The Valt Journal #18
Featuring latest research on PE (Neuberger, JPM, L&W); PC (TPG, M&G, TCW, Varde); sector focus: real estate & climate (Principal AM, KKR, GIC); private markets and alts (GS, UBS, State Street)
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 🔦
📝 Find the gap: The case for specialty private credit
TPG
Future high-quality private credit portfolios will likely include diverse sub-strategies similar to institutional PE, such as PE secondaries for J-curve mitigation and liquidity. Increasing obligor and asset type diversity within lending portfolios is key to downside risk mitigation.
✏️ European structured credit review and outlook: From strength to strength
M&G Investments
The European ABS market showed strong performance in 2023, benefiting from attractive valuations, strong collateral performance, and significant income generation despite rising borrowing costs. With yields at decade highs vs corporate bonds, the asset class offers historic value, maintaining manageable credit risks through structural protections.
📝 PIK, your poison
TCW
In 2023, the global private debt market's significance surged, with total AUM reaching $1.5 to $2 trillion, rivaling the size of the US high yield and broadly syndicated loan markets. Creative liquidity solutions, such as secured structures on out-of-scope assets and business carve-outs, are increasingly common to address liquidity challenges.
📝 Capital markets perspectives-2024
TPG
US and Euro high yield markets posted positive returns in Q4. In structured credit, home prices continued to rise and RMBS spreads declined. Direct lending M&A volume showed strength as interest coverage ratios remained stable. Sponsored mid-market direct lending deals amounted to $34B in Q4, up 10% yoy. Real estate saw challenges due to limited financing availability and valuation uncertainty while Asia showed some resilience.
TVJ Spotlight 🔦
📝 Varde views: 2024 Market outlook and opportunities
Varde
Selective opportunities exist across multiple sectoral themes including commercial real estate, student housing, asset based finance, APAC credit and certain dislocated first lien markets.
📝 Alternative credit insights 2024: Taking center stage
Nuveen
Amidst rising interest rates and market volatility in 2022, investors increasingly recognized the significance of alternative credit in portfolios. In 2023, despite the recovery of equities and bonds, alternative credit remains crucial for diversification and resilience, with over 40% of investors planning to increase allocations.
📝 Now may be the time for bonds: Five themes for 2024
Capital Group
Bonds with longer durations are attractive due to potential interest rate cuts by the Fed. Agency MBS and senior tranches of securitized credit offer quality, liquidity, and potential for excess returns over treasuries. High yield bonds offer appealing yields but come with risks. Emerging market debt presents a potentially more attractive risk/reward profile.
✏️ Global high yield: No time for beta but opportunities for active management
Man Institute
In the overvalued High Yield market, with 60% trading at a spread of under 300 bps, real estate and other high-dispersion sectors offer opportunities for active strategies to capitalize on mispricing, despite the market's overall expensive valuations.
✏️ Delivering differentiation in direct lending amid evolving markets
Institutional Investor
The growing private credit and direct lending market present LPs with the challenge of finding unique opportunities without overlapping investments.
✏️ The case for short duration, high yield bonds
Allianz Global Investors
In 2023, US high yield bonds led fixed income performance with historically high yields suggesting strong future returns. Their appeal, bolstered by healthy fundamentals and lower volatility in short maturities, reflects fading recession fears and optimism for sustained economic stability.
✏️ Three reasons to move from cash to investment grade credit
Robeco
The end of 2023 saw improved bond market performance, with investment grade and high yield credit markets outperforming money markets. 3 reasons: better return potential, resilience to inflation and greater diversification of risk exposure.
📝 Performing credit quarterly
Oaktree
High Yield Bonds remain attractive due to their returns, quality, and convexity. Opportunities for alternative lenders in markets less correlated with traditional corporate lending. Further, the rise in mortgage rates has impacted home sales and prices, presenting risks and opportunities in the residential real estate sector.
📝 Quarterly liquid loan market commentary
Partners Group
The US leveraged loans market saw a strong finish in 2023 with a notable annual return of 13%+, driven by high demand from both institutional and retail investors despite a drop in new loan issuance to $56B in Q4 from $76B in Q3. Total loan activity for the year reached $234B.
📝 2024 European loans outlook
Alcentra
In 2023, loans yielded strong returns of 13%+, surpassing other fixed income assets with lower volatility, attributed to solid technicals and robust fundamentals. With low defaults and strong issuer fundamentals, the outlook for 2024 remains positive with expected resilience in the European loan market, strong CLO issuance, and a focus on refinancing.
✏️ Debt capital markets outlook 2024
Natixis
Despite global instability in 2023, debt capital markets thrived with a notable supply in the covered bond market at €193bn, and increase in senior preferred (€107bn, up 35%) and AT1 primary supply (€10bn, up from €6bn). The positive trend is expected to continue into 2024, buoyed by investor optimism following the Fed's rate decisions.
