Baar-Zug, 28 January 2013
The great new value divide
Partners Group identifies opportunities in the divergence between real and perceived value in its semi-annual research report, the Private Markets Navigator:
In the current low interest rate environment, investors are forced to hunt for yield in other areas in order to meet their return targets. Coupled with the vast amount of liquidity in the system, prices of select assets are quickly reflating, a process we described for the first time in 2009 as asset price inflation. We are in a period of asset price inflation where the excess liquidity injected by central banks has driven up asset prices and will continue to do so; it began in the bond markets, followed by core real estate and core infrastructure and finally public equity markets as evidenced by last year's blue-chip rally. However, the traditional measure of inflation (the consumer price index) will barely indicate any inflationary pressure and will take years to catch up. Pension funds and other investors are set to lose a significant amount of purchasing power over the course of a decade should they elect to stay in cash or fixed income.
Alfred Gantner, Co-founder and Executive Chairman, comments "With the currently still elevated risk aversion, investors are piling into perceived safety, pushing the risk premium of supposedly safe assets to historically low levels. As a result, the flow of 'safe-haven-but-yield-chasing' liquidity has broken the link between perceived vs. actual risk and has resulted in large valuation gaps, which we call the 'great new value divide'. In this value divide, perceived and actual risks diverge sharply and investors will have to thoroughly search for real value to separate the wheat from the chaff."
In the individual asset classes, Partners Group believes real value can be found in the following segments:
- Private equityCompanies that are embracing a global growth strategy offer attractive investment opportunities. Whereas large cap pricing remains elevated, "going global" is a key theme for Partners Group’s small- and mid-cap investment activities, especially as it concerns "new world" companies in emerging markets that target consumers and benefit from the twin tailwinds of demographic trends and low cost manufacturing.
- Private real estateProperties in secondary locations in tier 1 cities or in prime locations in tier 2 cities are compelling. These offer attractive investment prospects as micro risks can be influenced through active asset management, while macro risks representing market beta cannot. In the secondary market, institutional disposals continue to provide ongoing deal flow and competition among investors remains lower.
- Private infrastructureAttractive premiums exist outside competitive auction-based core transactions in opportunities with country or greenfield exposure. Exposure to diversifiable micro risks of greenfield projects and country premiums enhances returns without increasing sensitivity to systematic market risks while generating optionality (to lock in premiums early on or pursue a longer-term hold strategy).
- Private debtThe most attractive risk-return opportunity is driven by the lack of available debt financing for small to mid-sized companies. Coupled with today's low economic growth rate, this has created an environment that is conducive to mezzanine and senior debt investing, which both compare favorably to the high yield market due to factors such as consistent availability, lower volatility and embedded control rights.
Partners Group's Private Markets Navigator research report provides investors with the latest economic and market information that impacts the global private markets. Should you wish to receive a print copy of the full report, please contact Milevka Grceva (milevka.grceva(at)partnersgroup.com).