North American limited partners remain attracted to real assets, European markets offer huge opportunities to well-capitalised investors and Asia is becoming an important source of limi
North American limited partners remain attracted to real assets, European markets offer huge opportunities to well-capitalised investors and Asia is becoming an important source of limited partner capital, according to alternative investment placement agent C.P. Eaton Partners.
The firm says that in the US the shutdown of debt capital markets and increased equity requirements create opportunities for balance sheet lenders and ‘dry powder’ funds.
RMBS and CMBS origination and securitization, which provided liquidity and propped up asset values in recent years, declined by more than 90 per cent from USD315bn in 2007 to USD28bn in 2008, shutting down the large balance real estate transaction market.
Today lenders require 30-40 per cent equity from sponsors, up from five to ten per cent in The Bubble years, implying asset devaluation of at least 20-30 per cent from peak value.
C.P. Eaton Partners says sellers will not acknowledge this asset re-pricing until they are forced to re-finance loans, the bulk of which have lenient covenants and do not mature until 2011-12.
‘This sets the stage for a drawn-out re-pricing process while fundamentals begin to bottom and slowly recover from the current global recession,’ it says. ‘The broad-based capital market shutdown has created highly attractive opportunities for traditional balance sheet lenders and new fund investors who have fresh capital to deploy in the 2009-2011 vintage years.’
C.P. Eaton Partners says real assets strategies (energy, infrastructure, and core capital assets) continue to draw limited partner interest as investors seek strong and stable cash flows and downside protection.
But traditional providers of capital for the space are now constrained, with commercial banks being forced to sell non-core assets to generate liquidity and shore up their Tier 1 capital ratios. The combined result of motivated sellers and tighter debt markets has been a major devaluation of leveraged assets.
‘Real asset fund managers are opportunistically stepping in to fill the financing gap and are finding very attractive entry points in assets such as rail cars, shipping terminals, gas pipelines, utility-scale wind and solar installations, and other energy infrastructure. The Obama Administration has indicated strong support for both private and public spending on energy infrastructure. Veteran real asset specialists with the expertise to identify the most attractive assets are seeing unprecedented investment opportunities,’ says C.P. Eaton Partners.
It believes investors will continue to migrate away from hedge fund strategies with significant market beta and use of leverage as the principal driver of returns. Capital will be re-deployed into strategies that have demonstrated low correlation to broad market moves – specifically direct lending, managed futures and distressed debt funds.
In Europe, C.P. Eaton Partners believes portfolio diversification strategies and attractive relative value will drive capital to EU markets.
EU private equity and real estate managers continue to benefit from capital flows from the US and the Middle East as investors divert funds toward international markets to achieve further geographic diversification.
‘Key Western European markets such as the UK, which is well ahead of the US with regards to asset re-pricing, offer tremendous value for fund investors who are well capitalized and can obtain the appropriate matched term financing to pursue deals in this environment,’ says C.P. Eaton Partners.
It adds that corporate balance sheet restructurings have created a need for more sale leaseback activity, re-capitalizations, and asset divestitures.
‘Corporates need to raise cash to reduce debt levels, support tier one capital ratios and strive to maintain investment grade ratings. This creates an opportunity for investors well-versed in complex deal structuring. Challenging economic conditions similar to the US has created a difficult market for traditional large scale PE buyouts. Headline risk and large scale staff reductions on recently announced deals further increase investor aversion towards large cap buyout funds. Investors are seeking more traditional PE players with deep operational teams and strong track records managing through earlier downturns.’
Meanwhile, the firm says Asia continues to present attractive growth opportunities in a weak global economy and has emerged as a new source of capital.
‘Foreign capital and private equity is increasingly welcome in Asia. In Korea, a recent court ruling in favor of Lone Star paved the way for a positive environment for foreign investment and private equity. The Chinese government is welcoming the participation of private equity funds in its effort to stimulate the economy and continue to lead the global economy with eight per cent plus GDP growth expectations.’
C.P. Eaton Partners says Asia has become a new source of limited partner capital.
While Asia is not immune to the global financial slowdown, C.P. Eaton Partners says it is well positioned for a quick and sustained recovery.
‘The Asian banking system and corporate balance sheets are in relatively good shape. Consumers are also well-positioned, as they generally did not develop the same high levels of household debt as their Western counterparts. GPs are seeing highly attractive valuations, making 2009-2011 very exciting vintage years.’