The Valt Journal #21
Featuring latest research on Private Credit (Blackrock, Oaktree, KKR); PE (Bain, BCG, Carta); Real estate, Infra, Energy (UBS, JPM, Abrdn); Alternatives as an asset class (Adams Street, JPM)
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.
Check out TVJ Spotlights 🔦 and Charts in Focus 📈
Interesting insights: Synthetic Risk Transfers (SRTs), NAV Finance and Global PE Report 2024. Scroll down to find out.
PRIVATE CREDIT x FIXED INCOME
TVJ Spotlight 🔦
📝 Synthetic risk transfers: A growing opportunity in private debt
BlackRock
Synthetic Risk Transfers (SRTs) enable banks to sell part of their loan portfolio risks to investors via floating-rate notes, promising steady cash flow and poised for growth due to regulatory changes and increasing market comfort. The loan pools underlying SRTs reached c. €200 billion globally by 2022. Recent Fed guidance and the Silicon Valley Bank collapse may further boost SRT usage in the US. SRTs are attractive for investors due to steady cash flow, potential for customization by large investors, and better alignment with banks compared to traditional investments. SRTs offer diversification, income, and exposure to valuable assets held by banks.
TVJ Spotlight 🔦
📝 NAV Finance 101: The next generation of private credit
Oaktree
NAV finance offers private equity funds non-dilutive capital based on their portfolios' net asset value, enhancing liquidity and portfolio management, with its use growing alongside the private equity industry. It features bespoke, senior-ranking loans with low loan-to-value ratios, providing benefits like liquidity and investment flexibility for borrowers, and strong downside protections and low volatility for lenders. NAV finance is usually provided either during a fund’s value creation phase or very late in the investment period when most of the limited partners’ capital has been called. The LTV ratios are typically low at 5-30% vs 35-60% for a typical middle-market direct lending deal. NAV finance deal flow reached $44 billion in 2023, representing 2% of private equity AUM in 2023 and is estimated to reach $145 billion by 2030.
📝 The lower mid-market offers a compelling opportunity
TPG
The middle market in direct lending is segmented by borrower EBITDA into upper, core, and lower segments, with the lower mid-market offering stronger lender protections, more conservative loan structures, and higher pricing due to its less commoditized nature and fewer competitors. This segment's attractiveness is bolstered by its relationship-focused environment, evolution with unitranche loans becoming dominant, and the importance of having deep industry knowledge and a diversified investment approach for success.
✏️ Five reasons to be active in fixed-income
Wellington Management
Despite the shift from active to passive strategies in core fixed-income markets, active management often outperforms the passive counterpart, offering enhanced returns by exploiting opportunities in market structure, credit deterioration, and dislocations. Active strategies leverage tools like sector rotation and security selection, mitigating risks and capitalizing on fragmented and opaque fixed-income markets to generate alpha. Greater dispersion among sectors, issuers, and individual securities provides more opportunities for active managers to potentially add value.
✏️ Where the looming credit maturity wall and the economy collide
Principal Asset Management
Investors are closely watching the Federal Reserve's policy direction in 2024, anticipating rate cuts amidst decelerating inflation, which historically benefits risk assets if a recession is avoided. However, concerns loom over a "maturity wall" of debt facing high refinancing costs, though a robust economy may mitigate widespread defaults, especially outside the lowest-quality credit segments. High yield bond risk hasn't risen much even with higher interest rates. Strong company finances and a potentially smooth economic slowdown by the Fed are keeping the credit market stable. This means businesses can handle their debt, limiting the risk for investors in these bonds.
✏️ The credit opportunity in M&A
Neuberger Berman
M&A are reemerging as a source of alpha in credit markets, especially as interest rates stabilize and corporate balance sheets remain strong. With M&A activity potentially on the rise, credit investors have opportunities to capitalize on strategic transactions that can offer growth and scale without excessive leverage, enhancing risk-adjusted returns. Acquisitions for cost-cutting or growth can be positive if funded with equity or have clear plans to repay debt. Debt-financed deals can be attractive too if they open up investment opportunities or the company has a solid plan to reduce debt later.
📝 Building upon our roots: Asia Pacific’s credit transformation
KKR
Asia Pacific's public and private credit markets offer a robust investment opportunity due to resilient growth, a demand-supply gap, and inefficiencies that benefit investors with regional expertise. Despite recent challenges, the area presents attractive valuations and diversification potential, thanks to a complex economic evolution, shifts in market composition, and a broad economic rebound post-COVID.
