An allocation to private markets can not only enhance total returns but also smooth the overall investment path by providing additional sources of returns. Partners Private continue to look for attractive investment opportunities with attractive risk / return characteristics. Below we provide some more detail on the outlook and opportunities across some of the private asset classes we cover.
Real Estate
Some further adjustment to valuations possible across the real estate sector, as repricing usually lags listed markets and multiple headwinds continue to impact the asset class.
However, the opportunity set is starting to look attractive as investors are able to purchase high-quality assets at discounted prices, and often below replacement costs. We believe that asset selection remains critical and investors looking to deploy capital should consider higher-grade properties, niche sectors and / or those with restricted supply.
Our sector preferences have not changed and include logistics and industrial assets, single-family rentals, self-storage, healthcare, and childcare centres.
Over the long term we see factors like demographic shifts, changing supply chains, and the transition to a low-carbon economy driving performance. These considerations should be integrated where possible to future proof portfolios.
Private Equity and Venture Capital
Over the past decade, private equity (PE) performed well on the back of lower interest rates and multiple expansion. Going forward, we believe a focus on value creation through operational enhancements to drive profitability growth will be crucial for PE investments.
While fund raising remains challenging across private equity and venture capital, the private equity market has not shut down completely. The growing need for exit avenues and liquidity continue to create strong tailwinds for secondary markets. In addition, funds with a small and mid-cap focus also remain attractive.
We are looking to add exposure across secondaries over the next quarters. Elsewhere, we continue to prefer investments that align with long-term trends like digital disruption, demographic shifts, and the energy transition to a low-carbon economy. We look to capture return enhancements by managers with capability in middle markets, some complexity premia, deployment of unique sector-specific skills or operational improvements.
Private Credit
Private credit remains attractive to investors, thanks to senior loans with attractive floating-rate asset yields, deal structures with large equity contributions, high quality businesses seeking credit, and low default rates. While higher financing costs put pressure on some borrowers in older deals, there have been few defaults so far. We expect the demand for private credit to remain elevated, which should continue to support the asset class performance.
Despite many positive tailwinds, private credit isn’t fully insulated from economic factors. We continue to monitor portfolio diversification across our exposures, avoiding deeply cyclical capital-intensive businesses. We also continue to monitor default rates and workouts, but don’t see signs of a bubble for the asset class so far.
We retain a positive view on private credit. While direct lending looks more competitive these days, there is still a shortage of capital in sectors traditionally dominated by smaller borrowers, including asset-backed consumer loans and commercial real estate lending. Owning some collateral could prove to be a boon in the uncertain macroeconomic environment.
Infrastructure
Like most other asset classes, private infrastructure weathered a slow transaction year in 2023 as inflation and rising interest rates presented a challenge. On the flipside, the value of an asset class that can serve as a potential hedge against both inflation and macroeconomic stress was on full display. We think infrastructure assets with a reliable customer base, strong market position, and contractual and regulatory cashflows provide both a downside protection in uncertain times and a way to gain exposure to secular long-term trends.
Choosing the right assets is one of the critical tasks. When we look at assets, we prefer direct inflation linkages, lower dependence on the economic cycle, and either strong market position or protection from competition by regulatory or contractual protections. We also consider valuations against growth potential. Infrastructure strategies we prefer have enhancements in returns from some green-field and brown-field expansion and supportive thematics such as energy transition, cloud computing and AI.
Agriculture
Adding allocation to agriculture into the portfolio provides diversification of return sources and adds long-term growth potential as the asset class is set to benefit from long term secular trends, particularly those related to demographics and food security. There are a range of strategies we continue to monitor and add to selectively, that involve single or multiple aspects of agriculture related land, business, technology and water, each with their own unique characteristics that could provide diversification and long-term returns. There are benefits of agriculture from ‘natural growth’ and ‘natural diversification’ as well as strong inflation linkages and diversified return drivers to financial market investments.