncertainty in the market, coupled with the inability to conduct on-site meetings, put a pause on some fundraising for private-equity shops, according to placement agents.

At the same time, some investors no longer have the appetite to put their money in illiquid investments this year, they said.

Alan Pardee, a placement agent with Mercury Capital, said it was still early to predict how investors would react to the coronavirus and resulting market volatility. But from what he has seen so far, there are a number of investors who are adjusting by scheduling video and regular conference calls as a substitute.

“We are aware of a couple [investors] that have said things along the lines of, ‘I’m not doing any more illiquid strategies for the balance of the year,’” he said. “We’ll see how the market sorts out, given the continuing downdraft in the public markets.”

The coronavirus could also make more attractive areas of private-equity investing that are not as correlated with the markets, like litigation finance, life settlements, music royalties, and needs-based real estate, such as self-storage, rental homes, and medical offices, placement agents said.

LPs Slow Pledges to Debt Vehicles


Demand for high-yield-debt funds appears to have softened in the past year.

The amount of equity raised by active closed-end vehicles is down for the first time since 2013, according to an annual review of high-yield real estate funds by sister pub­lication Real Estate Alert. Of the 533 funds identified by the survey, 74 invest pri­marily in debt — the most ever. But the number of fund operators in the mar­ket dropped to 65, from a record 70 last year (see list­ing on Pages 9-11).

After peaking at $54.9 billion a year ago, the aggregate equity held by debt funds plummeted 18% to $45 billion. The total amount invested by those vehicles also fell — to $11.4 billion, from $14 billion.

To be sure, the universe of debt funds is still large from an historical perspective. Before 2017, the total amount of equity raised never exceeded $40 billion. But after seven years of steady growth, the market clearly has slowed — and the coro­navirus pandemic could further suppress investor demand.

“There has been a massive proliferation of debt funds over the previous three years,” said Bill Thompson, senior managing director in Evercore’s private-capital advisory group. “So even before the coronavirus, LP interest was slowing. ‘Not another debt fund’ was the refrain.”

Thompson predicted, however, that investors will continue to back managers offering differentiated strategies, whether defensive or opportunistic.

Since the financial crisis, nonbank lenders have come to account for an increasing share of the commercial-mortgage sector. Originations by nonbanks amounted to 41% of the mar­ket in the fourth quarter, up from 29% a year earlier, according to CBRE.

Among high-yield vehicles, the total amount of dry powder they have to invest dropped 18%, to $33.7 billion from $40.9 billion a year earlier. That’s a potentially worrisome sign for borrowers at a time when commercial MBS lenders have retreated to the sidelines and balance-sheet lenders are proceed­ing with extreme caution.

Market pros expect debt funds that use leverage sparingly will remain active and even thrive amid an economic downturn, while highly leveraged vehicles will struggle.

“No investment committee has underwritten this kind of shock — none,” said Walter Stackler, founder of New York placement agent Shelter Rock Capital. “The groups that do well in this environment will be well-capitalized and have multi-disciplinary teams that can effectively manage the restructur­ings that are bound to happen. Managers with in-house direct equity expertise will have an advantage.”

Kevin Miller, chief executive of Los Angeles-based fund manager Thorofare Capital, said operators that borrow heav­ily to boost their returns or rely on CMBS programs to recycle capital will suffer in the months ahead. “Those groups that are overleveraged, they’re the ones who are going to get hurt. And being under-levered is finally going to pay off for groups like ours,” Miller said.

Multiple sources said banks that offer warehouse lines or repurchase-agreement financing to debt funds soon may pull back — either by freezing the facilities or raising rates to unworkable levels.

Real Estate Alert’s review found that just 17 debt funds held a final close last year — the lowest number since 2016. The peak was 28 in 2017.

Alan Pardee, co-founder of New York placement agent Mer­cury Capital, said foreign investors lately have been deterred by the high cost of currency hedging. “The one thing that has been different was that hedging costs to the dollar made U.S. debt funds a bit harder for international investors to invest in last year,” he said.

Real Estate Alert tracks active closed-end funds that invest in properties, debt, or both, and shoot for returns of at least 10%. The 533 vehicles identified in this year’s review are seek­ing to raise $411 billion of total equity. The debt-fund compo­nent has an aggregate equity goal of $66.1 billion, or 16% of the total — the lowest level since 2014.

