The resilience of private markets is set to be tested as short-term woes permeate the space, but industry experts still anticipate long-term opportunities.
Amid higher debt financing costs, a reduction in liquidity, and incoming recessions in the US and Europe, private equity, the largest asset class by assets under management within the private markets space, faces a fresh set of challenges.
Chelsea Financial Services senior research analyst James Yardley said ‘Private markets have been very hot for a number of years, with private equity all the rage. This led to a lot of money flowing into the sector and has likely resulted in some overvaluation.
According to Bloomberg Law, private equity deal activity has slowed in 2022 along with the broader M&A market. The volume of controlling-stake M&A deals fell 46% from 2021.
Charles Stanley chief investment analyst Rob Morgan said ‘Higher interest rates mean borrowing costs are ratcheting up, and it is necessary to keep a keen eye on debt levels, as well as earnings, which may be under pressure from recessionary forces.’
Falling equity markets have sparked concerns among investors about how this will impact the multiples used in private equity fund valuations, which lag the public market due to the delay in reporting of asset prices.
Persistently high inflation, a dramatic shift in central bank monetary policy, and a looming recession are largely to blame for weak investor sentiment and disappointing returns for listed real estate.
Janus Henderson said that 2022 saw a stark divergence in returns between listed and private real estate, with a gap of over 30%, despite similar assets, due mostly to reporting delays.
Fears of potential drawdowns in private real estate have driven retail investors to run for the exits, pushing some of the largest non-traded REITs, for example, Blackstone's £69bn Real Estate Income trust, to limit redemptions. This comes despite the trust being up 9.3% and not having delivered a negative return through October 2022.
Performance often far exceeds that of listed REITs, as seen with NAREIT’s all-REIT index, which was down 20.9% through November 2022.
Link: https://www.investmentweek.co.uk/analysis/4061772/private-markets-reality-check-2023