StepStone July 2018 Market Commentary

July 20, 2018

Fundraising and deal-making continue to be hot across private markets, but with some managers exiting sooner than expected, many market observers are wondering whether the end of this cycle is drawing near. Macroeconomic and political risk are still swirling about, but have not yet led to systemic disruption. Sectoral declines have been contained and economic growth remains robust.

IN THIS ISSUE

We have been talking about a market decline for well over a year. This unease may very well have encouraged greater discipline: despite concerns about lax underwriting standards, healthy equity-to-debt ratios are a feature of even highly-leveraged deals. Perhaps we should change the way we think about recessions; instead of waiting for the next global financial crisis, maybe sectoral recessions are the new rule. While this bull market may continue, overexposure in the wrong sectors could be damaging.

After a Glum 2017, Things May be Looking Brighter for Distressed Debt

An increasing number of funds are being raised to invest in the mezzanine and equity tranches of CLOs. These funds tend to be less than $500 million and have investment periods of only a year or two.

Oil Is Finally in Backwardation

With prices expected to fall, traders are encouraged to sell physical barrels at the current spot price, which discourages stockpiling; As a result, our Energy team believes that prices will remain range bound.

Demography Is Destiny

In the US, strong fundamentals and industry tailwinds are supporting significant interest in health care, even as prices rise. China’s education sector is also showing signs of heating up.

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