Delio: A view from the private markets – Part I

It goes without saying that we are currently experiencing unprecedented times. As the effects of COVID-19 continue to be felt across the globe, here at Delio we have ensured that we remain in regular contact with our private markets clients in order to reassure them that we are still on hand and operating at full capacity to support them through what is likely to be one of the biggest social and economic challenges in world history.

It will be some time before we see the full effects of the current climate and we will be watching data points across our private markets infrastructure closely to share with our clients more strategic insights. At this juncture, however, we want to share the patterns that are beginning to emerge in capital flows and transaction activity as we continue to speak closely with our clients at this time. Below you’ll find a high-level summary of the key observations from our clients and the patterns that are emerging. For a more detailed account of each, please don’t hesitate to get in touch with us directly to find out more.

A mixed landscape, but surprising resilience of private market transactions

Given the huge volatility seen across global financial markets and significant economic contraction we are facing, this is undoubtedly having knock on implications for private transactions. There is, however, no uniform picture across the landscape. Naturally, some sectors are more impacted than others (hospitality, travel and leisure deals are off the table outside of restructuring transactions; healthcare, biotech & productivity tools are all in vogue) but, from our work with clients across all spectrums of private capital we have been able to see prevalent trends emerge across the funding lifecycle too.

Early stage and venture deals are where we are seeing the most significant divergence. We are hearing on the ground that angel and pre-seed investors continue to be active and willing to transact. Whilst (virtual) pitch events are coming with a flurry of more macro questions, the fundamentals of investing for the long term and backing people you believe in has not changed; pre-revenue companies raising long-term capital are still successfully closing funding rounds.

Where there is more of a negative shock is in later stage seed and Series A transactions. Those companies that have recently commercialised or achieved early revenues but are looking for cash to prove a go-to-market strategy are seeing very little demand from investors. This is particularly true when seeking a first institutional investor; VCs appear to be reserving their dry powder on capital for follow-on rounds with their existing portfolio companies rather than portfolio expansion.

The abundance of follow on conversations is shoring up the later stage venture deals (Series B/C +) and transactions where there are proven unit economics, the ability to turn off the marketing taps and come back to a solid core, are still highly competitive.

Challenging times call for creative approaches

Progressing further up the spectrum, we are also seeing the impact of significant dry powder in mid-market and large cap private equity funds playing a significant role. We see many funds with cash to deploy aggressively seeking opportunities, however, execution is proven more of a challenge than one would expect with, outside of distressed sales, mismatches in valuation expectations wider than ever seen.

Most interestingly, we are already seeing that this is leading to the development of more creative deal structures in order to de-risk buyers, get deals over the line yet provide an upside to disposing parties. The same is true for Family Offices, as those with established direct investment or private market teams are using their long term mindset and patient capital approach to look at creative deal structures across both debt and equity.

That is not to say all Family Offices are active however. Many Family Offices, particularly more conservative and well established, are focusing on capital preservation and liquidity and are no longer deploying capital.

Meanwhile,in the private equity fund space, secondary transactions are continuing their momentum with many of the established secondary managers taking advantage of LPs desire for liquidity.

On the GP fundraising side, however, the scenario is more mixed. We are seeing many new funds defer their closes to later in the year but secondary managers and distressed/opportunistic funds coming to market quicker with the tried and tested message of “this is a great market to be investing in”, albeit already receiving mixed reactions from investors.

These are challenging times, but there is good news out there

It goes without saying that these are uniquely challenging times for financial institutions. With markets at their most volatile since the economic crash of 2008 and a landscape of social and political change taking place almost daily, it’s very difficult to predict where we’ll be in six weeks, let alone six months. However, it is reassuring to see that transactional activity in most areas of private capital markets continue at pace.

We have found that Late Seed, Series A and Hospitality deals are all struggling given the current situation, however Series B+, PE, Pre-Seed, secondaries and restructuring are all very active. What is perhaps most interesting, is the way in which deal structures are becoming more creative in order to serve a purpose which better fits this completely uncharted economic territory.

We’ll continue to update our clients with market insights as the consequences of the Coronavirus pandemic play out. If there’s any way that we can support you further at this time, please get in touch with us via team@deliowealth.com and one of our team will contact you as soon as possible.