Private Markets: An alternative look at 2024


29 Dec 2023

Direct lending, property and infrastructure offer a world of opportunity for those looking to give their portfolio an alternative edge. But what will the investment case for private markets look like in 2024? Fiona Nicolson reports.


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Direct lending, property and infrastructure offer a world of opportunity for those looking to give their portfolio an alternative edge. But what will the investment case for private markets look like in 2024? Fiona Nicolson reports.

The investment case for private markets is a lot stronger entering 2024 than it was 12 months earlier. At the start of 2023, private markets could be summed up as unsettled. In an overview published in February, JP Morgan said investors were “grappling with real uncertainty” against a backdrop of volatility and recessionary fears.

But by the summer, the outlook was brighter. Goldman Sachs private-markets research, which surveyed more than 200 limited partners (LPs) and general partners (GPs) across the Americas, APAC and EMEA, revealed a more positive mood. Almost two thirds (64%) of respondents reported improved investment conditions and 22% said these were stabilising.

Looking ahead to 2024, David Hedalen, head of real assets research at Aviva Investors, agrees that the landscape has been improving. “The fog which existed over the private markets space a year ago has started to lift,” he says. “Our central view is that we are at, or close to, the top of the central bank hiking cycle and inflation, in the main, is coming under control.”

Rob Martin, global head of investment strategy and research at LGIM Real Assets, says: “Optimism for private-market investments across institutional investors has continued to increase over the past year. We believe that many of the most pressing trends that could influence the investment environment can be traced back to one of four megatrends: demographics, decarbonisation, digitalisation and decoupling.”

Reflecting on what might happen in the private-markets universe next year, Hedalen says: “Activity will start to recover, as interest rates are expected to fall in late 2024, which will encourage investors out of cash and back into private markets. Returns in the private-debt space, across real estate, infrastructure and private corporate debt, remain attractive on a risk-adjusted basis. We expect this to continue into 2024.”

Asset classes and allocations

The largest average allocations reported over the summer were buyouts (12.2%), private credit (10.1%), real estate (9.6%) and infrastructure (6.4%), according to the Goldman Sachs survey.

Going into 2024, private credit looks set to retain its popularity, as Matthew Williams, head of institutional EMEA at Franklin Templeton, explains: “Private credit continues to be a preferred asset class for institutional allocators.

“Regulatory dynamics globally have led to reduced bank lending in private-credit markets, which is increasingly being replaced by private lenders. Secular and cyclical themes support the emergence of private credit as a core alternatives allocation. Disruption in the syndicated leveraged loan market, in addition to recent banking sector challenges in response to the rapid increase in short rates, has accelerated this trend.

“Healthy credit spreads and tighter underwriting standards in most private-credit markets reinforce the high demand we currently see for this asset class,” Williams adds.

Private credit is also flagged by Adam Lygoe, head of institutional and international wealth distribution at Macquarie Asset Management. “We have witnessed a strong interest in private credit, given the number of supportive tailwinds,” he says. “Going into 2024, we expect to see allocations being switched to private credit as an alternative to equity.”

He adds that the macro environment continues to demonstrate the role infrastructure can play in portfolios. “Indications are that the general trends of the past several years around increasing client allocations to the sector over the medium to long term are likely to continue.”

In its H2 2023 alternative assets investor outlook, Preqin reported that private debt “continues to shine”.

The data company also noted that according to its investor survey, private debt is the only asset class where most LPs expect returns to improve in the next year – and the only one in which a majority plan to bump up their allocations. Nearly all (90%) of respondents said it had met or exceeded their expectations over the past year.

While debt markets may look attractive, some areas need to be scrutinised with particular care, Hedalen says. “From a risk-adjusted perspective, debt yields remain at compelling levels. This is a great opportunity to lock in higher rates across infrastructure debt; real estate debt; and private and corporate debt. We are more cautious about sub-investment-grade debt in a tighter credit environment; investors should tread more carefully here and favour high-conviction companies and sectors. That said, we feel there is value to be captured in certain areas.

“We believe that this year and 2024 will be good vintages for commercial real estate,” he adds. “Caution, however, is required in the office sector, particularly average to weaker quality, where there are material headwinds in many markets.”

Jo Waldron, head of client & solutions, private credit at M&G, also alludes to private debt. “In the current stagflationary environment, central banks have maintained a somewhat vague stance on peak interest rates,” she says.

“Yield curves have gyrated significantly over the year, and we believe there is value in maintaining duration neutrality in this uncertain environment,” she adds. “We see value in defensive, senior, secured, floating-rate private debt which currently offers potential ‘all-in’ yields of around 10% without the need for taking undue credit risk.”

The impact of recession and inflation

Macro-economic challenges such as geopolitical conflict, interest rates and inflation were three of the main risks flagged by the respondents to Goldman Sachs’ survey.

But recession topped the agenda with almost half (48%) expressing concerns that it may be on the horizon.

