Q2 2023

Portolani update

Our entire team was glad to welcome most of you during our clients’ event in Ghent. We had the pleasure of sharing respective updates, and analyse private market trends with senior representatives from Altamar and Partners Group. Given your positive feedback, we will repeat the event next year in a similar format.

New hire: Michiel Meekers joined the public portfolio desk team led by Wim. Michiel joins us from his previous role as Private Banker at Van Lanschot, and a previous experience in the US with JPMorgan.

This link provides you with:

    • a summary table with funds’ performance per style,
    • the results of our clients’ poll that you completed last month: we hope you enjoy comparing your own views with the consensus.

 

Public Markets

Economically, the first half of the year was dominated by strong inflation data. Central banks continued to raise interest rates to curb inflation and cool the economy. Low energy prices brought relief, but labour market tightness means wage demand remain high. Corporate earnings in developed countries are past their peak.

The hype surrounding Artificial Intelligence (AI) fueled the flourishing of growth stocks, attracting investors seeking additional returns. As a result, funds specializing in this sector (EdR and Seilern) achieved impressive double-digit returns. However, despite their strong performance, these managers fell short of the MSCI Growth Index’s returns (+19%) due to their limited exposure to semiconductor companies.

Amidst concerns over regional banks facing losses on bond positions and declining energy prices, investors turned away from value stocks. Despite these challenges, managers such as Magallanes, Brandes and Artisan Value were able to strongly outperform the MSCI Value Index across the board.

Quality stocks are known for their resilience during periods of economic stagnation. With a low debt ratio, they are less impacted by rising interest rates, while their strong pricing power makes it easier to pass on rising commodity prices. Sectors like consumer goods and luxury performed well. However, despite delivering strong operating results, some companies struggled to see corresponding increases in their share prices. Nevertheless, all of our selected managers specializing in the quality segment (Artisan, Heptagon) posted positive returns.

Stock prices in emerging countries, notably China, experienced a downward trend. Despite robust earnings growth and a low inflation, China struggled to translate these positive factors into strong stock market performance. Consequently, funds invested in domestic China stocks, specifically China A shares, witnessed a significant decline. Despite this challenging environment, our selection of emerging market managers proved to be successful. Both GQG, which strategically maintained a substantial underweight position in China, and Robeco delivered robust returns, surpassing the performance of the MSCI Emerging Markets Index by a significant margin (+6-7%).

Despite the typical underperformance of small caps in challenging economic times, Kempen and Montanaro generated significantly higher returns than the MSCI Small Cap Index.

Overall, the Portolani Selection experienced an underperformance of 1.46% in the first six months of 2023. This can be attributed to our funds’ relatively lower exposure to the semiconductor sector, which proved to be a significant driver of returns during this period. It is worth noting that we maintain a cautious stance towards the hype surrounding AI, which we consider to be overblown. Notably, our value, global emerging markets, and small-cap selections have successfully generated substantial alpha.

 

Private markets

In the private equity (PE) landscape, the deal-making environment is currently tense. With the economy on the brink of a possible recession expected later in 2023, PE funds are proceeding with caution, adjusting their deployment of funds to adapt to the higher interest rate environment.

Buyouts: acquisition prices (measured by entry EBITDA multiples) have declined by approximately 10%. Despite this, buyout managers remain confident as the lower entry multiples more than offset the smaller and more expensive leveraged buyout (LBO) debt packages.

Secondary investments present attractive opportunities in the current market. Entry discounts, which refer to the reduced prices for purchasing existing ownership stakes, have reached approximately 20% for buyout funds and close to 30% for venture capital (VC) funds. This means that investors can acquire these ownership interests at a lower cost compared to their original value. Motivated institutional sellers are consistently offering these secondary investment opportunities, creating a steady flow of potential deals. However, it is important to note that as publicly listed equities continue to rise in value, the urge from institutional investors to sell PE allocations might diminish.

Private debt: fund managers are currently seeing exceptionally positive market conditions, with high base rates, high margins and comfortable arrangement fees. Given that banks are retreating from much of the corporate lending activity, funds can lend to high quality companies at attractive terms. Restructuring- and special situations funds are getting ready for the expected increase in defaults from companies that need to refinance historic debt at more expensive terms.

Venture Capital: deal activity remains muted as managers focus on improving profitability of their ventures to extend the useable period of their cash balances from previous fundraises. We are now reaching a time where VC managers will need to take painful decisions in 2023 to either keep investing in ventures at possibly lower valuations, or to stop their support of cash-burning ventures.

      1. Ardian Expansion is a new strategy that we propose from our core manager Ardian. We have secured a discounted management fee (1,6% p.a.) as they are starting their fundraising for fund VI, a buy-and-build strategy to grow portfolio companies in Europe. The team has previously invested in TrustTeam in Belgium with great success. All their exits to date have delivered 3x gross returns.
      2. Capital Dynamics also made a compelling case during our second Meet-the-Manager of Q2. This midmarket fund invests in smaller secondary GP- and LP portfolios, making the most of the inefficiencies in that segment. Their GSEC VI fund is already materially deployed (>30%) and valued at 1,65x gross. We expect the manager to complete the capital calls within 2,5 years, showing their ability to capture an attractive sliver from the high volume of current opportunities.

 

Upcoming events:

Join us on 28-29 September for the 2023 Portolani Investors Tour: London. We are preparing meetings with equity- and PE managers who will share their market insights.

We wish you and your family an enjoyable break and our team remains available throughout the summer.

Sincerely,
The Portolani Team

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