Featuring latest research on Private Credit (TCW, Abrdn, GS); PE (HarbourVest, BCG); Alts as an asset class (LGIM, FS Investments, MS); Real estate, Infra, Energy (UBS, KKR, M&G, 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) A hint of lower rates brings LBO green shoots (by TCW); 2) Private Markets outlook: Refilling the glass (by FS Investments); 3) Investing in our future: UK university spinouts reach inflection point (by LGIM)
Quickly scan the list of all reports in this edition here!
Numbers this edition: Links: 63 Authors: 30
PRIVATE CREDIT x FIXED INCOME
TVJ Spotlight 🔦
📝 A hint of lower rates brings LBO green shoots TCW Leveraged loan issuance has reached c.$1T YTD, with most returns driven by interest income rather than price appreciation. Borrowers have capitalized on favorable conditions to reduce borrowing costs, leading to lower spreads and improved debt service coverage. In Q3, declining SOFR rates and repricing transactions reduced interest expenses for borrowers, while increased deal activity resulted in the highest net new issuance in 2.5 years, driven by LBOs, M&A, and general corporate purposes.
📝 Emerging markets: The biggest, fastest growing, and arguably least understood pool of credit in the world PIMCO Emerging market debt has evolved to resemble US corporate debt in terms of risk and return, offering diversification rather than high returns. “Investors should not treat EM as a space to hunt for high returns. It may sound counterintuitive, but the case for EM debt should not be anchored on spreads, yields, or some other valuation metric. It should be based primarily on diversification benefits.”
📝 Collaterized Loan Obligations (CLOs) Camradata CLOs ($1.2T market) are gaining traction as a de-risking tool for pension funds and insurers, offering liquidity, low duration, and enhanced returns compared to other fixed income options. Despite perceptions of risk, CLOs have demonstrated historically low default rates, making them a valuable component of diversified portfolios. However, investors must carefully navigate the complexities and risks of different tranches to maximize returns.
✏️ Private Credit: Funding the climate transition Goldman Sachs The growing climate transition sector is driving significant demand for bespoke debt financing solutions, filling a gap historically dominated by equity investments, with c.$300T needed to meet net-zero goals by 2050. Private debt is expected to contribute up to 60% of the total financing required, with tailored solutions offering attractive returns.
✏️ ECB: Growth concerns PIMCO The European Central Bank has cut rates earlier than expected due to weak growth, signaling a focus on managing downside risks while remaining cautious about inflation. Despite falling inflation, with core inflation still above target, monetary policy is expected to stay tight, with another rate cut likely in December. Economic stagnation, weak domestic demand, and slow employment growth continue to pose challenges.
✏️ The hidden gem in today’s bond market? Robeco Corporate hybrids offer an attractive yield while maintaining investment grade credit quality, providing a higher-quality alternative to high yield bonds. These subordinated bonds are typically issued by large, stable companies (utilities and telecom) and blend features of both debt and equity. They offer yields between 4% to 8% with low duration, making them less sensitive to interest rate fluctuations.
✏️ The dual advantage of high-income green bonds Robeco Green bonds are rapidly growing, with sales reaching a record $356B in 1H 2024. Robeco combines income optimization with impact investing, focusing on higher-yielding BB and BBB-rated green bonds from developed and emerging markets. The strategy emphasizes on green corporate hybrids and subordinated bonds, providing a solution for investors seeking both higher returns and environmental impact amid market volatility with diversification.
✏️ Municipal bonds: Extend duration amidst rate cuts Principal Asset Management Municipal bonds are well-positioned to benefit from the Fed’s rate-cutting cycle, making 4Q 2024 an ideal time for tax-sensitive investors to extend duration and secure attractive, tax-advantaged income. Strong fundamentals and credit upgrades provide compelling value, with opportunities expected to increase as election-related pressures ease and bond yields decline.
✏️ Government bonds: the missing link in decarbonising portfolios? Abrdn Sovereign bonds have been largely excluded from net-zero investment strategies despite their significant market size. Challenges include concentration risks and difficulties in measuring a country's environmental impact. The rise of labelled green bonds and new frameworks for assessing the climate policies of sovereign issuers are helping overcome these barriers.
✏️ Insurers to continue upping allocations to private credit Institutional Investor North American insurers are increasingly turning to private markets, particularly private debt, to diversify portfolios and enhance returns, with 96% planning to increase allocations over the next two years. Globally, 91% of insurers also plan to invest more in private markets, focusing on opportunistic private debt, private placements, and direct lending. This shift is driven by the desire for diversification, lower volatility, and improved risk-adjusted returns.
