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Disclaimer: The information and materials prepared are for internal use only and on how the Dancap Family Investment Office (“Dancap”) views current market dynamics. Dancap does not guarantee the accuracy or completeness of the material and it is not intended in any manner to be investment, financial, legal, accounting, tax or other advice and should not be relied upon.

Dancap's Current Private Equity Strategy

March, 2022

Dancap has over  30 years of track record investing in private equity through third party funds, co-investments, and direct investments.  Our private equity portfolio is diversified across several underlying strategies and geographies, but our key focus is US buyout, secondaries and growth equity funds. This market overview looks to provide an update on current market dynamics, outlook, and future risks within as they relate to Dancap’s current private equity holdings. 

Buyout

Strategy

The current macro environment for private equity buyout funds remains positive. Higher economic growth and low interest rates should be supportive of continued EBITDA growth at the company level, higher valuation multiples, and low cost of debt for expansion; all of which support higher enterprise values. 

Since 2001, private equity funds have generated 11% annualized net returns, almost double the 6% annual returns generated by S&P 500 Index. Furthermore, private equity funds that started deploying cash following a market correction (i.e. 2001,  2009, 2012) generated returns 68% higher than funds that began investing during late-cycle peaks  (such as 1998 to 2000 or 2005 to 2007).  Since 2008, the average IRR for US buyout funds has been steadily increasing, supported by rising exit multiples and greater use of leverage.  The use of subscription lines alone has increased six-fold since 2010 and Cambridge Associates estimates that these credit lines are adding up to 3% in annual IRRs. 

JP Morgan – Food Fight: Private Equity Update, July 2021 

Outlook

Valuations today in the public equity markets (which drive private market valuations) are near their peak levels, but if you look at valuations relative to interest rates (i.e. equity risk premium) such as the 10-year Treasury rate, valuations remain relatively attractive. Furthermore, since interest rates are expected to rise from extremely low levels, interest rates still have room to rise in response to better real growth before potentially jeopardizing multiples and valuations. 

As markets remain volatile, partnering with top GPs and conducting deep due diligence will remain key factors for success as dispersion in performance between top and bottom quartile GPs is likely to continue. 

Source: Credit Suisse 

Secondaries

Strategy

The secondary market for private equity holdings continues to grow as more buyers and sellers enter the market and as secondary transactions today are considered to be more widely acceptable and mainstream. Limited Partners can enter secondary transactions in an effort to reduce exposures that are beyond internal limits or in an effort to raise liquidity. While General Partners can enter secondary transactions to wind up funds that are near or beyond their term limits. The number and variety of secondary programs is only expected to continue to grow over time and the secondary market is expected to surpass $100B in transaction volume in 2021: 

Source: JP Morgan – Food Fight: Private Equity Update, July 2021 

Outlook

While Dancap is not deterred by the illiquid nature of private funds and their longer duration, some investors can have more urgent need for liquidity. In 2020, pricing for secondary transactions fell as low as the 60s, albeit temporary, before recovering back to the 90s. With more and more secondary buyers and investors entering the market, pricing should remain stable and elevated, as it did between 2010 and 2020. Mangers will deep expertise should be able to continue to take advantage of market dislocations and buyers and sellers looking for immediate liquidity. 

JP Morgan – Food Fight: Private Equity Update, July 2021 

Dancap will continue to look to invest with secondary managers who have deep track record in the secondary market and continue to focus on their secondary strategy that has proven to be successful.

Growth Equity

Strategy

A combination of demand for capital, strong returns, and an opportunity to invest for the long term have created prime conditions for growth equity investments. 

Growth equity opportunities typically include companies that have already obtained traction in their respective markets and proven their thesis but still need to raise additional capital to bring their business to the next level including top-line revenue growth, obtainable market share, and scalability. A targeted growth equity company does not necessarily need the capital to continue operating but it can take the company to the next level. The growth equity space has been growing thanks to one of the most dominant tech themes of the past decade like digitization and startups staying private for longer. This phenomenon has enabled the rapid growth of $100 million-plus rounds, which were a rarity in private markets as recent as a few years ago. As demonstrated in the table below, top growth managers with strong access have demonstrated exceptional returns.  

Source: Pitchbook.com

Outlook

As Covid accelerates, technological trends in the market, an unprecedented amount of capital is being raised in the the growth equity space. Overall, a well-diversified private equity portfolio is required for stabilizing cash flows and in order to achieve excess returns over public equity markets and Dancap will continue to allocate capital to its top performing GPs. The importance of diversification, manager selection and due diligence will continue to be at the forefront of Dancap’s investment process and private equity portfolio in 2022. Dancap continues to look to invest with managers who have demonstrated strong positive returns and consistent performance in their specific areas of expertise across market cycles. 

To see the Dancap Private Equity Investment Criteria and Portfolio, please click here.