Private debt is now recognized as an important component in investor portfolios, providing an appealing alternative to more traditional fixed income products. While this trend has been many years in the making, a combination of factors is creating additional tailwinds for the asset class. In an environment of higher interest rates, the floating rate nature of direct lending is offering investors the potential for attractive double-digit returns and protection against inflation. At the same time, direct lending continues to gain market share, bolstered by the continued retreat from banks, as well as a slowdown in activity from underwriting banks in the broadly syndicated loan market.
Given these attractive features and the continued growth of the European direct lending space, how can investors make the most of the opportunities the market has to offer? In this article, our private debt team presents Partners Group’s views.
The US leveraged loans market ended the year with a frenetic last quarter in which continued sluggish new-issue loan volumes led to an extended secondary loan rally. Institutional and retail investors – regardless of whether they were shifting strategy back to “risk-on” or just seeking to redeploy cash – were quickly drawn to most loan offerings. In Europe, loan issuers seeing steady investor demand used the opportunity to amend and extend, refinance and issue incremental loans, while capturing tighter loan spreads and extending the duration of capital structures. This had a significant impact on the leveraged loan maturity wall, which by the end of 2023 saw almost no remaining 2024 maturities outstanding. Overall, US and European liquid loans delivered double-digit total returns for 2023, the strongest posted in over a decade. In this edition of our Quarterly Liquid Loan Market Commentary, we also discuss the changes in the use of SOFR credit spread adjustments (CSAs) following the transition from LIBOR in July 2023.
Partners Group presents a summary of the views discussed during our Private Markets Outlook Webinar in the new paper Navigating the "higher-for-longer" environment, which includes our outlook for the economy and our views on each of our four asset classes. In the paper, we argue that markets are still grappling with the dynamics of the new macro regime as the "higher-for-longer" interest rates scenario is here to stay. Technological advances such as artificial intelligence (AI) should help counteract some structural headwinds, but tepid growth and higher inflation will prevail over the short- to medium-term. Still, we expect compelling investment opportunities to emerge.
The US leveraged loan market sprung to life in the third quarter of 2023. Shaking off the specter of a looming recession and “higher for longer” interest rates, new issue loan volumes hit their highest quarterly levels since the Fed began hiking rates in Q1 2022. However, economic conditions and higher rates still took a toll on several underperforming loan issuers, resulting in a higher pace of credit rating downgrades.
The European new loan issuance market continued with its ups and downs across quarters, this time attaining the highest level of quarterly loan issuance activity since the start of the war in Ukraine. However, this volume increase was driven more by loan refinancings and less by accretive M&A activity. This edition of our Quarterly Loan Market Commentary also discusses whether the markets' current favorite catchphrase of "higher for longer" can also be used to describe the exceptional returns posted by loans so far in 2023.
In the last decade or so, core real estate investment lived a golden era. Low interest rates and cheap financing meant managers could buy assets in the core segment and secure an attractive return from rent collection. But with the emergence of a new macro regime many of those macro tailwinds have become headwinds. Going forward, double-digit IRR returns in real estate will increasingly depend on a hands-on approach to thematic sourcing and asset transformation. In this Q&A, Mike Bryant, Head of Private Real Estate at Partners Group, explains how investors are turning their attention to the ‘value-add’ segment of real estate. Through value-add strategies, we have the capacity to transform assets with a hands-on approach to meet evolving ESG requirements as well as the preferences of tenants in the corporate and consumer segments.
Modern pet owners love their pets and treat them as genuine family members. When it comes to health, they seek out primary care of the highest quality from their local veterinary hospitals. Having been interested in the veterinary space for many years, Partners Group invested on behalf of its clients in Blue River PetCare, a leading operator of veterinary hospitals in the US, in 2019. Drawing from our experience with physician services companies, we saw potential to enhance Blue River's already well-structured network, while preserving its key value-add propositions, such as medical autonomy and entrepreneurship. Since then, the platform has grown from 90 to more than 180 hospitals spread across 35 states. Group revenues more than doubled, with the average earnings per hospital up 12% in just under three years. And the investment case remains strong, with a solid pipeline of acquisition targets, great organic growth prospects, and practice managers focused on improving services and creating new ways to serve their communities.
In a replay of the last few quarters, the US leveraged loan market continued to limp along in Q2 2023. High interest rates, inflation and growing expectations of a US recession weighed heavily on both new loan issuance and the financial performance of many issuers. Refinancings and amend-and-extend transactions, while limited, were the only meaningful source of activity in the market. For loan investors, the secondary market was the focus of activity, while US CLO issuance dropped to the lowest quarterly level since Q2 2020. In Europe, new issue institutional volumes hit a ten-year low, with the Q3 new issue loan calendar appearing equally bleak. One positive development came from amend-and-extend transactions, with some stronger performing issuers able to extend loan maturities out to 2028 and beyond. In this edition, we also turn the spotlight on the potential impacts of the slowdown in CLO issuance on loan demand.
Swiss Pension Funds and Private Markets
Amid increased volatility and asset class correlation in public markets, the average Swiss pension fund incurred high-single-digit losses in 2022. Conventional diversification strategies were proven ineffective, with stocks, bonds and listed real estate losing significant value. We believe it’s time for pension funds to rethink diversification. In this paper, Partners Group explains how allocations to private markets can enhance risk-return profiles and portfolio diversification. We go deep into each asset class – private equity and debt, real estate, and infrastructure – to show how private markets demonstrated resilience in 2022, outperforming public markets, while also experiencing lower volatility and drawdowns.
