Featuring latest research on Real estate, Infra, Energy (TCW, Nuveen, Abrdn); Private Credit (KKR, JPM, M&G); PE (Pitchbook, Pantheon, UBS); Alts as an asset class (MS, State Street, LGIM)
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)Upper middle market lending (by KKR); 2) How private equity’s ‘engine room’ can drive alpha (by Pantheon); 3) The love-hate relationship in private equity secondaries (by Nuveen)
Quickly scan the list of all reports in this edition here!
Numbers this edition: Links: 57 Authors: 32
PRIVATE CREDIT x FIXED INCOME
TVJ Spotlight 🔦
✏️ Upper middle market lending: Four reasons we focus on larger companies KKR Lending to upper middle market companies ($50-$200M EBITDA) offers 1) stronger, more stable financial performance; 2) lower default rates compared to smaller companies, while 3) the spread difference in returns between the two is minimal. 4) Despite competition from syndicated markets, upper-middle market lending remains attractive due to its resilience, limited competition, and better risk-adjusted returns.
✏️ Effects of interest rate movements on securitised credit HSBC Asset Management Securitized Credit is positioned as a resilient fixed-income asset class in the current interest rate environment due to its low duration, floating rate nature, higher yields compared to investment-grade corporates, and credit enhancement that cushions against losses. Gradual rate reductions could benefit SC by making debt servicing easier and potentially tightening spreads, offering investors capital gains. SC is expected to deliver attractive returns even in a more normalized positive rate environment.
✏️ Mid-year private credit viewpoints Hamilton Lane Private credit is expected to remain resilient due to strong equity contributions, lower loan-to-values, and collaborative lender-borrower relationships. M&A and financing demand is driving deal activity. PE activity is expected to increase in the second half of 2024. LPs demand liquidity and lower borrowing costs are favoring LBOs.
✏️ Climate change and ILS: Boon or bane? Axa Investment Managers The increasing frequency and intensity of natural catastrophes is boosting demand for insurance and the growth of the Insurance-Linked Securities (ILS) market. ILS offers investors diversification benefits, attractive risk premiums, and limited correlation with economic cycles, making it an appealing asset class with proper understanding and careful selection.
✏️ What do upcoming rate cuts mean for fixed-income investing? JP Morgan Investors are advised to allocate to fixed income now to benefit from the anticipated decrease in yields. Historical data suggests that bonds, particularly high-quality, short-to-intermediate duration bonds, perform well following the first rate cut. Active management and careful security selection within fixed income can help investors capitalize on this opportunity.
✏️ Who will buy the oncoming surge of treasuries? And at what price? State Street The growing US federal budget deficits and higher refinancing costs are expected to lead to a significant increase in US Treasury issuance, with an estimated $2T of net issuance annually over the next decade. As price-sensitive buyers like households and corporates take on a larger share of Treasury investments, yields are likely to rise, requiring an additional 95 bps to attract these buyers.
📝 Thinking beyond the landing Capital Group The uncertain economic environment suggests that investors should maintain flexibility and diversification in their bond portfolios. Different economic outcomes favour different bond strategies, with longer-duration assets benefiting from a hard landing, and shorter-duration credit-oriented strategies benefiting from a soft landing. If inflation reaccelerates, cash could be the best option.
✏️ The benefits of combining fundamental and multi-factor high-yield Robeco Combining a quantitative, factor-based high-yield strategy with a fundamentally managed high-yield portfolio can stabilize performance amid market volatility. This approach leverages diversification and active management, offering resilience against risks like defaults and rating migrations while maintaining alignment with benchmarks, particularly in uncertain macroeconomic conditions.
✏️ Rate-cutting playbook: Investment strategies for offense and defense JP Morgan Last week's strong macroeconomic data boosted large-cap equities, leading to the best performance streak in over a month. As the Federal Reserve is expected to begin a rate-cutting cycle, investors are advised to prepare by considering both defensive strategies, such as moving into bonds for stability, and offensive plays in rate-sensitive sectors like refinancing, commercial real estate, and M&A activity.
✏️ Beyond expectations: US credit in an evolving world Abrdn While 78% of S&P 500 firms beat earnings forecasts in the latest reporting season, actual earnings growth was significantly lower than expected, leading to increased volatility and uncertainty. This environment highlights the need for income investors to adopt a selective approach, focusing on high-quality, resilient companies, and to consider diversifying across asset classes to navigate potential risks in a slowing economy.
