The Valt Journal #16

Featuring latest research on PE (Bain, Nuveen); PC (Barings, LGIM, TPG, M&G); sector focus on real estate & climate (GIC, Abrdn, GS, McK); cross-asset and alts (Oaktree, Carlyle, Bain, Wellington)

Hi, happy new year!

Welcome to the new edition of The Valt Journal, the first one for 2024. 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.

Don’t miss the TVJ Spotlights 🔦!

---

PRIVATE CREDIT x FIXED INCOME

📝 2024 private credit outlook: A question of balance
LGIM
LGIM suggests caution and a focus on resilient investment grade and crossover private credit, with an eye on emerging opportunities in alternative debt and real estate funding.

📝 2024 Outlook: Direct lending
Barings
Direct lending experts highlight its resilience amid market risks, with its unique, directly negotiated loans and reduced exposure to volatile sectors. Strong covenants and selective asset management further bolster this asset class, offering optimism despite headwinds.

📝 Resilient private credit fills a growing need across U.S. and Europe
Nuveen
Direct lenders are increasingly overshadowing banks, fueled by the growth of private credit and the dominance of major managers; this structural shift promises continued expansion and historically attractive returns.

📝 The evolution of sustainability-linked loans in direct lending
Alcentra
The direct lending market is adapting to ESG and sustainability due to regulation and investor demand, with a focus on sustainability-linked loans. In 2022, 50% of European leveraged loans had sustainability-linked features, signaling a growing trend, despite challenges in 2023.

📝 Fixed income perspectives
Principal Asset Management
As central banks pivot in early 2024, recession risks loom with inflation cooling, potential labor market shifts, and consumer challenges from high costs and stricter borrowing; this delicate balance shapes the fixed income landscape.

TVJ Spotlight 🔦

📝 Opportunities in preferred and capital securities remain attractive
Principal Asset Management
Fed is expected to halt rate hikes amid cooling inflation and labor markets, while hybrids look promising with sound credit fundamentals and high yields; geopolitical tensions and U.S. elections loom as key factors influencing 2024's market landscape. Where are the opportunities?

📝 A compelling value proposition in EM IG corporate debt
Barings
As U.S. teeters between a soft landing and mild recession, its economic trajectory remains pivotal for emerging market debt, offering a supportive backdrop with slow growth and declining inflation. Enhanced federal deficits and favorable fixed income yields further position this uncertain climate as an opportunity for strategic investors.

📝 5 reasons to consider fixed income in 2024
BNY Mellon
As rates rise, cash typically outshines fixed income; however, with the Fed's rate hikes slowing, shifting to longer-dated bonds (yielding 5.3% to 8.7%) is now opportune for leveraging their potential in a stabilizing rate environment.

TVJ Spotlight 🔦

📝 An investor’s perspective on the convertible bonds market
TPG
Amidst higher borrowing costs, firms pivot to convertible debt to save on interest, with a notable 15% of outstanding convertibles maturing in 2025 and 25% in 2026, signaling a robust future market and trading activity.

✏️ Allocators plan to bump up investments in private credit next year
Institutional Investor
Expecting a 12-month surge in private lending, 44% of allocators aim to boost their private credit investments, especially in Asia Pacific, anticipating private credit firms to outpace banks in lending.

✏️ Global high-yield outlook: Near term, defensive but longer term, solid
Wellington Management
Advocating cautiousness, it is suggested that global high-yield investors adopt a defensive stance, anticipating better valuations in 2024 as central banks curb inflation with the need for prudent risk management in a solid yet evolving market.

✏️ Views from NCRAM (Nomura’s high yield investment boutique)
Nomura
In 2023, the US high yield market gained 13.5%, driven by dovish Fed shifts and soft landing optimism, especially in Telecom and Banking. For 2024, returns depend on growth stability, Fed policy, and election outcomes, promising attractive yet variable outcomes.

✏️ European leveraged loans outlook: Embracing the unknown
M&G Investments
Outperforming in a tumultuous market, European leveraged loans delivered double-digit returns, leveraging their defensive nature and low exposure to global shocks, suggesting a reliable haven for investors amid financial uncertainties.

✏️ Investors cannot ignore the debt-sustainability question
Neuberger Berman
Despite a drop in bond yields, clients expressed uncertainty about investing amid soaring government debt, reflecting ongoing concerns about debt sustainability and economic prospects.

🎥 ABS: Cracks in the consumer
TCW
A discussion on the evolving challenges in the asset-backed securities market, where heightened inflation and constrained consumer spending have contributed to delinquencies in areas like car loans and credit cards.

---

PRIVATE EQUITY

TVJ Spotlight 🔦

📝 Global healthcare private equity report 2024
Bain & Company
In a tough fundraising climate, investors persist in seeking healthcare deals, particularly in biopharma and healthcare IT, with India emerging as a key market and the sector maintaining strong PE activity despite economic and geopolitical challenges.

