2022 market trends: Slow-down and consolidation1
After record high volumes last year, 2022 saw a sharp downturn in both the number and volumes of fundraising and deal flows in APAC.
Data from Preqin revealed the top 3 concerns in the current market to be:
(a) the challenging exit environment (the volume of exits in 2022 is less than half of what it was in 2021);
(b) lower valuations applying across all sectors and asset classes; and
(c) rising interest rates.
The general slowdown in activity is seen to be a result of many factors. The changed macroeconomic environment in 2022, the war in Ukraine, the marked slowdown in the level of activity by China-based and China-focused funds, as well as the lower valuations mentioned above.
The reduced number of exits has also meant that holding periods for funds have been extended, which is contributing to lower levels of liquidity in the market. New funds are taking longer to close and are spending longer in the market.
Investors surveyed by Preqin showed that most of them expect to contribute less in 2022. This is likely to result in more secondary market activity and the introduction of more continuation vehicles, in place of exits.
Finally, market volatility has seen certain funds selling off investments in public markets, meaning that some investors are dealing with the "denominator effect" of having increased exposure to private equity.
Views from the panel: The need for creativity and "Fund Finance 2.0"
Panellists at this Symposium were generally of the view that given the challenges of the current market and liquidity crunch, diversification is key. There is a need to "get creative" in financing structures, and to look beyond the traditional capital call facility to meet the current leverage needs of funds.
Commercially for financiers there is talk about looking at the right value proposition when lending, and the need to focus on product diversification for clients.
Enter: "Fund Finance 2.0". This is not a new term, and is one that has been talked about at length in the APAC market as well as overseas in the US and Europe.
For a long time, particularly in APAC, there were doubts as to whether there would be any uptake in alternative structures – however for the first time in 2022, panellists were able to confidently say that such structures are entering the market.
The three most common alternative fund finance structures discussed were: NAV Facilities, Hybrid Facilities; and GP Facilities. There was also mention of private credit and preferred equity structures.
In the face of tightening liquidity, NAV and Hybrid Facilities in particular were identified as a potential financing solution to the increasing levels of fund assets under management. Preqin expects the size to almost double by 2027 compared to current levels.
It was also observed that such structures could require significantly more involvement of the financier on an ongoing basis to assess valuations and KPIs.
Most experts agreed that alternative structures have only really started to enter the market in the past 12-18 months and not all transactions make it across the finish line. These alternative structures are expected to be more prevalent as the traditional subscription line facilities do not fully address the growing challenges and complexities faced by fund managers.
ESG: Is everyone on the same page?
It was generally acknowledged that environmental, social and governance (ESG) considerations have gone mainstream. Most organisations accept ESG targets and policies as being integral to any business or investment.
Some of the expert panellists observed that Europe was leading the charge in this space in terms of setting the expectations on standards for ESG-related KPIs and the requirements for monitoring and reporting on the KPIs.
However, there was a lively discussion about blowback against ESG. In particular, one of the interesting "hot topics" was the recent "anti-ESG" legislation in parts of the US such as Texas where there was an enactment of a law that prohibited most state agencies and local governments from contracting with certain firms because they "boycott energy companies" due to their ESG stance.
Panellists acknowledged that although ESG is here to stay, there is a need for financiers and investors to balance ESG requirements with the value proposition and the need for existing debts to be refinanced.
In certain sectors where organisations are reluctant to continue financing existing debt, this might lead to capital being sourced elsewhere (for instance, by GPs setting up new funds without such stringent ESG restrictions).
Where to from here?
Despite a downturn in activity in 2022, the general view among financiers, funds and industry experts was one of cautious optimism.
The live polling sessions throughout the conference showed that attendees expected there to be at least sufficient liquidity in the market to meet refinancing needs in the immediate future.
Activity is expected to continue on a steady upward trajectory in the medium-to-long term as the pace of transactions picks up and the APAC fund finance market matures to accommodate more creative solutions to address the current challenges.
It was a successful event that brought together like-minded stakeholders. We look forward to seeing all of you at next year's 2023 APAC Fund Finance Symposium.
1. Data in this section was derived from Preqin's Private Capital Market Update at 2022 APAC Fund Finance Symposium and the following reports: (1) Insights+ - "Preqin 2022 Alternatives in Asia-Pacific"; and (2) Insights+ - "ESG in Alternatives 2022: The Transparency Tipping Point Sample Pages".
