Why did you take on the role of in-house economist at AlpInvest? In the private equity context, it was an unusual move. Would it still be unusual today?
Private equity is one of the most dynamic segments in financial intermediation. Private equity investments do not occur in a vacuum; deals are constructed in the broader framework of macroeconomic and financial market conditions. The degree to which multiple arbitrage can contribute to a fund's performance depends on the state of the public markets. Financial leverage is critically determined by the level of interest rates and the liquidity of the debt markets. These are all areas of substantial interest from an economist's point of view. But obviously it is too early to tell whether the ?dismal science? can make a meaningful contribution in terms of AlpInvest's allocation decisions and enhancing our performance.
What are your roles and responsibilities at AlpInvest?
Broadly speaking, my responsibilities fall into three areas: the business cycle, structure of the market and individual deals we look into. Many potential co-investment deals are sensitive to changes in the business environment and asset prices. More recently, we have also examined an increasing number of investment opportunities in emerging markets, whose risk-return profile encompass broader governance issues.
Tell us about some research into the buyout industry you've been conducting.
Over the past year, we have been working on a number of key questions related to the performance of individual market segments. For example, we are examining the relative attractiveness of the US and European mid-market versus the large buyout segment, and the medium-to longer-term supply- and demand dynamics in the buyout market. How long will the recent trend towards larger fund and deal sizes persist? How large is the universe of potentially attractive buyout targets relative to the expected amount of capital flows into this asset class? What is the future of club deals? How globalized is the industry going to be, both in cross-border activity but also with regard to larger allocations of capital from investors in the emerging markets? Our research has not been constrained to buyouts. More recently, we have analyzed in greater detail the current stage of the global venture capital market, a project that has helped us determine our target exposure over the next few years.
What are the key economic themes facing private equity today, and what do you foresee will be significant over the coming years?
Cyclically, the most important question right now is whether the global economy will enjoy a soft landing over the coming 12 to 18 months as most analysts seem to expect. This will depend on whether the problems in the US housing market can be contained, and whether Europe and Asia can effectively decouple themselves from the US economy and pick up some of the slack. Will the interest rate outlook remain benign? Credit spreads have remained tight and debt markets are liquid, but what will happen when default rates begin to increase as some market participants expect? A final question concerns the outlook for the US dollar and the pace at which it might further slip against the Euro and Sterling. On the structural side, we monitor closely potential changes in the industry's regulatory framework. There are also important endogenous trends we follow closely. These include the increasing degree of market concentration, the floating of special investment vehicles in an effort to get access to permanent capital, and the decision of some players to sell minority stakes through an IPO. These developments suggest that we are at a critical juncture. If such trends persist or even gather momentum, the industry structure in some years from now could be quite different, with potentially very important implications for returns and asset allocation decisions.