Welcome to 2023!
Hopefully a year that brings peace and prosperity to the capital markets. It seems likely that the US will go into a recession, which should bring down interest rates, and the question is whether growth slows a lot or a little and for how long. We are hearing that most market participants believe a short, mild recession is most likely scenario.
There seems to be plenty of capital on the sidelines waiting for a signal to invest.
From our discussions, wealth management firms model portfolios are significantly overweight cash and cash equivalents (up to 40% of their asset allocations).
In addition, there is over $2 Trillion of Private Capital dry powder according to S&P1. This ability to invest is highly concentrated with the 25 largest Private Equity, Venture Capital groups accounting for approx. 25% of dry powder with number 25 (Lexington Partners) having $9.5 billion of dry powder and the firm with the largest amount of dry powder is Blackstone with $43.9 billion.
The number of transactions in 2022 from this group of firms varies from 1 transaction to 202 transactions with the average number of transactions per organization being 41 if the 3 organizations that have done more than 100 transactions in the year are included and 20 transactions per organization if they are not included.
Even though there is a great deal of dry powder, there is also a lot of capital market uncertainty and we do not expect capital deployment to pick up from 2022 second quarter until the uncertainty has decreased and the “bid/offer” between capital seekers and capital providers has narrowed.
Please contact us at firstname.lastname@example.org if you or someone you know would like to learn more about how we can help them with their capital sourcing. We believe that the earlier, especially when capital markets are tough, an organization receives professional help defining their investment proposition, the better the results will be.
Capital Provider Interest – We have demand for complex Private Credit Opportunities that provide a Capital Provider yield between 12 and 15+%. The demand includes asset backed as well as receivable backed transactions.
Corporate Response to Market Conditions – Concentrate on Liquidity Management: Corporations, large and small are focused on liquidity management and conserving cash. The advice is to speak to creditors early and often so that if forbearance is needed, there is time to properly negotiate. And, if additional capital is required, start the capital raising process early.
Venture Capital Response to Market Conditions – Focus on Cash Flow Break – Even: Both capital providers and companies are assessing ability to be cash flow break even. Even though Capital Providers have dry powder, they are conserving it to be able to provide follow on capital to their portfolio companies, but they want to spread the risk. Capital providers and venture companies should focus on realistic business development goals/milestones and, if additional capital investment will be needed – start the process early.
Private Equity Response to Market Conditions – GP/LP Secondaries: In order to balance dry powder with potential company liquidity needs, many capital providers are analyzing capital needs in order to maintain portfolio valuations. This has, more and more, meant that GP’s are using portfolio secondary sales to provide LPs with liquidity while trying to maintain valuations.
Founded in 2007, Deer Isle Group empowers Capital Participants with the right tools to ensure transparent, smooth, and efficient direct capital contact. Since our founding, we have successfully transacted over $5 billion in capital, through Deer Isle Capital, LLC (our FINRA registered broker/dealer), for companies and funds in a wide variety of security types, sectors, and geographies.
The foundation of our approach is innovative unbundled capital capabilities, expertise, and guidance that are customizable depending upon Capital Participant’s requirements.
These include Beacon, a proprietary technology that offers Capital Participants “Direct Issuance/Contact” capabilities, as well as capital markets brand building which helps ensure capital markets success today and, in the future, to a curated set of relevant potential Capital Participants from a universe of 10,000+ institutional capital markets organizations/45,000+ institutional capital markets people. In addition, Deer Isle provides “as needed” Strategic Capital ConsultingTM services to prepare for a capital or M&A transaction including Strategic Capital PositioningTM, Strategic Capital ModelingTM and Due Diligence Preparation, as well as Closing Advisory/Guidance expertise, through Deer Isle Capital, for structuring, negotiating, and completing a successful capital/M&A transaction.