The Valt Journal #17
Featuring latest research on PE (Adams Street, HarbourVest); PC (Macquarie, TCW, Oaktree); sector focus: real estate & climate (Stepstone, BlackRock, BCG); cross-asset and alts (KKR, Broadridge, MS)
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.
Don’t miss the TVJ Spotlights 🔦!
PRIVATE CREDIT x FIXED INCOME
TVJ Spotlight 🔦
📝 Fund financing for private credit
Macquarie
Credit portfolio financing offers asset-backed financing to private credit funds, secured against diversified loans to middle-market corporates. This growing market, estimated at €30-40 billion annually in Europe, offers institutional investors a chance to invest in middle-market direct lending with an investment-grade credit profile. The market, traditionally led by large banks, is evolving with new structural features and increased demand for leverage, providing opportunities for institutional investors seeking defensive private credit allocations with strong risk-return profiles.
📝 2024 Emerging market fixed income outlook: Back with a vengeance
Principal Asset Management
Global fixed income markets remain stable yet challenged by tight liquidity, high policy rates, and a strong USD. Developed economies show a slowdown, while EM maintain growth and fiscal stability, making Emerging Market debt attractive driven by strong fundamentals, higher yields, identified risks, and undervalued assets.
📝 2023: A year in review – A historically significant rally
TCW
Key highlights from TCW’s 2023 review report on credit markets:
Strong loan returns and low default rates in 2023, with significant gains in Triple C loans and default rates below expectations. High agency downgrades persisted despite market strength, with record-low recovery rates for first-lien loans due to high leverage and weak agreements
40% of CLOs passed their reinvestment period, influencing extension demand. Tightening liabilities may encourage deal resets in 2024
Strong primary and secondary loan market demand began in 2024, with a focus on refinancing and repricing. M&A activity remains low
📝 The emerging opportunity in direct lending
TCW
In times of market volatility and economic uncertainty, like the past 18 months, direct lending portfolio managers should focus on three key strategies: managing existing legacy portfolios, actively seeking new loans with better risk-reward balance, and exploiting opportunities in middle market direct lending by aiding overleveraged but viable businesses. Successful management involves conservative credit metrics, effective loan documentation, active monitoring, and aggressive portfolio management, essential for earning above-market returns through credit cycles.
TVJ Spotlight 🔦
📝 State of the credit markets 2024
Oaktree
Oaktree's Co-CEOs Armen Panossian and Bob O’Leary explore the state of performing and opportunistic credit markets. The current environment for credit investors is the most attractive since the GFC. Key takeaways below:
The opportunistic credit universe (high yield bonds, BBB-rated bonds, leveraged loans, and private credit) has reached $13T from $3T pre-GFC
Large-cap private credit opportunities offer attractive risk-adjusted returns, potential to lend at 12% to multi-billion dollar companies
Opportunistic credit may witness an unprecedented wave of liability management; $800B+ of U.S. high yield bond and leveraged loan debt due in 2024-2026
📝 Floating-rate loan market monitor
Morgan Stanley
Morgan Stanley provides a comprehensive review of the loan market through impactful charts. The report educates on the loan market, updates conditions, and explains the role of loans in portfolios with a focus on corporate debt from below-investment-grade borrowers, including well-known issuers.
📝 Fixed income outlook 2024: Opportunity knocking
Nuveen
Global interest rates and economic growth are stabilizing, likely plateauing before rate cuts and a mild recession in late 2024 in the U.S., Asia Pacific, and Europe. Investors are advised to favor fixed income in their portfolios, utilizing current yields and strategic cash deployment to avoid missing potential opportunities.
📝 Growth and change: Locking in certainty in an uncertain world
Nuveen x Savvy Investor
The private credit market, particularly in Europe, is rapidly growing, outpacing traditional bank financing. As of 2021, banks account for only 22% of financing in the U.S. and Europe, down from 44% in 2007. Private credit's appeal is bolstered by its adaptability to market volatility, featuring floating rates, active management, and relevance in key industries. Its benefits, such as quick execution, customizable structures, and scalable capital, enhance its attractiveness as an investment option.
TVJ Spotlight 🔦
✏️ Beyond corporate credit: Exploring asset-based finance for 2024
KKR
Covering diverse assets from consumer loans to music royalty contracts, ABF offers investors an opportunity for diversification and stable returns in a market that is steadily growing and expected to reach $7T by 2027. 2023 saw increased interest in ABF due to dislocations in the banking sector and public capital markets across four key categories: consumer finance, commercial finance, hard assets, and contractual cash flows.
✏️ Fixed income outlook 1Q 2024
Goldman Sachs
In 2024, a balanced outlook is expected, with inflation nearing central bank targets. Disinflation is foreseen as goods and labor markets recalibrate. Vigilance remains for risks like a growth slowdown or commodity price rises. Policy rate cuts are anticipated, emphasizing balanced portfolios, sustainable growth opportunities, and caution regarding potential risks from higher rates and political uncertainties.
