Private markets are becoming interesting again

Feb 13, 2025

 

MODERATOR Huub Ten Holter, Investment Leader, Mercer Netherlands PARTICIPANTS Richard Abma, CIO, OHV Asset Management Marc Debois, Founder, FO-Next Raymond de Kuiper, Client Solutions Manager, BNP Paribas Asset Management Wouter Weijand, CIO, Providence Capita

 

How do you advise on private assets and how do you guide clients in this?

Marc Debois: 'We assist families with direct investments, and we find it crucial that they have a clear understanding of private markets. Too often we have seen families invest because others are doing so, with disappointing results. After all, there are times when direct investments seem less appropriate than investing in funds, for example. We can guide clients in this: we need to know what they want to achieve with their investment and what impact they want their money to have. Only by focusing on this can we guide them optimally.'

Wouter Weijand: 'First and foremost, we want to know if investors are large enough to invest in private assets. For clients with €20 or €25 million to invest, the private assets portion could be around 15%, or perhaps 20%. And it could be 30% or more for clients with €50 to €100 million. Private equity was quite difficult for a while. We had a bear market for two to three years, but now, thanks to the interest rate cuts by the central banks, it may finally be over. At least for the most part, I think. It is becoming more interesting to invest in private equity. Infrastructure is interesting in any case and actually suitable for any client who wants to invest in illiquid assets. About a third of our clients have invested in illiquid assets; all these portfolios include infrastructure, which has a low risk profile and with which you can make a return of about 7% to 9%.'

Raymond de Kuiper: 'We supply so-called building blocks. After a difficult time for private assets, we have put a number of these building blocks together in a so-called private credit fund, in addition to standard offerings. We want to help parties that do not have the necessary resources themselves and can purchase from us in combination in one investment fund. These include infrastructure, commercial real estate and SMEs. And yes, of course we have ALM models, among other things to determine the optimal investment mix.'

Richard Abma: 'We are very diverse. We have many institutional relationships to whom we provide various types of services. We have export financing mandates (with AAA rating) with irrevocable guarantees from the Dutch government. This provides a nice risk premium compared to liquid Dutch government bonds. On the other hand, we have collateralized SME funds. We also work with insurers, providing financing to smaller insurance companies that want to merge, for example. So as I said, we are very diverse in our activities. To give another example, we also work with Invest International, which looks for ways to provide capital to exporting Dutch companies so they can export their capital goods to emerging economies in particular.'

How do you go about closing deals?

Mr. Abma: 'We conduct balance sheet analyses and analyze the income statements of companies that come to us. They obviously have to be solvent, healthy companies. Then we look at the collateral. Fortunately, the government is helpful in that regard with schemes such as the SME Credit Guarantee Scheme (BMKB). This allows us to cover certain risks. But export financing is a different matter. Ultimately, it comes down to a bit of an illiquidity premium and a bit of a complexity premium. How we look at it differs per borrower.'

 

Time in the market is much more important than timing the market.

 

De Kuiper: 'We are in the fortunate position of being part of the BNP Group. This means that we can finance BNP Bank's loan book if we want to. If BNP wants to provide a certain type of financing, we can participate at the mezzanine, senior or junior level, for example. In addition, we have contact with two hundred other GP's that we can source from. It would not be good if we had to rely solely on BNP Bank. Sourcing is very important. We also discuss the following with a number of clients: 'BNP Group is a long-term investor in the fund and BNP Bank provides the credit line. It is therefore possible that the borrower is financed by both BNP and the fund. The capital commitment for BNP Bank differs in terms of the investment in the fund and the direct loan to the borrower. The loans must meet the appropriate criteria in terms of risk and return, etc. It is a fine line. You can lend out all the invested funds at once to the first borrower you come across, so that you have filled the fund and achieved returns. Perhaps this 'non-selection' means you have to deal with a higher than expected number of defaults and your returns decline. Yes, you want to be invested quickly, but there are other ways to do that. Selection is crucial.'

How do you deal with costs?

Weijand: 'We create pools for clients to achieve optimal diversification. Most of our own funds are insufficiently diversified because they do not go beyond twenty or thirty loans. We want to have hundreds of loans to be sufficiently diversified. So we select external funds and of course they charge costs. But for the pool we create, achieving sufficient diversification, the client pays six basis points in administration costs. We do not have our own funds and prefer to remain independent. This allows us to freely choose whether to invest in listed or private assets within each asset management mandate that allows us to invest illiquidly. The client does not pay extra for this.'

Debois: 'Family offices often have the illusion that it costs less to invest directly. However, there are many issues that they may underestimate. Research shows that more than 60% of family offices indicate that they have insufficient access to quality deal flow. It costs money to find the right deals. About six years ago, you often saw deals involving one family.

The deals of the last quarter have an average of seven families. This indicates a trend, namely that families emphasize cooperation and risk sharing.'

