The Valt Journal #34
Featuring latest research on Private Credit (M&G, Abrdn, MS); PE (FS Investments, JPM); Alts as an asset class (KKR, Robeco, Schroders); Real estate, Infra, Energy (BlackRock, BCG, Bain, Nuveen)
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) Asia credit - a resurgence rooted in resilience and relative value (by HSBC); 2) An alternative perspective (by KKR); 3) The energy transition: 10 essential indicators for institutional investors (by Nuveen); 4) Infrastructure secondaries: Capitalizing on solid foundations (by Pantheon)
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Numbers this edition:
Links: 61
Authors: 30
PRIVATE CREDIT x FIXED INCOME
TVJ Spotlight 🔦
📝 Asia credit - a resurgence rooted in resilience and relative value
HSBC Asset Management
The Fed's rate cut has supported the momentum of Asia credit markets, with positive implications for repayment capabilities and credit quality. Asia's strong domestic demand, coupled with resilient economies in India, China, and ASEAN, is driving solid performance in Asia credit, particularly high yield. Low supply, healthy local demand, and favorable macro conditions make Asia credit attractive, while its lower duration makes it resilient.
📝 The outlook for direct lending
Morgan Stanley
Private credit, particularly direct lending to mid-market companies, has grown significantly with assets reaching $1.5T in 2024. Credit attributes remain stable, and the market offers strong risk-adjusted returns. Private equity's dry powder and the large US mid-market continue to support deal flow, while stringent valuation policies ensure transparency.
✏️ Prime opportunities within direct lending
M&G Investments
The most attractive opportunities in direct lending exist at the conservative end of the mid-market. As competition intensifies in the larger deal space, pricing and terms have deteriorated, making the lower mid-market more appealing for better risk-reward profiles. The floating rate nature, low volatility, and stable pricing of direct lending offer advantages.
✏️ The changing face of private credit at Oaktree Conference 2024
Oaktree
Oaktree discusses whether there is now too much capital chasing too few deals, but market efficiency will eventually restore balance. Private credit, which could reach $2.3T in near term, offers opportunities in direct lending and junior debt, as firms manage higher interest expenses. Regional differences exist, particularly in Europe's private credit market.
✏️ Investment grade ABS - Liquidity and spread pick-up in times of turbulent markets
AXA Investment Managers
Investment-grade Asset-Backed Securities (ABS) offer attractive spreads, liquidity, and diversification benefits vs traditional IG credit, especially in volatile markets. ABS provide higher yields with lower risk, thanks to their collateralized structure, floating rate nature, and shorter durations. Regulations have improved, making ABS an appealing option for investors seeking stable returns, lower volatility, and flexibility in turbulent economic conditions.
✏️ European ABS: A compelling tool for DC default strategies
M&G Investments
Key reasons for DC schemes to consider ABS: ABS offer a return premium, supporting the growth of savings over time; the floating rate structure can help protect savings in inflationary environments; DC schemes could create more resilient default fund structures by diversifying fixed income risk with ABS; defensive asset class that can protect members’ savings.
✏️ Europe’s private credit managers ponder exit puzzle
Pitchbook
Europe's M&A market is showing signs of recovery, but PE sponsors face challenges exiting large holdings, especially with the IPO market struggling. Direct lenders are focusing on mid-sized deals, as jumbo deals remain difficult to exit. M&A pipeline is improving, IT and Healthcare are key sectors with Club deals becoming more common.
📝 What makes infrastructure debt attractive?
UBS
Infrastructure debt offers stability, low volatility, and diversification from corporate risk. While fundraising for senior debt is challenging, high-yield infrastructure debt is appealing due to compressed returns in equity and private debt, making it an attractive lower-risk option for investors, particularly in sectors like energy transition and telecom.
✏️ Private CRE lending: Opportunities to seize and risks to avoid
FS Investments
Private senior secured commercial real estate (CRE) lending has delivered attractive returns, outperforming equities and bonds during market downturns. Opportunities are emerging, esp. in industrial, multifamily, and transitional loans. Lenders can benefit from rolling loan opportunities and purchasing loans from banks rebalancing their portfolios. Challenges in sectors like office but conservative lending in well-located properties offers return potential.
