Credit
By Dinah Cencig
As the global economy continues to recover from the impact of the COVID-19 pandemic, the financial landscape is shifting, with investors increasingly turning their attention to opportunities in the credit markets. One of the most notable trends in this area is the narrowing of the relative value between direct origination and broadly syndicated loans and bonds. This is due to several factors, including the impact of higher capital costs on fixed charge coverage ratios and leverage multiples.
Despite this trend, we expect to see continued opportunities for investors in the credit markets, particularly through opportunistic credit strategies that allow for the ability to toggle relative value between cheaper public securities and direct origination. This is in part because, as the global economy recovers, transaction volumes are expected to increase, albeit at a higher cost than in previous cycles.
One of the key drivers of this trend is the growing need for private investment to finance resilient supply chains, future-proof assets, and build what is needed in the future. For example, in the energy sector, the largest source of capital required for energy transition will be credit. This highlights the need for increased private investment in this area, particularly as the world continues to shift towards cleaner and more sustainable energy sources.
However, as credit is a contract, it is important to note the significance of rule of law, strong governance, and ESG commitments as decisive tools involved in funding the future. This is particularly important given the increased focus on these issues by investors, as well as the need to stay on the right side of contemporary industrial and regulatory policies.
Overall, while there are certainly challenges to be navigated in the credit markets, we believe that there are also significant opportunities for investors who are willing to take a long-term, strategic approach to their investments. By focusing on resilient supply chains, future-proof assets, and the right side of contemporary industrial and regulatory policies, investors can position themselves to generate better outcomes in a challenging, but ultimately rewarding, investment landscape.
Real Estate
By Ben Ingram and Samantha Williams
Real estate continues to be a popular investment option for many investors, as it offers a bond-like income yield from rents and capital appreciation linked to demand for space. However, the relative value between public and private real estate has been a headline topic in recent years, and this is expected to continue in 2023. Investors who can engage in opportunistic REIT purchasing strategies alongside core and non-core real estate will be well-positioned. To work across strategies, sectors and territories there is already a focus on those who have broad experience and proven ability to adapt; as a result, the niche, traditional and specialist real estate investment/fund manager is needing to broaden.
Interest rates have a significant impact on real estate investments, as higher rates tend to lead to increased capitalisation rates (or "cap rates"), which in turn results in accelerated capital depreciation across sectors. This year, experts predict that absent a major drop in interest rates, an increase in cap rates is expected, which will further complicate matters for real estate investors. This shift in interest rates will also lead to the need for more CapEx budget and tech spend to repurpose space and adapt to the changing market. As in 2008, this will lead to a refocus on asset management and those with demonstrable asset enhancement experience. This will also promote growth in markets including proptech, which are becoming increasingly important in the real estate industry.
High inflation, rising interest rates and ongoing volatility have continued to send the real estate sector into a stress cycle, noticeable by major dislocations in asset pricing and compressed capital markets activity. We continue to see pricing dislocation in real estate move from public to private markets. Alternative lenders in real estate have stepped in to provide liquidity, as traditional bank liquidity channels continue to be pressurised by the current inflationary environment, resulting in lending being curtailed. This has opened a window for the more creative lending strategies; we continue to see real estate lenders branching out with broader higher-yielding mandates, stepping in to provide liquidity with further distress on the horizon heading into 2023.
Infrastructure & Energy
By Hugo Clark
Global private infrastructure fundraising reached a massive total of $156bn in 2021. We thought that this would be a hard total to beat but 2022 surpassed it and hit a post-pandemic high of $162bn. In 2020, the average size was just under $1bn, it is now just under $2bn. The emergence of the ‘mega-fund’ has also played a significant part in this theme with KKR, Brookfield, Stonepeak, and GIP being some of the most notable names. 2023 is looking to continue this path with CIP targeting €12-15bn for their flagship core+ ‘dark green strategy’ equity fund.
