Our fortnightly market commentary from members of our Senior Management team provides valuable insight into the latest trends, opportunities, and views on the current marketplace. Read about recent events within private equity, corporate finance, investment management, and real estate.
After a flat September for Global equities, October has got off to an ugly start. The contraction in manufacturing is now confirmed as global, following the US reporting its factory data this week, and was quickly joined by poor UK services sector data reigniting concerns that the UK economy is in recession, and will likely remain so until the Brexit impasse is resolved. Worries escalated as the World Trade Organisation approved US tariffs on European goods to the tune of 10% to 25%, prompting fears of tit for tat retaliation and the clear impact that de-globalisation and free market interference has on corporate wealth. If that were not enough bad news in 3 days, slowing US job creation data propelled equity markets lower, Nevertheless, with global markets having risen around 19% during the first half of the year, a fall back had to be expected at some point in the second half.
Nevertheless, neither asset valuations nor growth prospects point to the risk of a near term market crash or US / global recession. Indeed, private sector interest rates are low and the US housing sector is booming. The earnings yield on equities remains well above the real yield available on bonds and central banks other than the EU, still have scope for rate cuts to stimulate growth.
Attending the grandly-styled and slickly-presented Unquote 2019 British Private Equity Awards this week with 450 others, I was struck by the development of the Private Equity industry in London that I first joined more than 20 years ago. I also enjoyed vivid recollections of the award I collected at the equivalent event for my previous firm 11 years ago, in those dark days just a few weeks after the collapse of Lehman Brothers. Most of the Private Equity firms, and the advisers that won the accolades this time, were not even in existence in 1997 when I attended events like this for the first time. In that period of time the industry has evolved beyond recognition in terms of scale with many more Private Equity firms and the ecosystem of advisers surrounding them.
What has not changed however are the motivations and methodologies deployed by the increasingly professional investment houses. The lessons I learnt all those years ago through direction and experience remain key to success in Private Equity investing today: a clear investment model, a focus on backing good management teams to deliver a developed strategy in industries which offer opportunities for growth, a rigorous focus on performance and knowing when best to seek an exit. I consider that the managers who have consistently exhibited these behaviours have delivered strong results for investors across decades now.
Meanwhile I can report that the mood at the Awards event even among those that did not win, was buoyant, recognising performance of their investments and activity levels, although many recognised challenges that may lie ahead.
The movement towards investment in real assets gathers pace. Speaking with senior investment professionals, one theme is particularly visible at present. These are challenging markets and operating models with real asset backing are attracting increasing attention.
We are seeing increased interest from individuals seeking to achieve a higher level of portfolio diversification, with greater emphasis on recurring revenues, sustainable operating margins and resilience. Coupled with commensurately less emphasis on an aggressive revenue trajectory, market share capture and latent scalability. Whilst it is true that family offices often take a longer term view on value creation, it also seems fair to observe that their assessment of intrinsic value is shifting towards more predictable cash flow delivery and earnings growth.
Harold Wilson famously said that a week is a long time in politics, however it would also be fair to say that a week is a long time at WeWork.
Since writing on the American serviced office operator ‘WeWork’ less than two weeks ago for Fortnightly Thoughts this curious business has pulled its plans to proceed with an initial public offering, received the resignation of Founder and CEO Adam Neumann and, just yesterday, had its credit rating downgraded two levels by Fitch from B to triple C (negative outlook).
For Robert’s full length article update on WeWork please click here.