✏️Why there is still time to move from cash into bonds JP Morgan The recent bond market rally suggests it's not too late to move out of cash and lock in longer-term yields. Extending duration in a diversified portfolio of high-quality bonds could capture potential price appreciation, offering greater returns compared to staying in cash, especially as risk-free yields are likely to decline.
✏️ What does India's benchmark inclusion mean for investors M&G Investments JP Morgan's inclusion of Indian government bonds in its Emerging Market Global Bond Index is seen as a positive development for both India and the index, increasing capital flows and stabilizing yields in India's $1.3T bond market. While this move may introduce some volatility, it comes at a time of improving the economic outlook for India.
✏️ EM corporate bonds and the SDGs: delivering profit with purpose Abrdn Opportunities exist in emerging markets, where companies like Brazil's Aegea, Axian Telecom in Africa, and India's ReNew are making significant progress in areas like water sanitation, digital connectivity, and renewable energy, while also delivering strong investment returns.
✏️ Emerging into the spotlight: The case for EMD in insurance portfolios Man Institute The growing insurance market is increasingly turning to emerging market hard-currency debt for meeting liabilities with higher yields. EMD offers quality investments, diversification, and longer maturities that align well with insurers' needs. However, insurers should be mindful of the illiquidity risks and issuer concentration in EMD, particularly in corporate bonds, and focus on quasi-sovereigns and large, high-quality issuers to mitigate these risks.
📝 Behind the memo – The impact of debt with Howard Marks and Morgan Housel Oaktree Howard Marks and Morgan Housel explore the impact of debt on investment strategies, highlighting the importance of balancing short-term gains with long-term endurance, cautioning against the risks of over-leveraging, which can lead to significant financial distress during downturns.
📝 The mid-market: how private equity’s ‘engine room’ can drive alpha Pantheon Pantheon finds the mid-market segment compelling due to its focus on buyouts or growth equity in a diverse range of private companies, often with lower entry costs and flexible exit options. The mid-market offers strong historical returns, with careful manager and asset selection being crucial for unlocking its potential. Mid-market funds allow managers to focus on niche sectors and identify undervalued opportunities that larger funds might miss.
TVJ Spotlight 🔦
📝 The love-hate relationship in private equity secondaries Nuveen LP-led transactions are still maturing but continue to deliver strong performance for investors. GP-led transactions, typically structured as continuation vehicles where PE firms recapitalize portfolio companies while maintaining control, are becoming a permanent fixture in the market regardless of the M&A environment. The paper suggests that investors would benefit from having exposure to both LP-led and GP-led strategies to optimize their returns.
✏️ The rise of semi-liquid secondaries funds UBS The private equity secondary market has seen significant growth, reaching $68B in volume in the 1H 2024 (up by 58% yoy) and is expected to reach $140B by end of 2024. This growth is driven by the increasing complexity and specialization in the market, including the rise of semi-liquid open-ended secondary funds, which offer liquidity and diversification benefits with better access and support of local feeder funds. GP-led (41%) and LP-led (59%) transactions are becoming more prevalent, with LP-led transactions reaching record levels.
✏️Asia’s evolving venture capital market Wellington Management The Asian venture capital market has grown significantly, with assets increasing 21x from 2011 to 2022. However, Asian VC funds have generally underperformed vs their Western counterparts due to factors like slower scaling, smaller market sizes, and overcapitalization. To succeed in this market, investors should focus on capital efficiency, local presence, right-size funds, and adopting a global approach with dedicated regional expertise.
📝 Exit alternatives for US VC Pitchbook High interest rates have significantly hindered VC-backed exit opportunities, leading to a sharp decline in US VC exit value and a lack of liquidity ($98B, down 85%+ from 2021 highs). This has increased secondary market share sales as early investors seek returns while companies remain private. Although continuation funds offer a potential solution, conflicts of interest and a small market size may limit their use.
📝 Healthcare funds report Pitchbook The report highlights a divergence between PE and VC healthcare specialist managers in 2024. PE healthcare specialists are raising more capital and outperforming the broader asset class, while VC healthcare fundraising has declined. Fundraising is increasingly concentrated in fewer, larger funds, with PE healthcare specialists showing strong performance in earlier vintages, though more recent healthcare investments have underperformed due to increased competition and pricing challenges.
