Baar-Zug, Switzerland, 27 November 2018
Partners Group publishes private markets outlook for 2019
'Entrepreneurial ownership holds the key to private markets outperformance'
- Global megatrends generating new investment opportunities include digital transformation, changing consumer preferences and increased energy efficiency
- Potential for more challenging macroeconomic conditions demands disciplined asset selection for downside protection
- Strong governance and value creation skills required to generate outperformance
Partners Group has published its 2019 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 at Partners Group, says: "While our base case economic outlook projects a period of continued modest growth, we are aware that the ride may become bumpier as multiple challenges emerge. In order to mitigate this risk, we focus on businesses and assets that are well positioned to withstand a variety of alternative economic scenarios in sub-sectors of the market that we expect to achieve superior growth rates. Even more importantly, in this environment, we are convinced that entrepreneurial ownership and strong value creation skills are the only way to generate outperformance."
A short summary of the views presented in the 2019 Private Markets Navigator:
Private equity: 2018 saw private equity valuations rise yet again from an already high base, with quality assets trading at EBITDA multiples in the mid-teen range. Partners Group attributes this to ever-increasing competition from private equity managers, strategic buyers and new market entrants, encouraged by the search for yield while interest rates remain low and by strong debt markets for leveraged buyouts. In this competitive market, the firm is emphasizing its focus on thematic sourcing, searching for opportunities in sub-sectors with above-average growth prospects that offer potential to generate further growth through strong governance and active value creation. Examples of themes that have enabled the firm to source recent investments include the growing demand for digital product engineering services, industrial consumables and outsourced manufacturing.
Private real estate: since the Global Financial Crisis, low interest rates have supported real estate asset values by lowering both borrowing costs and discount rates on future operating income. Coupled with high amounts of available capital, this has driven up prices for most property types globally to near-record levels. Looking ahead, the potential impact of rising rates on the asset class warrants close attention. Now more than ever, Partners Group is focusing on investments that have a value-add component, providing it with the opportunity to actively drive NOI growth and offset cap rate increases. In terms of property types, the firm currently sees the most relative value in office, logistics/industrial and residential assets with limited development risk. In order to source these opportunities, a strong network and the ability to provide bespoke solutions are key.
Private debt: stable demand for financing driven by high transaction activity continues to serve as a tailwind for institutional investors in private debt, who have generally increased allocations to this floating-rate asset class to protect against expected interest rate increases and obtain stable yield. Overall, the inflow of liquidity into the market, as well as the first steps towards deregulation in the US, have kept competition for high-quality assets at a healthy level. In light of this, Partners Group continues to be selective and aims to protect capital by investing directly in defensive, cash generative businesses, negotiating downside protection in loan documents and actively managing liquid loan portfolios. Moreover, the firm remains focused on identifying attractive sub-sectors, particularly within IT, healthcare and business services, which it believes exhibit defensive characteristics.
Private infrastructure: the continued increase in demand from investors has led to more competition in the infrastructure market and is putting upward pressure on valuation multiples, particularly for core operating assets. However, as interest rates are set to rise and the promise of further growth in valuations appears to be slipping away, the risk of overpaying is high. In this environment, Partners Group aims to maintain its portfolio's exposure to rising rates at a minimum, on the one hand, and focuses on investment with a value-add component in sectors benefiting from long-term growth trends, on the other. The shift towards clean, more efficient energy, the need for ancillary infrastructure business services and the disruption to the established energy industry as a result of the US shale gas revolution are all examples of trends the firm follows closely.
To download a copy of the report, please visit: www.partnersgroup.com/navigator