Featuring latest research on Private Credit (StepStone, Ares, KKR, Abrdn); PE (Pitchbook, Carta); Real estate, Infra, Energy (JPM, Bain, PwC); Alternatives as an asset class (Goldman Sachs, HSBC)
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 🔦 including 1) Corporate private debt primer (by StepStone); 2) Emerging trends in real estate (by PwC); 3) Finding opportunities in real estate debt amid dislocation (by Apollo)
📝 Corporate private debt primer StepStone Private debt AUM reached $1.7T in 2023 and continues to appeal due to its flexibility, confidentiality, and tailored financial solutions. Direct lending’s returns are primarily driven by cash coupons—contractual cash flows based on a floating reference rate and a spread providing stable income and robust returns. Most private debt managers lend to middle-market companies with EBITDA between $5-75 million. Mezzanine debt often comes with embedded equity components like warrants and carries higher risk but offers higher expected returns. They may have longer interest rate durations than direct loans and may include fixed-rate or floating coupons and PIK terms. With asset-backed finance, the presence of highly diversified underlying collateral pools, coupled with the inclusion of assets distinct from typical corporate private credit loans, offers a significant diversification benefit in an investor’s portfolio. Opportunistic/distressed credit is growing as there is demand from borrowers for financing solutions at a higher cost of capital than direct lending but lower than the cost of equity (as well as being non-dilutive to existing shareholders), driven by the increasing sophistication of CFOs and management teams. Deployment speed, deployment level, diversification and transparency are among the factors that investors should account for when considering a private debt allocation. The reports also highlights the various channels and structures managers can adopt to avail the various benefits and features across strategies, with a special focus on direct lending.
📝 Understanding private credit: The history and current state of the asset class Ares Private credit AUM has grown at c.15% CAGR in the last 10 years however it still forms a small fraction of the PE market. US private credit AUM is c.27% of the US PE AUM while private credit dry powder is c.22% that of PE dry powder. Private credit funds provide customized loan structures, are generally match funded with less leverage and typically have flexibility in restructurings vs bank loans. Direct lending has generated higher net returns with similar net loss rates to the liquid markets since 2005. Direct lending funds have typically low leverage at c.1x while banks use c.10x leverage which means 50%+ loss rate is required before fund equity is lost vs <10% loss rate for banks - a critical difference between bank lending vs funds.
✏️ Private credit viewpoints in 2024 Hamilton Lane In early 2024, the Broadly Syndicated Loan market in the US and Europe saw a significant rally, fueled by refinancing and repricing activities, with US loan volumes increasing by 125% and European volumes by 159% compared to the previous year. Despite a slow LBO market, private credit remains robust due to strong deal activity and a growing maturity wall, positioning it well for continued performance and yield.
📝 From consensus to allocation KKR Market consensus suggests inflation and interest rates have peaked, avoiding a hard landing, yet credit investors are uncertain about allocation strategies. Key points include the establishment of private credit in asset allocations, continued opportunities in liquid credit markets for income with manageable risk, and a golden age for credit allocation with a diverse array of options offering varied risk-return profiles and diversification. “At a time when interest rates are moving lower and financing in public markets looks relatively cheap for many large borrowers, private junior debt offers more significant call protection and often access to larger borrowers than senior secured direct lending”.
📝 Mind the (economic) gap: Infrastructure debt 2024 report Nuveen Capital-intensive infrastructure projects, especially those related to energy storage and digitalization like data centers, remain attractive to investors despite the challenges of rising interest rates and inflation. Nuveen emphasizes the importance of flexible capital solutions and disciplined structuring, with infrastructure debt offering diversified portfolios and risk mitigation through secured cash flows and protective contract clauses.
📝Emerging markets: Distressed leads the way TCW Early 2024 expectations of significant rate cuts were reversed due to robust US growth data and inflation concerns; however, recent FOMC dovishness has reignited risk-on sentiment. In Q1, Emerging Market’s hard currency debt outperformed, especially in high-yield sectors, while local currency debt suffered due to a strong dollar. “EM fundamentals are reasonably sound, with no sovereign defaults forecast for 2024. In addition, ratings upgrades are forecast to outpace downgrades for the first time in a decade. Further, debt/GDP for Developed Economies exceeds 100%, versus 67% for Emerging Markets. Attractive Emerging Markets valuations relative to Developed Markets, particularly in high yield.”
