Market Update - October Quarter 2022

Current Economic and Market Environment

The current environment in markets continues to be very volatile and points towards more
downside in both public and private investment markets, with key influences being rising inflation
and geopolitical risks.

• Central banks including the RBA and the US Federal Reserve, have persistently raised
interest rates in an to attempt to bring inflation down.
• There is no quick resolution to the Russia-Ukraine war in sight.
• Recession is front and centre of the market narrative as politicians are now joining the

Public markets have broadly been affected, from shares to bonds, commodities and currencies.
Private markets have also felt the affect, as investors continue to show concerns around the
illiquidity and longer-term lock-ups, typical of most private assets. Furthermore, rebalancing effects
from the public markets have ensured that allocations to private market assets are down, reflecting
a dire situation.

However, we are approaching a time of both unprecedented change and unprecedented
opportunity. The saying “it’s always darkest, just before the dawn” could be a fitting phrase for the
current climate. On balance, it is clear that there will be a global economic downturn and likely
recession in many countries in 2023, but Australia has a chance to avoid the worst of it.

Financial markets will price in expectations well before it shows up in the data, typically with a time
horizon of six months or more, and often before it begins to take shape in the real economy. As we
enter the last quarter of 2022, we may find financial markets begin to bottom out later this quarter
and into Q1 2023. There are a wide range of possible outcomes, however, we believe investors
should be preparing for the opportunities from mispriced public and private assets. This translates to
a higher cash weighting, as we research which opportunities to be ready to allocate to and take
advantage of market dislocations.

Tactical Opportunities in Private Markets

Those who follow Partners Private offerings will know that we recently raised capital for the Partners
Private Dexus Real Estate Partnership 1 Fund. This is an opportunistic property fund with a ‘buy to
sell’ strategy that is taking advantage of stress in property markets, reduced vendor expectations and pricing rebounds. This is driven by higher interest rate costs and revaluations based on funding
stresses, and lower valuations based on higher discount rates.

This environment impacts all interest-rate-sensitive long duration assets including infrastructure,
farmland, timber, stabilised core property. However, many asset prices are incorporating a highly
stressed environment. When partnering with experienced asset managers that can buy cheap and
add value to those assets, the forward looking returns can be highly attractive on a relative basis
compared with existing investments.

Private Equity and Venture Capital

We see areas of venture capital and private equity as being attractive for new allocations. We know
from prior investment cycles, that the performance of private equity and venture capital funds that
start in an environment of stress, typically outperform over the lifetime of the Fund. The economic
stress ensures that only the best companies survive and prosper, and those that tend to show higher
levels of capital discipline remain. This is because there is a pull back of capital from the market and
there are more businesses competing for less capital.

Equity investments in venture capital and private equity shouldn’t be discounted all together, as
better managers and strategies can have the opportunity to do well and excel in stressed
environments when many others can fail. The results can vary between okay, good and excellent,
with well researched investments and manager selection being key.

Income and Preferred Equity

Another way to invest into small and medium sized company growth, with additional downside
protection, is through an income strategy with an equity option. The advantage of investing into this
strategy now, is that the valuations for equity warrants have come down significantly alongside
other private, and public market companies. Taking a position in the equity now, enables the
investor to benefit from the upside of the business. Having a senior debt position with an equity
warrant or a preferred equity position allows investors to have exposure to the dramatic fall in
valuations, whilst also maintaining their risk exposure. We are seeing opportunities that can yield 8-11% cash income for investors that also have some equity upside, which can lift returns to around 15% p.a.

Private Market Long Term Trends

We know that certain trends are likely to persist over the longer term in private markets. We expect
the trend of private companies staying private for longer to continue, and banks pulling back from
lending to some corporates and individuals. This part of the cycle opens up a rich opportunity set in
private debt that keeps growing. Australia’s venture capital and private equity markets have
matured further and have seen a revolution of impact investing and differed approaches in the last
five years that we expect to continue.

With market dislocation, Partners Private is methodically building a resilient program for clients in
partnership with leading and boutique fund managers, allowing our investors access to best of breed
alternative assets. Partners Private brings our expertise from advising large institutions such as
superannuation funds, insurers and foundations to family offices and high net worth individuals. We
are always thinking about ways to increase longer term allocation to private markets for clients.
Please reach out to us or your advisor, if you would like to discuss further.

Partners Private Pty Ltd ABN 72 134 627 375 is an authorised representative of Partners Wealth Group Advice Pty Ltd ABN 82 162 823 083 (AFSL No. 483842). Partners Private Pty Ltd is a wholly owned subsidiary of Partners Wealth Group Pty Ltd ABN 17 140 105 077. All information in this document is general in nature and is not intended to be advice. It does not take into account your financial circumstances, goals and objectives. Before acting, you should consider its appropriateness having regard to your own circumstances.