StepStone Q4 2018 Market Commentary

February 20, 2019

Successive rate hikes, uncertainty around Brexit, the US/China trade war, and negative earnings surprises contributed to market volatility. After rising 4% in 3Q18, the MSCI fell 13% in the following quarter. Going into 4Q18, US$15 billion of capital had flowed into the syndicated loan market; within three months, about US$20 billion poured out of it.


The trade war is having a notable effect on growth in the US and China, with ripple effects being felt around the world. Aside from southeast Asia, and a handful of energy producing countries, there are not many countries driving global growth. The pullback in listed markets and the mass bond sell-off are a direct reflection of a shift in expectations from ebullient to merely rosy. That valuations in private markets tend to be stickier, however, suggests the effects of this shift will not appear for a couple of quarters.

Secondaries & Co-investments React Similarly to Volatility

Secondary pricing is quite responsive to market volatility. Bids are noticeably lower, per our Secondaries Team. We expect volume to fall in 1Q19 because the bids adjust more rapidly than asking prices.

Our Co-investment Team also reports that market volatility is affecting the price that buyers are willing to pay, but sellers aren’t convinced that market movements were anything more than a blip. Fourth quarter valuations, when available, could tell a different story.

For Credit Investors, the Middle Market Remains Attractive

The volatility that ravaged liquid credit markets has so far had little effect on Middle Market Direct Lending.

While our Private Debt Team still finds this space attractive, the recent drawdowns remind us to avoid the tell-tale signs that the cycle is ending – namely accepting more aggressive lending terms at the point in the cycle that default rates have historically increased.

Evolving GP Practices

Large institutional investors are moving toward direct ownership models, purchasing stable companies with low debt loads. GPs are cultivating this interest through separate accounts, offering asset management capabilities at reduced fees.

While interest rates are expected to rise in the US and other major markets, we don’t expect they will be high enough to discourage GPs from using credit facilities to fund capital calls. Although this increasingly common practice can help LPs manage their cash, they should be aware of it when measuring manager performance.

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