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focus on experienced and stable fund management teams, with some
form of a pan-emerging-markets focus, to ensure a healthy perspective
on valuations.
Within the U.S., interesting trends are emerging. Credit markets are
sifting from conservative to aggressive, which is likely to increase
merger & acquisition activity and benefit buyout funds, provided they
avoid “too much of a good thing.” Fundamentally, manufacturing in
the U.S. is increasingly competitive with overseas markets. Several
factors are driving this trend: cheap and abundant energy as compared
to other developed markets, rising labor and land costs in Asia, and
innovation in advanced technologies. These factors are highlighted in
the sidebar on this page.
Secondary markets continued to enjoy a robust pipeline of
opportunity. The double-strength volume is attributable to heavy
selling by financial institutions, primarily for regulatory reasons,
alongside the maturity of peak fundraising vintage year funds (those
formed between 2005 and 2007). Pricing remains moderate, which
positions recent vintage year secondary funds in line for robust returns.
Private Debt Outlook
Credit markets rallied significantly in 2012 and rewarded investors
across strategies and geographies. Securitized assets, including
residential mortgage-backed securities (RMBS) and commercial
mortgage-backed securities (CMBS), posted double-digit returns. Some
RMBS recorded price movements of 50% or better for the year. 11 At
this point in the cycle, the major move is behind us, but the assets
continue to offer attractive returns when compared with other credit
opportunities.
Relative to expectations for 2012, European debt provided healthy
opportunities, but not the flood of activity expected. Increased capital
requirements for European banks, defined in the Basel III regulations,
were postponed. At present, most banks have the capacity to sell and
many have active selling programs. Globally, PwC estimates $80 billion
of illiquid asset sales will occur in 2013, up from $58 billion in 2012. 12
Distressed credits trading in the current environment are more
idiosyncratic than earlier in the cycle. Value is likely to be realized over
time, not from a quick trade.
Issuance of new debt in conjunction with buyout deals and
recapitalizations ramped up late in the year. Recapitalizations alone
generated over $64 billion in dividends to investors. 13 Activity may
have been influenced by a desire to move ahead of tax law changes in
the U.S. Many new deals featured “covenant lite” and PIK (pay in
kind) options, reminiscent of the credit bubble days. Conditions today
have been described as “short of frothy” but they are trending that
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FOURTH QUARTER 2012
ADVANTAGE U.S.?
THREE REASONS TO FAVOR
MANUFACTURING AT HOME:
Cheap Energy:
and
Labor and Land:
Technology and Speed:
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