Examining Tariff Policy Impacts on Private Fund Contribution Rates

Recently we examined the impact of Latin America presidential elections—which carry presumptions about candidates’ economic policies—on private market performance. Now we turn to the U.S., where tariffs have remained a common refrain leading up to and after the 2024 presidential election.

Given the long history of tariff enactment, we analyzed the impacts to private fund contributions—specifically, total contributions as a percent of total commitments (but not yet funded) among investors.

• We selected the Asia-Emerging and Europe-Western geographies (both are targets of recent tariff policies) as comparison points with North America.
• The key dates to examine in this timespan are the initiation of tariffs the U.S. imposed on China in Q1 2018 and the end of the tariff conflict between the U.S. and EU in Q4 2021.

Key Takeaways

Looking at the pre-2018 window, there was a trend of overall upward growth in contribution rates across all geographies. That was likely due to private markets’ expansion in the wake of the 2008 financial crisis.

To say the rising tide lifted all geographies makes sense, even with volatility in Asia’s markets at the time, and is likely explained by its smaller sample and developing market historical returns.

From 2018 onward, there was remarkable consistency in contributions among investors across geographies. Europe and Asia displayed a consistent regime of 10% average contribution throughout the timeframe of our analysis. The U.S. hovered slightly above 10% before 2020 but experienced higher volatility in the wake of the pandemic.

That levelling off of contributions reads more as an equilibrium than a suppression due to policy. Given the noise in the chart, it could be argued that any spikes from a change in policy in Q4 2021 European investment per se were clearly not sustained.

Asia similarly does not display much change in private market investment interest throughout the tariff policies since 2018.

Looking Ahead

The U.S. has used tariffs is various forms to achieve its economic objectives for decades, and it appears there is continued support of a tariff policy from the next administration.

Regarding the implications for private market investor contributions, it may be difficult to extrapolate an immediate impact. Given the long investment time horizon, private markets are insulated from temporary policy. But time will tell if any longer-term trends may emerge to change investor sentiment.

Comparing Public and Private Market Performance: Does Geography Matter?

We’ve often analyzed various index returns in the public and private spheres over the years. For today’s analysis, we have augmented our approach to visualize the role of geographies in the variance between public and private market performance.

Given the robust data available, we selected Asia-Emerging, Emerging Markets, Europe-West, Latin America, and North America from the MSCI regional indexes on our platform. The analysis timeframe starts in 2007 so that you can also see the variance of returns after the Great Financial Crisis. Overall, there are several trends to examine.

Key Takeaways

All markets have ultimately trended toward the 0% variance line because of the cumulative effect of the performance numbers over time. The high variance in early years of our 2007 – 2024 sample period reflects a fair amount of noise in the data. However, as the data in our analysis reflects total returns over time, the equilibrium values in the later years are more accurate compared to the initial chart noise.

For 2024:

• The positive indexes are Latin America and Emerging Markets with a delta of around 3% and 4%, respectively. That indicates a higher return for the public market compared to the private market. This is likely due to a high loss ratio, and low internal rates of return among those private markets during our sample time period, buoying otherwise normal public market values.
• The negative index is Europe-West with a delta of around -7%, indicating a higher private than public market return. This is likely due to the stagnant public market returns of the region in the past 10 years combined with above average private market returns—especially a significant group that generated returns above 15%.
• The near-zero indexes are Asia-Emerging and North America with a delta of around -2%, indicating a slightly higher private than public market return. In both cases this is driven by high public and private market returns, with the disparity between the two likely driven from the illiquidity premium that private investment offers.

Looking Ahead

While this dataset covers total returns and therefore is not predictive of future public/private disparity in performance, it does show some overall trends on which geographies have tended to outperform in their public vs. private spheres.

Many of these trends are locked in: 4 of the 5 have always been positive or negative, with one, Asia-Emerging, having flipped between the two. It’s an interesting trend to follow as investment in private funds in China has likely overtaken public investment as the country’s public rate of return has slowed to other developed-market economy levels.