✏️ Why your bonds may finally excel in your portfolio Abrdn The bond market has struggled recently, but bonds perform well in slower growth and weaker inflation periods. The end of yield curve inversion and expectations of a "soft landing" for the US economy may make bonds attractive again as a portfolio diversifier, particularly with falling interest rates ahead.
✏️ US fixed income: How to invest in a falling rate environment? JP Morgan Despite recent muted performance due to resilient economic data and shifting interest rate expectations, bonds have strong potential for future gains. Attractive entry points exist across the fixed income spectrum, with yields above historical medians, and the risk/reward profile is skewed to the upside as interest rates stabilize.
✏️ Positive tailwinds brighten fixed income outlook BNY Mellon As inflation nears central bank targets and interest rates decline, fixed income markets are expected to benefit, with credit markets offering opportunities in a low-default environment. The demand for corporate bonds remains strong, though credit spreads are tight. Potential exists in asset-backed securities (ABS), driven by lower rates and increased supply.
📝 Sustainability in private equity 2024 BCG The 2024 report on sustainability in PE highlights mixed performance compared to public companies, with private firms excelling in areas like job creation but lagging in board diversity. Private companies often improve sustainability metrics during their hold period, driven by private equity’s long-term focus and management influence. The sector’s growing emphasis on sustainability offers competitive advantages through cost reduction, risk mitigation, and green growth opportunities, supported by increased access to data.
✏️ The potential benefits of a multi-sector approach to private equity Goldman Sachs While sector specialists in PE may have advantages in sector-specific knowledge and networks, their performance varies by sector. IT and healthcare specialists have shown strong outperformance, while financial services specialists have lagged. Investors may benefit from a core/satellite approach, combining multi-sector managers with selective allocations to sector specialists, ensuring diversification while capitalizing on targeted expertise.
✏️ Small and mid-sized co-investment deals shine in the absence of IPOs HarbourVest Amid a challenging IPO market, PE’s small and middle-market segments have shown resilience, offering alternative liquidity paths through acquisitions and value creation. These companies, particularly in co-investment strategies, provide diversification and flexibility, making them less dependent on public market exits. Co-investments in small and mid-sized firms offer LPs opportunities for higher returns and liquidity.
✏️ The state of private equity: A look back at Q3 2024 Juniper Square Q3 2024 saw a 24% jump in PE dealmaking, driven by the Fed’s interest rate cuts, though fundraising has slowed due to limited LP liquidity. Despite fewer exits, values remain strong, and dealmaking is on track to rank third-highest in history. As sponsor-to-sponsor exits increase, there’s hope for a late-year surge in activity, potentially easing liquidity concerns and encouraging future capital commitments from LPs.
📝 Private Markets outlook: Refilling the glass FS Investments The private markets have experienced a slowdown due to rising interest rates, but signs of recovery are emerging as rates begin to decline. Despite challenges, private equity and private credit have performed well, supported by a resilient US economy and strong fundamentals in middle-market firms. While deal activity is expected to rebound in 2025, liquidity remains a challenge for investors, and a gradual recovery is anticipated rather than a rapid one.
TVJ Spotlight 🔦
📝 Investing in our future: UK university spinouts reach inflection point LGIM The UK university spinout market is entering a new phase of growth, driven by maturing ecosystems around key university hubs and supportive government policies. The sector has attracted over £14.5B in investment across 1,800 spinouts over the last decade. Key industries, including healthcare, clean energy, and advanced computing, offer significant potential for innovation. Opportunity exists in the early scale-up stages.
📝 Understanding the role of capital solutions HSBC Asset Management Strategies like Revolving Credit Facilities (RCF) and Net Asset Value (NAV) financing capture the illiquidity premium through conservatively structured loans, providing enhanced yield without compromising credit quality. RCFs support corporate liquidity, while NAV loans offer senior secured loans tied to private equity portfolios, making them attractive for diversifying institutional portfolios with resilient, high-yielding alternatives.
📝 Ruminating on asset allocation Oaktree This memo by Howard Marks emphasizes the critical role of asset allocation in investing. It highlights the importance of determining an investor’s risk posture—whether to prioritize capital preservation or growth—and how this choice influences asset allocation. Marks advocates for increasing credit investments, given current favorable returns and the lower volatility they offer compared to equity, particularly in today’s market environment.
📝 Tax loss harvesting: A primer for investors Dimensional Tax loss harvesting helps investors reduce or defer taxes by selling investments at a loss to offset capital gains or income. Investors should be aware of costs, wash-sale rules, and how the strategy aligns with their financial goals. Investors could consider tax-efficient ETFs.
✏️ Choose your vehicle: A closer look at private market fund structures Goldman Sachs There is no universal best choice between private market fund structures, as each comes with trade-offs across four key dimensions: liquidity, complexity, product availability, and performance. Evergreen funds offer better liquidity and ease of management, while drawdown funds provide broader access and higher performance potential. The decision should be based on achieving an investor’s long-term investment goals rather than comparing individual funds.