📝 The case for CLO equity: complementing private equity
Nuveen
Traditional PE funds offer attractive mid-teen returns and lower volatility, drawing increased interest from investors. However, as they face headwinds like a sustained high-interest climate and market uncertainties, there are compelling arguments in favor of utilizing CLO equity as a complement to private equity as it could provide better risk-adjusted returns in the current environment

📝 The future of co-investment
Churchill x PEI
Global PE deals were down by 51% in value and 39% in volume in early 2023, yet co-investment remains robust as traditional investors withdraw and GPs increasingly seek co-investors to offset debt scarcity and preserve capital.

✏️ VCs are optimistic about 2024 fundraising. Exits are a different story
Institutional Investor
Venture capitalists, after a challenging year, are optimistic about 2024 fundraising despite concerns over portfolio exits; recent positive economic shifts and a surge in investments fuel this confidence, with many expecting to increase deal activity.

🎥 Navigating value creation in private equity
Neuberger Berman
Private equity managers have several levers they can pull to create value, but which ones are the most effective today, and what does that mean for investors?

---

ALTS AS AN ASSET CLASS

TVJ Spotlight 🔦

📝 How tokenization can fuel a $400 billion opportunity in distributing alternative investments to individuals
Bain & Company
Tokenization can revolutionize the alternative asset management industry by simplifying investments for both wealthy individuals and institutions. This innovation could generate up to $400 billion in additional annual revenue, with wealth managers and wholesalers at the forefront of this transformation.

✏️ The private fund rule debate isn’t over yet
Institutional Investor
The SEC's private fund advisor rule, in effect since August, is causing a division between private equity industry groups and client advocates.

✏️First Cut — State of private markets: Q4 2023 and FY 2023
Carta
Preliminary Q4 data reveals median pre-money valuations increased in all venture stages except Series C, with Series A rising from $29 million to $45 million. While final Q4 figures are pending, U.S. venture capital is expected to have a typical quarter.

✏️ US and Europe private company trends: Normalization underway
ICG
ICG provides an in-depth view of the key fundamental trends that are seen across the private markets and assess the outlook for 2024.

✏️ Time to start rotating out of cash and T-bills? The time for the right alts is still now
FS Investments
Now is the time to plan the strategic deployment of the substantial cash and T-bills amassed in the past four years, given the economic resilience despite various challenges.

🎙 2023: A vintage year to remember?
Hamilton Lane
What are the trends and market investment strategies in private credit and middle-market buyouts, and how they continue to fare across the globe for a comprehensive capital markets outlook.

---

SECTOR FOCUS

📝 Fintechs: A new paradigm of growth
McKinsey & Company
Fintech has rapidly risen in the past decade, with a market capitalization of $550 billion for publicly traded fintechs and over 272 unicorns valued at $936 billion by July 2023. A market correction in 2022 led to a slowdown, shifting fintechs towards a more sustainable approach. This report delves into strategies for fintechs to thrive, drawing from insights gathered from industry leaders.

✏️ United we thrive: The untapped power of bank-fintech partnerships
Bain & Company
Partnerships with fintechs have become increasingly attractive for banks to react faster in a digital age. Success entails focusing more on partnerships rather than providing solutions. Common pitfalls include vague definition of the business need, unclear performance metrics, and opaque decision-making processes.

✏️ Global banking annual review 2023: The great banking transition
McKinsey & Company
Banking faced challenges including increased oversight, digital innovation, and low interest rates. Recent months have seen some upsets but also marked a favorable period, with rising interest rates boosting global banking profits to levels not seen since at least 2007.

📝 Global natural resources 2024 outlook
BNY Mellon
We could be in the early stages of a commodity bull market, driven by cyclical and secular forces, with active managers poised to navigate and capitalize on growth opportunities. Key factors like economic recovery, constrained supply, and demand from decarbonization and energy transition continue to fuel this trend into 2024.

📝 Sustainable supply chain opportunities take center stage
Nuveen
15 months after the Inflation Reduction Act, the U.S. is witnessing a manufacturing resurgence, especially in supply chains aiding power generation decarbonization, with an anticipated $500 billion to $1 trillion annual investment needed; this convergence could spark a sustainable energy supply chain renaissance and attractive infrastructure debt opportunities.

📝 An affordable, reliable, competitive path to net zero
McKinsey & Company
The share of renewable energy in primary energy production has only risen from 8% in 2010 to 12% in 2021. If we continue on our current emissions trajectory, estimates suggest we won't achieve net-zero emissions even by the end of the century. What can be done?

📝 Beyond financing gaps: Sizing the decarbonization investment opportunity
GIC
Accelerating the low-carbon transition requires an estimated $126 trillion by mid-century; GIC's study, focusing on the total addressable market for mitigation technologies, reveals a comprehensive value chain perspective, estimating the climate solutions supply chain's incremental investment value in 2030 to be between $5-11 trillion.