Furthermore, other select emerging markets may see a similar reversal, with their private markets beginning to outperform the public ones as their economies also stabilize and more robust pathways of private investment appear.

Changing Fortunes: Tracking 20 Years of Returns Across Credit and Venture Capital 

Last month, the Federal Reserve announced its first cut to interest rates in over four years. This is expected to be followed by more cuts into early next year, reversing the trend of increasing rates throughout the 2020s.  

With this in mind, we analyzed the returns of credit investments in our dataset and noted how it tracks through different policy adjustments and environments. For the analysis, we pulled the Credit Time Weighted Rate of Return (TWRR) and included the same metric for venture capital. VC offers a good counterpoint to credit, as they have different risk profiles that would be expected to behave different under various macro stressors such as inflation and high-growth environments, for example. 

Key Takeaways

As anticipated, VC and credit offer many different quarters and periods of divergence over the past 20 years. This is a helpful pairing to highlight how different environments effect credit.   

Conversely, credit much more closely follows a strategy like buyouts. In fact, over the 20-year sample period, credit and buyout returns were within 1% of each other for 23 quarters, or 28% of the time. This level of similarity created a pattern where the dips and recoveries very closely mirrored themselves across different macro environments. 

The last two recessions best illustrate how the macro climate can shape performance among these strategies in different ways. Coming out of the global financial crisis, credit experienced four quarters of outsized returns, benefiting from undervalued distressed assets. Meanwhile, venture rebounded as well, but more mildly, as the recovery from the crisis was less conducive to startups and tech. 

The roles were reversed at the start of the 2020s, as VC experienced sharp recovery from the COVID bottom-out. Fueled by cheap money in a low-rate environment, VC had seven quarters of market-beating returns, but has been mired in two years of underperformance as inflation and a tightening economy took control.  

Conversely, credit didn’t experience the peak performance through the end of 2020, but it has steadily produced returns in recovery and outperformed VC since Q1 2022, with a more beneficial high-rate environment and less of an impact from large-scale events like the bank failures of 2023. 

Looking Ahead

Outside of a roughly five-year window at the end of the 2000s, credit has been the more consistent strategy quarter-over-quarter dating back to 1995 when our dataset starts. With this track record, we expect that trend to continue holding through the rest of the 2020s. 

This may hold true even as rates are cut, which historically has been a boon for VC returns. If this leads to outsized returns a few quarters down the road for the strategy, we still expect the quarterly consistency to remain on credit’s performance.

Measuring Momentary Impacts of Latin America Presidential Elections on Public and Private Markets

Investors often look at the future economic policies of presidential candidates to forecast public versus private market elevation. Latin America has had many recent presidential elections that give us a quality sample size to analyze if a connection exists.  

The charts below represent a portfolio of Latin America fund performance. We display both value change and return to capture private markets and placed that against the overall public market return for the region to discern potential correlation to a public market effect. 

Key Takeaways

To establish the list of elections we looked at Brazil (Q4 2018, 2022), Mexico (Q3 2018, 2024), Argentina (Q4 2015, 2019, 2023), and Colombia (Q2 2018, 2022). As the four largest economies in Latin America, they comprise the majority of private investment interest within our dataset. 

Q4 2016 – Q1 2017 saw significant contributions, and Q1 2023 saw significant distributions. While a change in power did occur in Brazil in Q4 2016, it was mired in weak sentiment and was unlikely to have lifted investment interest. Q1 2023 also does not coincide with any election, and therefore may instead reflect the eventual distribution of funds invested in 2020 given how three years of the highly profitable deep-value investments of 2020 may have begun to pay off. 

Q3 2020 delivered a reversal of the private and public market returns as the private market return jumped from a negative to around 5%, while the public market returns dropped from around 8% to 3% over the same time period. This doesn’t seem to correlate with any of the election timelines. It could easily be a combination of public market drawdowns from pandemic shutdowns combined with large returns from a small group of funds floating the private market returns. 

Looking Ahead

Late July saw a heavily scrutinized election in Venezuela: A country that has historically had significant impact on oil pricing, but a smaller overall economy. This will likely have significant effects on local markets, but it’s too soon to evaluate if the election will impact investment interest at a regional level. Overall, however, our analysis within Cobalt’s market data set tells us it’s difficult to predict the impact of presidential results on public or private markets above the level of mere market noise.  

