The Valt Journal #15

Featuring latest research on PE (Adams Street, JPM); PC (KKR, StepStone, Barings); sector focus on real estate & climate (BCG, UBS, StateStreet, M&G); cross-asset views (KKR, JPM, Blackstone, GS)

Hi, welcome to the new edition of The Valt Journal. In every issue, we cover the best and the latest insights into the global private markets. The Valt Journal is a repository of time sensitive and timeless research, delivered to your inbox every 2 weeks, so you don’t have to look anywhere else! Clicking the headlines is all it takes.

This will be the last edition of 2023. We will be back in 2024!

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PRIVATE CREDIT x FIXED INCOME

📝 2024: A credit vintage to remember?
KKR
In 2024, the $1.4 trillion private credit market is expected to thrive with lenders capitalizing on scarce capital to secure favorable terms, while asset buyers increase transactions amid lower valuations. Despite concerns over deteriorating corporate fundamentals, opportunities exist in high-yield bonds, corporate lending and asset-based financing, suggesting resilience in the credit sector.

📝Diversification in direct lending
Stepstone
Analysis of c.23k middle-market loan tranches worth $678 billion, reveals that diversifying across borrowers and GPs in direct lending reduces risk. This strategy was applied across c.5k loans and 41 GPs leading to better IRR and lower loss rates, indicating that there could be merit in diversification.

📝 Private debt managers bullish despite uncertainty
Barings
Post GFC, private credit rose as banks scaled back due to regulations, leading to its institutionalization as a significant asset class. Continued interest and shift towards alternatives oriented portfolios could mean opportunities for private debt managers in 2024.

📝 Leveraged radar: The state of the leveraged finance market in 2023
Alcentra
In 2021, the leveraged loan market thrived with c.$1.2 trillion across c.1,330 deals, but 2022 brought a sharp downturn driven by global factors. How did the leveraged finance markets fare in 2023?

✏️ Opportunities in private credit: Stepping in as banks step out
PIMCO
The steep interest rate rise, the largest in 40 years, coupled with $3.6 trillion in maturing real estate loans by 2025, sets a prime stage for private credit investors as banks retreat from the market.

✏️ Private credit: Key market themes for the year ahead
Wellington Management
In 2023, private credit investors observed a pivotal shift with banks' retreat leading to a rise in nonbank lending and a focus on less traditional areas, highlighted by a 900 bps drop in regional banks' CRE debt market share. This trend, along with a surge in covenant-lite deals, sets the stage for private credit's continued dominance into 2024.

✏️ European high yield: A clear case for active management
Neuberger Berman
Passive high yield investing is hindered by the illiquidity of bonds, leading ETFs to a biased focus on larger issuers and increased risk exposure. In contrast, active European high yield managers consistently outperform, beating passive ETFs by c.260 bps across periods.

✏️ As private credit surges, banks and alternative asset managers turn frenemies rather than foes
Institutional Investor
Jamie Dimon (CEO, JPMorgan Chase) underscored the rising dominance of private credit firms which are stepping into roles traditionally held by banks, who now adapt by partnering with them and innovating in private credit, despite the competition.

🎙 Managing through cycles in the direct lending space
TPG
In a recent podcast, experts from Twin Brook Capital Partners discussed how direct lenders can manage portfolios amid market changes and identified future drivers of manager differentiation.

🎥 Adapting to the evolving credit landscape
PIMCO
Discover strategies for adapting to the evolving landscape of banking and private credit through insights from a panel discussion at PIMCO’s Alternatives Investor Conference.

🎥 CMBS: Finding gems amid a dislocated market
TCW
Liza Crawford (Co-Head, Global Securitized) explores the challenges faced by the commercial real estate sector post-pandemic, focusing on the significant change in office space demand and identifying potential opportunities arising from market dislocations.

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PRIVATE EQUITY

📝 A pulse check on private equity
Juniper Square
Around 80% of PE professionals aim to raise funds in 2024, focusing on lower mid-market ranges ($200-$500 million), which are adept at closing deals in the current market. Despite a slowdown in 2023, expectations for 2024 are optimistic, potentially surpassing 2023's fundraising, which is projected to be one of the highest in a decade.

