On Thursday July 15th CAIA Chicago kicked off its educational event series with a presentation entitled Current State and Trends in the Private Equity and Distressed Debt Markets. This event was held at Morningstar’s new auditorium. CAIA Chicago assembled a distinguished panel of experts and practitioners from both Private Equity and Distressed Debt. Speaking from the Consulting viewpoint was Dr. Louis Finney- a principal at Mercer Investment Consulting and from the Distressed Debt side we had Marc Lasry-Founder of Avenue Capital and from the Private Equity area we had Troy Barnett-Partner at Adam Street Partners. The moderator for the evening was Kweku Obed from Mercer Investment Consulting. It was really an informative and lively event and here is a brief synopsis of the evening’s discussion.

All participants gave a view of how they currently see things from where they operate and the general consensus was that things have improved from the dark days of the late 2008-early 2009 period but that there was still some hesitance on the part of investors and that although liquidity has improved in all markets- it has not returned to Pre-Lehman levels. From an investor viewpoint it was made clear that investors in Private Equity and Distressed Debt need to have a long-term time horizon and low liquidity needs.

An important topic discussed was correlation. Dr. Finney showed out that the long-term correlations for Private Equity is zero to Treasuries and 0.7 to equities and for Distressed Debt the correlation to equity is 0.5 and 0.25 to Treasuries. Regarding the correlation between Private Equity and Distressed Debt the other members of the panel agreed that while generally the two asset classes should be non-correlated, this was not the case in the immediate period post-Lehman and that liquidity needs drove the correlations towards 1. This was a good segue to how things are today. Both Marc and Troy were upbeat on their particular market sectors. Marc thought the low growth environment was good for distressed debt and he highlighted some of Avenue Capital’s current investments (Trump Casinos and American Media). Troy made the point that the amount of leverage in Private Equity can cut both ways-exaggerating declines but providing the fuel for gains on the upside. Troy said that Adams Streets investments were split 50% between the USA and 50% the rest of the world. Troy highlighted that it is difficult for Adams Street to make investments in certain parts of the world not because of a shortage of growth opportunities but that the Legal Infrastructure in certain countries is not sufficient to provide the needed assurances to make a long-term investment. The panel also seemed to feel that financial reform regulations would have limited impact on their business outside of slightly increased costs and it was agreed it would have a larger impact on smaller players.

Following the panel discussion our 85 guests networked while taking in great views of the Chicago skyline. It was an enjoyable and educational evening.

Please note that CAIA Chicago is having a social gathering on July 28th at Elephant and Castle.

David Mousseau, CAIA
Member of the CAIA Chicago Chapter Committee