📝 Public PE and GP deal roundup Pitchbook GP consolidation is accelerating, with deal flow involving GP franchises on track to break records in 2024, reflecting the broader industry's consolidation phase. Fundraising has surged by c.45% in H1 2024, driven by synergies from strategic acquisitions, while credit origination within these firms has shot up by over 155%. Realizations are also improving, with expectations for further gains in the second half of the year as market conditions stabilize.
✏️ Biotech IPOs in 2025: Quantity, quality, and best practices Wellington Management The biotech IPO market has cooled since the highs of 2020-2021, with investors now more focused on companies with mature, differentiated assets and clear paths to value creation. Successful biotech IPOs today are characterized by strong product pipelines, experienced management, and realistic valuations. The market is normalizing, favouring biotech companies with unique, de-risked assets and well-defined strategies.
📝 Global machinery & equipment report 2024 Bain Leading machinery companies are leveraging installed base management and digital twin technologies to enhance product performance, predict maintenance needs, and generate new revenue streams. This approach, which involves continuous data flow from machinery, is expected to drive significant growth in the digital twin market, projected to reach $110 billion by 2028.
📝 State of pre-seed: Q2 2024 Carta The pre-seed fundraising landscape has shifted significantly, with SAFEs (Simple Agreements for Future Equity) now dominating the market, making up 88% of deals in Q2 vs 12% for convertible notes. This change has important implications for early-stage founders and investors, as SAFEs and convertible notes differ in structure and financial impact during later fundraising rounds while pre-seed rounds are getting smaller.
✏️ How to address the most common VC data challenges Juniper Square VC firms face significant challenges in managing and utilizing vast amounts of data, often stored across disparate systems, leading to inefficiencies and difficulties in meeting investor demands. There is a need for a single, interoperable system that offers real-time, self-service access to data, enabling streamlined and automated reporting. AI could enhance portfolio management, provided that data is well-structured and centralized.
✏️ Big deals rule: Healthcare private equity midyear update Bain In the first half of 2024, North American healthcare IT and provider deals saw a rebound in deal value ($44B), driven by large-scale assets and IT investments. Despite a global shift in investor focus towards Asia-Pacific, particularly in India, North America remained a key region for healthcare IT investments, with increased interest in derivative plays and specialties like infusion services.
✏️ All about alpha: Capturing returns in today's market environment Morgan Stanley The current market environment in 2024 has created favourable conditions for hedge fund alpha generation, especially for equity market-neutral strategies. Despite volatility and concentrated market gains driven by technology stocks, hedge funds have outperformed long-only managers due to their ability to generate both long and short alpha, unconstrained by traditional benchmarks.
📝 Smartsourcing: Creating dynamic operating models State Street Investment firms are rethinking their operating models to achieve diversification, growth, and competitiveness. Forming partnerships with providers who act as extensions of their business is crucial for creating adaptable models tailored to their current needs. The article explores the benefits of "smartsourcing" models, balancing internal and outsourced capabilities, and leveraging modern technology to optimize operations as businesses grow.
✏️ Thematic investing: uncovering rich seams with mega themes Abrdn Three "mega themes" today: energy evolution, health and generational shift, and transformational tech. High-quality companies must be identified within these themes as opportunities exist in sectors like electricity grids, data centers, and gene therapies. Thematic investing is gaining momentum among institutional investors, and a quality-first approach is recommended to capture value in a world where economic growth is slowing.
✏️ Family-office war chests keep shrinking. Here’s where they put that capital to work Institutional Investor Family offices have been reducing their cash reserves and reallocating funds across various asset classes, including fixed income, equities, and hedge funds, as inflation eases and market conditions evolve. Family offices are more agile in their investment decisions compared to institutional investors, with a continued focus on alternative investments like private equity and private credit.
✏️ Mind the risk: The value of valuations LGIM Forecasting asset returns involves not only considering expected returns but also the associated risks, as changes in risk can offset perceived opportunities from higher expected returns. A consistent allocation strategy may often be more efficient than adjusting allocations based solely on expected return changes, especially during volatile market conditions.
