Supply struggles and inflationary pressures in the post-pandemic world
The global economy is facing several challenges. In April, Titanbay Investment Associate Hakki Mustafa wrote about the prospects for investing in private markets amid geopolitical uncertainty, supply chain issues and rising inflation. Since then, the macroeconomic and geopolitical situations have intensified. As a result, some issues have come more to the fore and investors are asking new questions about how markets are likely to perform in the coming months. These questions fed much of the debate and discussion at the Owen James Meeting of Minds event in June.
On the day, Adam Harrison, Titanbay’s Chief Commercial Officer, hosted a roundtable discussion with several prominent figures from the wealth management and private banking industries. Below, we recap some key elements of the group’s conversation and examine the themes that participants thought most likely to determine the prospects for private markets.
Pausing for thought?
Early in the discussion, there was a focus on the economic factors at play. Supply chain issues - already a concern in light of increased demand in the post-pandemic world, have intensified as a result of the war in Ukraine. These are fuelling inflation and constraining global gross domestic product growth. The World Bank now expects global growth to slump to 2.9% in 2022 . This is significantly lower than the 5.75% expansion recorded in 2021. Weak growth and higher prices may combine to create a bout of stagflation. Typically, cyclical assets struggle to perform well in this kind of environment. Roundtable participants emphasised that while investors must hope for the best in the short term, it is essential to keep a focus on long-term solutions.
What is clear is that demand for private market investments remains elevated. Some members of the group felt that there may be a need to “pause for thought”, when it comes to private equity investing, because the number of “unicorn” companies is not high enough to satisfy high levels of demand from new investors coming to market. Others, however, pointed to businesses emerging from promising sectors such as digital transformation. The Covid-19 pandemic has been instrumental in accelerating technological change on a global scale, creating a boom in the number of global entrepreneurs. Our recent blog piece covers this subject in more detail.
Nevertheless, one member of the group noted that “...there is more capital than there are good companies to invest in…”, highlighting the importance of conducting robust and diligent research before making the decision to invest in private equity.
Addressing the liquidity question
From here, conversation moved to another risk associated with investing in private markets — illiquidity. The consensus around the table was that the need to lock in capital for up to ten years may always present a challenge for retail investors. But for sophisticated investors, the risk is not always clear cut. Trading in listed equities, for example, can cause bouts of short-term volatility. Private equity investors, with longer investment horizons, may be able to avoid these. We touch on this subject in this short article and in Edouard Nouvellon’s long-form report, Allocating for the family office - what role might private equity play?
Volatility was also discussed in the context of investment trust pricing. By then, the discussion had moved on to whether the definition of private markets could be considered too broad. Members of the group pondered whether investment trusts might be able to fulfil a similar role to private market investments, but concluded that high volatility in investment trusts’ trading prices may be off-putting to investors. Once again, the long-term nature of private market investing is pertinent here, short-term volatility is much less evident when an investment has a ten-year lifespan.
Making the most of the information advantage
Finally, the attendees agreed about the importance of good intelligence. For private market investors, high-quality, actionable information is crucial. Private markets are the only part of the financial universe where the information advantage — the ability to access and use important data about a business before anyone else — still exists. Obtaining it is costly and time-consuming, however. Having access to an extensive network of relationships within the industry is essential.
Overall, discussion at the roundtable was lively, engaged and well-informed. Adam summed it up as follows:
“At the roundtable I wanted to look at the impact of the current macroeconomic environment on private markets. History shows us that times of crisis can ultimately lead to periods of strong performance for private markets, so we shared ideas as a group on how to adjust portfolios for clients and prepare for the future, seizing opportunities, despite these worrying events.
We concluded that, in volatile markets, investors absolutely need to have those diversified portfolios. Long-term planning is incredibly important, too.
To create portfolios of this calibre, investors need access to carefully curated, best-in-class private market funds, without facing an excessive administrative burden.”
If you found this article interesting, and haven't already signed up to receive
content from Titanbay, please subscribe below.
The views, opinions and estimates expressed herein constitute personal judgments of certain members of the Titanbay Ltd. (Titanbay) team based on current market conditions and are subject to change without notice. This information in no way constitutes Titanbay research and should not be treated as such. Titanbay does not make investment recommendations, and no communication, including this document, should be construed as a recommendation for any security offered on or off the Titanbay investment platform. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production.
This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, investors should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment in private placements involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance is not indicative of future results. Non-affiliated entities mentioned are for informational purposes only and should not be construed as an endorsement or sponsorship of Titanbay.
Investments in private placements, and private equity investments via feeder funds in particular (such as through the Feeder), are speculative in nature and involve a high degree of risk. The value of an investment may go down as well as up, and investors may not get back their money originally invested. Investors who cannot afford to lose their entire investment should not invest. Past performance is not indicative of future performance. Please refer to the respective fund documentation for details about potential risks, charges and expenses. Prospective investors should carefully analyse the risk warnings and disclosures for the respective fund or investment vehicle set out therein. For private equity investments via feeder funds, investors will typically receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. Investments in private equity are highly illiquid and those investors who cannot hold an investment for the long term (at least 10 years) should not invest. The external Alternative Investment Fund Manager is Avega Capital Management S.A., a public limited company (société anonyme) formed under the laws of Luxembourg, with registered office at 2, rue Edward Steichen, L-2540 Luxembourg, Grand Duchy of Luxembourg, and registered with the RCS under number B 246.691.
The representative in Switzerland is ARM Swiss Representatives SA, Route de Cité-Ouest 2, 1196 Gland, Switzerland. The paying agent in Switzerland is Banque Cantonale de Genève, 17 quai de l’Ile, Geneva, Switzerland. The Prospectus, the Articles of Association and annual financial statements can be obtained free of charge from the representative in Switzerland. The place of performance and jurisdiction is the registered office of the representative in Switzerland with regards to the Shares distributed in and from Switzerland. Titanbay is an Appointed Representative of Brooklands Fund Management Limited which is authorised and regulated by the Financial Conduct Authority with firm reference number 757575.