Vehicles are considered active if they are still raising capital or if they have already held final closes but have invested less than 75% of their equity. So each year, a rotating group of funds is counted. Twenty-six debt funds were added this year and 25 fell off the list.

One that dropped off was a $4.8 billion Blackstone vehicle, Blackstone Real Estate Debt Strategies 3. The removal of that fund is part of the reason that the total amount of equity held by high-yield debt funds fell by as much as it did.

The review classifies funds as debt vehicles if they intend to invest at least half of their equity in the origination of loans or in the acquisition of loans or debt securities. The other 459 high-yield real estate funds primarily target property pur­chases, but 224 of them also can buy or originate debt. So 42% of the fund universe overall can invest in debt to some extent.

Funds are included if they raise capital at least partly from U.S. investors or invest mostly in U.S. commercial real estate. Joint ventures, separate accounts and open-end funds are excluded.

Investors Tap the Brakes on Fund Commitments


After several years of explosive growth, the market for high-yield real estate funds is slowing.

The total amount of equity managed in closed-end funds fell for the first time since 2013, according to Real Estate Alert’s 24th annual review of the fund industry. Other key metrics including the number of fund operators in the market and number of vehicles that held a final close also dipped.

“It does feel a little slower out there,” said Alan Pardee, co-founder of New York placement agent Mercury Capital. The market is “still healthy — it’s still one of the strongest years we’ve had overall — but it’s got a slightly different tone.”

The big question now is to what extent economic damage from the corona- virus pandemic dampens fund performance and suppresses investor appetite. “The prognosis for the near term is extremely challenging,” said Bill Thompson, senior managing director in Evercore’s private-capital advisory group. “The market hasn’t stopped, but with limited face-to-face meetings, expect long capital-raise periods.”

To be sure, the size of the fund universe remains in record territory — by any measure, substantially larger than it was at the last cyclical peak. The number of commingled vehicles seeking 10%-plus net returns ticked up to 533, from 528 a year earlier. And the total amount of equity being sought by managers increased 1.6% to a high of $411 billion.

But the number of fund sponsors dropped to 418, from a high of 426 a year ago. And fewer of them reached the finish line for vehicles they were marketing. The number of funds that held a final equity close fell to 123 in 2019, from 140 the year before and a high of 146 in 2017.

Perhaps the most telling indicator of a market slowdown is that the aggregate amount of equity raised by active vehicles declined 2.4% to $307 billion. During the previous four years, that figure had climbed an average of 16% annually.

Even as fund raising fell for the first time in seven years, the amount of uninvested capital continued to rise, lion. As a percentage of equity raised, the amount of dry powder increased to 74.9% — the highest level since 2009 and a clear sign that managers have been finding it increasingly difficult to put money to work. “Everyone has been struggling to find deals,” said Walter Stackler, founder of New York placement agent. Shelter Rock Capital.

That reality is reflected in the return target of the average high-yield real estate fund, which fell to 14.4%, after fees, from 15.1% a year earlier. That’s the sharpest drop in more than 10 years, though the figure has been drifting lower for almost two decades.

It’s no wonder that the number of opportunity funds, which seek net returns of 16% or more, has been on the decline, while managers have been teeing up more value-added and core-plus vehicles, which target lower returns. The count for opportunity funds has plummeted to 113, from 184 in 2014. During the same period, the number of value-added funds has shot up to 264, from 142. For core-plus funds, the number has nearly doubled to 69, from 36.

The industry’s rapid growth in recent years largely was driven by institutional investors, which began ratcheting up their real estate allocations in the wake of the global financial crisis. While fund returns may still appear attractive on a risk- adjusted basis, there are indications that investor demand may be peaking.

An annual investor survey by Cornell University’s Baker Pro- gram in Real Estate and advisory shop Hodes Weill & Associates found the average target allocation for real estate is projected to rise to 10.6% this year, from 10.5%. That’s the smallest increase since the survey’s inception in 2013. “The rate of increase has been in the range of 20-40 bp over the past five years,” according to the latest survey report.