📝 Navigating emerging market debt Goldman Sachs Despite concerns about emerging markets, particularly the slowing Chinese economy, reality shows that in 2023, these economies demonstrated resilience with a growth rate of 4.3%, outpacing developed markets and leading to strong gains in emerging market fixed-income assets. “The combination of lower funding costs, falling inflation and resilient growth lead us to believe that EM sovereign bonds will produce a total positive return for the second year in the row in 2024, mainly due to the carry it provides. Valuations improved modestly earlier in the year, which we believe has created an attractive entry point.”
📝 Conversations with Oaktree – Defying gravity Oaktree Oaktree Capital’s co-CEOs discuss first-quarter surprises and the outlook for global convertibles and Chinese equities. They reveal a mixed view: while market resilience has persisted in the face of substantial rate hikes and geopolitical events, leading to tightening spreads, there’s an underlying caution about persistent inflation and its potential impact on future rate cuts and market stability. However opportunities still exist. “So if you can construct a superior instrument with more assets pledged to it and better downside protection and price it at a premium, that’s pretty good business. That’s what’s exciting here. Again, we think it’s only going to grow over the course of the next year. It’s still ramping as we speak in spite of very good market conditions, and we think that it has legs.”
✏️ Should investors be constructive given yields or cautious given spreads in corporate bonds? JPMorgan Despite recession risks last year, corporate fundamentals remained solid, leading to tight credit spreads and strong returns for investment grade and high-yield bonds, with yields above average and low default risks maintaining robust demand. Even as spreads are historically tight, the strong performance and positive credit flows, coupled with healthy economic indicators, suggest that yields and spreads are expected to stabilize, maintaining strong demand for these bonds.
✏️ Private credit remains a hot item for insurance companies Institutional Investor Despite sharing common concerns about economic slowdowns, market volatility, and geopolitical tensions in 2024, insurance companies are still looking to increase their portfolio risk, particularly by investing more in private credit, with a significant portion expecting private credit to yield high returns.
✏️ Fund financing: credit where it's due Abrdn The current market climate, characterized by high inflation and rising interest rates, presents an opportunity for asset owners to invest in fund finance—short-tenor, floating-rate loans in private markets like equity and real estate—which offers attractive yields and risk protection. Fund finance is appealing due to its near-zero duration, credit quality, and low correlation with other assets, despite the complexities of management and due diligence.
✏️ What’s baked into your credit exposure? Dimensional Corporate bond funds are attracting significant inflows early in the year, and investors should understand that active credit monitoring is critical since it uses real-time market data to adjust credit strategies and avoid potential downgrades.
📜 Periodicals »
📝 Floating-rate loan market monitor Q1 2024 Morgan Stanley The report offers a detailed analysis of the loan market through comprehensive charts, linking market changes to loan allocation decisions for investors; it focuses on corporate debt from substantial yet below-investment-grade issuers, detailing the structure and security of these often sizable, familiar loans used for corporate financial activities.
📝 Fixed income weekly: Musings Goldman Sachs This weekly insight report provides an overview of global economic and fixed-income market trends, including updates on growth, inflation, and employment, alongside predictions for future monetary and fiscal policies. It also explains how these insights shape investment strategies and decisions.
✏️ Market view: High yield monthly update Nomura The US high-yield market experienced a positive turn in March with a 1.19% gain, ending the first quarter up by 1.51%, buoyed by issuer profitability and the expectation of Fed rate cuts. European and emerging market high yields also performed well, with technicals indicating continued positive momentum. Nomura’s multi-asset credit strategy also reported solid gains and adopted a barbell approach to balance growth assets and hedges against slowdowns, highlighting the importance of multi-asset portfolio approach.
✏️ Credit outlook Q2 2024: Land of opportunity amid the hazards Man Institute Market discussions are focused on whether the Fed has managed a soft landing to avoid recession, with the US economy showing current resilience but with signs of pressure in certain sectors. While there's an emerging weakening in companies' ability to manage debt without a significant rise in defaults yet, the high-rate environment is starting to stress over-levered firms, particularly in Europe where lower-rated credits are losing their earlier gains. “While this environment, characterised by increased dispersion, may be hazardous for indiscriminate investors, it presents opportunities for investors who have the flexibility to be selective.”
📝Distressed credit weekly wrap PitchBook Default and restructuring activity in the US leveraged loan market slowed in March, with only one Chapter 11 filing and one distressed exchange, leading to a drop in the payment default rate to 1.14% and the dual-track default rate easing to 4.22%.
