Baar-Zug, Switzerland, 21 August 2014
Partners Group publishes market outlook for H2 2014: value creation ability continues to be crucial as asset prices remain at inflated levels
Partners Group today publishes its semi-annual Private Markets Navigator for H2 2014. The Private Markets Navigator outlines our views on the macro-economic environment, as well as our outlook for all private markets asset classes over the next half-year. A snapshot of our views is outlined below.
- Macro-economic view: capital markets are out of sync with economic fundamentals. GDP growth forecasts are once again being revised downward across the globe as the year progresses. At the same time, asset prices are still marching higher boosted by central bank rhetoric and actions – leading to what we term "assetflation". Barring an escalation of geopolitical tensions and an earlier pricing in of monetary tightening, we see little to end the decoupling of economic reality and assetflation and believe certain high-quality assets may continue trading at levels considered "synthetically elevated" for years to come.
- Private equity: high purchase multiples are here to stay in the US and European markets. The deal environment in the US and Europe continues to be highly competitive, with some valuations even above 2006-08 peaks, supported by rising leverage, robust capital markets, and increased competition for deals including from strategic buyers willing to pay a premium for quality assets. We occasionally see buyout managers dipping into the growth segment, as well as US and Asian investors courting European assets as economic recovery begins to spread. In all cases, we suspect potential mistakes are being made by investment managers deploying capital outside of their typical sweet spots. In this environment, we prefer to go deeper into our existing strategy of helping mid-market leaders to grow internationally, identifying investments with strong downside protection and investing in future growth on behalf of our clients.
- Private real estate: the disparity in pricing compared to the growth dynamics of the global economy continues to increase. Core real estate pricing has edged higher due to the continued availability of cheap financing; meanwhile, expected returns on new core investments have fallen to low levels with pricing rising faster than net operating income. In this environment, our approach to real estate investing on behalf of our clients focuses on playing to the excess demand for high-quality properties globally, either by developing them or by "fixing" non-core properties through asset management in order to reposition them as core in markets with strong fundamentals.
- Private debt: lenders can be over-proportionately compensated in mid-cap vs. large-cap transactions. Global debt markets continue to provide unusual levels of liquidity – there are indications we could be heading towards another volume record in 2014. In particular, the large-cap section has been flooded with debt financing driving leverage levels higher, while liquidity in the mid-cap section remains at more "normal" levels. At the same time, the gap between the average returns for mid-cap vs. larger large-cap transactions has further widened, disproportionately compensating mid-cap investors. In this context, we believe sweet spots can primarily be found in mid-cap companies with robust downside protection, low cyclicality and strong and resilient business models – we place particular emphasis on sectors including foods, security and IT services, education and healthcare.
- Private infrastructure: investors are often inadequately compensated for inherent business, regulatory or macro risks in core infrastructure investments. We have observed several cases of core infrastructure assets being sold at valuations that are too high and even surpass sellers' expectations, underpinned by "optimistic" assumptions about growth and regulatory support. Investors should avoid categorizing all core infrastructure equity investments as a good substitute for a fixed income strategy, as they often require active management and careful structuring to adequately address specific asset risks. We continue to underweight highly-valued core infrastructure assets, like regulated energy and water utilities in Europe and the US or availability-based secondary PPPs. Instead, we overweight opportunities in markets where liquidity is scarcer due to market segmentation and investors are able to capture premiums that exhibit low correlation with the regulatory and real rate return drivers of the asset class.
For a full copy of the report or to learn more, please contact Milevka Grceva (firstname.lastname@example.org).