Comment: Fund forecast

With growing macro-economic challenges (rising interest rates, inflation, the cost-of-living crisis, etc.), the sector is set for significant change, and below are some of my predictions.

1) We’re going to see tightening of liquidity in the market

Even with the Bank of England’s Monetary Policy Committee approving a 25-basis point increase in the base interest rate to 1% - the highest it's been since the ’08 crisis – credit markets are still fairly benign, but there’s underlying tension coming. Given where inflation is, where interest rates are going, and the pressure on consumer wallets, companies will start to feel the pinch and as a result, banks will start to tighten their purse strings. This creates challenges for many businesses – especially those with more leverage than they had pre-covid because they took out additional debt through emergency loans and the like.

It will be interesting to see how this squeeze on discretionary income affects portfolio investments within funds, and how GPs and LPs respond. I suspect subscription lines will be fine but what will prove challenging is raising hybrid liquidity lines, hybrid facilities, and NAV facilities. The key for funds will be ensuring they have the liquidity or access to it to ensure they can see these next 12-18 months through.

2) Small and medium-sized funds will be the hardest hit by this

If the market tightens, it will become even harder for smaller funds to access capital. Larger players and mega funds already have strong liquidity lines and long-standing relationships with investment banks, so they’ll be fine. The funds that will suffer will be the small and mid-sized funds – just as we see in a down-cycle or recession, it’s always the SMEs that are hardest hit.

3) So, the smartest GPs will be raising capital now while the market’s in a good place

The smartest GPs, no matter the size, type or vintage of the fund they’re managing, should be seeking to bolster their liquidity and raise capital now – even if they don’t need it – while the market’s still in a healthy place. This will put them in the strongest negotiation position and means the capital is there should they need it once liquidity tightens. Whether for defensive purposes (i.e. bolstering existing investments), offensive purposes (i.e. to accelerate M&A activity at the investment portfolio company level), or both, this capital buffer will give them the reassurance they need.