Alternative investment managers expect the best but are planning for the worst — a recession in as little as three years, just when they need to exit their portfolio holdings.
Several are preparing their portfolios to withstand any downturn. Some managers of real estate, private equity and other alternative investments are setting aside capital in case they need to hold the assets in their portfolios longer than planned, industry insiders say. Others are moving from what they view as trouble spots, such as retail real estate, or shifting to higher quality, senior secured debt investments and out of equity investments.
Managers are stockpiling capital, said Daniel Martin, a partner focused on real estate in the New York office of law firm McDermott, Will & Emery. “It's not dry powder but "wet powder,'” he said. “It's ... (capital) preserved in case they will not be able to refinance at the levels and rates they had intended” when investments were originally made.
Managers needing cash injections find them harder to get in a recession, he said.
One indication of increased manager caution is the percentage of equity vs. debt in private equity deals. The amount of equity in leveraged buyouts has been rising steadily — up 10 percentage points since 2013, according to data from S&P Capital IQ, to about 40% for large corporate buyouts and more than 45% for middle-market transactions.