The Valt Journal #19
Featuring latest research on PE (MS, Adams Street); PC (TPG, Neuberger Berman, Abrdn); sector focus: real estate & healthcare (Blackrock, M&G, Barings); private markets (KKR, Pitchbook, Carta)
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 🔦
📝 Private credit: Opportunity & innovation
TPG
The private credit sector is experiencing remarkable growth, driven by factors like high public market valuations and investors' demand for control, alongside prospects of higher interest rates. Experts predict significant expansion in private credit's role and AUM, emphasizing its increasing importance in investment portfolios and current market dynamics. Focus is on the opportunity to introduce diversification, granular credit selection and structural protections amidst higher financing costs and potential downside economic risks.
📝 Private credit is gaining steam—Where do we go from here?
Neuberger Berman
Private credit has greatly expanded beyond traditional corporate lending to over $2 trillion in various financing forms, with banks forming partnerships with private credit providers due to stricter regulations like Basel III. Despite rapid market growth and concerns of a bubble, the increase is seen as a shift in market share, not a bubble indication.
TVJ Spotlight 🔦
📝 The big opportunity in bank de-risking
TPG
US banks are under pressure from rising interest rates and regulatory changes, possibly leading to a shift away from traditional lending areas. This opens up a substantial opportunity for non-bank entities, particularly private credit funds, to fill the gap with a variety of lending options. Opportunities for alternative credit funds to: purchase assets sold directly by the banks; assume the role of originating; provide capital and liquidity to banks as a means for them to deleverage and to non-bank or specialty finance lenders.
✏️ Added value in ABS
Neuberger Berman
Investors are shifting back to high-rated fixed income, finding value in ABS and MBS markets that continue to outperform despite rising bond yields, offering higher spreads than corporate bonds. While corporate credit remains stable with tight spreads, the securitized sector is seeing dynamic debates, opportunities in non-office CMBS, and diversification, especially with an increase in second-lien mortgage securitizations offering higher yields.
📝 Credit market monitor Q4 2023
Morgan Stanley
Fixed income sectors, especially investment grade bonds, saw strong performance and investor demand, amidst low but rising default rates and overall credit market resilience. Longer-duration products performed well. Issuance levels remained below historic averages across sub-investment grade credit markets. Loan default rates remain below 2% in both the US and Europe, while distress ratios remain below 10% across all of these markets. Credit excess returns were broad based across the fourth quarter, with CCC-rated bonds and loans performing best throughout 2023.
📝 The importance of monitoring credit spreads In positioning equity portfolios
Neuberger Berman
Credit spreads are a crucial market-based economic indicator, historically predicting recessions and reflecting investor sentiment. Currently, tight spreads signal a possibly unsustainable positive macroeconomic outlook and complacency, whereas widening spreads suggest increasing economic stress and a shift towards more defensive investing.
📝 Separating the wheat from the chaff in direct lending
TPG
Amid fluctuating market conditions, the appeal of direct lending lies in its potential for diversification and returns, highlighting the necessity for lenders with proven experience and disciplined strategies to ensure stable returns and manage risks effectively.
✏️ Unlocking opportunities in the private middle market through direct lending
Man Institute
Private credit, especially direct lending in the middle market, is seen as well-positioned to offer attractive risk-adjusted returns through structural advantages like senior secured positioning and floating-rate income. Many traditional core middle market (EBITDA of $10M to $75M) direct lenders are moving up the market to finance companies in the lower end of the traditional syndicated loan market (EBITDA of $100M to $300M+). This leaves opportunities for direct lenders specialising in the core middle market.
📝 A perspective on private equity NAV loans
Neuberger Berman
NAV loans have become a hot topic in private equity, with ongoing debates about their suitability. Neuberger Berman advocates for a balanced view, suggesting that whether NAV loans are beneficial or detrimental depends on the specific details and context of each transaction.
✏️ Emerging market debt January 2024
Abrdn
In January, hard-currency emerging market debt (EMD) and local-currency EMD saw declines of 1% and 1.5% respectively, while EM corporate debt posted a gain of 0.6%. These movements were influenced by wider spreads, rising US Treasury yields, geopolitical tensions in the Middle East, and a strengthening US dollar against emerging market currencies.
✏️ Junior credit: Going on the offense in the current interest rate environment
Harbourvest
The Federal Reserve's dovish shift amid cooling inflation suggests potential interest rate cuts in 2024, yet rates are expected to stay above post-GFC norms. This scenario may enhance returns for private credit markets, particularly in junior credit opportunities, while potentially increasing debt costs and affecting private equity returns.