✏️Asia Pacific credit: Finding the sweet spot
KKR
Asia Pacific's rapid growth contrasts with its immature financing markets, which are heavily reliant on conservative bank lending. It leaves a significant opportunity for knowledgeable investors in the underexploited private and public credit sectors. Traditional banks account for 80% of lending with private credit forming just 0.1% of the overall financing in APAC. Key components to consider include a strong local presence for sourcing, selection and underwriting; dedicated, scaled, and flexible capital; disciplined risk management; and acute credit structuring knowledge with the ability to navigate local regimes.
PRIVATE EQUITY
TVJ Spotlight 🔦
📝 Global Private Equity report 2024
Bain
In 2023, PE faced challenges with declining dealmaking, exits, and fundraising due to rising interest rates, leading to an exit conundrum as LPs pull back allocations from all but the largest funds, necessitating robust approaches to value creation and liquidity solutions for the industry to navigate. Despite a sound long-term outlook, the private equity industry witnessed unprecedented challenges resembling the aftermath of the 2008–09 Global Financial Crisis, with deal value (down 60%), deal count (down 35%), exit value (down 66%), and fund closures (down 55%) all showing significant declines. However, “record dry powder is stacked and ready for deployment. A sizable chunk of this dry powder is aging and needs to be put to work. Looking into portfolios, nearly half of all global buyout companies have been held for at least four years”.
✏️ Europe’s growth equity landscape
BCG
Institutional investors are targeting companies in the post-venture, pre-buyout stage, particularly within the fragmented and concentrated growth equity market of software and technology. Analysis of 10K+ deals suggests key strategies for investors: investing in companies nearing the end of the venture phase; seizing opportunities in mature industries; and speculative investing in emerging sectors with strict due diligence.
✏️ Have secondaries reached a tipping point?
Bain
In 2023, secondary funds raised 92% more capital due to a $3.2 trillion backlog of unsold companies in buyout portfolios, representing a significant increase from the Global Financial Crisis. Despite providing just $120 billion in liquidity annually in an over $20 trillion industry, the growing need for liquidity and innovative financial structures suggests a large potential for further growth in the sector.
✏️ The year cash became king again in private equity
Bain
Recent private equity fund vintages are mirroring the slow capital return patterns of the 2006 vintage, due to a swift investment pace followed by market disruptions and exit stalls. However, today’s conditions differ, with varied exit strategies and a stronger economy, suggesting potential for quicker recovery as interest rates ease and dry powder remains high for acquisitions. Unsold assets are piling up in PE portfolios, preventing distributions to investors and threatening future fund-raising due to lack of exit opportunities. The proportion of long-held companies in buyout portfolios is growing and hasn’t been this big since 2012. GPs need to prioritize getting capital back to LPs by developing comprehensive, pragmatic strategies to generate near-term exits.
📝 What co-investment funds bring to the table
Pantheon
Pantheon experts advocate for co-investment fund strategies, highlighting their ability to offer investors diversified, efficient scaling of private equity allocations with reduced concentration risks. They emphasize the advantages of co-investing, such as access to a wider range of deals, especially in the mid-market segment, and stress the importance of choosing co-investment managers with strong deal flow, due diligence, and execution capabilities to maximize returns and diversification.
✏️ Key considerations for follow-on co-investments in today’s market
HarbourVest
The level of co-investment follow-on activity is rising and playing a crucial role in a company’s financing while offering investors an opportunity to gain greater exposure to high caliber assets with attractive pricing and terms. Investors must carefully allocate capital to ensure optimal use, balancing alignment with lead sponsors against their unique objectives and risk profiles. Experienced partners can provide critical support in navigating these complexities, ensuring swift, informed decision-making and effective portfolio management.
✏️ Interested in buyout? Strategies for estimating the sensitivity of liabilities to interest rates
LGIM
The net funding position of defined benefit (DB) schemes significantly improved from March 2022 to March 2023, with 67% fully funded by September 2023. As these schemes prepare for potential buyouts, hedging against interest rate sensitivity becomes a crucial challenge due to the complex and variable nature of buyout pricing, making precise hedging difficult but essential for near-term buyout targets.