✏️ Climate Metrics 2.0: Measuring what matters for real economy climate
Goldman Sachs
Decarbonizing financial portfolios may conflict with real-world carbon reduction; it's time to shift from initial historical emissions-based targets to a more refined climate metrics 2.0 approach that supports high-emitters' transition and catalyzes broader decarbonization, accepting initially higher carbon intensity for greater long-term impact.

✏️ Sustainability: 3 reasons why we need to look beyond decarbonization
Abrdn
Investors are diversifying beyond decarbonization, with a 40% rise in corporate net-zero commitments from 702 (June 2022) to 1,016 (Nov 2023). Anticipate more sustainability regulations in 2024 as over half of the world's largest firms adopt net-zero goals, representing 66% of their annual revenues.

✏️ Infrastructure: How sustainability is focus of new investments
Abrdn
Infrastructure investments have shifted from niche to essential in institutional portfolios, offering stability, yield, and diversification from volatile assets.

📝 Unlocking commercial private real estate
KKR
Private real estate investments, similar to buying a home, involve a 'capital stack' combining various layers of debt and equity, reflecting the total value in complex transactions, whether held directly or through non-exchange-traded investment funds.

📝 Inside Real Estate Outlook
Principal Asset Management
Global investors anticipate central banks to end monetary tightening, a moment possibly arriving in 2024 amid subsiding inflation. What are the implications for real estate and the strategic investment adjustments in the market?

✏️ Real Estate: Navigating challenges, 3 big opportunities
Abrdn
Direct real estate valuations are expected to reach their lowest in 2024, presenting opportunities amid market corrections and a global shortage of ESG-approved buildings, while REITs anticipate recovery and lending prospects arise as banks retreat.

✏️ Private CRE debt offers a hefty yield premium to cash
FS Investments
The commercial real estate market is undergoing an 18-month correction due to rising interest rates, resulting in declining property prices. However, lenders benefit from high yields of approximately 7.9% and conservative loan-to-value ratios below 65%. Despite the appeal of cash, CRE debt maintains a yield premium of about 250 bps over the 3-month Treasury bill.

✏️ Five areas influencing the B2B SaaS industry in 2023
OTPP
In 2023, B2B software companies struggled with macroeconomic challenges, resulting in weaker performance, slower growth, and longer sales cycles, prompting a greater focus on offering "mission critical" software and tighter financial management to navigate the complex environment.

---

CROSS-ASSET CLASS

📝 Global Insights
Carlyle
Following the November FOMC meeting, Powell suggested no further hikes if conditions stayed tight, yet markets reacted oppositely, easing conditions; despite 2023's inflation decline and improved pricing power, the economy's robust spending keeps rate cut considerations cautious. A quick overview of the global scenario.

📝 The roundup top takeaways from Oaktree’s quarterly letters
Oaktree
In 2023, credit markets saw dramatic sentiment shifts, geopolitical surprises, and rising rates; Oaktree experts analyze emerging opportunities and risks across asset classes in this volatile climate.

TVJ Spotlight 🔦

✏️ Wealth solutions for the next generation
General Catalyst
The upcoming largest wealth transfer in U.S. history from Baby Boomers presents a rare chance for wealth management disruptors to capture market share, especially as 88% of heirs reconsider their parents' advisors, challenging the traditionally high retention rates in the sector.

✏️ Why income-seeking investors need to look across asset classes
Wellington Management
With cash rates at 5%, income investing has become less risky, offering investors a chance to reevaluate opportunities across asset classes for higher returns with lower risk. Understanding the potential income and associated risks is crucial in this changing landscape, where income plays a multifaceted role in enhancing portfolios.

✏️ How family offices and other co-investors are sizing deals
Institutional Investor
Most LPs prefer smaller co-investments between $5 million and $20 million, seeking to be significant yet balanced contributors to transactions, primarily driven by family offices and asset managers in North America and Europe.

Thank you for reading The Valt Journal!
Check out our other editions here.

Disclaimer:

The content provided on this platform contains references and links to external sources, including articles, reports, websites, images, or videos. We do not own or claim copyright over the content found in these external sources. The ownership and rights of the content belong to the original creators.

This post and the information presented are intended for informational purposes only. The views expressed herein are the author’s alone and do not constitute an offer to sell, or a recommendation to purchase, or a solicitation of an offer to buy, any security, nor a recommendation for any investment product or service. While certain information contained herein has been obtained from sources believed to be reliable, neither the author nor any of his employers or their affiliates have independently verified this information, and its accuracy and completeness cannot be guaranteed. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, timeliness or completeness of this information. The author and affiliated persons and companies assume no liability for this information and no obligation to update the information or analysis contained herein in the future.