The first half of the year saw some dislocations in pricing which began to close with some vendors and buyers of private market assets bridging expectations and becoming more willing to complete deal transactions. As a consequence, transaction activity has picked up amongst private market buyers while public market activity shows tentative signs of recovery from a recent pickup in non-mining initial public offerings.
The backlog in transactions and investment realisations has meant some institutional investors are more willing to sell early in secondary transactions to fund committed but undrawn capital investment programs.
There are nuanced differences playing out across asset classes and within subsectors:
Private equity and venture capital pricing has adjusted with more attractive pricing now for new money. Realisations are still slow with distribution to paid in capital (DPI) at a cyclical low but expected to pick up.
Private credit continues to be favoured by investors despite mixed reports, some justified and others less informed. Selection is very important and despite current defaults at low levels they may pick up.
Infrastructure assets have had most of their expected price adjustments, which has been offset by inflation linked cashflow growth and service volume improvements. This reflects the nature of infrastructure essential services and their link to inflation.
Agriculture has benefited from cheaper water and energy inputs with demand growing from rising population and upgrading of nutritional expectations in emerging markets. Some structural impacts will vary due to local markets and climate, while energy and global agricultural markets will affect all.
In the current environment additional returns can be found where there are return premia above median returns by selecting more active core-plus to value-add, middle market, and strong operator input investments. Track record of returns, process and key staff also must be vetted to verify the quality of the fund manager.
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. We highlight the benefit of adding alternatives and note the dispersion of returns meaning that thorough research and informed selection is key to better outcomes.
The chart below from JP Morgan shows that adding alternatives can improve returns and reduce risk (even with the median alternatives returns).
The importance of fund manager selection and due diligence
The importance of thorough research, due diligence and selection of alternatives is highlighted when better returns can be gained from selecting better return for risk offerings in markets where there is high dispersion of returns. This is often because it is not possible to invest in index exposures to alternatives, and there is high variation in quality and outcomes as shown in the charts below.
We provide some detail on the outlook and opportunities across the real estate, private equity/venture capital, private credit, infrastructure and agriculture asset classes.
The 'middle-market effect' is a premium of returns above smaller- and larger-sized investments that is persistent and accessible with select investment strategies and managers. Part of the reason for this is supply and demand, preferences of large investors, combined with growth opportunity that provides higher returns than the smallest- and largest-scale investments.