✏️ The case for EM corporate bonds
Abrdn
Emerging Market corporate bonds have grown 250% since 2010, now exceeding $2.5T, making them larger than EM sovereigns and US high-yield markets. The asset class is well-diversified across regions, sectors, and countries, with strong fundamentals like lower leverage vs US and European high-yield bonds. Despite higher perceived risks, EM corporate bonds have shown similar default rates like western counterparts, with favorable spreads offering opportunities.
✏️ The emerging-market-debt switch should always be on
Institutional Investor
Emerging-market debt (EMD) should be a permanent portfolio allocation due to its potential to overcompensate for credit losses. Hard-currency EMD to return to its pre-pandemic excess returns with opportunities in local-currency debt after a decade of poor performance. EMD can be source of alpha, making active management preferable vs passive ETFs.
✏️ Fixed income: Why higher-rated corporate bonds still make sense
Abrdn
IG bonds typically outperform in moderate growth environments, while high-yield (HY) debt may offer limited compensation given tighter spreads. Corporate fundamentals remain strong, but geopolitical risks and higher interest rates pose potential challenges, particularly for HY investors. Caution is advised, especially in the high-yield segment.
✏️ US high-yield funds extend inflow streak
Pitchbook
US high-yield retail funds saw inflows for the sixth straight week, totalling $671M in the week to Sep 25. YTD, net flows are positive at $27B, with mutual funds leading the way. Fund valuations have surged to $297B, nearing all-time highs, as the Fed pivots toward rate cuts. This marks a strong rebound after three consecutive years of outflows.
📝 The Fed’s triumph
Robeco
The market remains confident in the Fed's ability to achieve a soft landing following a 50 bps cut, despite a slowing US economy and weakening labor market. Investment-grade companies are improving leverage, though high-yield firms may face challenges. There is an expectation of a new regime with higher fiscal spending, inflation, and interest rates.
✏️ Bond investing to support positive environmental and social outcomes
M&G Investments
Bond investors can play a key role by directing funds towards companies and projects providing sustainable solutions, and addressing ESG challenges. ESG bonds, green bonds, and sustainable solution providers present opportunities for positive impact and strong financial returns, with active investors focusing on diversifying portfolios and supporting ESG goals.
📜 Periodicals »
📝 Fixed income musings (Goldman Sachs)
✏️ Unconstrained fixed income views: September 2024 (Schroders)
🎙 Opportunistic strategies and outlook for 2024 (Morgan Stanley)
🎙 Misconceptions and opportunities in ABS (M&G Investments)
🎥 Actionable alternatives: Synthetic risk transfer (SRT) (PIMCO)
🎥 The shifting landscape within direct lending (M&G Investments)
PRIVATE EQUITY
📝 Separating bargains from busts: Five steps to evaluate PE secondaries
FS Investments
Investors have been attracted to PE secondaries due to discounts on stakes and benefits like J-curve mitigation. Investors should assess factors like pricing drivers, the manager’s track record, portfolio quality, and liquidity needs before investing. Recent market dynamics, including rising interest rates, have influenced pricing, though demand is recovering.
📝 Going for growth: Middle market private equity secondaries
FS Investments
Middle-market PE secondaries offer an attractive risk/reward profile, combining growth potential with lower risk vs VC or large-cap PE. With reasonable valuations and targeted EBITDA growth, mid-market PE provides opportunities for growth at a more manageable risk, especially today where other growth options may be more volatile or overpriced.
✏️ Why invest in Asian PE? India as a potential breakout PE/VC market
Morgan Stanley
India is emerging as a key destination for global investors seeking exposure to Asia, with its PE market showing significant potential. India mirrors many characteristics of China’s past growth, including rapid GDP growth, digitalization, and infrastructure investments. Although challenges exist, India’s structural tailwinds, capital efficiency, evolving exit markets make it an attractive PE opportunity, esp. for investors partnering with experienced local managers.
