Private Companies Keep Growing — But Trade Wars Have Fund Managers Worried

Most privately held companies pushed through volatile stock markets this year to beat or meet expectations for growth, according to a survey by alternative investment firm Hamilton Lane. 

Seventy-three percent of fund managers polled by Hamilton Lane said the revenues of their portfolio companies grew as expected, while 22 percent reported that their expectations for revenue growth were exceeded. The firm surveyed funds overseeing $1.2 trillion of assets across strategies including buyout, credit, growth equity, real assets, and venture capital for the report, which is expected to be released to Hamilton Lane clients on Tuesday.

“They’re still optimistic,” Jeff Meeker, chief client officer at Hamilton Lane, said in a phone interview. According to Meeker, portfolios have fared well even as the risk of trade wars “quickly jumped” to the top of their list of macro-economic concerns, with private market managers worrying that escalating geopolitical tensions could derail growth of companies in their portfolio.

General partners also pointed to political polarization, erosion of the European Union, and Sino-American relations as three of the top-five risks to their portfolios. The U.S. and China have been negotiating a trade deal, with the threat of duties from each country rattling the stock market. 

“I am a Tariff Man,” President Donald Trump tweeted December 4. 

The second biggest concern for private fund managers, according to the survey, is rising interest rates. Higher rates could make it more difficult for highly-leveraged companies to invest in growth. 

“The last several years we have all broadly wondered about when the economic cycle will start to slow down or start to turn,” Meeker said. In the meantime, he said that portfolio companies continue to consider acquisitions as a way to keep growing.

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Half of the fund managers surveyed by Hamilton Lane said they’re spending more time than last year evaluating acquisitions for their portfolio companies. Acquisitions are the preferred use of excess cash by the chief executives of portfolio companies, followed by paying down debt and investment in research and development.

Only two percent of the chief executives view paying dividends as a most desired use of cash, according to the survey.

“It’s encouraging to see CEOs focused on growing their businesses rather than just pulling capital out,” Hamilton Lane said in the report.