Notes from the frontline(3)

A changing economic landscape means private equity portfolios must be examined through a new lens, writes Steve Moseley.

At StepStone Group in March 2008, when the financial news seemed grim but not yet catastrophic, we couldn’t and didn’t predict the path of today’s global decline. And there have been several moments since when we’ve paused to absorb the magnitude of this crisis.

If there were any remaining doubt that the subprime debacle had spread beyond the credit markets, it would have been eliminated by Volvo’s announcement in October that European truck sales had declined from 42,000 in Q3 2007 to 115 in Q3 2008. And when the average bids on the top 40 European leveraged loans dropped below $0.70 it was clear that private equity portfolios needed to be considered through a new lens.

Our business is developing superior private equity portfolios for separate accounts and advisory clients through primary fund commitments, secondary purchases, and co-investments. Yet recognising that the investment landscape has rapidly and fundamentally shifted has altered our day-to-day activity only slightly.

Steve Moseley

We do find that we’re spending even more time on macro-level analysis. This reflects an acknowledgement that because the economy has been altered, winning strategies and winning teams will inevitably change too.

At the same time we’re investing considerable resources in identifying and assessing special opportunities that emerge from the current crisis. We consider secondaries, for example, particularly those available in smaller trades, a compelling opportunity that results directly from scarce liquidity and poor visibility. There are also enormous and enormously attractive credit investment opportunities today. In both cases we believe that we’re all on the front end of an expanding opportunity. 

The corollary to this observation about opportunity is less cheerful: we are still in the early days of a long and painful global recession. 

In our investment committee meetings and in the hallways we now talk about how long it will be before we emerge from recession rather than wondering, as we did last year, how long it will be until we enter a recession. That probably can’t be characterised as much more than a flicker of optimism but it reflects our long-standing investment strategy and our tactics for the months ahead: Invest capital thoughtfully and patiently alongside the most talented private equity managers in the industry.

Steve Moseley is president of StepStone Group, a California-headquartered private equity advisory firm.