National Conference on Public Employee Retirement Systems

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Private Capital: Four Themes for 2024

By: Randy Schwimmer and Jason Strife, Nuveen

The U.S. Federal Reserve's battle against inflation, which triggered higher-for-longer interest rates, means investors and borrowers alike are dealing with a slowdown in dealmaking, valuation discrepancies and higher borrowing costs. This has led to a pivot of buyout financings from public to private credit. Private capital — both private credit and private equity — is in the spotlight. Nuveen has identified four trends for 2024 emerging from the current market dynamics that will impact deal making and fundraising.
This is an excerpt from NCPERS Spring 2024 issue of PERSist, originally published April 25, 2024.

Summary: We believe that 2024 may usher in a new “Goldilocks” era of growth and opportunity in private capital. Explore the themes shape our outlook.

Disclosures: The view and opinions and forward-looking statements expressed in this material are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market, economic or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. There is no representation or warranty (express or implied) as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such. Views of the author may not necessarily reflect the views of Nuveen as a whole or any part thereof.

The U.S. Federal Reserve's battle against inflation, which triggered higher-for- longer interest rates, means investors and borrowers alike are dealing with a slowdown in dealmaking, valuation discrepancies, and higher borrowing costs. This has led to a pivot of buyout financings from public to private credit.

Private capital – both private credit and private equity – is in the spotlight.

Four trends for 2024 have been identified, emerging from the current market dynamics that will impact deal making and fundraising

1. New normal rates: The new macro and what it means
Since the 2008 financial crisis, investors have become accustomed to an ultra-low rate environment, though they are now faced with a new, higher rate landscape.

Tighter systemic liquidity is seen as favorable to credit buyers, given the structures, lower leverage, and expanded pricing. It also keeps market conditions from becoming too frothy.

Considering the depressed levels of merger and acquisition activity during 2023, owners have been slower to achieve realizations. With more favorable all-in debt costs, equity returns should start improving, accompanied by a more accelerated deployment of dry powder for 2024.

These trends are also tailwinds for portfolio performance. Lower benchmarks will bring interest and fixed charge coverages back to more comfortable levels and allow borrowers with payment-in-kind instruments to activate cash- pay options. In the first half of the year, the Fed is expected to avoid aggressive approaches to achieve a perfect 2% CPI landing. Investors could face a more balanced economy with rates closer to old averages.

2. Winners and losers: Continued dispersion from multiple market dimensions

In 2024, expect to see continued dispersion across three key market participants: private capital asset managers, private equity firms, and portfolio companies. The winners in today's market have a variety of distinct attributes.
  • For asset managers: Those with scale, diverse investment capabilities, diverse sources of dry powder, and sustainable deal-sourcing advantages will thrive.
  • For private equity firms: Those with ample dry powder and a proven track record of valuation discipline will prevail as the “buyer of choice” for the best platform investment opportunities.
  • For portfolio companies: Those who have adopted prudent balance sheet structures or leveraged bifurcated financing strategies that offer payment-in-kind flexibility will be best suited to pursue organic and inorganic growth opportunities.
The strategies adopted by winners – embracing scale, cultivating diverse capabilities, leading with true sourcing advantages, exercising valuation discipline, and maintaining conservative and flexible balance sheet structures – will highlight a brighter roadmap for success in 2024.

3. Stay alive to thrive: Portfolio excellence sustains investment activity
The gap between winners and losers will only accelerate as today's winners continue to thrive in the current market. Private capital managers with healthy, high-quality portfolios can and will continue to play offense and take market share.

What goes into creating portfolio excellence? We believe investors should follow the below principles:
  • Diversification as a shield: Diversification must be evaluated across numerous dimensions: sector, deal structure, leverage profile, sponsor relationships, company model, and so on. Absolutely fundamental is position-level diversification.
  • Flight-to-quality approach: Prioritizing high quality assets should always be a focus, irrespective of economic conditions. By consistently backing strong businesses (in both bull and bear markets), investors can have a durable portfolio that continues to see sustained growth despite a tough environment.
  • Clear alignment: Investing behind sponsor-backed portfolio companies has been crucial to mitigating risk. GPs not only bring deep experience creating value through market cycles, but more importantly have meaningful stakes in the outcome, typically through an equity investment.
Maintaining a diversified portfolio, focusing on resilient sectors and mitigating risk through strong alignment, private capital investors will not only survive challenges but can also thrive amidst uncertainty.

4. Next gen private capital: A new world of financial process
Fed's efforts to tackle inflation all but drained liquidity from various sources. Buyout financings pivoted from public credit to private as a result. Lower interest rates will likely create advantageous conditions for liquid loans. Private debt managers today have armed themselves with attractive, covid era-styled loan terms. Middle market direct lenders have benefitted from a skewed ratio of private versus capital financing, and this will likely lead to refinancing and new leveraged buyouts for the long term.

Conditions may be just right
These themes present opportunity and risk for investors in today's market. However, we believe that with careful navigation, conditions could be the beginning of the “Goldilocks era” of private capital.
For a deeper dive into the outlook for private capital, visit: themes

About the Authors
Randy Schwimmer, co-Head of Senior Lending, Churchill Asset Management.
Randy is co-head of senior lending for Churchill, an investment specialist of Nuveen, the $1.1B asset manager of TIAA. Randy has broad experience in leveraged finance and is widely credited with developing loan syndications for middle market companies. Prior to joining Churchill, Randy served as a senior managing director and head of capital markets and indirect origination at Churchill Financial. In those positions, he took responsibility for all loan capital markets activities and for managing the firm's indirect origination platform. Before that, he worked as managing director and head of leveraged finance syndication for BNP Paribas. He spent 15 years at JP Morgan Chase in corporate banking and loan syndications, where he originated, structured and syndicated leveraged loans. Randy graduated with a B.A., cum laude, from Trinity College and an M.A. from the University of Chicago.
Jason Strife, Head of Junior Capital and Private Equity Solutions, Churchill Asset Management.
Jason leads Churchill's private equity and junior capital platform, including executing strategic initiatives, capital raising, sourcing investments, firm management, and portfolio construction for six mandates that provide debt and equity capital into the U.S. private equity middle market. Prior to joining Churchill, Jason was a Principal at Bison Capital focused on junior capital investments. Prior to Bison Capital, Jason was an Associate at Weston Presidio, a private equity firm focused on growth capital and LBOs. Prior to Weston Presidio, Jason worked in the M&A group of Wachovia, executing private equity transactions. Jason graduated from Wake Forest University with a Bachelor of Science in Analytical Finance and a Masters in Accounting, where he earned a scholarship for his graduate studies and passed the CPA examination.


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