✏️ Research validates growing adoption of continuation transactions
HarbourVest
Continuation funds have seen rapid growth, becoming a flexible tool for GPs to generate liquidity and raise capital while holding onto high-performing assets. These funds offer investors PE-like returns with lower risk, and their adoption has increased even in favourable exit markets. They can deliver outsized risk-adjusted returns vs traditional buyouts, making them a key part of the GP and LP toolkit with strong potential for future growth.
✏️ Private equity fund structures
Carta
PE firms typically use an LP structure, consisting of GPs and LPs. This structure offers operational flexibility, tax advantages, and liability protection. It allows PE funds to efficiently manage and invest in portfolio companies while complying with regulatory requirements and remains widely adopted due to its long-standing tradition in the industry.
✏️ Why it might be a new day for growth equity
JP Morgan
Growth equity offers exposure to fast-growing private companies in innovative sectors like AI, healthcare, and energy transition. Despite recent valuation declines, the space presents long-term growth potential, particularly as valuations are now more attractive than in previous years. Diversification and careful management is needed to balance risks & rewards for clients.
✏️ Fertility investors look to ancillary services as platforms remain scarce
Pitchbook
PE firms are increasingly targeting ancillary fertility services, such as reproductive banking and mini-IVF, due to limited opportunities for large-scale IVF platform investments. The fertility sector remains attractive. Demand for fertility assets persists, with investors seeking to consolidate and expand in a relatively recession-resistant market.
✏️ Private equity deep dive
Wellington Management
This paper compares VC and buyout strategies within PE, highlighting their distinct risk-return profiles and roles in a portfolio. VC targets high-growth, often unprofitable companies, while buyouts focus on profitable, stable firms using leverage for operational improvement. Both strategies offer diversification benefits and are typically less correlated with public markets, providing investors with the potential for higher returns across company’s life cycle.
🎙Alternative Realities: Private equity challenges and opportunities (JP Morgan)
🎙A deep dive into private equity’s future (Bain)
PRIVATE MARKETS AND ALTERNATIVE ASSETS
TVJ Spotlight 🔦
📝 An alternative perspective
KKR
The Alternatives industry is expected to grow from $15T in 2022 to over $24T by 2028, driven by demand-supply imbalances, the illiquidity premium, and diversification benefits. Alternatives encompass a broad range of asset classes, each offering unique characteristics in terms of return, risk, and liquidity, playing essential roles in modern portfolio construction.
📝 The smarter alternative: Enhanced indexing
Robeco
Investors are increasingly turning to passive strategies, but enhanced indexing offers a smarter alternative by combining broad market exposure and low costs with potential outperformance. By incorporating techniques like machine learning and sustainability, it aims to deliver better risk-adjusted returns compared to traditional passive approaches.
✏️ How does a semi-liquid fund work?
Schroders
A semi-liquid fund combines features of both liquid and illiquid assets. It allows investors to benefit from the higher returns of less liquid assets like PE, real estate, or infrastructure while maintaining some level of liquidity, often through periodic redemption windows. This structure provides greater flexibility and potential for yield.
✏️ 2024 midyear outlook: Hedge funds
Morgan Stanley
1H 2024 was strong for alpha generation across hedge funds, driven by fundamentals as macro factors had less impact on asset-level returns. Hedge funds are expected to benefit from continued alpha opportunities with a preference for market neutral, relative value, and macro strategies. Caution is advised on equity and credit beta given stretched valuations & volatility.
✏️ IPM monthly blog –September 2024
UBS
Real estate investors are seeing signs of recovery, with volumes stabilizing and investment activity rising in some markets, infrastructure investment benefits from improved financing conditions, inflation resilience, and government support. PE could see increased exit activity due to lower interest rates, while in private credit, falling rates are expected to boost refinancing and affordability in the residential real estate sector, supporting housing demand.
✏️ Listed asset managers show record-breaking revenue growth over the past year
Institutional Investor
Publicly traded asset managers in private markets are outperforming their peers, with higher revenue growth vs other asset management firms. These managers saw revenues increase by 6% from Q2 2023 to Q2 2024, with private markets showing the strongest growth. Traditional asset managers are likely to expand into private markets as opportunities continue to rise.
