Morningstar - Q2 2022 - 30

Spotlight: Public/Private Markets
EXHIBIT 1
Boom Times Shares of publicly traded private-market investment managers soared
in recent years relative to the global equity market. But is the party ending?
Investment Growth 02/16/2017 to 02/15/2022
Morningstar PitchBook Developed Markets Listed Private Equity Index
Morningstar Developed Markets Index
400
300
Starting values set at 100.
251.6
177.8
02/2017
02/2018
Source: Morningstar Direct. Data as of 02/15/2022.
02/2019
02/2020
02/2021
02/2022
200
100
The index notably includes T. Rowe Price TROW,
an example of a " crossover " investor. Best known
for managing mutual funds, T. Rowe's venture
capital activities were significant enough to merit
inclusion. According to PitchBook, T. Rowe owns
stakes in RealPage, Waymo, and Glassdoor
and was a pre-IPO investor in Airbnb ABNB, Paytm
PAYTM:IN, Toast TOST, and Twitter TWTR.
Low interest rates have undoubtedly helped fuel
this boom. Private equity funds typically make
significant use of leverage, issuing or restructuring
debt to enhance returns. Debt-heavy deals
in 2021 included the $12.3 billion buyout of cloud
security vendor Proofpoint, $6 billion for Hertz HTZ,
$9.7 billion for British supermarket chain
Morrisons, and Medline, which was the largest
leveraged buyout in a decade.
But long-term structural drivers make private
assets increasingly difficult for investors to ignore.
Deal Count
8,000
Privates Peaking?
6,000
GLOBAL
Speaking at the Morningstar Investment
Conference in September 2021, Brian Selmo,
a mutual fund manager at First Pacific
Advisors, bemoaned a paucity of undervalued
securities compared with the late 1990s,
another growth-dominated era:
4,000
basketball team, in which a private investment
group owns a minority stake; and transportation
centers such as Sydney Airport in Australia,
taken over by a consortium of private investors.
FINANCIAL CRISIS
" The sophistication of the private equity world today
and the amount of money that's there...mean
that the sort of neglected little industrial business...
or consumer staples or restaurants...[are
impossible to find] in today's market because they
would be bought by someone at maybe twice
the multiple. "
2,000
Q1
2006
Dry Powder
Q3
Q1
2007
Remaining Value
Q3
Q1
2008
Roughly $12 trillion managed by private equity,
venture capital, and other such funds compete
for assets of all kinds, including public companies
such as Telecom Italia TIT:IT, which received
a EUR 10.8 billion buyout bid from KKR KKR;
family-held businesses such as Medline, bought
out by a private equity group for $34 billion; sports
franchises such as the Golden State Warriors
Q3
PitchBook estimates that the number and value
of deals reached record heights in 2021 in
both Europe (16,352 deals worth $1.8 trillion) and
North America (18,539 deals worth $2.8 trillion).
Valuations for early-stage companies jumped
50% in 2021 to a median of $45 million,
while the typical late-stage valuation surpassed
$750 million.
186.3
Q1
2009
The composition of the Morningstar PitchBook
Developed Markets Listed Private Equity
Index reflects a dynamic global landscape
(EXHIBIT 2 ). Partners Group Holding PGHN of
Switzerland; Sweden's EQT EQT:SE and
Kinnevik KINV A:SE; Canada's Onex ONEX:CN;
Japan's SBI Holdings 8473:JP; and the
United Kingdom's Intermediate Capital Group
ICP:UK sit alongside U.S. managers such
as Apollo Global Management APO, KKR, and
Blackstone BX, which closed 2021 managing
$880 billion in private equity, private debt,
and hedge funds.
Q3
Q1
2010
Q3
Q1
2011
Q3
100
$12T
" Tightened credit conditions could limit the firm's
ability to move into new investments, while
weak economic conditions and difficult equity and
credit markets could affect not only the value
of Blackstone's investments, but also its ability to
cash out of these investments. " 1
9
During the global financial crisis of 2007-09,
private-market activity fell off a cliff ( EXHIBIT 3 ).
1 Warren, G. 2021. " Solid Flows and Market Gains Lift Blackstone's Q3 Results; Increasing FVE to $120 Per Share. " Morningstar. Oct. 21.
6
30
Morningstar Q2 2022
3
300
Deal Value
$400B
Rip-roaring public equity markets also provided
a tailwind to private assets. In 2021, the best
IPO year since 2000, listings like DiDi Global
DIDI, Coupang CPNG, Robinhood Markets HOOD,
Wise WISE:UK, and Coinbase COIN provided
massive " exits " for their investors. And
public companies flush with cash and hunting
for acquisitions drove up private asset prices.
Microsoft MSFT acquired healthcare-focused
AI firm Nuance Communications for $19.7 billion,
for example, and DoorDash DASH paid EUR 7
billion to acquire Finland-based Wolt.
200
As interest rates rise and public markets cool,
however, private markets will feel the pinch.
Market volatility has already postponed some
private-capital-backed IPOs. In an analysis
of Blackstone that applies broadly, Morningstar
equity strategist Greggory Warren writes:
Morningstar - Q2 2022

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