3 questions to smart minds

What do fund of funds programs need to look like now?

For this 3 questions to Robert Massing

SOLUTIO AG in Grünwald/ Munich
Photo: Robert Massing
27. July 2022

What is the impact of the current poli­ti­cal and econo­mic situa­tion on umbrella programs? Fund of Funds inves­tors share the risks of the selec­ted funds in which they invest. Current deve­lo­p­ments are caus­ing a lot of turm­oil in GP port­fo­lios. How can a fund of funds inves­tor, take this into account and stay in control?

For this 3 ques­ti­ons to Robert Massing, Member of the Manage­ment Board of SOLUTIO AG in Grünwald/ Munich

1. SOLUTIO, toge­ther with Pantheon (London), successfully closed the second joint private debt secon­dary fund of EUR 510m in May. What is your fore­cast for the private debt market?

The private debt market has grown globally from USD 32 billion in 2010 to USD 192 billion in 2021. An obvious evolu­tion of the market, as was the case in the PE market about 20 years ago and in the infra­struc­ture market about 8 years ago, is to provide some liqui­dity through secon­dary market tran­sac­tions. The global private debt market has also reached this thres­hold. We ther­e­fore expect this segment to conti­nue to deve­lop dyna­mi­cally in the coming years. We do not expect the increase in key inte­rest rates in the USA and Europe to slow this down. Private debt itself bene­fits from rising inte­rest rates, as most loans are struc­tu­red as so-called floa­ters. This means that the inte­rest rates of the loans auto­ma­ti­cally increase with the market.

The advan­tage of a private debt secon­dary market tran­sac­tion is the trans­pa­rency of the port­fo­lio and the broad diver­si­fi­ca­tion. Typi­cally, a secon­dary is acqui­red in year 3 or 4 of a private debt target fund’s life cycle. This means that the allo­ca­tion of loans to the target compa­nies has largely been comple­ted. As a result, there is a high degree of trans­pa­rency regar­ding the loans gran­ted and the credit­wort­hi­ness of the debtors. Another advan­tage of the alre­ady widely struc­tu­red secon­dary port­fo­lio is that the commit­ment is quickly retrie­ved and thus “gets to work”.

2. SOLUTIO has raised the last private equity fund with a volume of 553 euros. You are curr­ently in the market with the eighth fund of funds. How do you assess the private equity sector over the next 12 months?

The private equity valua­tions show up in the 2nd quar­ter 2022 stable to slightly incre­asing. It is to be expec­ted that in the 3. and 4. valua­tions will fall in the fourth quar­ter due to the “market to market” approach, because the lower valua­tions of the stock exch­an­ges are taken into account. Howe­ver, we are not curr­ently obser­ving a decline in corpo­rate earnings.

After secon­dary tran­sac­tions had seen almost only single-digit discounts on the NAVs of the traded port­fo­lios since around 2014, the corona-indu­ced distor­ti­ons in the first half of 2020 resul­ted in some signi­fi­cantly higher discounts. Howe­ver, this effect largely dissi­pa­ted again in the course of 2021. We expect a simi­lar scena­rio and resul­ting oppor­tu­ni­ties towards the end of 2022. Curr­ently, sellers still have asking prices based on valua­tions at the end of 2021. These will not be main­tai­ned due to the slow­down in the economy as a result of the Ukraine crisis.

3. You successfully closed your last (clas­sic) infra­struc­ture fund at the end of 2021 with a volume of around EUR 500 million. What is your stra­tegy here?

Our infra­struc­ture funds of funds are aimed at German and Austrian inves­tors due to simi­lar regu­la­tory regimes in these count­ries. The fourth gene­ra­tion of the succes­sor fund will be laun­ched in early 2023. Taking into account the EU taxo­nomy, this will be laun­ched as an Article 8 fund.

The stra­te­gic and geogra­phi­cal focus is on Europe and North America. The aim is to gene­rate current income for our inves­tors with low vola­ti­lity and a high level of risk protec­tion through broad diver­si­fi­ca­tion by segment and risk/return profile. Infra­struc­ture assets offer some infla­tion protec­tion as the regu­la­tory frame­work takes into account the gene­ral price trend.

About Robert Massing

As a member of the Execu­tive Board of Solu­tio AG in Grün­wald, Robert Massing is respon­si­ble for Inves­tor Rela­ti­ons, Busi­ness Deve­lo­p­ment, Marke­ting, Press and Human Resour­ces. Foun­ded in 1998, the company deve­lops invest­ment concepts for insti­tu­tio­nal inves­tors in the field of alter­na­tive assets and curr­ently mana­ges around EUR 6.6 billion in the asset clas­ses of private equity, infra­struc­ture, private debt and real estate. >

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