Douglas Weill, founder and co- managing partner of New York- based Hodes

Weill, said institutional investors turned more cautious in the past year. “Investors were moving more slowly in terms of making investment decisions,” he said.

Weill noted that the sharp drop in stock and bond prices in recent weeks could prompt investors to slow the pace of their real estate investments due to the so-called denominator effect. As the values of their securities portfolios decline, institutions’ real estate holdings suddenly account for a larger per- centage of total assets.

“How many institutions are going to find themselves over-allocated to real estate?” Weill wondered. “We’re starting to see that the past couple of weeks.”

Real Estate Alert’s review high- lights a bright spot for small and mid-size fund managers: The combined market share of the big- gest operators dipped in the past year after climbing steadily for several years. The top 10 managers accounted for 33% of the total equity raised, down from a record 37% a year earlier. The top 25 firms corralled 47% of the total, down from 50% a year earlier.

Blackstone remains the industry’s undisputed champ. The investment behemoth finished marketing the largest-ever real estate fund last year, closing on $20.6 billion of equity. Other managers of megafunds that held final closes since the start of 2019 are Brookfield ($15 billion), Lone Star Funds ($4.6 billion), TPG ($3.7 billion), Angelo, Gordon & Co. ($2.75 billion), KSL Capital ($2.7 billion), Westbrook Capital ($2.5 billion), Gaw Capital ($2.2 billion), Ares Manage- ment ($2 billion) and Greystar Real Estate ($2 billion).

The prevalence of $1 billion-plus vehicles lifted the average fund to a record $771 million. The average size has risen for seven consecutive years.

While the concentration of capital among the largest man- agers is at a five-year low, fund-raising conditions for smaller shops remain challenging.

“If you’re an incumbent and you’re on Fund 4 or 5 or 6, you get your money raised,” said Shelter Rock’s Stackler. “If you’re a new guy, it’s really hard. That’s not going to change.”

And the coronavirus outbreak has added a new wrinkle for fund marketers.

“There are certainly LPs that are being very measured about their own travel, who they’re letting into their offices and all the rest,” said Pardee, of Mercury Capital. “We really don’t know what to make of the future.”

Assuming the pandemic is short-lived, the impact on the real estate market could be minimal, Pardee added. “We’re still dealing with a buoyant market in the context of transactional activity . . . with the asterisk of coronarvirus,” he said. “But overall, the market is healthy. If it’s slowed down a little, it feels like it has the ability to ramp back a lot.”

Real Estate Alert’s review tracks property and debt funds that raise capital at least partly from U.S. investors, that invest mostly in U.S. commercial real estate, or both. Of the 533 active funds, 363 invest only in the U.S., 122 invest only outside the U.S. and 48 invest globally. Vehicles are considered active if they are still raising capital or have already held final closes but have invested less than 75% of their equity.

That means a rotating group of funds is counted each year. Most of the departing funds were removed because they sur- passed the 75% threshold, but five were dropped because they were put on hold or canceled. Overall, 186 vehicles were added to the list and 181 were removed.

Vehicles must be seeking to raise or have closed on at least $50 million of discretionary equity. Excluded are joint ventures, separate accounts, nontraded REITs and club funds (typically with fewer than a half-dozen limited partners).

Bain, TPG Go Long in Major Push into Public Equities


Bain Capital and TPG have rolled out new vehicles focused on long-hold public equities – aiming for billions of dollars in new capital and further blurring the lines between the public and private equity markets.

Bain’s new Public Equity Global Long Equity Fund and TPG’s Public Equity Partners Long Opportunities strategy – both registered as hedge funds last year with the Securities and Exchange Commission – are expanding on existing hedge business lines at each firm, but are going after investments intended as long holds. TPG also is launching a new Strategic Capital Fund that will buy minority stakes in public companies, according to a Bloomberg News report.

Private equity investors haven’t been clamoring for their managers to spread into the hedge fund and long-only markets, says Alan Kosan, senior v.p. and head of alpha investment research at Segal Marco Advisors. But there clearly is further convergence as big asset managers focused on the public or private equity markets march into the other’s turf, he says.