What can be said about the investment horizon?

Mr. Abma: 'With regard to SME-related loans, we often originate loans with a linear schedule over five to seven years. It is a semi-open-end fund, which even offers monthly liquidity. The duration in such a fund is two and a half to three years. The risk-adjusted return is attractive, but perhaps not exciting enough for many investors. As far as export financing is concerned, we see basically the same characteristics.'

Weijand: 'Traditional closed-end products need three years to reach full investment. They are then invested for three years and then they are wound down for three years. Then there are still assets that need to be sold off. The entire period covers ten to twelve years. Over that period, you are only half invested on average. With evergreen funds you are 100% invested over the entire period, and you therefore achieve a much better return. With an evergreen fund there is no horizon, because with such a fund it comes down to being fully invested every day. In the first year you sometimes pay a penalty if you want to exit, but that penalty decreases if you have been invested for a few years. You can choose when you want to exit, except of course if everyone wants to exit at the same time, then it is not possible. So forget all those closed-end products, forget the investment horizon. Until recently there were no evergreen funds, now there are private debt infra-evergreens. Once again: forget the horizon, evergreen is the only future.'

 

A long-term investment horizon is one of the most important factors for investing in private credits.

 

Surely there are other ways to increase the J-curve or your term and your exposure?

Weijand: 'Yes, but they are also in evergreen products. If you start with an evergreen fund, you have nothing yet. You need co-investments to buy investments from previous years and then you can say: I have also spread my vintages. That is almost only possible with co-investments and secondaries.'

De Kuiper: 'We offer an evergreen structure in an open-ended fund. For the first two years, we apply an exit fee of 5% if you decide to exit. In the first few months to years, there is an average term of about four years in the fund. So it takes time to build the book. A long-term investment horizon is one of the most important factors for an investment in private credits, because you want to be paid for the illiquidity risk. Building a solid portfolio in the wrap-up period is part of that. We can say that it is an open-end fund, that everything is there and that there is liquidity. But if everyone wanted to get out at the same time, there would be no liquidity, of course. As for performance and fees, we have a fixed percentage fee and no performance fee. This is also the basic idea behind ELTIF 2. We try to make the fund as liquid as possible and accessible to everyone.'

Debois: 'In theory, a family doesn't think in terms of five to eight-year periods, but in terms of generations. With evergreen products and co-investments, we can ensure that the legacy is preserved and that the family benefits from it in the long term.'

Does ESG also play a role in your private markets proposition?

Abma: 'Many clients are interested in ESG. We have an SME fund with which we want to make an impact and facilitate economic growth. Banks are increasingly unwilling to provide financing to Dutch exporters who ship capital goods to emerging economies, due to the uncertainty surrounding those markets. We are active in this area and it is very ESG-driven.'

Weijand: 'You can see that fund managers in private assets have really taken serious steps in the ESG field in recent years. Even large American parties are working hard on this. However, it remains difficult to achieve a high level of diversification, especially when fund managers themselves offer many fund-offunds. We have an asset management mandate that we will soon be upgrading. In the beginning, we were skeptical about the availability of sufficient ESG data in the business world, but at the beginning of 2025, we will shift the entire process to Article 8. Then we will actually have the choice to select private funds that meet the requirements.'

How do you view the private equity market? Is the bear market really over?

Abma: 'We always say that time in the market is much more important than timing the market. The longer you are in private equity, the more you can balance your returns in the longer term. Of course, you can sometimes take advantage of opportunities when they arise, but looking ahead remains very difficult.'

Debois: 'The peak year for direct investments by family offices was 2020, with 3,300 transactions totaling more than €128 billion. This year, the more than 800 families we follow have been involved in 1,437 transactions, totaling €23 billion. I don't think we're out of the bear market yet. Private markets and direct investments are in better shape now than in recent years, but we still see room for growth.'

De Kuiper: 'It is difficult to judge whether the bear market is over. In the audience, about 20% raised the green “yes” sign, but the red “no” signs were in the majority.'

Weijand: 'The private equity market peaked in 2021, when everyone was outbidding each other with multiples of up to 14, 16, 18, even 20 times the profit. The entire structure collapsed due to the large interest rate increase in 2022. This created a huge gap between the asking and bid prices. The gap could not be bridged. This has been going on for two years now and this year marks the third year. Something did change in 2024, namely monetary policy. This is important because many private debt deals finance private equity deals. I expect more deals to come in the near future. I therefore think we have seen the bottom and that the liquidity of this market will gradually recover.'

 

Summary Private equity has experienced a bear market over the past two to three years. This seems to be over due to the interest rate cuts by the central banks. Fund managers in private assets have made serious steps in the area of ESG in recent years. The longer you are in private equity, the more you can get your returns to a certain balance.

Attachments

• FI-1 - 2025 - Verslag seminar 21-nov.pdf