Private Market Outlook January 2024

Private Market Outlook January 2024

Key Points

  • 2023 was a year fuelled by uncertainty across financial markets; while private markets remained relatively resilient, transactions have slowed with repricing in many sectors leading to increased dispersion of returns.
  • For 2024 and beyond, long-term structural trends will support further growth across private markets with opportunities from repricing persisting in the coming years.

  • The real estate asset class tends to perform well after periods of repricing, as those allow investors to purchase high-quality assets at discounted prices, and often below replacement costs.

  • Private equity and venture capital remain in a period of adjustment, particularly as lower transaction volumes have slowed exits and capital returned to investors.

  • Private credit continues to be favoured by investors, particularly due to low to no capital volatility and attractive income returns. While public bond yields have become more attractive over the year, they continue to trail private credit.

  • Infrastructure assets have had some price adjustments due to their sensitivity to long duration government bond rates, however, provide advantages of essential services, inflation linkages and add to long term returns.

  • Agriculture will continue to benefit from demographics and food security trends and some ‘real asset’ inflation protection. Opportunities are arising as capital is deployed towards best of class operators with risks mitigated through due diligence and sector selection.

  • Research, due diligence and selection of alternatives is a crucial part of private markets investment framework due to the high dispersion of returns and the persistence of higher returns from the best operators and fund managers.

Recap of 2023

For most of the past year, investors grappled with elevated levels of uncertainty. While the Australian and US economies managed to (so far) avoid an economic hard landing, persistent inflation and higher interest rates remained a concern for capital allocators. In this environment, investment portfolios that included exposure to alternative asset classes tended to deliver higher and more consistent returns. This is partially due to private markets historically showing lower correlation to traditional investment strategies and lower sensitivity to macroeconomic factors. Nonetheless, private markets are not fully insulated from the rest of the economy, and we have witnessed both slowed activity in terms of the transaction volumes and repricing in many sectors. Dispersion of returns has also increased, making investment due diligence and active portfolio management crucial steps in investment selection.

It is important to note that while economic conditions and market dislocations present a concern in the short term, over a longer timeframe, slowdowns can create opportunities for new private asset investments. Historically, attractive vintage years have emerged during times of recession. Therefore, we continued to look for high quality investments to add to client portfolios. Over the year, we raised AUD 200m of client funds across infrastructure, real estate, agriculture, and private debt opportunities.

Looking Beyond 2023 – The Changing Role of Alternatives

The last several years have made it obvious that the traditional stock-bond investment portfolios can benefit from addition of alternative asset classes. Over the long term, investors with a diversified multi-asset portfolio that includes alternatives —are most likely to not only protect but also grow their wealth. The emerging trends such as slower global growth rates, higher debt levels, shift to digitalization and carbon neutral economy, as well as demographic changes are all likely to support further growth of private markets.

Given the strong tailwinds, it isn’t surprising that alternatives are becoming a more important consideration for portfolio construction and asset allocation. While traditionally only utilized by large institutional investors, like the superannuation funds and sovereign wealth funds, more and more family offices and individual investors are considering adding alternatives to their portfolios. The most recent research report compiled by J.P. Morgan Asset Management shows that investors who shift from a balanced stock-bond portfolio to a 40-30-30 stock-bond-alternatives portfolio, could increase annual returns by 50 basis points per year (0.5%) with 1.7% less volatility. This represents a significant increase in portfolio efficiency.

Generally, adding alternatives to investment portfolio would achieve one (or more) of the following goals:

  • Generate additional income;
  • Preserve capital and smooth the investment outcomes; and
  • Enhance total returns.

Depending on your circumstances and the investment objectives, your investment adviser should be able to optimize the mix of private market opportunities to fit your investment portfolio needs. It is important to note that alternatives also come with a unique set of risks, from lockup periods, to leverage, illiquidity and defaults. Understanding and managing those will be critical to successful implementation.

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Amongst the ongoing uncertainty that investors are facing, we remain convinced that including an allocation to private markets can not only enhance total returns but also smooth the overall investment path. We continue to look for attractive investment opportunities that offer both portfolio diversification and attractive risk/return characteristics. While private markets are often seen as a single investment option, it is important to note that return dispersion tends to be relatively high across these assets compared to public market equity and bond strategies. Therefore, a disciplined and rigorous due diligence processes combined with sector selection and partnerships with experienced investment managers is crucial for investment success.