“We will see more private equity firms invest in public equities, and more [traditional long-only] public equities managers investing in private equity,” he says. “It’s hard to say it’s a bigger trend at this point, though we see more firms confident that they can execute in new [sectors]… and it’s likely to happen more in the future. But we haven’t seen a lot of traction yet from [investors] following a manager on the private side into the public side.”

Bain’s open-end fund had sold about $23.5 million when the manager first registered it with the SEC in October, but is targeting $5 billion to $7 billion for the vehicle at full capacity, according to Bloomberg. The filing lists Joshua Ross, a managing director on the public equity team who joined Bain in 2016 from Och-Ziff Capital Management, as the new fund’s lead investment principal.

TPG’s long opportunities fund, first registered with the SEC in May 2019, had raised $1.2 billion, according to updated filings in late December. It is part of the TPG Public Equity Partners (TPEP) division, which in its last Form ADV filing in March 2019 presaged the launch, noting “we expect to form ‘long only’ investment vehicles that only hold long positions in the public equity securities included in other TPEP Funds’ long portfolios.” The ADV also noted that its TPEP funds “have a broad mandate to invest in publicly traded equities globally across all sectors and market capitalizations.”

TPG’s strategic capital fund, which is not part of the TPEP group, will aim to build minority positions of at least 5% in large companies, with a goal of gaining board seats and playing a constructive activist role on corporate governance and environmental matters.

Other private equity managers have made their own forays into public equities investing in recent years, including Apollo Global Management,

which has built a $7 billon total return fund, and Providence Equity Partners, which last year launched a new hedge fund strategy.

It’s not a big leap for buyout managers to believe they can translate their private company research techniques into the public equity sector, and some have been doing so for years, Kosan says. While public equities managers often look at earnings per share and top line revenue growth data, and private equity shops focus on EBITDA growth and multiple expansion, there are “commonalities” in that both are vetting management teams, business plans, sector dynamics, and individual company positioning, he says.

“You see why [private fund managers] want to export their knowledge of company sectors and valuations into the public domain,” he says. “At the end of the day, the target is if the company can grow revenue or earnings or profits. It’s about identifying companies that are competitive and have the potential to grow the top line and bottom line.”

The moves also reflect the larger trend of big private equity managers spreading into other asset classes, especially with real estate, private debt, and hedge fund strategies, says Alan Pardee, a managing partner at Mercury Capital Advisors, a placement agent.

“We certainly have seen more product proliferation at the large private equity firms,” he says. “The bigger the firm is, the more product they have.”

Larger private equity managers may have an edge in such crossover efforts, because they can build a deeper team to work on new funds, Pardee says. “People are going to trust the big platforms to do something interesting, whereas a smaller manager might find it a tougher thing to accomplish,” he says.

But investors still naturally hesitate to embrace alts manager moves into other asset classes, Pardee says. “[Limited partners] are generally uncomfortable with hedge funds launching private equity funds and private equity funds launching hedge funds,” he says.

Investors will likely question whether any buyout manager launching a public equities product has established the proper investment process, shows an adequate level of commitment to a new investing mode, and has built up sufficient staff for the function, Kosan says. It may take a lot to convince investors to not simply award their public equities mandates to the traditional managers in that market, he says.

“It’s up to the private equity firm to make the case it has the expertise,” he says. “The backdrop here is the search for active management capabilities. There can be some appeal if it’s crafted appropriately with the right sponsorship and the right thesis.”

Brookfield Grabs Quick $1B in New ‘Special Opps’ Push

Posted by Muhammad Ibrahim Masudi

By Tom Stabile

Brookfield Asset Management raised a quick $1 billion last quarter in a new wide-angle special opportunities fund – aiming for a less travelled product area in which Blackstone Group and others
have raised big sums and face little competition.

Brookfield is aiming for $5 billion overall in the new strategy, part of a suite of products the $385 billion manager has been launching in the last two years to complement its flagship real estate, infrastructure, and private equity funds. The manager is finishing a fundraising cycle for the latest vintage in each of those asset classes, with $27 billion raised over the past year toward an infrastructure fund targeting $20 billion, a private equity vehicle that has brought in $8 billion, and a real estate fund that closed in January with $15 billion.