Going for Gold: Assessing the Strongest Investment Strategies In Western Europe

With the eyes of the world on Paris for the Olympic Games, we wanted to identify the top–performing strategies in France’s geographic profile, Western Europe, and award some medals of our own. To best assess the overall performance of each strategy, the top-line performance along with underperformance and downside, we review the quartile benchmarks for the seven main investment styles in the region. 

Key Takeaways

Among the seven strategies there are three standouts: buyout, venture capital, and growth equity. At first glance, growth equity is the top performer with the highest upper fence at 22% (or the percent at which any fund above it could be considered an outlier within the dataset). Venture capital (VC) would appear second, but it has a higher top-quartile cutoff at 23%. This, paired with a better lower fence (denoting less downside risk) means we would place VC slightly ahead of growth equity for the gold medal in Western Europe.  

Buyout funds lack the top-level performance of the other two but make up for it with a third quartile breakpoint of 6.4%, much higher than VC and growth. This positions buyouts as having a bit less upside, but steady returns for at least three-quarters of funds in the region make it a clear case for the bronze medal. 

The other strategies take the benchmark pattern of buyouts a step further. Although they have considerably less upside from the top-performing quartile, they have a higher floor with all lower fences for these strategies falling above -10%. The sturdiness of these investments and the smaller spread of likely outcomes provide slightly more certainty to these strategies compared to the top performers. 

Looking Ahead

Although venture capital has won the gold, the changing macro-environment may have an outsized effect on the private markets in the years to come.  

With economic indicators such as inflation and the CPI normalizing over 2024 after the rockier preceding years, there may be a rising tide that lifts all strategies to healthier returns in the back half of the 2020s. 

Tracking Private Market Investments in Natural Resources Through the Evolving Regulatory Environment

Recent months have seen temperatures rise between Exxon and large institutional LPs, namely CalPERS. The conversations are centered around board member votes and, more broadly, shareholder rights. While these factors don’t directly impact our Cobalt dataset, it’s a timely opportunity to analyze our LP base portfolio allocations to Natural Resource.  

For the analysis, we focus on the pace at which distributions are being made in that strategy across all geographies over the last 10 years. (distribution pace = distributions as a % of NAV). 

Key Takeaways

The most evident trend in the chart is the steady downward trajectory throughout the 2020s, from a high of 23.5% in 2014 to the low of 11.6% in 2019. This mirrors the trend in the public markets in that timeframe, with the S&P Global Natural Resource Index peaking over 2900 in 2014 compared to a high of only 2500 throughout 2019. This reinforces that Natural Resource saw decreasing fortunes through the decade, even as many other industries thrived. 

This trend continued to an even larger extent into 2020, with only 7.6% pacing throughout the year, the lowest since 2009. As COVID greatly impacted all markets earlier in that year, Natural Resources continued to struggle in the latter half as well with each individual quarter all returning < 2.5%.  

The span of 2021 – 2022 proved to be a strong bounce-back period, with 2022 returning a high of 32.8% in the timeframe. Although 2023 isn’t quite on pace to match that recent strong form, it should reach roughly 14% – 18% depending on the final Q4 numbers. That would fall in line with many of the average years of the 2010s.   

Looking Ahead

The Natural Resource Index saw 3.7% growth in Q4 2023, so while not a 1-to-1 comparison to the trends seen over the past decade, this is a sign we may see a healthy Q4 posted once numbers are finalized. The same index has also seen a strong 2024 thus far, so we should continue to see the 2020 dip in the above chart as an outlier in an otherwise strong recovery from the downturn throughout the 2010’s.  

The questions raised by this conflict will be interesting ones to monitor throughout the decade. The dynamic between LPs and large companies when it comes to investment horizons and ESG policies will continue to play out and have large impacts on these investments moving forward. 