✏️ DC private markets portfolio construction made simple
Abrdn
As barriers to private market investments diminish, DC pension schemes are increasingly seeking diversification beyond traditional asset classes. While private markets offer the potential for enhanced diversification and long-term returns, building a robust portfolio in this space presents challenges, such as managing liquidity, risk, and cashflows.
✏️ Private equity’s woes bleed into other alternative investments
Institutional Investor
Hedge funds are facing challenges raising capital as PE investors struggle with liquidity, with distributions from PE funds significantly down. Despite hedge funds' strong performance in 2024, allocators lack liquid capital to invest due to capital calls from PE funds. As a result, hedge funds have seen redemptions, despite increasing interest from investors.
✏️ Customizing private markets portfolios for success in Asia's dynamic market
Hamilton Lane
Private markets investors in Asia face an evolving landscape with more asset class options beyond traditional PE, allowing for greater diversification and flexibility. Key challenges include macro uncertainty, liquidity, and adapting to higher capital costs. Successful portfolio construction hinges on using newer investment tools and maintaining a disciplined approach.
✏️ Measuring and tracking the alpha of private market funds
EDHEC
A new approach using privateMetrics data has been introduced to measure and track the alpha of private market funds, helping investors select and monitor funds against representative benchmarks. In a comparison of two funds, while both outperformed public markets, only Fund 2 generated positive alpha, highlighting the importance of selection.
✏️ Risky business: Why the smart money forecasts risk, not returns
Man Institute
Investors face challenges in navigating volatile markets, where the short-run relationship between risk and returns is unpredictable. A risk-based approach, focusing on diversification across asset classes, can enhance risk-adjusted returns. By actively managing risk and diversifying against macro shocks, portfolios can achieve greater resilience in periods of stress.
🎙 Alternative Realities: Unlocking value in private markets (JP Morgan)
SECTOR FOCUS
Energy Transition x Climate Finance
TVJ Spotlight 🔦
📝 The energy transition: 10 essential indicators for institutional investors
Nuveen
The transition toward a lower-carbon energy system is a complex, multi-decade process requiring significant capital allocation of $275T by 2050. 10 key indicators for investors include clean energy capex, EV infra, corporate carbon reduction, EM cost of capital, carbon pricing, coal phase-out, trade policy, land, climate tech funding and nuclear energy & CCUS.
📝 The five forces transforming power markets
BCG
The global energy market is transforming due to a shift towards renewable energy, leading to more fixed-cost generation, increased price volatility, and seasonal price divergence. Market designs will need to adapt to manage investment signals, system costs, and volatility as the share of solar and wind power grows significantly by 2050.
📝 Climate change is here. And so is the need to embrace sustainability in RE
Morgan Stanley
Human actions are driving climate change, significantly impacting the real estate industry, which contributes 40% of global CO2 emissions. Publicly traded real estate companies are uniquely positioned to play a vital role in achieving net-zero targets by 2050, making sustainability a critical factor for future risk and return prospects in real estate investments.
📝 Decarbonizing aerospace – No longer winging it
TCW
Aviation contributes 2% of global energy-related CO2 emissions, with demand expected to double in 20 years, making decarbonization challenging. Sustainable aviation fuel (SAF) is key, expected to account for 65% of carbon mitigation by 2050, but current production is only 0.2% of total aviation fuel due to high costs and limited availability. Innovations in lightweight materials and airframe design aim to improve fuel efficiency incrementally.
📝 Integrating climate adaptation into physical risk models
GIC
Climate change is increasingly impacting real estate, with projected cumulative costs of physical climate risks reaching up to $559B by 2050 under medium-high warming scenarios. While adaptation solutions like floodproofing can reduce these costs, coordinated efforts between private and public sectors are essential to mitigate the worst impacts.
📝 Global developments in sustainability regulation and policy: Q2 2024
Schroders
The quarterly regulation update highlights key global developments in sustainability regulations, focusing on policy milestones and consultations shaping the investment industry. Key updates for Q2 2024 include extending the UK's Sustainable Disclosure Rules (SDR) to portfolio management and the EU's ESMA ESG fund name guidelines.
