StepStone Q3 2018 Market Commentary

October 31, 2018

Across all asset classes, GPs are keen to capitalize on favorable fundraising and exit conditions while they still can. No one wants to be caught without a seat when the music stops. The amount of time needed to close continues to shrink, especially for blue-chip managers.

IN THIS ISSUE

The US has never gone into recession while corporate profits have been rising. S&P 500 earnings are projected to grow 20% this year, and 7% in 2019. At the same time, the spread between 2- and 10-year Treasuries is getting perilously low—a recession almost always comes within a year or two of the yield curve inverting. Combine this with the fact that interest rates and inflation are creeping up, and it becomes clear that investing in growth drivers is becoming harder. Finding value in under-penetrated or defensive sectors is critical.

At This Stage of the Credit Cycle, Borrower Quality Is Key

The expectation of higher interest rates is driving demand for floating-rate assets such as syndicated loans and direct loans to the middle market. At some point, however, rising rates will have negative consequences for some borrowers. Our Private Debt Team noticed an uptick in default activity.

The Distressed Cycle May Be Warming Up—Starting in Brazil

While large buyout managers have waited until after Brazil’s presidential election to return to the market, new distressed managers are responding to signs of duress; more than 1,400 companies have filed for bankruptcy this year.

Secondary Buyouts Have Been on the Rise

Due in part to a lackluster acquisition and divestiture market, a record number of US Private Equity backed deals were sold to another sponsor in the first half of 2018. Though exit activity in Europe has fallen short of expectations overall, secondary buyouts are accounting for an increasing share of exits.

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