CONTRIBUTORS
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
In the latest episode of the Alternative Allocations podcast, I had the opportunity to sit down with Matt Katz of Fiduciary Trust International. Matt and I discussed opportunities in the middle market, the current exit environment, the growing role of secondaries in portfolio construction and the importance of due diligence in evaluating funds.
I began by asking Matt where he sees the most attractive investment opportunities in today’s market environment. He noted for private equity, “We've always tended to gravitate toward the middle market and lower-middle-market side of the asset class. I think it's even more prevalent today as to your point, the asset class has just continued to grow exponentially. One of the reasons that we like that space is we think there's a structural capital availability and opportunity imbalance.”
We discussed the current exit environment and subtle improvements over the last year. “You know it has been a little bit of a slog over the past couple of years, but we are starting to see signals of momentum in both deal activity and exit activity.”
“What we're really looking at is the larger end of the market to see signals there because we've been noticing there's been an uptick in exit count and exit value from 2024 to 2025. The rate at which deal count is accelerating, and exit count is accelerating, is much higher than value. So, what that tells us is that a lot of smaller deals are still getting done, but it's the larger end of the market that has yet to see an opening of exits.”
As the opportunities look attractive, and there are more funds available in the wealth channel, I wanted to probe into conducting due diligence and evaluating funds. Conducting due diligence for private markets funds can be challenging for advisors. I asked Matt about the four Ps”—people, philosophy, process and performance.
“We believe firmly that the principal asset in a private equity firm is the people. When we're speaking with folks at a firm, we look at the senior leaders. We want to know their history and experience. We want to know what their motivations are. We want to know if there's alignment of interest between us and them. We want to know if there are several senior people; do they have complementary skill sets? Are they investors and operators? And how they are building the firm for the future, because I mentioned these are very long-term relationships.”
Matt shared his views about the importance of the process used for sourcing and allocating capital. Sourcing capital can be through intermediaries or through existing networks.
“Performance-wise, at a bare minimum, you need to have above-median performance consistently. There's a wide dispersion of returns in private market performance, much wider than in public markets. At a bare minimum, you need to have that consistent performance over time. There's also a higher persistency of performance. So, if you've done it before, there's proof that you can do it again. But specifically, we want to know how they're generating that performance at the deal level.”
Given Matt’s role, and focus on allocating capital, I asked him where else he saw opportunities to deploy capital. “One area where tactically we've been seeing a lot of capital, and it makes sense just given the lack of distributions, is the secondaries market. In our mind, secondaries can be used as a tool in the toolbox within a private market allocation. Secondaries are structurally different in many ways than traditional private equity.
In secondaries, you're investing into a mature portfolio of companies and funds. What that can do is ramp up your allocation more quickly. You're eliminating the blind pool risk. At the same time, because these investments are more mature, you're going to get distributions back more quickly. So, it's a great way to get a private market allocation started.”
Matt offered some valuable insights and perspectives on allocating to private markets. If you missed this episode, or any of the previous Alternative Allocations podcast episodes, don’t forget to subscribe wherever you get your podcasts. We encourage you to subscribe so you never miss an episode.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
Private equity "primaries" are investments made directly in newly formed private equity funds (offered by General Partners) to gain exposure to privately held companies. Private equity "secondaries" are transactions that offer liquidity solutions to owners (Limited Partners) of interests in private equity and other alternative investment funds. “Blind pool risk” refers to investing in a pooled investment vehicle without knowing the specific investments that will be in the portfolio. Most primary funds are blind-pool, since a manager typically does not begin investing until initial investor commitments have been received.
Investment strategies involving Private Markets (such as Private Credit, Private Equity and Real Estate) are complex and speculative, entail significant risk and should not be considered a complete investment program. Such investments viewed as illiquid and may require a long-term commitment with no certainty of return. Depending on the product invested in, such investments and strategies may provide for only limited liquidity and are suitable only for persons who can afford to lose the entire amount of their investment. Private investments present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor's ability to dispose of them at a favorable time or price.
Diversification does not guarantee a profit or protect against a loss. Past performance does not guarantee future results.
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