✏️AQR: How to model future returns and risks of private credit
Institutional Investor
Investors grappling with estimating returns and risks in private credit now have a new model from AQR. The model uses public high yield credit as a base, adjusted for private credit's unique attributes. This innovation by AQR, recognizing the challenges of diverse data in private credit, offers a structured approach to understanding the complexities and potential of private credit investments.
✏️ European structured credit review and outlook: From strength to strength
M&G Investments
In 2023, European ABS in structured credit thrived with robust valuations and strong collateral performance, offering higher returns than corporate bonds. Despite credit risks, its structural safeguards ensure manageable risks, making it an attractive option in an uncertain economic climate.
✏️ Agency MBS update for December
TCW
In December, risk assets experienced a significant rally, driven by cooling inflation and expectations of peaked interest rates. Yields fell sharply, and the S&P 500 Index neared record highs. Agency MBS particularly benefited, with the Bloomberg US MBS Index outperforming other benchmarks. Despite modest year-to-date returns, the potential for MBS to excel in 2024 remains high, especially if economic conditions lead to a recession.
PRIVATE EQUITY
TVJ Spotlight 🔦
📝 Capturing secondary market structural benefits – A 3D perspective
Adams Street
The traditional advantages of secondary investing, such as entry discounts, shorter duration, and increased diversification, are crucial for attractive risk-adjusted returns. In an evolving secondary market, buyers benefit from being purposeful and well-informed, leveraging deep insights for structural benefits desired by LPs. The expansion of transaction types, including GP-led vehicles and various strategies, reflects the market's evolution while maintaining the fundamental appeal of secondaries for generating strong equity returns with lower dispersion rates.
✏️ Today’s opportunities for buyers of limited partner-led secondaries
HarbourVest
LP-led secondaries have evolved into a diverse marketplace, providing flexibility and customized terms for buyers and sellers. The market has grown substantially, offering solutions for varied PE objectives with key benefits including increased diversification, potential for early distributions and lower (or no) blind pool risk.
🎙 The rise of the secondaries market: From backwater to boomtown
Bain
Nigel Dawn, Senior Managing Director at Evercore, elucidates the exploration of innovative tools and techniques by GPs and LPs for financing deals.
✏️ The state of venture capital: A look back at Q4 2023
Juniper Square
In a tumultuous year for venture capital, Q4 2023 brought a stark decline across metrics. Following an 82% plunge in exit value to $6.7B (vs $38B in Q3), it stands as the worst quarter since Q1 2013. VC exits declined to 250+ in Q4, however fundraising improved with $24B being raised in the quarter. The overall rebound observed in Q3 didn't sustain, posing challenges for VC professionals.
✏️ VC investments may hit a 5-year low in 2024
Institutional Investor
In the face of challenging market conditions, start-ups accustomed to annual funding exceeding $100B from VC firms might encounter a shift. EY's analysis revealed that $140B were invested in 2023, however EY prediction says that the $100B threshold might not be reached in 2024, although substantial deals are anticipated.
✏️ How an independent market study improves private equity exits
BCG
BCG highlights the success factors that come along with an independent market study and how it simplifies the work of the buy-side due diligence team and presents a strong case for making the deal. It helps PE firms prep portfolio companies for transactions and explores strategic moves that could make a company more desirable.
ALTS AS AN ASSET CLASS
📝 Outlook for 2024: How are we thinking about expected returns?
KKR
Push-pull dynamic between fiscal policy and tight monetary policy suggests a selective investment approach focused on growth and diversification. Private asset valuations have compressed, presenting opportunities for significant value creation through operational improvements. Focus on credit, suggesting a balanced credit portfolio between fixed and floating assets, and an opportunity to lock in higher yields for the long term. Preferences in private credit lean towards asset-based finance, structured credit, and select real estate credit due to more reasonable valuations. Real asset prices have adjusted to higher real rates, with real estate and infrastructure offering attractive entry points
✏️ Top disruptor trends facing APAC funds in 2024
Broadridge
The APAC asset management industry, valued at $20 trillion, is experiencing transformative shifts due to complex market conditions, digital advances, and new asset classes. Broadridge identifies key 2024 trends, including the rise of ESG investing, ETFs, private funds, digital assets, and AI's increasing influence in asset management.
✏️ The alternative outlook for 2024
Natixis
Private assets account for 50% of asset management revenue and are projected to grow 7% in the next five years. Institutional investors are bullish on private equity (64%) and private debt (60%). Tighter credit conditions and bank retrenchment make private credit popular. The democratization of private assets, like ELTIF 2.0 in Europe, aims to expand retail access and offer diversification amid rising inflation and correlated stocks and bonds.
🎥 Accessing outperformance: Private market insights from Europe
Stepstone
Stepstone expert highlights niche European sectors like healthcare at the 2023 360 Investor Conference, underscoring the region's diverse investment potential for outperformance despite economic headwinds.
SECTOR FOCUS
Real Estate x Infra
📝 Infrastructure’s middle market: An emerging opportunity
Stepstone
Infrastructure has become a significant investable asset class in just 20 years, offering inflation protection, stable cash yield, and low correlation. Smaller funds, defined as the Middle Market, have dominated fundraising since 2010, with sizes reaching up to $8 billion, expanding opportunities in the sector.