✏️Across four key industries, the state of seed funding looks quite different
Carta
In 2023, healthtech startups experienced a significant fluctuation in seed valuations, initially dropping 25% in Q1 2023 but ultimately rebounding to a decade-high of $16 million by Q4, outperforming other sectors such as consumer, SaaS, and fintech, which also saw increases but did not reach new highs
✏️ UK startup investment in 2024: Metrics, trends and the "old normal"
Carta
Venture capital fundraising, especially in the UK and European tech sectors, involves navigating complexities such as SEIS/EIS schemes, understanding investor preferences, and adapting to the current challenging environment for raising capital. Success hinges on a startup's ability to communicate its value, demonstrate strong future growth prospects, and retain significant founder equity, with AI, climate tech, and digital health emerging as particularly attractive sectors for investment.
✏️ Harnessing generative AI in private equity
Bain
Generative AI is proving its potential to revolutionize various industries by enhancing customer interactions, content creation, and data analysis. Private capital firms are rapidly adapting by evaluating AI's impact on their portfolios, incorporating AI assessments into due diligence, and leveraging AI to optimize investment decisions and back-office functions, demonstrating its strategic implementation can significantly enhance business processes and value.
📝 Payment tech offers everything private equity firms love
GTCR
GTCR's acquisition of Worldpay for $18.5 billion highlights the appeal of the payment technology sector to private equity firms, emphasizing the sector's relevance, innovation requirements, and value-creation potential. The industry's shift towards digital payments has been accelerated by the pandemic, with a notable increase in consumer adoption, making payment models attractive due to their predictable, recurring revenue streams and significant growth opportunities both organically and through acquisitions.
SECTOR FOCUS
📝 Taking action!
UBS
Real estate & private markets have integrated sustainability as a core value driver, responding to the rising demand for net-zero-aligned real estate from tenants, regulatory emissions limits, and client investment solution demands, with a notable supply-demand gap for sustainable assets. In 2023, UBS developed new sustainability capabilities in transportation, healthcare, and real estate, with plans for expansion in food security and natural capital in 2024.
✏️ Is commercial real estate finding a floor?
JP Morgan
Direct real estate is down 16% from its peak, while REITs fell 31% from the end of 2021 through October 2023. Despite recent pessimism in real estate investing due to Federal Reserve rate hikes, key indicators suggest a potential rebound. Historical patterns show downturns are typically short-lived, with direct real estate prices finding a floor and investor sentiment showing early signs of recovery, pointing towards an optimistic outlook for the sector.
✏️ Living the dream: the evolving case for European living strategies
Abrdn
Over the past 22 years, European residential real estate has offered the strongest risk-adjusted returns compared to other sectors, with the sector growing in importance within investors' portfolios due to robust demand-supply dynamics and an increasing renter population. However, challenges such as housing affordability and the need for environmental sustainability are reshaping investment strategies, especially in metropolitan areas. At c.€1.5 trillion, ‘living assets’ represent 36% of the broader investible European real estate market. ‘Living assets’ include private-rented residential housing (PRS), purpose-built student accommodation (PBSA), and senior-living accommodation.
✏️ Direct real estate: Understanding the macro opportunity
JP Morgan
Direct real estate offers diversification and inflation hedging benefits to investors, with low or negative correlation to the S&P 500 and the ability to generate stable cash flows and higher returns in inflationary periods. While real estate prices are resetting, sector selection — favoring areas with strong demand like industrial and apartments over challenged sectors like office space — is crucial.
✏️ Real Estate: the refinancing headache?
Natixis
The real estate sector is expected to continue seeing loan extensions into 2024, facing a higher debt challenge but potentially benefiting from steady ECB interest rates and prospective rate cuts. Buyers are favored in the market, particularly for decentralized office properties, while shopping centers and logistics are viewed optimistically due to their income and rent growth prospects.
✏️ Pension funds are tapping affordable housing for high returns — not the social benefits
Institutional Investor
Despite growing interest in affordable multi-family housing as part of real estate allocations, research indicates that most pension funds focus on investments without long-term affordability objectives. The sector's investment value significantly increased from $75 billion in 2011 to $365 billion in 2022, highlighting its rising demand amidst inflation and shifting real estate market preferences.
✏️ Infrastructure: Understanding the macro opportunity
JP Morgan
Global infrastructure investment is experiencing a resurgence, with an estimated $3.6 trillion annual need for upgrades and net zero carbon initiatives, offering significant demand for assets. Infrastructure investments provide stable income, capital appreciation, and inflation hedging, contrasting with the volatility seen in traditional bonds.