✏️ Fixed income ESG outlook 2024
Morgan Stanley
In 2023, the sustainable bond market remained robust, nearing $1T in issuances, with a notable 7% increase in ‘Green Bonds’ to over $560B. Morgan Stanley expects continued strength in 2024, supported by regulatory moves towards harmonized sustainability reporting and the introduction of the EU Green Bond Standard.
🎙 A new era for private credit (Neuberger Berman)
🎥 Opportunity in focus: Private credit (PIMCO)
🎥 Q4 credit market update (PIMCO)
PRIVATE EQUITY
TVJ Spotlight 🔦
📝 Private equity outlook - 2024
Neuberger Berman
High levels of dry powder indicate potential for significant PE activity, but inefficient capital distribution remains a challenge. Providing capital through preferred/structured equity to seize opportunities in a constrained debt environment is key.
📝 Private capital insights
Latham & Watkins
Fund managers are considering continuation funds and secondaries to promote momentum and liquidity among constricted fundraising. The asset management sector can boost liquidity and dry powder by targeting large and reliable pools of capital. GPs are exploring new markets such as Europe that continues to provide new opportunities with innovative structures.
✏️ The growing opportunity in PE secondaries and co-investments
JPMorgan
Secondary transactions help mitigate the J-curve effect, reduce blind pool risk, increase diversification, and often involve purchasing shares at a discount. The secondary market's growth is driven by institutional investors seeking liquidity while co-investments provide targeted exposure to single companies, attractive economics with no-fee or no-carry incentives, a second layer of due diligence, and a shorter J-curve.
✏️ No more free lunch: Impact of higher interest rates on PE strategies
Wellington Management
Higher rates leading to higher cost of debt has impacted buyout funds leading to fewer fundraises, lower returns, increased default risk and slower deal activity. VC and growth funds face indirect effects through changing valuations. The impact on secondaries and fund of funds varies based on their underlying strategy exposure.
✏️ The state of PE: A look back at Q4 2023
Juniper Square
In 2023, the US PE industry experienced a decline in deal activity, with a 30% yoy decrease in PE investment levels and a 26% drop in exit value. However, fundraising reached $375B, only 2% less than the previous year's record, and there was an increase in the number of megafunds ($5B+) closing, totaling $191B across 17 funds. Dry powder also reached a new record of $956B, indicating a need for deployment in the coming years.
✏️ Late-stage startups led a VC valuations rally in Q4
Carta
In Q4 2023, late-stage venture valuations surged, with Series D median valuations increasing by 83% to $453M and Series E and beyond by 68% to $708M, marking a significant recovery from the lows of 2022 and early 2023. Series A/B round sizes, valuations surged in Q4 - and this positive trend was observed across most startup stages.
📝 AI – A venture investment opportunity that is hard to ignore
Adams Street Partners
VC is expected to lead the transformation in AI by investing in visionary founders aiming to create disruptive companies capable of generating long-term value. Success will depend on partnering with top-tier GPs with a solid track record and deep insights into AI and innovative technologies.
🎙 The evolution of the secondaries market: From crisis to opportunity (Bain)
ALTS AS AN ASSET CLASS
TVJ Spotlight 🔦
📝 What’s next for the democratization of alternatives?
Goldman Sachs
In 2024, the rising demand for private market investments from advisers and clients is fueled by diverse objectives like return enhancement, diversification. Managers are refining offerings, while regulatory changes in Europe aim to improve accessibility. Clients should tailor allocations based on risk profiles, considering various structures and fund managers.
TVJ Spotlight 🔦
📝 Access for all
Neuberger Berman
Available structural options for private investors include: Closed-end Fund: Traditional LP model with a 10-year fund life, capital calls, and distributions; Exchange-listed Closed-end Fund: Less prevalent but available, especially in UK; Open-end Funds: Innovative structure offering subscription and redemption features, though underlying assets remain illiquid.
✏️ Digital asset custody network interoperability
State Street
The challenges of interoperability in digital asset custody, emphasize seamless integration among off-chain services, within DLT networks, and between different networks. It addresses risks like inadequate reporting, cyber threats, and data incompatibility while suggesting mitigants such as simplified investor strategies, traditional monitoring tool adaptation, and reliance on APIs for data transfer.
✏️ Tokenization: The next frontier for investing?
M&G Investments
Blockchain-based digital bonds and tokenization are making traditionally closed markets more accessible. Examples include the European Investment Bank's €100 million eNote and Siemens' issuance of blockchain-based digital bond on a public blockchain platform, Polygon.
PRIVATE MARKET IN FOCUS
📝 The Connection
Blackstone
Investors are encouraged to consider the structural changes in the economy and adapt their strategies accordingly, with an emphasis on real economy investments and active portfolio management to navigate the expected higher interest rates and inflationary environment. The report shares how global CEOs are thinking today via key findings from Q4 survey of 80+ Blackstone portfolio company CEOs.