✏️ Fixed income bulletin: We’ll take your word for it Morgan Stanley Developed market yields dipped slightly as markets trusted the Fed's commitment to three rate cuts, while the Bank of Japan exited its long-standing negative interest rate policy; emerging market rate cuts slowed, causing varied reactions in yields, with the US dollar strengthening and both US and Euro-area investment grade credit spreads tightening, although Euro-area high yield spreads widened due to specific risks.
✏️ That $2.5 trillion in PE dry powder? These businesses say they want some Institutional Investor A majority of US small- and mid-size businesses are open to private equity investments in 2024, hinting at a potential uptick in deal activity despite a recent market slump due to higher interest rates and recession fears. With over $2.5T in unspent capital, private equity is expected to see increased dealmaking, supported by positive perceptions and strategic moves by managers to foster transactions.
✏️ The alternative truth of private equity and what that means for asset allocation Institutional Investor The term "alternatives" in investment often refers to private assets like private equity, but labeling them as such doesn't automatically ensure the diversification benefits they are presumed to offer due to the practice of performance smoothing, which can mask their true risk and volatility compared to public markets.
📝 US PE breakdown Q1 2024 PitchBook After two years of downturn, global M&A could see a revival in 2024, yet private equity may not fully capitalize on this potential recovery due to reduced market share and challenges in generating exits. The sector's health hinges on unlocking exit strategies, as evidenced by an increase in secondary market funds and successful large PE exits.
📝 Venture monitor Q1 2024 PitchBook Q1 2024 in the venture capital sector saw a steady pace of investment with $36.6B across 3,900+ deals, with a cautious climate due to macroeconomic headwinds and regulatory issues impacting technology commercialization. On the upside, there's a positive market shift with capital calls and notable exits, and despite recent challenges, the sector is preparing for future growth.
📝State of private markets: Q1 2024 Carta Carta's preliminary Q1 report on US startups indicates that median pre-money valuations increased for early venture stages but dipped for Series D and E+ due to lower round volume, while median fundraising amounts grew across most stages, suggesting another quarter of likely modest growth in venture capital activity.
✏️ The state of venture capital: A look back at Q1 2024 Juniper Square The Q1 2024 venture capital landscape saw a revival in IPO activity with notable listings, yet overall exit value, though improved, remains far below previous highs. Despite a slight increase in exit values, the venture fundraising environment is tough, with new fund creation and capital raised hitting decade lows, indicating a cautious outlook for reinvestment in the VC sector. “All eyes are on the IPO market in 2024. As the total number of funds and the amount raised by these funds remains at recent lows, the industry hopes that distributions back to LPs will see fresh investment in new managers”.
📝 Companies and climate change Amundi Research shows variable strategic integration across sectors and emphasizes the need for consistent policy support, particularly noting that adaptation and physical risk management are the least addressed aspects. APAC presents a diverse landscape for investment in the energy transition. Developed markets offer lower risk due to political stability and strong infrastructure. However, emerging markets like Thailand and India boast high potential rewards due to their rapid growth and need for new power sources. Replacing coal dependence with renewables creates a significant investment opportunity, especially in established technologies like hydropower and solar. New technologies face challenges due to limited infrastructure and regulations, but still hold promise in select markets. Overall, APAC offers a range of risk-reward options for investors looking to support the clean energy transition.
✏️ Quantifying carbon and climate risk UBS For real estate investors, beyond carbon emissions, crucial ESG factors include tackling biodiversity loss, managing physical risks, and preparing for climate change-induced relocations. While there's progress in measuring the social impact within ESG, it's less defined than environmental aspects, with emerging subsectors like life sciences and sustainability-focused renovations becoming more mainstream. “What we call a green premium or a brown discount is, fundamentally, pricing reflecting the sustainability characteristics of a building. And so, yes, the pricing should, does and will continue to differ between green versus brown. I don’t see that changing because of the fundamentally different future cash flows of those two types of assets.”
✏️ Investing in natural resources can help to manage both climate and inflation risks OTPP OTPP addresses inflation and climate change risks by investing in natural resources, with a strategy that includes a diversified portfolio of controlling stakes in various sectors, influencing operations for environmental and community benefits. The plan's investments span across agriculture, aquaculture, timberland, and commodities like copper and gold, essential for the energy transition.
