In the hunt for enhanced returns, private market investments – namely in the infrastructure, private equity and private credit space – have faced a wave of interest from investors, and for good reason.
While the illiquid nature of the assets means investments may be difficult to immediately realise, that same illiquidity can offer a return premium over the long term.
The benefits of active ownership through control positions and diversification – offering access to geographies or sectors under-represented in public markets – contribute to their allure.
As with all investments it carries a risk to capital, but infrastructure assets in particular can offer protection from inflation due to the essential nature of assets, regulated pricing, and long-term contracted revenues.
In a world where inflationary pressures are real, volatility is heightened, and the outlook uncertain, alternative private market strategies can play an important role in balancing portfolios, albeit only for those with a longer-term outlook.
However, not all private market assets are made equal, so where can we look for long-term opportunities? Here, we explore three key structural megatrends which continue to shape the sector.
Transformation of energy infrastructure
Decarbonisation and the energy transition is a key structural trend, particularly in infrastructure and it is a key theme in Border to Coast’s private markets programme, which now includes a dedicated £1.35bn Climate Opportunities sleeve.
Traditional renewable energy assets are a clear window of opportunity, with the need to displace fossil fuels with ‘clean’ sources, such as wind and solar, evident.
However, it is not enough to add more renewable power generators to the grid. We must also improve the infrastructure that enables efficient transmission and distribution of energy and build out storage to balance supply to meet spikes in demand.
We also need greater electrification of transport and to support heavy industry, such as steel and cement, to decarbonise their processes.
A digital revolution
A society-wide reliance on data and technology is fuelling the growth of digital and cloud-based companies, with many looking to private equity for funding.
The pandemic accelerated this with ‘stay home’ orders leading to a boom in gaming, streaming and a 30% increase in global data usage in 2020, according to PwC. Advances in cloud computing, AI and machine learning are also transforming business operations.
The digital revolution has demanded a faster roll out of fibre optic networks, the building of sophisticated centres for data storage and transmission, and demand for space on mobile communication towers.
The trend of technology adoption and personal data usage will drive substantial market growth in this investment theme .
Demand for healthcare
Booming demand for higher-quality healthcare has marked the sector out as a significant megatrend offering the potential for long-term growth and protected earnings margins.
Developed nation populations are ageing – the Office for National Statistics expects the proportion of over-60s to hit 16.4% of the world’s population by 2050, up from 12.3% in 2015 – and rapidly growing populations in emerging markets are demanding better access to quality medicines and facilities.
This dynamic has created a demand for healthcare that will increase in the years ahead. As well as serving an ageing population, waves of healthcare innovation could open opportunities.
Biotech companies are using digital technology in their research and testing, and the rise of next generation therapies is paving a new path in areas such as genomics.
Growth in demand and spending, as well as the need to fund innovative drugs and treatments seems likely to continue to lead to opportunities for investors to step in.
Overarching investment in private markets is the need to integrate and monitor ESG issues.
The onus is on us to drive standards, engaging with managers to improve disclosure. ESG is not just a way to mitigate risks but can also help to identify investment opportunities.
Ian Sandiford is senior portfolio manager for private markets at Border to Coast