Brookfield raised $19 billion overall last quarter, led by $10.2 billion for the infrastructure fund and $500 million for its private equity fund. But that quarterly fundraising haul also featured newer vehicles, including $1 billion for the new special opportunities fund, $700 million for a long-life infrastructure strategy, and $500 million for its new opportunity zone fund, which it landed on several advisor platforms this year.

The new special opportunities fund has the most sweeping mandate of the newer products, able to invest through either control or minority stakes in equity, credit, and hybrid deals – and across
private equity, real estate, and infrastructure – with a purview essentially of any promising deals that don’t fit into its existing funds.

“This program allows the flexibility to invest across a wide range of opportunities beyond the scope of existing mandates we have in funds,” said Bruce Flatt, CEO at Brookfield, on its second quarter earnings call earlier this month. “The funds could be deployed across the risk reward spectrum, so some returns could be in the low teens and some are opportunistic returns. They just don’t fit the mandates of our flagship strategies.”

The model Brookfield is using echoes strategies from several of its large private fund peers, most notably Blackstone, which has raised $29.6 billion in capital across various vehicles and coinvestments since the 2012 launch of its tactical opportunities business.

Others plying the area include Ares Management, which has $2.9 billion in a special opportunities fund that targets minority stakes in “stressed, distressed and opportunistic situations,” and TPG
Sixth Street Partners, a TPG affiliate whose Adjacencies funds have about $9.3 billion, with a heavier focus on credit investments. And Fortress Investment Management has run a hybrid
version of the strategy since 2002, when it launched its Drawbridge Special Opportunities vehicle, which is in a hedge fund format, but often targets illiquid assets that don’t fit in its private equity strategies.

Hedge funds were the earliest players using the approach, with larger managers moving beyond their single-strategy models to add special opportunities themes to grab a broader set of assets,
says Alan Pardee, managing partner at Mercury Capital Advisors, a placement agent.

“Hedge funds created a box-for-everything strategy, and Blackstone looked at that and said, ‘Why can’t we do it?’” he says, noting that Blackstone applied it to a drawdownstyle
private equity format. “It was a stroke of brilliance… And it’s no surprise that anything successful has its imitators.”

But it’s also an area that may not end up with a lot of competitors, because investors will likely only favor managers that have a broad set of products – and expertise on a wider range of investments – to populate these “all-other buckets” with viable deals, Pardee says.

“Blackstone proves there is demand for it, but we’re not sure there is demand for somebody to apply this strategy in areas where they don’t have experience,” he says. “The appetite from investors for funds with a very broad mandate across a lot of things will only be for the larger firms that have a lot of different ways of attracting deal flow.”

One way that smaller players might compete on the margins of this investment style is to create funds adjacent to their specialties, Pardee adds. “They’re not entrusting capital to a middle market
buyout specialist to go invest anywhere,” he says. “But you might be able to create a special fund that looks at everything else in your own deal flow, including credit [investments] alongside your
equity deals.”

In addition to its new special opportunities strategy, Brookfield is also betting big on its long-dated funds, launched in 2016 and 2017. It expects to raise $50 billion each in separate real estate, infrastructure, and renewable energy strategies over time in open-end funds designed to hold assets longer than typical private vehicles, while targeting 7% to 11% returns. Those funds have to date brought in about $5 billion, Flatt said on the recent call.

And even though Brookfield only recently closed its flagship opportunistic real estate fund and may soon close its flagship infrastructure strategy, it may be back in the market with successor funds relatively soon, because each of those new vehicles is already 50% invested, Flatt said. “So… the follow-on funds come relatively quickly afterwards,” he said, later noting that Brookfield’s fund documents allow it to pursue a successor vehicle after investing 75% of the prior version.

Brookfield is also set to add another $124 billion to its coffers sometime this fall when its deal to acquire Oaktree Capital Management is set to close.


By clicking on this link you will leave the Mercury Capital Advisors, LLC (“Mercury”) website and be taken to a website owned and operated by third parties. These links are provided for your information and convenience only and are not an endorsement by Mercury or the Mercury iFunds™ platform. Mercury has no control over the contents of any linked website and is not responsible for these websites or their content or availability. Mercury therefore makes no warranties or representations, express or implied about such linked websites, the third parties they are owned and operated by, the information contained on them or the suitability or quality of any of their products or services.