Outlook for private Markets: A new era for private debt and infrastructure
In Short
"Our [infrastructure] strategies aim to address major societal challenges such as the energy transition, green mobility, digital transition and improvements to social infrastructure."
by Roberto Marsella
Head of Private Markets at Generali Investments Partners
Key Takeways
Private markets typically lag public markets, so we expect that once the sector recalibrates to macro uncertainty, growth should resume
Infrastructure that addresses sustainability and decarbonisation continues to attract capital
Private debt is an increasingly attractive credit source for SMEs, while private equity remains attractive on a long-term basis
We are at the threshold of a new era for investment opportunities in private debt and infrastructure, despite short-term macro headwinds, explains Roberto Marsella
Private markets remain set for long-term growth
As of 2023, the private markets industry faces some challenging macroeconomic conditions. Higher interest rates, recession concerns, inflation, and tightening financial conditions are raising questions about the risks and durability of momentum in the industry. Short-term headwinds naturally arise when such a rapid increase in interest rates occurs, leading to market dislocations as recently seen in the case of the SVB and Credit Suisse banking failures.
However, it is expected that once private markets adjust to this uncertainty, growth will resume. Morgan Stanley projects the industry to grow from $10 trillion to $17 trillion in AUM over the next five to six years, which is a compound annual growth rate of 12%. One key contributing factor to this is the industry’s ability to attract highly talented young professionals who are eager to transform and innovate in private markets, be it private equity, private debt, or infrastructure. This ability to attract young and motivated professionals is crucial to the long-term success of the industry.
An important point for investors to note is that adjustments in private markets generally lag the public markets, with private debt typically repricing a little faster than private equity. So, in the short term, rapid repricing can impact the momentum of private markets growth. The key issue is always the extent to which institutional investors can tolerate illiquidity. Institutional investors have a limit to how much illiquidity they can tolerate, which changes over time and institution by institution. However, the illiquidity premium that comes with investing in private markets remains a key benefit. This illiquidity premium was temporarily compressed but has since re-emerged. As such, private markets are expected to remain attractive for the foreseeable future.
This secular growth thesis is underpinned by the increase to private market allocations across the entire spectrum of investor types, including sovereign wealth funds with a projected 21% by 2025, up from 19% in 2020 (see Chart). This is driven by the intrinsic characteristics of real assets and private markets, such as the opportunity for portfolio diversification due to a low correlation with liquid markets and a good degree of inflation hedging and value reserving. In the specific case of sovereign wealth funds, accessibility is key: investing in private markets enables sovereign wealth funds to access a range of sectors and geographies that they would otherwise be unable to unlock.
Rising investor allocations underpin private asset growth
Private markets allocation by investor type 2020-25E (% total investments)
Sustainable and renewable energy: The changing face of infrastructure
Higher uncertainty regarding cash flows in the current financial environment is a key challenge for Generali and other institutional investors to navigate. So where do we see risks and opportunities in the private markets landscape today?
Firstly, we are excited about the enormous potential of infrastructure investing, an asset class that continues to attract capital due to its ability to provide stable cash flows, less correlated returns and a hedge against inflation1. In particular, revolutions in energy, mobility and digitisation are currently at the forefront of geopolitical considerations and are changing the face of infrastructure investing, which since the GFC has gradually shifted from traditional infrastructure to a wider definition, in which renewables are a key component.
Crucially, decarbonisation requires vast amounts of new infrastructure and will not be achieved when existing assets simply change hands. Substantial capital spend is not only required for new renewable generation capacity, but also for power grid improvements and energy storage solutions that are vital to the delivery of clean, flexible, and reliable power.
At Generali Investments Partners, we offer distinct private debt and private equity strategies that target sustainable infrastructure and renewable energy infrastructure. Our strategies aim to address major societal challenges such as the energy transition, green mobility, digital transition and improvements to social infrastructure. Indeed, our entire infrastructure product range is Article 8 or 9 under SFDR regulation, with ESG or sustainability at the core of the investment process2.
A new era for private debt
In the short term, private debt and infrastructure are likely to have a more favourable outlook than private equity, where deal-making, exits and fundraising have slowed somewhat due to macro forces. However, in the long term, private equity remains highly attractive for long term investors. The extraordinary growth of the private equity universe continues apace at the same time as going public decreases in appeal, allowing more companies to remain private for longer.
Finally, we are positive on the outlook for private debt. The current unfavourable macroeconomic conditions, the continued deterioration of the banking sector, and the trend towards increased regulation should continue to favour private debt as an increasingly attractive credit source of choice, especially for SMEs that may suffer the most from these circumstances.
Indeed, we have recently launched a new direct private debt fund that aims to invest in SMEs in continental Europe that are willing to commit to ESG objectives3. The fund focuses on floating rate, senior secured debt in the most protected part of the capital structure, given the evolution of the market and the challenging macroeconomic environment4. SMEs are the backbone of the European economy, representing 99% of all businesses and accounting for more than half of Europe’s GDP. This breadth of opportunity allows us to be selective as investors while still providing diversification. As with all funds across our private debt range, the strategy benefits from the co-investment synergies of Generali Group’s long-term relationships with external private debt and private equity firms.
