Real estate and infrastructure are attractive investments in the private markets space, but individual investment selection has become more important in private equity and debt, according to the latest major analysis by global private markets investment management firm Partners Group.
Partners Group says: “Over the past six months there has been considerable speculation as to the directional movement of the real estate markets. For the next 12 to 18 months (the firm) has a strong conviction that the tide not only is coming in, it is coming in far faster than many believe.
“Investors’ salient questions are: ‘where will new capital invest in real estate?’, ‘what are the opportunities?’ and ‘where can the savvy investor find the best risk-adjusted returns?’
Nori Lietz, partner and chief strategist for private real estate at Partners Group, says: “We think the herd mentality will cause many investors to invest in core ‘trophy’ properties. Our view is that more sophisticated investors will search for those opportunities which remain capital constrained, including investments in secondaries, debt recapitalizations and emerging market real estate.”
The report says there is an estimated $ 180 billion of dry powder for private real estate investment after the “window shopping” of the past three years, and that this may be an understatement. Notwithstanding the abundant capital available for trophy assets (such as large new or landmark office blocks), little is presently available for distressed situations.
Geographically for real estate, Partners Group currently favours emerging markets, especially Brazil, over Europe and then North America.
In unlisted infrastructure, entry valuations are very important because it is a classic value asset class. This is because there are usually only a limited number of operational levers which can compensate if a high entry price is paid.
Michael Barben, partner and head of private infrastructure at Partners Group, says: “The relative scarcity of capital in the infrastructure space consequently offers today’s investor the advantage of attractive valuations and limited competition for transactions.”
The report notes that the infrastructure market seems to be moving away from the “captive” or “sponsored” funds, which may have perceived conflicts of interests, and towards the specialist managers.
With respect to private equity and debt, timing is very important and the current cycle makes investment selection of paramount importance.
The report says the industry currently has an estimated $400 billion of dry powder for equity in buyouts and some managers will be pressured to invest because of the low level of activity of the past two years. Pricing on transactions has bounced back, particularly at the big end. The firm sees better opportunities among small-medium-sized companies. It also currently favours direct investments over primary funds and the secondaries market.
Similarly with private debt, the firm is focusing more on direct investments as the low-hanging fruit from distressed sellers has already been picked. However, the positive outlook for private debt lenders in general is supported by less competition, particularly from the banks, but also from some managers being unable to raise capital.
“Over the past two years, fund-raising has become more difficult,” the report says. “Only high-quality funds that managed to generate strong track records throughout the crisis are able to come back to the market.”