✏️ Asia energy transition infrastructure: A regional answer to a global issue Institutional Investor Asia's rise as a major energy consumer and a burgeoning market for renewables highlights the region's potential for private market investments that offer strong returns, especially in countries incentivizing renewable energy and having a history of infrastructure development and private sector engagement. The significant need for renewable investment, coupled with the shift away from coal, positions Asia as a prime location for energy transition opportunities.
📝 Emerging trends in real estate PwC "There is still a fair degree of caution in real estate, and diversification of risk by market and by sector will be critically important. The colossal amount of real estate debt that needs to be refinanced this year and next – $1.2T in the US alone and the deployment of so-called “rescue capital” will be a big part of the global real estate narrative in 2024. Though the industry has been in wait-and-see mode over the past two years because of short-term, cyclical forces, the interviewees are looking to the long term. The message is clear that the driver of investor and occupier behaviour is no longer about the traditional property sectors but increasingly focused on demographics, digital and decarbonisation. There are opportunities across logistics and alternative real estate sectors – most notably data centres. Concerns over housing affordability are translating into far greater investor attention on the various forms of housing.”
📝 Turning tides: Catching the wave of European value add real estate BlackRock Europe presents a prime opportunity for value-added real estate investors, capitalizing on asset value repricing and long-term structural trends, despite rising interest rates. This strategy can deliver attractive risk-adjusted returns, with the potential for both income and capital gains, as well as inflation protection in a recovering market.
✏️ Has the housing market turned a corner? JPMorgan Signs indicate a turnaround in the housing sector, with the thawing of the 'mortgage lock' effect leading to increased existing home supply, and a robust construction pipeline set to ease the undersupply. Despite high mortgage rates, strong demand persists, supported by an immigration boom and slight rate decreases, with expectations for a gradual recovery in housing market activity without significant economic vulnerability.
TVJ Spotlight 🔦
📝 Mind the (funding) gap: Finding opportunities in real estate debt amid dislocation Apollo Global Rising interest rates have led to lower valuations and reduced activity in commercial real estate (CRE), creating a misperception of universal distress, while sectors like industrial and multifamily remain strong. This environment presents a ripe opportunity for real estate debt investments, especially for private capital providers filling gaps left by traditional lenders.
✏️ Flexible capital can fortify a recovering real estate sector Macquarie As interest rates rise and valuation uncertainties stall dealmaking, investors are facing a challenging environment for real assets, with opportunities emerging in the latter half of 2024. Flexible capital solutions are aiding real estate businesses struggling with floating-rate loans, amidst a backdrop of considerable dry powder and a transaction freeze due to valuation discrepancies.
✏️ Dual Dynamics: Investing in and with artificial intelligence Goldman Sachs AI investment opportunities are expanding as the technology matures, with potential in firms developing AI infrastructure and those leveraging data for model training. Investors should also use AI tools for market analysis while preparing for unforeseen developments in AI technology and geopolitical risks, as AI shifts from hype to practical deployment in 2024.
📝 Eye on the market JPMorgan Tech sector profitability has consistently outpaced other sectors for 30 years, with high free cash flow margins and significant outperformance in large cap US tech stocks. However, despite current high valuations and a slowdown in tech IPOs due to past poor returns, markets are favoring AI suppliers with higher multiples, suggesting an optimistic outlook for the sector's profitable innovation.
✏️ It’s for real: Generative AI takes hold in insurance distribution Bain Generative AI is set to revolutionize insurance distribution by enhancing agent productivity, supporting customer self-service, enabling hyper-personalization, and improving business insights for risk identification. This transformation is evident across both employee-led and digital channels, with firms already leveraging AI to improve client coverage, lead conversion, and customer service.
Financial Services
📝 Insurance 2030 - Direct distribution PwC Insurance distribution has largely maintained its traditional agent-based model over the past two decades, with direct channels proving challenging for carriers to master in customer targeting and risk pricing. However, blending personal with digital channels in a multichannel strategy has the potential to enhance sales, customer retention, and risk assessment when executed with a clear economic model and value proposition.
📝 Global insurance survey 2024 Goldman Sachs The 13th Goldman Sachs Global Insurance Survey, reflecting insights from CIOs and CFOs managing over $13T, reveals a focus on credit quality, high-yield investments, and ESG opportunities amidst a shifting macroeconomic landscape with paused interest rate hikes and geopolitical tensions. Insurers are adapting with resilience, exploring new opportunities in a risk-on environment that includes the use of AI for risk assessment.
✏️ Investing in financial inclusion: Driving growth and building wealth Goldman Sachs Tech-based solutions are improving financial inclusion, offering investment opportunities in fintech through private equity, social bonds, and listed equities that target underserved consumers and support inclusive growth in both developed and emerging markets.