✏️ A guide to constructing an infrastructure portfolio
HarbourVest
Private infrastructure, with a remarkable 16% return in 2022, stands out as the sole asset class that witnessed growth. From 2007 to 1H 2023, private infrastructure consistently delivered superior absolute and risk-adjusted returns compared to its public counterpart. Allocation to infrastructure depends on factors like cash yield, liquidity requirements, investment timeframe, and return and risk requirements. Infrastructure assets can have revenue linkage to inflation through contracts or correlated demand, providing protection in inflationary periods. Important to get diversification across transaction types, geographies, vintage years, revenue types, and infrastructure sub-sectors.
✏️ Infrastructure: How sustainability is focus of new investments
Abrdn
Infrastructure is now a mainstream asset class for institutional investors, driven by decarbonization, with opportunities in energy, transport, utilities, and digital sectors. This includes biogas, energy storage, electrification of public transport, and digital infrastructure like fiber networks and data centers.
🎥 Market opportunities: Real estate secondaries & recapitalizations
Stepstone
Stepstone experts discuss GP-led real estate secondaries strategy and highlight real estate's resilience during inflationary periods.
🎙 The investment podcast: A brief history of real estate – and what’s back in fashion
M&G Investments
M&G real estate experts explore real estate trends from high inflation to low interest rates and predict a return to property fundamentals.
Energy Transition x Climate
📝 Transition center of expertise: Mobility-land
BlackRock
The passenger EV industry is in a growth phase, led by China Europe and U.S. Investment prospects span vehicles, charging infrastructure, battery tech, and more. However, consolidation is likely due to high capital requirements. Risks include slow adoption, energy resale margins, tech obsolescence, and supply chain issues. Opportunities vary across public and private markets, from startups to large infrastructure projects.
✏️ Battery storage in the energy transition
UBS
Battery energy storage systems are advancing due to technological improvements, global investments, and regulatory support. Global energy storage capacity must increase significantly by 2030. The US BESS sector's growth is attracting global private capital. Opportunities also exist in regions with high renewable capacity but limited transmission, like Japan and Europe. Europe, with its supportive markets and regulatory changes, is driving BESS development, notably in the UK targeting 30 GW of battery storage by 2030.
✏️ The hidden dynamics of the energy transition
BCG
The energy transition comprises multiple interconnected transitions across industries. Simplistic analysis leads to blind spots; holistic, systems-based approaches are needed for better decision-making and understanding complex interconnections.
🎥 Decarbonization, energy, security & affordability
Goldman Sachs
Goldman Sachs experts discuss global decarbonization and inclusive growth strategies at the GS Carbonomics conference, featuring insights from industry leaders and policymakers.
Tech x AI
✏️ AI and the investment industry: Preparing for the transformation
State Street
Generative AI is set to transform investments and institutional investors need to deploy AI for efficiency. Building a strong data foundation is crucial, as data quality is essential for well-informed decisions. Data remains a vital resource and a source of competitive advantage for data-driven organizations.
✏️ From potential to profit with GenAI
BCG
BCG's survey of 1,400+ C-suite executives shows that GenAI is transforming business, but 90% are waiting for it to move beyond hype. While AI is a top priority, 66% are dissatisfied with their progress.
CROSS-ASSET CLASS
📝 Capital Markets Group: Our seven key themes for 2024
Morgan Stanley
The Capital Markets Group outlines seven crucial themes for 2024 across consensus expectations - correlation between stocks and bonds, implications of monetary policy, pace of disinflation, Japanes equities, China in general and Alternatives.
Private markets are adjusting to their first major price correction since the GFC, offering opportunities across three segments: markets that have already meaningfully repriced (core-real estate, late stage VC); markets that have experienced modest valuation changes, but at defendable levels (buy-out and growth PE); and markets where we expect continued valuation softening (large cap buy-out PE).
✏️ How ETFs promote democratized access for investors
State Street
Originating after the 1987 market crash, the SPDR S&P 500 ETF Trust, the first U.S. ETF, transitioned from an institutional tool to a retail investment vehicle, growing slowly until fee-based advisors adopted it for its affordability and ease of use. By 2010, only 2% of U.S. households owned ETFs, but as trade commissions decreased, advisors expanded ETF assets to $150 billion, about 12% of the total. ETFs have since then placed a critical role to democratize access for investors.
📝 Global Insights: 5 questions for 2024
Carlyle
In 2024, the focus shifts from the previous year's landing debate to questions on rate cut timings, economic impacts, China's auto export and EV sector rise, and the balance between Generative AI adoption and investor funding trends. Explore more in this report by Carlyle.
✏️ To seize a $7 trillion opportunity, banks need bolder strategies for serving customers and society
BCG
Banks could double valuations to $7 trillion in five years by targeting growth and P/B ratio improvements. Focus on growth, productivity and investor appeal is critical to address performance issues. Need to support economic growth and climate transition and adopt tech and AI-led business models.
✏️ These 9 forces are reshaping the global business landscape
BCG
At the World Economic Forum in Davos, leaders talk about global geopolitical dynamics, climate change, macroeconomics, AI advancements, role and impact of Asia and BRICS on the global economy along with China’s evolving business environment.
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