The view from the Funds team – Lorna Robertson Q2 2023

News: Insight & Opinion | 12 April 2023

Our newsletter

Challenging times are far from over but the strategies we’re selecting play to market realities 

Our approach, as ever, is to stay invested especially in this inflationary environment, but avoid strategies that have high levels of market correlation, instead we seek out those that can take advantage of the pressure in particular parts of the market and deploy capital both effectively and opportunistically, and are able to offer robust returns potential. 

For example, last quarter, as well as finalising our investment in Investindustrial Growth Fund III, a niche southern European focused private equity (‘PE’) growth fund, we took advantage of the re-rating of venture capital (‘VC’) secondary pricing to top up our participation in the Hambro Perks Access Fund III, which acquires secondary stakes in later-stage, high quality venture businesses at significant discounts to lock in attractive future returns.  

The current uncertain climate underscores our continued commitment to stick to working with experienced fund managers with long-term track records and consistency for performance across the ups and downs over many previous cycles. In light of the recent banking turmoil, making sure managers have good housekeeping with regards to treasury management is even more critical: they must have suitable infrastructure in place to manage risk, even if it’s unexpected. 

In Q2, with reputation and experience in mind, we’re preparing to offer our clients the chance to participate in a €multi-billion European PE flagship fund run by one of the most respected marquee PE managers in the world. While this means we are stepping outside of our normal remit in terms of scale, we believe that the ability to invest in a fund of this size, managed by a brand that is universally trusted as a ‘safe pair of hands’, with consistent performance across market cycles, will give our clients enormous comfort at this challenging time. 

We know that in the past, periods of out-performance generally follow market downturns, so with that in mind, where else will we turn our attention in the coming quarter? 

Market conditions will likely continue to frustrate new fund raising and ultimately public market uncertainty will delay this route for PE exits, prompting business owners to stay private for longer and seek equity or debt investment from the private markets in the interim. Refinancing costs, especially for companies with already over-leveraged balance sheets, could be punitive as the cost versus risk balance tips too far for lenders and default levels increase for smaller businesses unable to access mainstream lenders. Against this backdrop, opportunistic credit strategies - particularly in the mezzanine and structured credit space, which are at the upper end of the returns profile, with downside protection - plus equity participation and ongoing cash yield built in - are interesting to us. 

So too is the growing area of PE secondaries, strategies that provide liquidity solutions to investors and managers of PE funds, or strategies that support independent sponsor transactions, investing alongside managers who do not have a blind-pool fund.  

At Connection Capital, we always seek to pursue the niche, specialist strategies that play to market realities, such as complex carve-out strategies that enable businesses to spin out non-core assets or step in to fix stalled M&A processes: areas that are beyond the capabilities of others or that take too much skill or time for them to bother with. Now is an opportune time to get involved with this kind of value PE investing. 

As we progress into Q2, there is no doubt that there is continued uncertainty and caution in the market, but investing during a downturn can have the potential to lock in strong future returns as good businesses with immediate challenges can be acquired at attractive prices, as the graph below shows. 

However, downturns are usually swift, so it’s vital to capture the opportunities they create now, before things return to the norm. By identifying strategies that are primed to perform either across market cycles, or selecting those that can benefit from market challenges and volatility, that’s exactly what we’re doing for our clients. 

Source: Pitchbook