✏️ This private-markets slog? It too shall pass and another boom will follow Institutional Investor PE faced a challenging 2023 with declining valuations and tough fundraising, leading to continued struggles in 2024. However, Bain predicts a strong recovery, with private market AUM expected to grow significantly, potentially reaching $60-$65T by 2032. This growth is driven by retail and institutional investors seeking higher returns and diversification in alts.
✏️ EIS funds in the UK Carta An EIS fund is a venture capital fund that invests in startups through the Enterprise Investment Scheme, offering tax relief to early-stage investors. These funds help startups secure the necessary funding for growth, with various active EIS funds available, each specializing in different sectors and stages of investment.
✏️A long-term perspective on ARP LGIM After nearly a decade of integrating Alternative Risk Premia (ARP) strategies into multi-asset portfolios, it's clear that while ARP strategies have struggled in headline performance, their diversification benefits have been valuable, particularly during market downturns. Despite their challenges, ARPs continue to justify their place in portfolios due to their low correlation with other return streams and their ability to provide stability during volatile periods.
📝 Navigating the future of energy: The growing power demand in emerging markets TCW Emerging markets, driven by economic growth and urbanization, are experiencing rapid increases in energy demand, with India playing a pivotal role. India needs c.$10T by 2070 for its energy transition and to meet its 2030 targets, India must double its pace of renewable energy uptake to about 17% per year. Opportunities exist in renewable energy, grid modernization, and energy storage.
✏️ Biogas – an untapped source of renewable energy UBS Biogas and biomethane are renewable energy sources with versatile applications, including heating, power, and clean transportation and currently contribute <1% to the global energy supply. Biomethane offers a reliable, 24/7 energy source that can support the circular economy. Challenges include such as social acceptance and competition with other sources.
✏️ Climate change: sustainable returns, real-world impact via active transition investing Abrdn A successful climate investment strategy should prioritize real-world emissions reductions, support the low-carbon transition, and facilitate climate adaptation, focusing on companies that lead in these areas. Fixed income instruments are vital for funding climate-resilient projects. Promising sectors include renewable energy, EVs, and sustainable manufacturing.
✏️ The golden opportunities buried in e-waste BCG The UK’s Royal Mint is now extracting gold from discarded electronic devices, reflecting a broader trend of local e-waste recycling driven by advancing clean technologies. While only a fraction of global e-waste is currently recycled, local recycling can address critical mineral supply gaps, reduce geopolitical risks, and improve sustainability.
✏️ “The tortoise and the hare”: It’s a long race for the hydrogen economy Natixis Green hydrogen faces challenges in demand due to high costs and a lack of end customers. Despite its long-term potential, widespread adoption is delayed, with significant growth expected post-2030. Government policies, technological advancements, and strategic investments are essential to overcoming barriers and realizing green hydrogen's impact on the global energy transition.
Real Estate x Infrastructure
✏️ Office to multifamily conversions: Implications for CMBS investors Wellington Management The demand for office space has significantly declined due to the rise of hybrid work, leading to challenges and opportunities in the commercial mortgage-backed securities (CMBS) market. Cities and states are promoting office-to-multifamily housing conversions through incentives, which could help reduce excess office supply and provide economic benefits.
✏️ Transforming urbanization Nuveen Urbanization remains a key driver of opportunities across real estate, infrastructure, and natural capital, with a focus on sustainable development, renewable energy, and smarter urban planning to meet environmental goals.
✏️ Artificial intelligence: Data is the differentiator Goldman Sachs Significant investment opportunities in GenAI, particularly for companies involved in data management, storage, cleaning, and protection. As AI models rely heavily on high-quality data, firms that can effectively handle unstructured data, provide secure storage solutions, and offer data cleaning and cybersecurity services are poised to benefit significantly.
✏️ AI enterprise market map: Cutting through the hype Lightspeed AI could save professionals up to 12 hours per week and the technology could contribute more than $15T to the global economy in productivity gains by 2030. The rise of AI has led to a crowded and rapidly evolving market, with over 200 startups across foundation models, enablement platforms, and applications. Enterprise applications are expected to drive long-term value by disrupting software categories and enabling end-to-end workflow automation.
✏️ How is GenAI transforming the financial landscape? State Street AI is enabling organizations to create content in various formats and transform how they interact with machines. While LLMs offer significant opportunities, they also present challenges such as explainability, cyber risks, and biases. Key opportunities include document intelligence, data quality controls, client onboarding, and productivity enhancements.
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