✏️ Distribution drought: The quest for liquidity in private markets Goldman Sachs The record-breaking exit activity of 2021 has been followed by a "distribution drought" as exits have slowed due to cyclical and structural factors. GPs are extending hold periods for key investments, seeking intermittent liquidity through continuation vehicles and mid-stack capital solutions. These trends are reshaping PE strategies at entrance and exit, offering new liquidity options for LPs while adapting to longer hold times.
✏️Measuring the moat: Assessing the magnitude and sustainability of value creation Morgan Stanley Investors should evaluate corporate strategy to understand how a company builds a competitive advantage, or moat, for sustainable value creation. This involves analyzing industry dynamics, market structure, disruption risks, and integration strategies, followed by assessing the firm's value drivers, pricing, regulation impact, and brand strength. A checklist is provided to guide this assessment.
✏️ Skills required when investing sustainably in private markets LGT Capital Partners Private markets have grown over the past decade as investors seek diversification and sustainable opportunities. Success in PE hinges on building strong relationships with top fund managers making it essential to connect with well-established managers early. ‘The ability to take a long-term view, coupled with direct control over assets, makes private markets an investment of choice for asset owners focusing on sustainability and impact.’
✏️ Building a high-velocity back office: Scaling for success State Street The document emphasizes the importance of agility and scalability in institutional investors' back-office operations. It highlights the need for strong collaboration between front- and back-office teams, supported by empowered employees and advanced technology platforms. Key strategies include automating manual processes, leveraging data management, and fostering a culture of partnership, all to improve efficiency, decision-making, and overall performance.
✏️ Long short equity strategies: "Hedging" your bets Morgan Stanley In the face of market volatility driven by inflation and central bank policies, long-short equity strategies offer risk mitigation by investing both long and short in equities. These strategies, particularly market-neutral ones, can reduce market sensitivity, mitigate downside risks, and provide steady returns through stock selection. They have historically performed well during market downturns, offering flexibility and resilience to diversified portfolios.
✏️ How these hedge funds posted consistent returns in the riskiest markets Institutional Investor Six of the top 50 consistently performing global hedge funds invest in volatile emerging markets, averaging over 12.5% returns from 2019-2023 despite challenges like the 2022 rate hike. Key drivers of success include EM credit opportunities, risk management, on-the-ground research, and a strong macro understanding, helping these funds navigate volatility and deliver consistent returns.
✏️ The biggest asset managers keep getting bigger. But small ones have reason to hope Institutional Investor Morningstar's research shows that the largest asset management firms continue to dominate, with the top 20 firms holding 85% of US AUM. Firms like Vanguard and BlackRock lead due to passive fund popularity, while smaller firms can still see rapid growth if a product gains traction. Active management and alternative investments are also influencing market dynamics, with active ETFs showing potential for growth.
✏️Not all ‘alts’ are created equal Man Institute Defined contribution (DC) investors are turning to alternative assets for diversification, but many of these assets may be more correlated with equities than expected, especially in volatile markets. A liquid alternative approach, focusing on diverse return streams across major asset classes, may provide better diversification and risk management, particularly during portfolio drawdowns. This strategy offers a more robust, cost-effective, and liquid complement to traditional equity and bond investments.
✏️ Trade routes realigned: From integration to fragmentation Goldman Sachs Global economic fragmentation is creating new geo-economic fault lines, leading to higher inflation, tighter monetary policy, and lower growth. However, reshoring is driving an industrial renaissance, especially in developed markets like the US, with significant investments in sectors such as semiconductors and clean energy. Fragmentation also presents long-term investment opportunities for companies adapting to the evolving global landscape.
📝 Searching for impact UBS The energy transition, particularly in transport electrification, presents a significant investment opportunity, with $175T needed by 2050, primarily for renewables and transport infrastructure. While clean grids have facilitated broader electrification, investments in transport tend to offer higher carbon reduction impacts than renewables in areas where grids are already decarbonized, making it an attractive opportunity for investors.
📝 Optimising for net zero and nature positive outcomes Nuveen Net zero and nature positive investing may seem aligned, but net zero strategies can inadvertently embed nature risks, limiting benefits for biodiversity. Insurers should adopt a nature positive investment approach, prioritizing natural resources, land use, and pollution management. This strategy could enhance risk management and long-term financial performance while supporting global sustainability goal.
