Mid-July Update On Private Market Conditions
Despite outperforming the public markets, deal volumes on the private market have been underperforming for the last couple years after emerging out of the COVID-19 pandemic. The lower money supply has caused banks to become more conservative with lending thus hiking up interest rates, making borrowing a lot more expensive. On top of that, the geopolitical tensions with the Russo-Ukrainian War, has halted fundraising growth after 11 years in the EU, appreciating the value of the US Dollar. Diversification of investment portfolios have become more crucial than ever with the volatility of the economy and political atmosphere which has inevitably led to the uprise of the secondary market and piqued interest in the housing market.
The secondary market is going through a revival and is definitely about to head into an upswing in the next few months. Second hand trading is in high demand among companies right now as it’s helping them get a real market valuation of how much the company is worth. The secondary market has also transitioned into a buyers market due to the fact many buyers from last year, such as crossover investors and hedge fund managers, have become sellers now, increasing the volume of sellable shares. The discount rates of privately traded securities on the secondary market have been upwards of 50% this past year as sellers are trying to liquidate their stakes as soon as possible. From a diversification standpoint, secondary funds are especially beneficial in a volatile market/economy where industry trends are constantly fluctuating. Secondary managers, with a focus on investing in mature fund stakes and assets, are better equipped to deploy capital a lot faster as opposed to primary funds. However the phrase “high risk and high reward” still pertains in the second hand market, hence the more mature a fund is the less return you can expect.
Having finally turned a positive gross margin, hedge funds have gained approximately 4.1% in the fourth quarter of 2022 after having been negative at -0.6% and -6.8% in third and second quarter of 2022 respectively. Many investors evaluate the intrinsic value of a company as the present value of their future earnings, and so undervaluing those earnings would lower the valuations, causing a higher demand for those assets. However higher short-term interest rates will attract investors, as they generate more interest revenue with the higher rates. This can be beneficial for hedge funds holding short-term fixed income roles. These distinguished strategies are witnessing a surge in demand, as they effectively utilize surplus collateral to sustain consistent high risk-free rates of return.
The real estate market has been a buyers market ever since the pandemic has begun cooling down, and that isn’t likely to change in the near future. Breaking a record since February 2022, more than 750,000 new homes have been sold in May of 2023 alone. Once the pandemic hit, a lot of people headed back home and out of the city but now with this new era of work from home a lot of residential city spaces have been empty and losing value in the process. Additionally, current homeowners have been finding refinancing their mortgages more expensive with the surging interest rates. Corporate tenants have also been having a difficult time transitioning their employees back into their offices, causing companies to not renew their leases for their office spaces. A lot of construction companies have resumed their projects after the pandemic and that will continue to grow the housing inventory. Housing prices have been relatively stable to balance out the high interest rates appealing to the buyer market and will probably stay so in the foreseeable future.