Saturday, 1 October 2016
Last updated 21 hours ago
Feb 18 2014 | 11:01am ET
Asia is in, renewable energy is out, according to a recent survey by Altius Associates. In its annual report: The Key Challenges Facing the Private Equity Sector in 2014, the private equity advisory behemoth, which has approximately $26.7 billion in assets under advisement and management, forecasts some of this year’s most dynamic investment opportunities.
Altius cautions against co-investment opportunities despite their growing popularity. While often used to mitigate fees while deploying dry powder, Altius highlights the significant challenges involved in co-investment integration including adverse selection and aligning incentive. William Charlton, head of Americas investment at Altius states in the report, “a GP might have an incentive to hold the investment longer to maximize their carry while the LP might prefer an earlier exit that would generate a higher IRR.”
In terms of the Asian private equity market, Altius sees the conditions for investing as generally better than any over the last few years, as “Asian managers have been able to eke out a better return multiple by an average of 60 basis points in 1H 2013 compared to 1H 2012.”
Turning to emerging markets, Altius suggests that its substantially lower DPI ratio can be attributed to investing growth capital in growing companies opposed to the traditional buyout strategy of the U.S. market. In order to increase liquidity in this strategy, Altius suggests supplementing your growth strategy portfolio with other investment strategies including the purchase of secondaries, which will increase the liquidity of the portfolio.
It is no surprise then that Altius predicts the rebound of the secondary market citing the increase in primary fundraising since the “trough in 2009” as well as the changing financial regulations. With over $50 billion of private equity on their balance sheets, major financial institutions will be turning to the secondary market to achieve liquidity, says Altius. Chason Beggerow, head of secondary investments at the firm, sees the numerous advantages of adding secondaries to a portfolio, citing, “that exposure to the secondary market is additive to a private equity portfolio – adding the opportunity for strong risk adjusted returns, better portfolio visibility, and shorter hold periods.”
Altius also cautions against investing in real assets, specifically renewable energy. While many investors believe renewable energy to be one of the most exciting market opportunities, Jay Yoder, head of real assets investment at Altius, said he “constantly warns investors about renewable energy as it involves investing in assets where the main sources of return are mandates in the form of forced purchases, tax credits, and subsidies. Therefore one is investing more in political decisions than in tangible assets.”