🎥 Bonds look attractive compared with cash, equities (PIMCO)
PRIVATE EQUITY
TVJ Spotlight 🔦
✏️ The founder advantage: Finding alpha in middle-market private equity
Morgan Stanley
Private equity has expanded significantly, becoming highly competitive across all company sizes, with the middle market offering unique alpha opportunities, particularly with founder-involved companies. Success in this segment hinges on a manager's specialized skills, diligent evaluation, and a track record of value creation. Middle-market companies offer growth potential, improved margins and acquisition potential.TVJ Spotlight 🔦
📝 Integrated platforms can provide valuable insights for co-investments
Adams Street
Access to a broad network of quality GP relationships and a multi-strategy platform can give co-investment managers an edge in deal sourcing and due diligence, leading to potentially favorable investment terms and diversification benefits in private equity co-investments. Integrating insights from various investment strategies and market cycles further strengthens the potential for successful co-investment outcomes.
✏️ Venture capital outlook: Signals point to a brighter 2024
Wellington Management
Recent financial shocks and higher interest rates have led to a general slowdown and valuation reset in the venture capital market, but with public markets rebounding, there's optimism for a recovery in private equity, particularly for seasoned private managers, as deployment and valuations potentially reach their low point and look to rise in 2024.
✏️ The venture capital regulatory playbook
Carta
Venture capital regulation is rapidly evolving, with the SEC increasing scrutiny and introducing significant new proposals, prompting the need for a comprehensive VC regulatory playbook to help fund managers stay informed and compliant.
✏️ State of private markets: Q4 and 2023 in review
Carta
The startup ecosystem saw reduced volatility in 2023, with a significant decrease in venture deals and capital raised, yet maintaining a steady fundraising pace. This new normal, characterized by longer runways, increased bridge rounds, and a surge in Series A valuations, suggests a more stable but cautious venture landscape moving into 2024.
✏️ The data revolution in venture capital
Signature Block
Over 75% of public market trades are now executed by data-driven algorithms, managing over a trillion dollars, a trend started by hedge funds in the 90s which is now rapidly infiltrating venture capital, with an estimated 75% of VC deals expected to be AI and data analytics-informed by 2025.
🎥 Uncovering hidden value in European private equity (Stepstone)
PRIVATE MARKETS IN FOCUS
TVJ Spotlight 🔦
📝 KKR 2023 family capital survey
KKR
Despite a slowdown in global capital market activities, leading CIOs within the KKR family office network plan to increase their investments in Alternatives in 2024, particularly in private credit, infrastructure, and private equity, seeking the illiquidity premium's benefits for wealth compounding. This strategic shift involves reducing public equities and cash holdings, with a focus on leveraging long-term strategies and partnering with specialized GPs to outperform more passive capital pools.
📝 Global fund performance report Q2 2023
PitchBook
The first half of 2023 saw underperformance in PE, VC, and private debt against historical averages, with only real assets exceeding their 10-year average. However, a surge in public market returns indicates potential optimism for private market strategies, suggesting possible private fund write-ups in Q4 2023. PE returned only 6.6% for the year through June, a massive dip from its average return of 16.4% over the last decade. [Paywall]
✏️ Coming to the defense of private markets valuations
Institutional Investor
Amidst a volatile public market landscape, the S&P 500 fell significantly in 2022, while private equity saw a much smaller decline, sparking discussions on the valuation methods of private equity, which some critics view as irrational compared to public markets. However, analysis suggests that private equity valuations have remained rational during market turbulence, particularly within buyout valuations, as opposed to venture capital or growth sectors.
✏️ Finding value amidst volatility
Harbourvest
Global markets in 2023 experienced significant slowdowns due to various challenges, resulting in reduced private market activity; however, this presents opportunities for selective investment in high-quality deals, with the main challenge being the assessment of risks and timing as we head into 2024.
✏️ Are asset managers ready for the new data demands of private markets?
Institutional Investor
Investors are diversifying into private markets like private debt and equity to seek higher returns, less correlated with public markets, driving a significant capital inflow towards asset managers. Success in private investments requires managers to efficiently handle extensive data, ensuring robust asset selection and integration into comprehensive risk management and regulatory compliance systems.
✏️ DC schemes building a brighter future with private assets
M&G Investments
DC pension schemes must undergo radical reform to meet retirees' aspirations, involving increased contributions and access to private markets to fund innovative and sustainable investments. Addressing the dual challenge of inadequate savings and environmental issues, private capital, growing rapidly, offers opportunities in sectors like renewable energy, presenting a compelling case for pension schemes to invest in private assets for higher returns and societal benefits.
✏️ Family offices are boosting allocations to Alts in 2024
Institutional Investor
Family offices are shifting focus towards long-term wealth growth, planning to increase their alternative investment allocations to 52% in 2024, up from 42% in 2022, reducing traditional asset holdings. This trend, driven by the goal of securing future generations' wealth through illiquid investments like private equity, is expected to intensify, particularly as high interest rates and a better economic outlook make 2024 a favorable year for such strategies.
