Private credit and secondaries lure in PE funds

Oksana Patron

3 February 2023

Private credit and secondary markets will offer attractive investment opportunities for private equity (PE) funds given the current market dislocation caused by inflation, rising interest rates and higher volatility.

Pengana Capital’s chief executive, Russel Pillemer, said that elevated interest rates, in particular, put private markets in an interesting position for those looking for investment opportunities across private credit and the ‘secondaries’ market, which assumed buying a stake in quality businesses from other PE managers.

“Rising interest rates have created more opportunity for private credit following several years of very limited activity in this space, and we have some ability to participate in this space,” Pillemer said.

“We’re also seeing more potential in the secondaries market, where there are some reasonable discounts for stakes in high quality businesses available.”

His Pengana Listed Private Equity Trust purchased five middle-market funds managed by three different private equity firms, which were purchased at an aggregate discount of around 20% to the 31/3/22 NAV, Pillemer added.

According to him, secondaries market opportunities were attractive largely due to managers needing to rebalance their portfolios, after a period where listed equities fell in value while private equity continued to grow, therefore it would make them more motivated to sell off some of their private equity interests.

The manager also noted that many private companies were still growing their cash flows and earnings and that PE was a spectrum, from riskier seed capital in start-ups to well established, high cashflow businesses.

“The cash flows are key because these companies are not relying on future forecast earnings for their valuations. These businesses are therefore not as vulnerable to interest rate fluctuations or market sentiment as public companies or start-ups.

“Private equity investments continued to perform because the bulk of quality private equity investments are in companies which are established, often relatively boring companies, with strong cash flows.”