📝 The secondaries paradox
Adams Street Partners
Overallocation in PE due to public market declines prompts LPs to seek liquidity and rebalance through this market, leading to new investment dynamics. LPs’ lack of liquidity to invest in secondaries funds is exactly what drives those periods as attractive times to invest in the secondaries market.

✏️ The growing opportunity in PE secondaries and co-investments
JP Morgan
Secondary transactions and co-investments are now key strategies for diversifying alternative portfolios, particularly in PE. Active GPs are ready to deploy capital and LPs are using the secondary market for rebalancing, despite a slower deal environment. Success depends on strong relationships and a solid reputation among GPs.

✏️ Growth efficiency: The new venture capital regime
Wellington Management
Diverse and underrepresented founders, receiving minimal venture capital, must prioritize growth efficiency and the ‘Magic Number’ metrics to boost funding accessibility and manage costs, that are crucial for demonstrating revenue efficiency and sales effectiveness.

✏️ Big VC funds are underperforming smaller ones and their future is dim
Institutional Investor
The limitations of large VC funds come to surface as research supports smaller funds' efficiency, showing only 17% of funds over $750 million achieve significant returns compared to 25% for those under $350 million.

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SECTOR FOCUS

📝 Striking gold with EV battery recycling
BCG
Battery recycling is crucial for EV supply chain stability and sustainability. Globally, EV battery recycling capacity is expanding through partnerships among automotive and recycling companies, offering profit opportunities across various stages. However, challenges include evolving cell technologies, regulatory risks, and commodity price volatility.

📝 Emerging markets: financing the transition
BlackRock
Emerging markets are crucial in the global low-carbon shift, accounting for over 50% of energy demand and emissions by 2050. Successful reforms could boost EMs' annual low-carbon investment by $200 billion, while ineffective reforms may reduce it by $50 billion, affecting economic growth and global transition.

📝 Green premium
UBS
UBS research indicates a green premium of 28% and 19% respectively for environmentally certified office buildings in New York and London. This is driven by factors like net-zero commitments in the context of global emissions reduction efforts.

📝 Financing the agricultural transition
State Street
Accelerating regenerative agriculture, vital for reducing CO2 emissions from agriculture, requires overcoming barriers. There is need for a financing model, involving institutional investors, local authorities, banks, MDBs, and insurers, to support farmers and bridge the financing gap for this sustainable practice.

📝 Transition center of expertise: Batteries
BlackRock
The electrification shift is driving surging demand for lithium-ion batteries, particularly in electric mobility, with estimates predicting a 6x demand increase by 2030. The entire battery value chain, from mining to recycling, could see revenues quintuple, driven by decreasing unit costs and technology adoption.

✏️ What investors’ attitudes reveal about the future of climate finance
BCG
A survey of over 100 climate finance leaders shows optimism for growth in climate finance, particularly in LatAm and Asia. Subsidies and incentives drive progress, but their slow implementation poses challenges. Collaboration between commercial and concessionary investors, with measures like blended finance, is seen as crucial for scaling climate investments.

✏️ Offshore wind can soar once choppy waters calm
Impax Asset Management
Despite challenges like rising interest rates and material costs, offshore wind's growth is fundamental to global energy transformation due to its competitiveness, abundant wind resources, and suitability for meeting climate goals, especially in markets like the UK.

✏️ Where next for the European rooftop solar market?
LGIM
The growing residential rooftop solar market in Europe, driven by rising energy costs and decarbonization goals, offers investment opportunities. Europe aims to add 150 GW of solar capacity by the decade's end, requiring over €200 billion for solar rooftops alone, with potential for higher investments.

✏️ Why climate change matters in private markets
Wellington Management
Climate change presents both risks and opportunities for companies across sectors. It impacts operations, costs, and the need for resilience, highlighting the importance of proactive climate strategies and transparent disclosures.