SECTOR FOCUS
TVJ Spotlight 🔦
✏️ Global healthcare outlook 2024
BlackRock
In 2023, the healthcare sector struggled amid rising interest rates, lagging behind tech and communication services but still offering alpha opportunities due to its diverse performance. Pharmaceuticals saw mixed results, with weight loss drugs boosting some companies, while others felt the post-COVID pinch. The medical device sector's early gains were erased by a sell-off, and biotech continued its decline. Healthcare services faced challenges from COVID's aftermath, though distributors experienced improvements.
✏️ Nuclear power policy update makes some companies investable
Robeco
Governments in eight countries are advancing the development of deep geological repositories for safe nuclear waste storage, with the first set to open this year, highlighting nuclear power's zero-emission advantage for achieving net zero by 2050 despite its risks.
✏️ Waste to wealth: A circular economy approach to e-waste
M&G Investments
The surge in e-waste, growing three times faster than the world's population, exacerbates resource depletion and pollution, prompting a shift towards sustainable practices via a circular economy. In 2020, the EU produced 4.7 million tonnes of e-waste, with less than 40% being recycled.
✏️ US real estate: Positioned for recovery
Barings
The US real estate market is nearing an inflection point amid a significant price correction and liquidity pullback, with transaction activity poised to increase in 2024 despite ongoing uncertainties. Real estate values have declined for six consecutive quarters, transaction activity has fallen by 41% yoy in Q4 2023, and public REIT prices dropped by 44% since late 2021, indicating potential for further appraisal value adjustments.
📝 What’s shaping the value-add opportunity in European real estate?
Barings
High inflation and interest rates have led to a sharp decrease in European real estate values, presenting a prime investment opportunity with the market showing signs of recovery and the potential for significant growth due to both cyclical and structural drivers. The current market downturn, with transaction volumes dropping over 60% from their peak in 2021, signals the property cycle's trough, offering value-add investors chances for discounts up to 40% off peak pricing.
🎥 Asymmetric returns in hospitality and multifamily (Juniper Square)
CROSS-ASSET CLASS
📝 The Beat
Morgan Stanley
To enhance yield and reduce duration risk in a potentially range-bound interest rate market, the strategy shifts towards increasing bank loans' weight and maintaining an overweight position in high-yield (HY) bonds without further additions. The approach also involves reducing cash holdings in 2024 to fund carry strategies, as inflation peaks and policy rates may drop, moving towards a mix of neutral to overweight positions in emerging market hard currency debt and selective investments in private markets, acknowledging a price correction and spotting opportunities in real estate and special situations private credit.
📝 The Alta report
BNY Mellon
As central banks, except Japan's, prepare for rate cuts, investors are moving towards longer bond durations and shorting the US dollar, anticipating US rate cuts that may not be as significant as expected. Despite the potential for a soft US landing, risks of a global recession loom with Europe entering recession, the UK fighting inflation, and China using fiscal stimulus amidst a property downturn, suggesting a volatile year ahead with significant global elections.
📝 Cross asset investment strategy - February 2024
Amundi
Central banks face balancing act with disinflation (especially in Europe) speeding up uncertainties as central banks struggle to calibrate restrictive rates for the right duration. Growth slowdown expected with weakening labor markets and potential impact on consumption in US and below consensus growth in Europe.
📝 Key themes for 2024
Morgan Stanley
Current trends are reverting to pre-pandemic norms with "higher-for-longer" interest rates potentially short-lived, a slow transition to green energy, a peak in global populism, and the resurgence of the traditional 60/40 investment portfolio. AI is expected to become a widespread, commoditized service, influential yet not sensational.
✏️ Unlocking growth in emerging markets
GIC
Emerging markets present opportunities for portfolio diversification and resilience, with India, Brazil, and China showing positive long-term prospects despite unique challenges. Over half of global investors intend to boost their emerging market allocations in the next 5-10 years, as per a GIC Insights 2023 poll.
✏️ Frontier markets - Benefitting from structural reforms
HSBC
Frontier markets, with their youthful demographics and competitive labor costs, offer substantial growth prospects through enhanced productivity and integration into global supply chains due to diversification efforts. These markets are becoming increasingly business-friendly and digitally inclusive, improving financial inclusion and economic efficiency.
✏️ Market volatility, local investments, and sustainability top of mind for global investors in uncertain environment
OTPP
Investors prioritize dealing with financial market volatility, trust, and macroeconomic factors amidst uncertainty in economic growth and rising geopolitical tensions. Despite these challenges, opportunities in digital transformation and climate transition are being explored, with investor sentiment particularly wary of increasing geopolitical instability and concerned about sustainability and macroeconomic trends.
🎥 Unleashing the power in Asia fixed income: Outlook for the year of the dragon (HSBC)
🎙 Behind the memo - Easy money (Oaktree)
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