Is now the right time to start? How do market dislocations affect portfolio construction?
A common concern of investors is that private markets tend to follow public market corrections. Sitting on the sidelines seems like a safer bet. As for other asset classes, time in the market beats timing the market.
We see pockets of opportunities across the asset classes. In a market environment characterized by high interest rates, low GDP growth and inflation, infrastructure, real estate and private credit are particularly well suited to offer downside protection due to the yield component. In some instances, explicit inflation protection is contractually defined, or implemented via pricing power. On the real asset side, in particular in infrastructure, we expect that the secular trends around digitalization, demographic change, decarbonization and, more recently, deglobalization continue to fuel investor demand, as reported in our 2024 infrastructure outlook.
Combined with the inflation protection properties, this is a very interesting space for investors in 2024. We believe that the entire risk spectrum within infrastructure – from yield-focused investments to private-equity like plays – is attractive and has its merit in client portfolios.
Real estate benefits from persistent supply/demand imbalances in sectors like housing and industrial. Additionally, green real estate is becoming an important trend with highly attractive risk-adjusted returns. Research we recently conducted into the two largest office buildings in New York and London finds evidence of a green premium.
For investors who place more emphasis on capital appreciation, private equity secondaries are a good place to invest in 2024. Private equity has always been an asset class that was able to access sectors and themes that are not investable on the public market, like disruptive technologies and impact investments.
Many private markets asset classes were hit by a mild or more pronounced denominator effect in the last two years, which is in the process of easing. Take a situation where an institutional investor has a strategic asset allocation of, for example, up to 10% to private equity. With a public market correction of 20% and no correction on the private markets side, he finds himself overallocated to private equity. Not only can this investor make no new investments in private equity but may also have to consider selling his private equity assets on the secondary market to re-align the portfolio. This an opportunity for investors in private equity secondaries, as these assets can be acquired at a discount.