PE Taps PIKs for Liquidity, U.K. Regulators Seek Transparency and AI Steps into Portfolio Management in this Week's Edition...
Take a Lap Around the Industry
Fed Seen Standing Pat on Rates At Policy Meeting (NYT)
Olive Becomes Latest AI Unicorn to Shutter Operations (MarketWatch)
Charlesbank Seeks Over $1 Billion For New Private Credit Fund (Bloomberg)
WeWork On Brink Of Bankruptcy As Investors Flee (Reuters)
Private Equity's Risky New Debt Gambit: Payment-in-Kind Loans Surge
Private equity firms are increasingly turning to payment-in-kind (PIK) debt to fund leveraged buyouts and refinance portfolio companies as rising interest rates make traditional cash-pay debt unaffordable. PIK debt allows borrowers to pay interest with additional debt rather than cash, preserving liquidity in the short-term while piling on more leverage. Usage of PIK loans has soared as a temporary fix until rates decline, with major PE firms like Carlyle, Vista Equity, and BC Partners utilizing the tool. Lenders like Apollo and Ares that offer PIK financing are benefiting with an edge over banks. While PIK loans carry expensive interest rates up to 16%, borrowers are betting they can refinance at lower rates before maturity. However, PIK debt doubles every 5 years and triples in 8, putting solvency at risk if rates stay elevated. With $500B of LBO debt maturing through 2025, PIK usage could hit record highs as PE returns to dealmaking, despite the dangers of overleverage if âhigher-for-longerâ rates persist. Though intended as a bridge, PIK Loans transfer liquidity risks to the future, making them a risky gambit if the expected rate decline fails to materialize.
"So long as interest rates are still high, I donât think all of the current issuers can refinance themselves using traditional senior debt...Theyâre going to need something else. And in a lot of instances, that âsomething elseâ might be PIK. Even if only 10% of that requires PIK, thatâs a huge opportunity."
Michael Small, KKR
Private Funding Pulse Check
50inTech, a fast-track app for women that aims to reach gender equality in the tech industry, has secured $1.6M in a Seed funding round joined by Lyon, France-based EVOLEM
In a recent Series C round, Capricorn Investment Group participated in an $99M investment in Seurat Technologies, a 3D printing company transforming the metal manufacturing industry
MSD Capital and New Legacy Group, LLC have participated in a $41M Series A funding round for Samara, a new company designing and building backyard homes
Sparta Group LLC and Catamaran Ventures have engaged in a $54M Venture investment in Aequs, a Belgaum, India-based aerospace ecosystem
Regulators Set to Pull Back Curtain on Private Asset Valuations
The Financial Conduct Authority plans to probe how U.K. private assets like real estate and infrastructure are valued - a critical moment to scrutinize a complex trillion dollar market. When describing the space, industry insiders often mention poor transparency, questionable methodologies and inconsistent cash flow assumptions. Valuations frequently depend on subjective assessments and motivations to present a positive outlook, with the added danger of increased risks due to escalating interest rates. Gaps between private assets' net value and their share prices approach historic highs. While new regulations may uncover bad practices, private equity firms face little pressure to sell undervalued assets right now. The review presents a key chance to illuminate an enormous gray area the shocks of which could reverberate across the financial sector. Still, opaque corners may persist given the private market's inherent complexity.
"Each one of those assets should say in the annual report how they are valued, all the details. If those numbers are strange or they never change, then that would prompt them to ask some questions and maybe avoid nasty surprises later on."
AI Revolution Underway in Portfolio Management, Per Invesco Study
A new report from Invesco reveals artificial intelligence is transforming portfolio management. The study of 130 investors managing $22.5 trillion in assets found half already use AI in their investment process, with most expecting it to rival traditional analysis within 10 years. Investors are harnessing AI to identify market patterns and optimize allocations. Natural language processing for sentiment analysis is also gaining traction. The report highlights AI's ability to mitigate biases and forecast unexpected events. However, implementation costs and model complexity remain obstacles. The study also found investors believe systematic strategies helped manage 2022's volatility. Tools like dynamic allocation and macroeconomic regime analysis are expanding toolkits beyond conventional factors. With inconsistencies in ESG ratings, many are applying systematic techniques to reconcile data gaps. The report notes growing consensus that methodical approaches can be applied more broadly, like in commodities and currencies.
"Managing stakeholders and providing transparency is a key challenge for institutional investors...Investors need to be prepared to clearly articulate how AI models are being used in portfolios to justify their use and value add."
Mo Haghbin, Invesco
Family Offices Demand More from Software Providers in 2023
The family office software and technology industry has seen rapid growth and change over the past year, largely driven by the emergence of generative AI. According to recent research by Simple, an estimated 80% of technology providers are already using or planning to adopt AI, with the goal of better responding to evolving customer needs. The research, which included surveys of both family offices and leading providers, found that clients are demanding expanded features like mobile apps and APIs, deeper integration between products for efficiency, and increased customization. In response, providers are aggressively hiring, expanding into new regions, and enhancing their platforms. While positive for the industry overall, the proliferation of providers makes selection difficult for family offices. Simple's annual review aims to provide clarity, grouping providers by region, primary functional offerings across aggregation, management, analysis, reporting, and more. With both demand and supply increasing, the family office software sector continues to gain maturity.
"Heralded as significant as the internet itself, generative AI and particularly OpenAIâs ChatGPT immediately put every single software provider in a position where theyâd be judged on how quickly and effectively theyâd adopt this new technology."
UBS Wealth Management has announced that an 18-person advisor team, TCG & Associates, has joined the firm
The team combines for nearly 200 years of experience, including industry veteran, Ladd Lumpkin, who previously spent 28 years at Merrill Lynch
The Columbia, SC-based private wealth group remains dedicated to providing specialized wealth management services, carrying over roughly $2.6B in AUM
UBS continues to strategically expand its footprint in the Mid Atlantic region by adding this skilled advisor team (Yahoo)
Written by:
Andrew Popp | Sr. Research Associate
FINTRX delivers an industry-leading suite of private wealth data and research solutions to the alternative investment space and private capital markets. Engineered to help clients identify and access family office and RIA capital intuitively, the FINTRX platform ensures accurate and updated data and research on 850,000+ private wealth records globally. To subscribe to our newsletter and see previous versions click below.