Silicon Safari: Examining the Trajectory of Sub-Saharan Investment Trends

In May, the US hosted Kenya President William Ruto as part of a diplomatic effort with the Sub-Saharan Africa nation. Much of the focus was on the economic relationship and potential partnership for investing in areas such as technology startups in Kenya’s “Silicon Savannah” or sharing funding from the CHIPS Act.

Building upon our previous analysis of emerging market investment, in this article we’re investigating investment interest and returns so far in the region. The chart below shows the levels of contributions and distributions over the past 15 years, overlaid with a comparable index (MSCI Emerging Markets IMI) to show regional performance in the public markets.

Key Takeaways

While the relatively small size of the sub-Saharan private market means there will be lower volumes of cash flows to measure, we see a pattern of fairly low but consistent contributions from 2010 to 2020. After 2020, the contributions largely drop off except for a return to form in 2023. This is a result of a small sample size, largely concentrated in funds raised in the early to mid-2010s. When these funds were fully contributed by 2020, the contributions dropped off, with newer funds beginning to show up in 2023. Overall, it indicates a stable but low level of interest in investment.

On the other hand, the distributions tell a different story. As expected, the distributions slowly begin about three years after contributions had initiated. However, they proceeded to slowly build over the time period observed, ending at several multiples of the highest contribution levels. This and the choppy-but-consistent slow growth of the emerging market sector shows there are returns to be had—even with the small sample—and there may be room for increased investment.

Looking Ahead

In light of this news of greater investment into the region, investors will likely pay more attention to the Kenyan tech sector. And that interest could certainly spread into Ghana and Nigeria in West Africa, which have shown strong growth in population and tech capacity.

What remains to be seen is whether the sparse-but tangible returns the private sector has seen over the past 15 years are indicative of future capacity—or whether expanding the sample size will show a market no more remarkable than any other.

Derivative Charts: Plotting the Growth of the Alternatives Market

Following up on last month’s chart and the exploration of our off-platform data capabilities, we exported the popular NAV and dry powder chart data to determine the quarter-by-quarter NAV growth of the Global Alternatives market.

Key Takeaways

Though presented in a different manner, our quarterly NAV growth chart tells a similar story to our Cobalt base analytics, with the negative downturns of the early and late 2000s and 2020 prominently displayed. Overall, it is still a growth story: Only 18 of the 96 sample quarters showed zero or negative growth, and the total NAV averaged 5% quarterly growth over the sample period.

The period from Q4 2002 to Q3 2008 is exemplary as the longest stretch of continued quarterly growth. It was a transition period for the private capital industry, when discussing the size of the alternatives market jumped to trillions from billions. Paired with a fruitful climate that led to organic NAV growth between the dot com bubble and the Great Financial Crisis, the half-decade of sustained growth is readily explained.

Naturally, as the market has ballooned to astronomical heights, the peaks of growth seen in the earlier days of our tracked data (near 30% growth in the quarters of the late 90s) are harder to come by. You’ll see that in the chart in the down-and-to-the-right shape of the highest growth quarters over time, with much more needed today to grow a multi-trillion-dollar pie.

Looking Ahead

Barring an impact like that of COVID in Q1 2020, we believe the tightening of growth is likely to continue. This would mean consistent quarters of single-digit growth with the occasional negative quarter.

If LPs continue to reconsider portfolio construction and commit a larger percentage to alternatives, this may act as a buoy for the market to maintain its growth regardless of other macro factors that could prompt a downturn.

Surge Pricing: Examining the Ability to Adjust North America Infrastructure Investing on a Short Timeline

The state of Infrastructure investing in America has been an often-criticized topic.  In addition to wear and tear, sudden and catastrophic damage is a real danger to both the logistical integrity of our economy, and the lives of those who need to use these facilities every day.  While we often look at infrastructure investing, considering recent sudden damage such as the Francis Scott Key bridge collapse, or the elevated hurricane levels predicted for this year’s Atlantic coastline, this time we wanted to look at the investors’ potential impulse contribution level: how fast investment could shift at a private level to respond to demands for greater infrastructure investing. The next few months we will be testing out expanding beyond our in-app Cobalt Analytics to leverage the dataset capabilities out of the platform.  As such, we put together a portfolio of North America Infrastructure funds and exported the data to create the above visualization.  The goal is to see how flexible investment contributions have been over the past 5 years on a quarterly basis.