✏️ Why energy demand just cannot stop growing M&G Investments Energy transition models face a tension between improved efficiency due to technological progress and the emergence of new energy use cases driven by these advancements. While the energy system becomes less wasteful, demand continues to rise due to novel applications like AI and electric vehicles. Regions like China and India are experiencing increasing energy consumption, further challenging the global energy transition.
✏️ Making biodiversity investing actionable Goldman Sachs Investor interest in biodiversity is growing, driven by its economic importance and regulatory changes, but challenges remain due to the complexity and early stage of the market. To integrate biodiversity into investment strategies, investors need to clarify objectives, such as managing risks or increasing exposure to positive solutions, and build customized toolkits for targeted analysis. The diversity of approaches and tools still complicates adoption.
✏️ The energy transition conversation is changing KKR Decarbonization is increasingly seen as a driver of value creation and protection for businesses. Players highlight how sustainability is becoming a core part of corporate strategy, managing electrification complexities, and planning for long-term technological advancements in renewable energy, respectively. The transition presents opportunities to address critical sustainability concerns while generating financial and environmental benefits.
✏️ The rise of natural refrigerants UBS The transition to low global warming potential (GWP) refrigerants is gaining momentum due to regulations like the Kigali Amendment, which mandates a phaseout of harmful hydrofluorocarbons (HFCs). CO2-based cooling systems are emerging as a promising alternative, offering energy efficiency and minimal environmental impact. CO2 systems represent a significant growth opportunity in under-penetrated regions such as North America.
✏️ SI Dilemma: Climate adaptation versus mitigation Robeco Sustainable investors face the challenge of balancing climate mitigation and adaptation in their portfolios, with limited investment options for adaptation. While mitigation has long been a key focus, adaptation is becoming increasingly critical as global temperatures rise. Investors must consider both strategies, alongside biodiversity efforts like deforestation prevention, to effectively address climate risks and capitalize on emerging opportunities.
Real Estate x Infrastructure
📝 Is it time to reallocate to real estate? Nuveen Global real estate returns turned positive in Q2 2024 after two years of losses, signaling a potential recovery in the asset class. Real estate values, which had fallen to 2018 levels after the tightening cycle, showed signs of stabilization, with modest value losses and strong income returns contributing to positive total returns. Investors can reconsider real estate for its historical stability, diversification benefits, and potential for robust returns.
📝 Geopolitics and life sciences real estate UBS The life sciences real estate sector in Europe offers strong investment potential due to growing demand driven by demographic shifts, technological advancements, and geopolitical factors affecting pharmaceutical supply chains. European governments are seeking to bolster domestic medicine production and supply chain security, real estate for laboratories, warehouses, and distribution hubs is in short supply, creating opportunities for investors.
✏️ Why is housing supply still so low? JP Morgan Housing supply remains limited due to chronic underbuilding since 2008, elevated mortgage rates, and high costs for builders and homeowners. Builders face challenges such as higher material costs, labor shortages, and zoning laws, which have kept new construction levels low despite increasing demand. There are signs of improvement with zoning reforms and potential lower mortgage rates expected to boost builder confidence and activity.
✏️ From roads and bridges to renewables and 5G: An infrastructure evolution Goldman Sachs Megatrends like climate change, tech acceleration, shifting trade flows, and demographic changes are creating new investment opportunities, with infrastructure offering resilience, inflation protection, and attractive risk-adjusted returns. Private infrastructure, in particular, provides essential services and offers diversification benefits.
✏️ Japanese property yields: is the only way up? Abrdn Despite recent interest rate hikes, rental growth is proving to be a more significant driver of Japanese property yields than rising bond yields. Investors continue to allocate capital to Japanese real estate, especially in sectors like multifamily housing in Tokyo and Osaka, where rental growth is strong, while Japanese REITs present potential value due to current discounts.
✏️ Real Estate: How the future of logistics lies in energy and data Abrdn Logistics hubs are increasingly playing a role in energy generation and storage, integrating with data infrastructure. Investors should prioritize logistics sites with strong energy connectivity and renewable infrastructure, as these future-ready sites will attract higher demand, offer rental premiums, and support the green energy transition.
📝 Two years into the generative artificial intelligence age TCW The "Generative AI Age" began with the launch of ChatGPT in November 2022, sparking innovation and massive investment, especially in AI infrastructure. Although a mass-adopted AI application hasn't emerged yet, early adopters in areas like software development and advertising show promise. Continued investment in AI infrastructure and future product improvements are expected to drive broader AI adoption and innovation.
✏️ Data center revolution Natixis Data centers, a critical asset class at the intersection of real estate, telecommunications, and energy, are rapidly expanding due to the rise of cloud computing, AI, and increasing digital infrastructure needs. While demand for data centers continues to surge, driven by hyperscalers and corporates outsourcing IT needs, the sector faces challenges with energy consumption.
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.