📝 Private capital themes: Four for ‘24
Churchill
2023 highlighted the significance of private capital, both in credit and equity markets, and the need to discern emerging trends from persistent myths in the private capital landscape. Experienced managers view tighter systemic liquidity favorably, benefiting from tighter structures and lower leverage.
✏️ Portfolio construction vol. I: A foundation for success
Hamilton Lane
Private markets are increasingly popular due to their potential for premium returns, but constructing a private markets portfolio requires active decisions on asset allocation, diversification, and exposure management, impacting portfolio risk and return. Access to high-quality data and quantitative analysis can help address these challenges.
✏️ Private market insights – January 2024
UBS
Real estate's performance is linked to volatile interest rate expectations, with potential 2024 cuts expected to support a market bottom. Infrastructure sees consolidation trends, private equity finds opportunities in co-investments and secondaries, while the US housing market in 2023 faced challenges and has a mixed outlook for 2024.
✏️ Ten considerations for private markets in 2024
McKinsey
Key considerations for private markets in 2024 include expectations of a return to more normal dealmaking, fundraising challenges, concentration among larger funds, emphasis on value creation, talent diversity and retention efforts, creative sourcing strategies, acceleration of infrastructure investing, continued growth in private credit, a pick-up in real estate deal volume, and the growth of secondaries to enable liquidity for GPs and LPs.
🎥 Private market perspectives (Wellington Management)
🎥 The state of the private markets in 2024 (Juniper Square)
SECTOR FOCUS
TVJ Spotlight 🔦
📝 Real estate outlook 2024
Principal Asset Management
Real estate values may be under pressure due to credit costs, but opportunities are expected post-repricing. Listed REITs are poised as an attractive investment opportunity as they offer defensive qualities with staggered lease renewals and have historically outperformed during periods of falling yields. European Hotel Sector offers investment opportunities in well-located but underperforming independent hotels, allowing for value creation through upgrades, repositioning, and improved operations.
✏️ Infrastructure: A potential economic shock absorber
KKR
KKR suggests private infrastructure investments which have been historically less volatile along with attractive returns, as a steady option for investors amid economic volatility.
✏️ A blueprint for evaluating climate risk in real estate
Robeco
Robeco's SDP model identifies companies aligning with emission targets, credible reduction plans, cost-effective green investments, and regulatory impacts, offering investment opportunities in this emissions-intensive sector.
✏️ Ready your cash: Private real estate might bottom out this year
Institutional Investor
There is an opportunity in the commercial real estate market as a record amount of debt matures in the next four years, potentially leading to distressed property sales. They anticipate private real estate prices to drop further in 2024, making it a strong vintage.
✏️ Sustainability outlook for 2024
KKR
KKR experts highlight investing in businesses promoting sustainability and financial goals, foreseeing opportunities for value creation, and stressing the importance of addressing sustainability-related issues to preserve value and manage risks.
✏️ Unlocking the climate solutions of the future
GIC
Climate change is evident worldwide and notably in developing economies like Asia, where 80+ climate-related disasters in 2022 cost $36 billion. Decarbonizing the global economy is crucial, requiring a mix of mature solutions like renewables and emerging technologies like green hydrogen, with scalability being a challenge.
✏️ 2024 Asia outlook – A year of transition
JP Morgan
In 2023, Asian economies faced challenges, but some countries like South Korea, Taiwan, India, and Japan saw strong equity market gains. However, 2024 is expected to be a transitional year, with hopes for stability before a more sustained recovery in 2025.
✏️ The year ahead for the major industry sectors, Part 1
Neuberger Berman
In 2024, key themes in major industry sectors including Healthcare, potential mean reversion in Life Sciences, challenges and opportunities in Energy sector due to oil supply and demand dynamics, and the energy transition in Power & Utilities. Part 2 includes AI's impact, rise of alternative asset managers in Financials, consumer spending normalization in the Consumer sector, and quality and early-cycle opportunities in Industrials.
📝 Tomorrow’s innovation, today’s opportunities
Capital Group
Innovation is vital for success, with evolving global innovation ecosystems in countries like US, China and India. Investing in innovative companies requires thorough research, an open mind, and patience, with trends like artificial intelligence-driven transformation and the third wave of biopharma innovation being closely monitored.
✏️ Unlocking the value of artificial intelligence
GIC
AI disrupts industries like education and healthcare, streamlining business models. For AI-powered businesses, clarity on value addition, strategic product commercialization, and regulatory measures to ensure safety, accessibility, and innovation are crucial, as AI is seen to complement, not replace, the future workforce.
🎙 Why real estate has become the talk of the town (Schroders)
🎥 Banking on AI (Insight Partners)
🎥 Environmentally focused real estate (Morgan Stanley)
🎙 M&A views: Wealth and Asset Management || Payments || Banking (Bain)
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