More than three quarters (77%) said they expect a US recession in the next two years: 23% thought it would come this year and 53% anticipated its arrival during 2024. When considering the eurozone, almost all (90%) expect it to land in the UK – either this year (42%) or in 2024 (44%).

And as 2024 approaches, concerns about recession and the impact of inflation linger. “Our central case remains a recession for the US, Europe and UK in H1 2024, as higher interest rates start to squeeze disposable income and corporate margins,” Martin says. “Our conviction is strengthened due to central banks’ inability to respond quickly because of high inflation and the current strength of the labour market.

“Weaker GDP growth is likely to lead to lower demand for cyclical businesses and the more economically sensitive areas of real estate and infrastructure, such as offices and transportation.”

However, Hedalen says: “Our central case is that there will not be a recession within the UK or the eurozone in 2024, but there will be a period of low growth as restrictive policy rates continue to feed through into economic activity.”

Cautious valuations

Despite increased levels of optimism around private markets, there is still a degree of uncertainty when it comes to the outlook for valuations in 2024.

Lygoe says: “Private market investors continue to take a cautious approach to valuations, with a range of factors including deglobalisation, geopolitics, trade tensions, protectionism, and reduced monetary and fiscal policy flexibility all contributing to that caution.”

Waldron also anticipates some challenges, as she explains: “Although it is likely that private-market valuations will continue to be better insulated from broader macro-economic volatility, defaults are likely to peak next year.”

She adds: “Most companies within the private-debt space have successfully navigated higher debt obligations, with many starting the year with decent fundamentals and the majority of near-term debt refinanced. Borrowers have worked flexibly with lenders to build customised funding solutions; however, now is the time where we will start to see the winners emerging.”

Mikko Iso-Kulmala, head of private credit solutions at Fidelity International, says: “At the moment, we are still seeing a gap within private equity between entry and exit valuations, but we expect these to continue to converge.

“There is a lot of talk around private-market valuations in general and some of the existing deals in current portfolios may need valuation revisions as funds come towards the end of their lives. Beta and floating rate have generally performed well this year, with duration having suffered.

“That said, more recently we’ve seen a bit of a correction around spreads moving wider across all risk assets, so any entry point from now on to year end as well as early 2024, broadly stating, should be at historically attractive levels,” he adds.

The impact of ESG

The limelight is likely to continue to shine on ESG in 2024, believes Rafael Calvo, managing partner at MV Credit. “There is no question that sustainability and diversity and inclusion will remain high on global corporate agendas in 2024. We expect to see asset managers and private investors alike appreciate ESG-focused, private-debt managers. This in turn will influence investment decisions in the coming months,” he says.

Emmanuel Deblanc, global head of private markets at AllianzGI, also anticipates a continuing focus on ESG, particularly the S. “ESG will remain a key pillar, but we expect to see a stronger focus on diversity,” he says.

But Deblanc adds that the quality of data, which is needed to allow transparent reporting and monitoring, will be key. “There will be more pressure on institutional investors to show more progress with this.”

Returning to the megatrends that could influence private-market investments, Martin says: “The acceleration of decarbonisation efforts should create vast demand for new asset creation, as well as initiatives to support climate adaptation and energy efficiency.

“The European energy transition alone represents an €840bn (£666bn) opportunity for investors looking to deploy capital into sustainable infrastructure,” he adds. “We see strong investment opportunities for wind and solar farms, battery storage and, in time, power-network infrastructure, which is required to ensure increased renewable capacity is effectively integrated into the energy system.”

The impact of AI and data science

While ESG remains high on the agenda, there is a new acronym in town.

Goldman Sachs’ survey revealed that over the next five years, the greatest drivers of alternative-investment evolution are expected to be Artificial Intelligence (AI) and data science, cited by a third of respondents.

“AI and data science are going to have a significant impact in the long term,” Calvo says. “Having said that, over the next five years we are going to see an increase in the regulation of AI, which in turn will somewhat slow down the speed of the advance we are experiencing now.

“However, we believe that AI and data science will help significantly with due diligence and the investment process; the collection and monitoring of ESG KPIs; and the improvement of the investor experience.”

Iso-Kulmala also anticipates positive developments. “We expect AI and data science to make existing processes more efficient, for example, by using GPT/large language models to consolidate, analyse and summarise vast amounts of existing research and pool it into quick snapshots of essential information. This approach will be able to draw insights from disparate sources of information on past and present deals.

“It will also allow for less reliance on, or in some instances, full elimination of manual processes for reconciliation and forecasting, by consolidating data from various sources and having the ability to interpret data formatted and itemised in different ways.”

He concludes that this will free up peoples’ time to “focus on ‘value-add’ tasks while automation streamlines more mundane and systematic matters, thus ultimately increasing the efficiency of the investment process”.

It appears that private market assets appeal to long-term investors and they have plenty of economic and real world exposure to consider in 2024.


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