✏️ Anchoring a more inclusive economy: Extending access to finance Impax Asset Management Innovative companies are utilizing digital technologies to enhance access to financial services like banking, loans, and insurance, especially in emerging markets, helping to secure economic participation and growth. These pioneers aim to meet financial needs and capitalize on the shift towards a more inclusive global economy.
✏️ From TINA to TARA: Investing in the next cycle Goldman Sachs TINA (There is No Alternative) has made way for TARA (There are Reasonable Alternatives) to US equities. These alternatives aren’t limited to equity markets, but can be found across asset classes, including fixed income and private markets. The investment landscape is adjusting to a higher-for-longer rate environment, presenting diverse opportunities for returns across asset classes. In equities, idiosyncratic factors are increasingly important despite high valuations, suggesting a role for active management, while in fixed income, both core and higher-risk credit strategies offer valuable options despite falling rates.
TVJ Spotlight 🔦
📝 Private markets ‘mythbusters’ series:Navigating the evergreen fund frenzy Partners Group Private markets investing has largely retained traditional closed-end fund structures since the 1980s, which are less suited for retail investors who only make up 16% of alternative investment allocations despite owning half of global AUM. The growing preference for evergreen or open-end funds, which offer more liquidity and lower investment thresholds, is reshaping access for individual investors, with a record number of new launches adapting to their needs.
✏️ Private markets: Our top picks for future-facing portfolios LGIM The global push for net-zero targets, involving 90% of the world's population, presents a significant investment opportunity, particularly in Europe’s energy transition estimated at €840B, focusing on renewable energy infrastructure like wind and solar farms, battery storage, and power network upgrades. These investments offer diverse assets with varying risk/return profiles, including stable cash flows from offshore wind and emerging, riskier technologies like green hydrogen and carbon capture, enhancing the diversification of infrastructure portfolios and supporting natural capital initiatives.
✏️ Industrialization of alpha: A look at multi-manager hedge funds and modern allocation strategies Goldman Sachs Multi-manager hedge funds, which allocate capital across various portfolio managers rather than centralizing decision-making, have significantly outperformed the broader hedge fund universe, growing AUM by 175% from 2017 to 2023. While these funds continue to attract talent and invest in advanced infrastructure amidst an "arms race," it's advised that investors also consider the vast pool of skilled managers outside this ecosystem for a more unconstrained investment approach.
✏️ There is a relationship between past success and future return after all Institutional Investor Recent research by Essentia Analytics challenges the conventional disclaimer that past performance does not predict future returns, finding that equity portfolio managers who demonstrated skill in the past year are 1.5x more likely to outperform their benchmarks than those who didn't. This suggests a significant link between a manager's historical decision-making and future results.
📝 Europe insights: Lagged effects of tight policy HSBC Rate cuts by the ECB could ease borrowing conditions and potentially revitalize the European construction sector and small-cap equities, although a cautious approach remains advised for investment-grade bonds given moderately attractive yields. The overall recovery in these markets will depend on a variety of macroeconomic factors beyond just interest rate adjustments.
📜 Periodicals »
✏️ Hedge fund strategy outlook Q2 2024: Opportunities persist across hedge funds after a strong start to 2024 Man Institute Q1 2024 saw strong hedge fund performance, supported by positive equity market momentum due to unexpectedly strong economic data, which adjusted central bank rate cut expectations. Despite past enthusiasm for rate cuts driving market gains, the current strength of the economy suggests fewer cuts are needed, yet both scenarios have bolstered the markets, creating a diverse investment landscape ripe for identifying high-performing assets. “There are encouraging indicators that the M&A rebound will be sustainable, as rising valuations help bridge bid-ask spreads, pending M&A financing is meeting robust demand from capital markets, CEO forecast confidence has been picking up, and a growth in activism may become a driver of M&A campaigns. We remain more neutral on Special Situations more broadly, but see encouraging potential in idiosyncratic opportunities.”
📝 Investment monthly: Closer to cuts? HSBC In light of uncertain economic forecasts and volatile risk asset valuations, a 'defensive growth' strategy is recommended, emphasizing selective investments in fixed income, risk assets, and private markets, with a focus on opportunities outside the US, particularly in emerging and frontier markets. Alternatives such as private credit, hedge funds, infrastructure, and real estate are also seen as crucial for portfolio diversification.
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.
