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Overview
Hedge funds participated in a record number (circa 1,400) of private markets deals in 2021, or two times the 2020 level, and nearly three times 2019. In aggregate, hedge funds, along with other investors, deployed $180 billion in private transactions; that accounted for 15% of total private markets deployment versus historical hedge fund participation in the low single digits. Opportunities from hedge funds ramping up participation in privates include the expectation of higher returns, enables participation in faster growing private markets and the reduction of overall fund return volatility.
Chart 1: Hedge fund participation in private markets
Source: Morgan Stanley Research
PE company Enterprise Value to Earnings (EV/EBITDA) multiple valuations remain below their public equivalent as the median valuation for PE markets was 13.7x compared to 15.6x for the S&P 500. At a time of rising valuations across all markets as we saw throughout 2021, many PE managers are pursuing value creation strategies such as buy-and-build and add-on approaches where they will look to buy market leaders in industries with strong tailwinds and acquire smaller competitors at lower valuation multiples to build global platform style businesses at a cheaper cost to public listed comparable companies.
Chart 2: Private equity valuations attractive versus public
Source: Pitchbook
Commodity markets have been some of the best performing markets year to date with the Bloomberg Commodities Energy sub-Index up 57.2% and the Industrial Metals sub-Index up 27.4% whilst Precious Metals have lagged up just 8.1%. Research has shown that commodities have performed strongly during previous Federal Reserve tightening cycles with energy and industrial metals performing the best during these periods. Adding to current strength in these markets is the ongoing geopolitical uncertainty in Russia and Ukraine causing prolonged supply disruptions to many markets and a pick up in demand for many industrial metals from China in recent months which may keep commodity prices elevated for some time.
Chart 3: Commodities continue to push higher
Source: Bloomberg
Stephen Dickinson
Investment AnalystDarragh Kennelly
Investment Analyst