📝Looking to 2024
KKR
In 2023, private infrastructure faced challenges due to inflation and rising rates but proved its value as a hedge. In 2024, increased transactions are expected as markets recover. Infrastructure assets with strong positions offer stability and growth opportunities in decarbonization, digitalization, and deconsolidation.

📝 StepStone real estate (“SRE”) house views
StepStone
Explore the key themes and trends in the market, preferred strategies and portfolio construction practices along with regional outlook for real estate market.

✏️ Global real estate outlook: Negotiating higher rates and other new paradigms
M&G Investments
Global real estate markets adapt to "higher for longer" interest rates, exploring the balance between property yields and bond spreads, while assessing growth prospects for rents and income yields amid inflationary pressures.

✏️ The forces shaping the future of real estate
Juniper Square
Three major shifts in the real estate market: geopolitical conflicts affecting capital flow, a swift move from quantitative easing to tightening in monetary policy, and technology's transformative impact. Clean data is vital for competitive advantage and productivity gains through AI.

🎙 Real estate house views with Jeff Giller and Margaret McKnight
StepStone
This podcast explores the world of private markets with a focus on the real estate market and presents in-house investment views.

🎥 Capitalizing on change in the real estate market
PIMCO
Explore promising real estate market prospects discussed during PIMCO’s Alternatives Investor Conference panel.

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CROSS-ASSET CLASS

📝 Guide to alternatives
JP Morgan
A comprehensive report on alternatives and private markets that unpacks key stats and trends across private asset classes.

📝A watershed year for alternative investments
BlackStone
In 2022, advisors sought diversification through private market alternatives, like private equity and real estate, to counter volatile public markets and achieve portfolio balance as the traditional 60/40 portfolios were down by 15%+. Overall adoption of alternatives rose, with 70%+ advisors allocating 10-20% of client portfolios to alternatives.

📝 Multi-strategy alternative investing
FS Investments
Multi-strategy alternative investing combines various hedge fund strategies in one fund, offering consistency and risk-adjusted returns. This approach adapts to changing market conditions and provides a one-stop solution for improved risk-adjusted returns in a challenging investment landscape.

✏️ A chasm between generations persists at family offices
Institutional Investor
Over 50% of North American family office employees believe the younger generation lacks qualifications for leadership due to their age, while 33% find discussing succession uncomfortable for senior family members.

✏️ Key takeaways from the Alternatives Summit 2023
Goldman Sachs
Investors adapt to changing market dynamics, emphasizing macro factors and liquidity. Geopolitical complexities and the 2024 election cycle drive businesses to seek more control.

✏️ Platform-based business models are taking over asset management
Institutional Investor
Asset managers adopting platform-based models, similar to Amazon, outperform others, attracting $600 billion in net flows despite a $13.5 trillion AUM drop in 2022.

✏️ Allocators had (limited) power over fees
Institutional Investor
Asset owners are pressuring for fee reductions, with average discounts of up to 0.19% in hedge fund-of-fund strategies and 0.12% in active multi-asset class strategies.

✏️ New billionaires are inheriting more wealth than creating it
Institutional Investor
Inheritors now outpace self-made billionaires in wealth accumulation - 50+ inheritors received c.$150 billion, surpassing the c.$140 billion self-made billionaires amassed. UBS anticipates over a thousand billionaires will pass an estimated $5.2 trillion to their children in the next 20 to 30 years, leading to changes in wealth management and investment preferences.

🎥 Navigating uncertainty with alternative investments
PIMCO
Gain insights on adapting to today's market landscape from a panel discussion at PIMCO’s recent Alternatives Investor Conference. Also, explore PIMCO's quantitative investment strategies shared at the event.

🎙 Podcast: Alts managers race for retail clients — but they’re not lowering fees
Institutional Investor
Bob Elliott (Co-founder, Unlimited) explains the technology he employs to convert publicly accessible data on hedge fund returns in the industry into a comprehensive overview of positions for ETF delivery.

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