Partners Group, the global private markets investment manager, has published its 2020 Private Markets Navigator, which shares the firm’s economic outlook and investment preferences for all private markets asset classes.
Introducing the report, Stephan Schäli, Partner, Chief Investment Officer, Partners Group, says: “Against a challenging backdrop of low growth and geopolitical uncertainty, we believe offense is the new defense in private markets investing. The main driver of returns in private markets today is growth, therefore we seek opportunities to build resilience instead of buying it by focusing on assets with value creation potential in sub-sectors with above-average growth rates. Paying close attention to market dynamics and applying a hands-on approach to governance and value creation are key to growing these assets during our ownership and positioning them to withstand business cycles.”
A short summary of the views presented in the 2020 Private Markets Navigator:
Private equity: the private equity investment environment remains highly competitive, with valuations near record highs, especially for assets perceived as stable and non-cyclical. Although these factors mitigate downside risk, they only partially justify exceptionally high valuations given these assets’ inherent sensitivity to changing fundamentals such as growth assumptions. Partners Group’s strategy in this environment is to leverage secular versus macro trends, focusing on sub-sector trends generating higher top-line growth and identifying opportunities to create value at the asset level. This approach allows the firm to build more resilient valuations and, in turn, should enable its portfolio companies to be more insulated from economic swings. Examples of attractive sub-sector trends include growing demand for pet and veterinary services and increased demand for well-being services such as physical therapy.
Private real estate: global real estate valuations remain high, supported by continued demand and low interest rates and notwithstanding softening GDP growth clouding the prospects for rental growth. Competition for core assets remains high, even though these assets are particularly at risk should there be a change in monetary policy. Given this environment and the threat of an economic slowdown, Partners Group seeks assets that provide both value creation potential and downside protection through existing cash flows, aiming to source these assets off-market to avoid competitive auction processes. Focus areas include locations that benefit from fundamental demand drivers, such as population and employment growth, and favorable real estate fundamentals, such as low vacancy rates and the limited threat of excessive new supply. The firm currently sees the most relative value in office, logistics/industrial and residential properties in most regions.
Private debt: there is continued demand for private debt despite slowing global growth and rising volatility. Although senior loan issuance has eased in 2019, the private debt market continues to be borrower-friendly. Underwriting discipline and access to attractive transactions remain key in the direct lending space. This means having strong relationships with sponsors to help source transactions and the ability to provide comprehensive, tailor-made financing solutions at an appropriate risk-adjusted pricing. In addition, Partners Group is placing even greater emphasis on applying “private equity-style” due diligence to loans, gaining a holistic understanding of an asset’s business model and ensuring transaction metrics provide adequate downside protection. For liquid debt instruments, active management, diversification and a rigorous bottom-up analysis of credits are key in the current environment.
Private infrastructure: market expansion has helped lift infrastructure asset valuations to the upper end of historic ranges, resulting in an attractive exit environment. Over the last two years, Partners Group has successfully sold six mature assets into the core market, realizing an average gross multiple of 2.3x on capital invested on behalf of its clients. However, higher asset valuations are also putting downward pressure on future returns. The firm continues to focus origination efforts on infrastructure assets and businesses that offer value creation potential; operate in sectors and sub-sectors supported by long-term transformative trends; and have business models that are less likely to be disrupted or may even benefit from disruption. Trends generating attractive opportunities in the infrastructure sector include the continued demand for clean, efficient and reliable energy, the need for midstream infrastructure, and the demand for infrastructure services in the energy and transport sectors.
To download a copy of the report, please visit: www.partnersgroup.com/navigator