Key Takeaways

Looking back to the beginning of our charts, we see a low sustained level of contribution: hovering between $1B and $2B per quarter.  The primary driver of growth quarter over quarter is clearly coming from LP investment.  This is a strong rate of investment, with usually positive NAV growth statistics contributing to slow and steady expansion over time.  This market clearly accommodates noise with its fluctuations in contribution levels but seems to mean revert and hold a steady state rate of investment. 

This changes as we move forward in the chart.  Looking to Q3 2021, we see a rapid increase in investment level, with no clear new mean level of support.  The timing here coincides with the passage of the Infrastructure Investment and Jobs Act, thus either leading to a rapid expansion in infrastructure investment interest, or an expansion in the universe of infrastructure investment opportunities.  Regardless, assuming this trend is a going concern, the result is that available funding for infrastructure has expanded as is flexibly investible on a quarterly basis: able to go up one quarter, and down the next. 

Looking Ahead

Given the greater investment capacity of the last few years, there is a good chance that the capacity for a surge of investing towards infrastructure needs does exist.  The main holdup would be the investor appetite for immediate change, and whether projected returns on such short-term scoping can sufficiently attract these surges to keep pace as America’s need for further infrastructure investing increases. 

Law of Averages: Comparing 3 Decades of Commitments Among Buyout, Venture Capital, and Credit Funds

In private markets, we regularly analyze three main facets of our Cobalt market dataset— performance, fundraising, and cash flows—to gain insight into the fund commitments that limited partners (LPs) have made across their portfolios. Today we’re analyzing those commitments to see what we can learn about optimal portfolio construction, just as we’ve done in the past.

This chart highlights the average commitment sizes from 1990 through 2023 among three of the main alternative investment styles: buyout, venture capital, and credit.

Key Takeaways

That chart illustrates some well-known points in the alternatives investment space.

• Venture capital set the baseline of lowest average commitment size at $20 million over the last 30 years.
• There’s also a general trend of commitments rising over time, in line with the growth of private equity during the 2000s and 2010s.
• The largest exception in the chart is from 2009 – 2011 during the financial crisis, when average commitments dropped rapidly (down nearly 50% from 2008).
• Altogether, the trends imply that average LP investment levels generally chart with the health of the market over time.

Surprisingly, the largest LP commitment sizes by investment type swapped, with credit having the larger average for nearly a decade between 2007 and 2017. That’s despite buyout firms having raised over double the amount in fund size compared to performance in the same timeframe. In other words, there was likely a smaller LP base with a sizable allocation to credit, but that smaller base made larger investments, on average.

Nearing midway through the current decade, we are seeing a clear divergence: Buyouts have grown their average investment size 64%, while credit has lowered investments by 74%.

Looking Ahead

Our 2023 data show that credit barely exceeds venture averages. If the pattern persists, it would be the first time since 1993 that they come in as the lowest of the three strategies.

While high interest rates are the largest macro factors in the private credit market, our investor data also shows a changing trend in portfolio creation that may be factoring into the dropping commitment average. From 2000 – 2009, LPs with credit investments averaged 1.7 investments per year. In the new decade (for years with complete data 2020 – 2022), the average has jumped to 2.6.

The increase may be indicating that LPs are committing a similar dollar amount from their portfolio—but spreading it across more individual funds, and therefore dropping the average check size to today’s lower levels.

It’s unlikely buyouts can maintain the last few years’ pace of growth. The previous high-growth period lasted three years (2010 – 2012), and if future years continue to look like that, we should anticipate the average buyout commitment to normalize.

One aspect that may cause this time to be different, though, is the continued expansion of buyout fund sizes compared to other strategies. Post-2015 buyouts greater than $2.5 billion have become much more commonplace, with over 30 being raised each year. That offers LPs opportunities to invest more in the funds, potentially propping up the inflated averages so far in the 2020s.