📝 To understand climate mobility, follow the water
BCG
Climate mobility refers to the movement of people due to climate change, particularly changes in water patterns, such as droughts, floods, and rising sea levels. These shifts affect agriculture, clean water access, and land use, potentially leading to social conflict and altering where and how people live. Addressing water-related climate mobility is critical.
✏️ Big asset owners are leaning further into ESG factors
Institutional Investor
A survey of 500 institutions with $18T in assets found that 67% view ESG as more important now, with 42% of their assets managed using ESG criteria. While challenges like standard data and concerns over returns persist, ESG continues to grow in importance, particularly for managing risks related to climate change and leveraging AI for ESG data innovation.
✏️ Why investing in climate action makes good economic sense
BCG
If global temperatures rise by 3°C by 2100, the world could face economic losses of up to 22% of cumulative GDP. Investing less than 2% of cumulative GDP in climate mitigation could limit warming to below 2°C, reducing potential economic losses by 11-13% of GDP, while also necessitating adaptation investments to avoid further damage.
📝 Climate change: Inaction is not an option
LGIM
The Climate Solutions whitepaper argues that investing in high-emission companies or those impacting other companies' emissions offers significant climate impact and potential returns. This approach emphasizes proactive company engagement to drive business opportunities from the transition while reducing emissions.
Real Estate x Infrastructure
TVJ Spotlight 🔦
📝 Infrastructure secondaries: Capitalizing on solid foundations
Pantheon
Infrastructure secondaries have gained prominence due to liquidity challenges in the market, leading to increased deal flow. This asset class is known for resilience, lower volatility, and attractive risk-adjusted returns, driven by global trends like digitization and decarbonization. The sector's growth is supported by strong primary fundraising, offering investors a shorter-duration, high-potential entry point with favorable valuations.
📝 APAC real estate growth without risk
BlackRock
The APAC region offers strong growth opportunities without emerging market risks, particularly in transparent markets like Australia and Japan. It provides diversification benefits with low global correlations and presents both cyclical and structural investment opportunities, making local knowledge essential for success. In APAC, investor preference has shifted towards value-add strategies (preferred by 63% investors in 2024 vs 33% in 2023).
✏️ Top 3 trends and challenges affecting the life sciences industry
UBS
The growing collaboration between biotech companies and big pharma is crucial, with pharma increasingly acquiring biotech innovations. While public biotech markets have faced challenges, investment opportunities remain strong, particularly in Europe. AI is set to disrupt the biotech industry, accelerating drug discovery. For real estate investors, this collaboration may drive demand for spaces near pharma research centres and AI-focused lab facilities.
✏️ Japan multifamily real estate
UBS
Japan’s economy is transitioning from deflation to inflation, with robust wage growth and increased household spending signaling a positive outlook for long-term yield spreads and rental growth in the multifamily real estate sector. However, demographic challenges and potential policy risks remain, requiring careful investment focus.
AI x Tech
📝 The power of AI in financial planning and forecasting
BCG
AI and machine learning can significantly enhance planning and forecasting processes through "dynamic steering," which combines data automation and driver-based models for agility and accuracy. This approach allows companies to generate more precise financial forecasts and insights, leading to faster planning cycles and improved decision-making.
📝 Technology report 2024
Bain
In 2024, AI adoption surged across the tech sector, but skeptics questioned its return on investment. Bain's research shows that AI's value lies in changing business processes, not just in deployment. Early results suggest generative AI could boost EBITDA by up to 20%, with broad impacts on industries, business structures, and talent.
📝 The stairway to GenAI impact
BCG
Many companies are struggling to realize the expected benefits from GenAI investments, with 66% of executives dissatisfied with their progress. Despite this, 54% still anticipate cost savings in 2024. The key issue lies in treating GenAI as a typical tech upgrade rather than focusing on operational redesign, training, and leadership-driven transformations aimed at measurable financial improvements. Success requires structured planning and C-level support.
✏️ Healthcare IT spending: Innovation, integration, and AI
Bain
Post-pandemic, 75% of healthcare providers and payers increased IT spending to drive innovation, with a focus on cybersecurity and return on investment. Vendors should prioritize easy integration and tech stack management. While generative AI adoption is growing, challenges like regulatory issues and governance remain.
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