StepStone 1Q19 Market Commentary

May 28, 2019

Higher valuations, looser lending terms, and greater volatility in listed markets all seem to portend the end of the cycle. Developed and emerging markets avert potential economic disaster each quarter, yet markets seems to be growing skittish. Investors in private markets should remain committed but watchful for excessive risk taking.


It is no secret that the amount of dry powder continues to grow, each year eclipsing the record set the year prior. As companies stay private longer, the opportunity set increases. Sure, there are more companies raising, but GPs are putting more capital to work than they are calling. That private markets still make up less than 3% of the global market cap seems to suggest there is still a lot of room for private markets to grow. While there has been much hand-wringing about the record amounts of dry powder, we find it is hard to separate the signal from the noise on this metric.

Valuations Are High But Appear to be Fair

Across all asset classes, valuations are above their prior peak for the last several years. Factoring in low interest rates, however, puts valuations into perspective.

On the other hand, higher EBITDA adjustments could mean valuations are understated.

Volatility in 4Q18 Led to Greater Volume in the Direct Lending Market

Issuances in the US and Europe remained strong, supporting the observation that during times of market volatility, some borrowers turn toward direct lending.

US Real Estate Remains Fundamentally Strong

Low vacancy rates, rising net operating income, and low cap rates are all positive signs for real estate investors. In the US, investors have been looking down market—property values in non-major markets are rising faster than they are in major markets.

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