Alternative Investment Opportunities Through a Slowing Economy

The lack of capital market access will also mean that certainborrowers will be forced to restructure their balance sheets and reduce debt, providing opportunity fordistressed investors to buy debt at discountedpricesand take an active approach to capture higher recovery values. Opportunistic credit funds will be able to take advantage of volatilityand dislocationscreated from the uncertaintyof capital market access. With lockedupcapital, they can be patient in order to exploit wide dispersions between the best and worst performing credit securities. Credit markets are not the onlyplacewhere providers of liquiditycandifferentiate themselves in times of stress. For example, in illiquidalternatives, certain institutional limitedpartners are struggling to work through the asset class imbalances in their portfoliosbrought onby public market declinesand the slowdown inportfolio exits that occurred in 2022. The secondary private equitysector has developedand grownover the past 20+ years to provide liquiditysolutionsand flexibility inan otherwise illiquidmarket. Historically, secondary transactions were primarily LP-led, where an investor sought to sell limited partnership interests in a fundor a portfolio of funds to a secondary buyer. However, in times of valuationuncertainty, secondary buyers will typicallymake offers that have significant discounts toNAV, thusdiscouragingmany LPs from transacting. Despite this, 2021 and 2022were first years that transaction volume surpassed $100 billion. However, it is also falling on general partners (“GPs”) to findways to enhance distributionsand liquidity for their investors during a periodwhere traditional exit paths are closed. This is driving the increasing popularityof GP-led secondary transactions in the market, now representing 50% of all secondary transaction volume ( FIGURE 10 ). In a GP-led secondary transaction, a fund manager decides to sell one or more existingportfolio companies into a new investment vehicle which is overseen by the same manager. Tomitigate potential conflictsof interest, the GP utilizes a third party (the secondary firm) to anchor the acquisitionandnegotiate an arms-length transaction for the assets. One of the key advantages ofGP-led secondary transactions within the context of today’s creditmarket is that they are not dependent on the capital markets for executionas they are, in most cases, able to leverage the existing credit facilitiesversus obtaining newdebt. OPPORTUNITIES | WEALTH OUTLOOK 2023 | MID-YEAR EDITION │ ALTERNATIVE INVESTMENTS | 16