📝 Infrastructure investor: Flight to quality over quantity
UBS
Despite challenges like rising interest rates and reduced capital from insurance funds, the infrastructure debt market, valued at around $130 billion, remains robust, particularly in the European mid-market space. Opportunities for investors are expanding as banks withdraw, offering the chance for better risk-return profiles amid growing interest in infrastructure as an alternative investment, with infrastructure debt showing lower default and higher recovery rates compared to corporate debt.
📝 Infrastructure and real assets 1H 2024
Stepstone
Despite 2023 marking the weakest fundraising year since 2015 due to rising interest rates, Q4 saw a significant uptick in commitments, suggesting growing LP confidence. Energy transition funds increased by 60%, with interest in emerging technologies like biofuels and EV charging, and the infrastructure secondary market is rapidly maturing, indicating a promising outlook for 2024.
TVJ Spotlight 🔦
📝 Electravision - annual energy whitepaper
JP Morgan
The Market Energy Paper by J.P. Morgan delves into the current state and challenges of the global transition to renewable energy, highlighting the slow pace of electrification and the importance of natural gas in maintaining human prosperity. It emphasizes the need for investment in the gas ecosystem to prevent outages and reduce methane emissions, alongside exploring nuclear power, China's role, hydrogen, and the concept of "net zero oil”.
📝 The economic cost of the carbon tax
Amundi
The debate between price-based and quantity-based environmental policies is reignited with the EU's new initiatives aiming for a low-carbon economy by 2050. A proposed global carbon tax of $100/tCO2e could generate significant revenue but also lead to substantial economic costs and inflation, questioning the efficiency of such a tax in practice despite its theoretical appeal. Implementing a global tax of $100/tCO2e generates revenue of c.3% of world GDP, but it also implies a net cost of c.2% and inflation of c.4% in terms of the producer price index (PPI) and 4% in terms of the consumer price index (CPI).
✏️ The cost of decarbonizing in the shipping industry
BCG
BCG's survey highlights the growing momentum of green shipping amidst environmental and business opportunities but notes the gap between cargo owners' willingness to pay and the need for maritime industry decarbonization. Barriers like alternative-fuel production challenges and shifting regulations hinder progress, urging cargo carriers to seek early-mover advantages in untapped markets.
✏️ Silent enablers of the global tech boom in Asia
Impax Asset Management
Asian technology companies play a pivotal role in supplying industries crucial for transitioning to a sustainable economy, with electrification, consumer electronics demand, and semiconductor industry growth driving the region's tech ecosystem. The evolving technology product lifecycles offer significant opportunities for suppliers specializing in niche services and components essential for chipmaking.
PRIVATE MARKETS AND ALTERNATIVE ASSETS
TVJ Spotlight 🔦
📝 Navigating Private Markets in 2024: Opportunity knocks as change accelerates
Adams Street
88$ of institutional investors in a survey believe private markets will outperform public ones, with 67% planning to increase private investments in 2024. Concerns are shifting from rising rates to political uncertainty, with a focus on sectors like financial services, tech, and energy for the best opportunities. Companies raising funds in the next 12-24 months could be an attractive vintage to consider especially with valuations re-setting.
✏️ Fund finance: Evolution, insights, and opportunities
Abrdn
Fund finance, encompassing subscription-line facilities and NAV loans, is enticing credit investors with its low-risk, income-generating profile and high illiquidity premiums, offering attractive alternatives to assets like government bonds. This asset class provides strategic advantages for GPs and LPs, enhancing liquidity management and potentially yielding better risk-adjusted returns for investors.
✏️ Alternatives: Understanding the macro opportunity
JP Morgan
Incorporating alternative investments into a portfolio can enhance returns and minimize volatility, with the exact mix depending on an investor's goals and risk tolerance. Alternatives offer the potential for alpha, income, and diversification, with the choice of asset class and manager skill being crucial to achieving these outcomes. Global private equity and venture capital outperformed other asset classes with 24% and 20% annual returns respectively, during 2013-2023.
✏️ The evolution of single-asset deals
ICG
ICG experts highlight that single-asset transactions are resilient and increasingly standardized, ideal for consistent performers in sectors with low cycle risk, offering GPs portfolio management flexibility and LPs liquidity options without relying on favorable credit markets.
✏️ The benefits of modern administration
Juniper Square
Modern fund administration addresses the challenges of legacy models, like compliance risks and inefficiency, by offering technology-driven solutions that enhance data transparency, streamline data management, and strengthen investor relationships, thereby positioning GPs to better meet current and future demands.
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