May 1, 2016
Market Commentary May 2016
The capital markets remain choppy and the disconnect between Wall Street and Main Street continues.
This disconnect is causing price declines in most asset classes and it is becoming common that buyers are falling out of contract, especially first “high bid” buyers.
Sellers are slow to accept lower pricing, and sponsors, in many cases, need to transact so are stretching to purchase. In contrast, equity is saying no and debt is pulling back. This is resulting in sponsors not getting the capital structure they want and sellers are not getting the pricing they want.
JCR saw this coming months ago and noted in our market letter dated November 2015 that “peak values are in the rearview mirror”. This pull back is healthy.
In making new investments, we are focused on investing at a low basis anticipating more choppiness ahead. Due to continued sponsor optimism, we are also able to get better structures to further protect our principal.
With our existing investments, since we stressed our exits at initial underwriting, our anticipated profits remain intact; however, transactions are taking longer, which in some cases reduces IRR (but increases our multiple).
We see the current market as a “correction”, not a massive dislocation. As we have said before, we are forecasting a 3-8% decrease in values from the 2015 peak over the remainder of 2016.
In this time of volatility, we continue to see excellent deal flow, driven by our reputation in the market as “predictable and reliable capital”. The biggest challenge is staying disciplined, not believing in overly optimistic assumptions, and being selective in our investments.
This is not the time to “plow in” or “back up the truck”. When it is, we will let you know.