Energy Transition is now a key area for private markets with renewable energy sources expected to account for 80% of global power generation growth by 2025. Some notable fundraising examples here include Energy Infrastructure Partners closing their first energy transition fund at €1bn (€2bn target). Eurazeo’s energy transition fund reached a €210m first close (€1bn target). Blackstone raised just over $1bn for their fourth energy transition fund (targeting $6bn), which will reach final close this summer.
On the hiring front, equity and debt funds have been very active across all levels but this year there has been increased demand, not just for strong juniors but at Vice President and Managing Director levels too, as firms look to build out new teams to deploy the huge war-chests of capital available. In addition, we saw lots of senior IR moves, unsurprising given the amount of fundraising activity.
Finally, compensation increases were, quite frankly, wild in 2022 as firms competed to hire the scarce amount of high-quality talent available in the market. Base salaries increased at every level, on average at 14%, with Associate-level base salaries up a staggering 22%. The good news for hiring managers is that this intense pressure will not be seen in 2023 and compensation should plateau. The macroeconomic situation is one of uncertainty, but infrastructure has always been a resilient sector. Hopefully our clients’ success in 2022 will be repeated in 2023.
Private Equity
By Olly Blaydon
Private equity is adapting to the higher interest rate environment. GPs are finding it hard to do deals so there are old assets which can’t be moved, and newer assets which are being marked to cost. Funding has dried up or is incredibly expensive, we’ve heard of one GP accepting a facility with its investment bankers at 12%. The UK is seen as behind Europe and the US and is probably going to suffer more and emerge later.
As organic growth has slowed, all houses are switching to operations as the main source of value creation. Data and digital technologies are very important in this scenario and the funds which have established these capabilities should come out of 2023 much better than those which haven’t.
Venture Capital
By Hugh Barran
The venture capital (VC) industry has experienced a slowdown in recent months due to a challenging macro environment characterized by geopolitical instability, inflation, and market volatility. Despite these challenges, first-time fund managers have remained resilient, with many expecting that their funds will perform better than if they had started them when valuations were higher. This is because start-up valuations are currently lower than they were last year, making it an ideal time for investors to ramp up investment in start-ups that have demonstrated past and ongoing success.
Smart fund managers understand the importance of investing in both up and down cycles, and many have realized that to thrive in 2023, they will need to increasingly harness the power of data, automation, and new technologies to inform their investment decisions. This is because in this environment, firms will be defined by the technology solutions they choose to give them a competitive edge.
Regardless of a firm's size, it needs the ability to manage relationships, transactions, processes, workflows, and compliance matters in a very data-centric, automated, and secure manner. According to a recent study by McKinsey & Company, companies that have adopted advanced technologies such as artificial intelligence, machine learning, and automation have seen an average revenue increase of 6% and a reduction in costs of 4%. Leveraging the power of data and new technologies to inform investment decisions and create a competitive edge will be crucial to ensuring a successful 2023 and mitigating macroeconomic headwinds.
Distribution
By Roger Threlfall
The private markets sector in early 2023 has seen continued investor interest, particularly in specific areas of both private credit and real assets. Higher returning private credit strategies have emerged as a significant area of focus, with institutional investors still continuing to allocate an increasing share of their portfolios to this asset class. Increasing interest rates throughout 2022 have made investors look more into this space.
Real assets, particularly infrastructure and natural resources, have also seen a marked increase in interest, with investors seeking exposure to tangible assets that offer inflation-hedging properties and steady, long-term returns.
Investor relations is still a key focus for private market managers, as competition for capital continues to intensify. Firms are continuing to invest in technology and data analytics to improve the investor experience, enhance transparency and streamline communication.
Capital raising remains a key challenge for smaller / newer private market managers, as competition for capital continues to intensify. Despite the recent increase in fundraising, many managers are still facing difficulties in securing commitments from investors, particularly in the wake of the recent market turbulence.
In conclusion, the private markets sector in 2023 continues to evolve, with investors seeking exposure to a wider range of asset classes and managers focusing on improving the investor experience. The sector is expected to see further growth in the coming years, as investor demand for alternative investments remains strong and managers continue to refine their strategies.