Q&A with Andres Small, Managing Director, Private Equity Partnership Investments
The secondaries market has grown significantly in recent years, surpassing the USD 100 billion mark in transaction volume. Rather than just a by-product of relentless growth in investment activity, secondaries are now supporting the evolution of private markets into a more versatile and liquid asset class. In this Q&A, Andres Small, Managing Director at Partners Group, outlines the long-term factors underpinning this trajectory and explains how a thematic and integrated approach to the asset class – particularly in a period of market dislocation – makes secondaries an especially compelling strategy right now.
This record isn’t broken: How private equity buyouts can continue to succeed in the new macro regime
With financing costs on the rise and lower debt availability, the private equity buyout model is attracting deep scrutiny, with some market observers going as far as heralding its death. But we believe the complexity of the buyout model calls for a more thorough and detailed analysis. In this paper, Partners Group’s Portfolio Management team explains that while higher rates will certainly have an impact on buyouts and reduce the room for error on the execution front, investors will not be bidding farewell to this strategy any time soon. Instead, it is time to capitalize on lower entry valuations and refocus on operational value creation and disciplined underwriting.
Despite persistent macroeconomic headwinds and banking turmoil, the US liquid loan market had a surprisingly robust start to the year. Q1 new-issuance loan activity was marked by better performing issuers marketing a relatively high volume of refinancings, while in CLOs demand improved month by month reasserting the growing appeal of the asset class. In Europe, although some momentum was created by demand from loan and bond investors, buyers eventually stepped to the sidelines when the shocking news about Credit Suisse hit in March. Amid rising market expectations of a US recession, this latest issue of our Quarterly Loan Market Commentary also puts a spotlight on the discussion about whether US loan defaults could overwhelm portfolios over the next year.
Private markets are overtaking public markets in financing the real economy and this role reversal is set to fundamentally reshape the private markets industry, argues Steffen Meister, our Executive Chairman, in a White Paper.
Private equity investment covers a multitude of asset types, risk and reward profiles, and investment horizons – it is a world of opportunities. But making the most of private equity requires extensive resources combined with deep sector knowledge.
Through our bespoke mandates, we can create a strategic partnership with clients and open up the full potential of private equity investing.
Read our case study for more.
Institutional investors face a variety of challenges today. It might be regulatory complexity, an urgent requirement to deploy significant cash balances, or perhaps they need rapid diversification into new asset classes. When all these challenges come together, investors need a partner that can offer a bespoke solution and do so at speed.
Partners Group helped one leading US insurance group achieve just that.
Read our case study for more.
Despite a modest increase in loan issuance and some new found loan market stability in Q4, 2022 was a disappointing year for loan markets. It came as no surprise to most market participants that the numerous headwinds of high inflation, rising interest rates, a looming recession, lingering supply chain challenges and unprecedented geopolitical worries would chill both the US and European loan markets, which posted their slowest year of activity in at least a decade. In our latest Quarterly Loan Market Commentary, we look back on a challenging year for loan markets and shine a spotlight on what an increase in credit rating downgrades might mean for CLO portfolios.
In 2022, Partners Group's innovative bespoke client solutions were the largest contributor to fundraising at 70% of assets raised. Understanding our clients and their needs is at the heart of what we do. Within the scope of bespoke client solutions, creating mandates for large institutional investors, such as pension funds, allows them to achieve their long-term target allocations to private markets.
Pension funds are increasingly looking to private equity investments to provide diversification and asset security. We helped one US corporate pension plan gain diversification, reduce fees and benefit from consolidated reporting across all assets.
Read our case study for more.
Where there is disruption, there is opportunity. COVID brought the entire global value chain to a halt, with the scale and speed of the pandemic’s impact on global supply chains eclipsing anything that had been seen before.
In our 'Reinventing Supply Chains' paper, we discuss how private markets play a critical role in creating the resilient and sustainable supply chains of tomorrow across our four asset classes: Private Equity, Private Infrastructure, Private Real Estate and Private Debt.
Faced with unrelenting economic headwinds led by rapidly rising interest rates and surging inflation, institutional US loan issuance volumes were effectively tabled in Q3, posting their worst new issuance quarter since the Global Financial Crisis. Despite this, investors were not all “risk-off”, with demand for secondary traded loans emanating from newly-issued CLOs in Q3. Meanwhile, weakening economic conditions across Europe continue to cast a long shadow over capital markets and loans are no exception, with loan market conditions only marginally improving in Q3 compared to Q2 levels.
As ESG and sustainability continue to climb up debt investors’ agendas, so sustainability-linked loans are increasing in popularity both for limited partners seeking ESG-compliant investments and for company management teams looking to improve their ESG performance. From a standing start just a few years ago, the sustainability-linked loan market grew to USD 600 billion globally in 2021, 3.5 times its value in 2020, according to LSTA figures.
In this Q&A, Aurélie Madé and Gerald Tee explain Partners Group’s systematic approach to these loans and how the market is developing.
A case study of timeless toy figurines that appeal to children and parents everywhere
When Partners Group first invested in Schleich in mid-2019, the company had already firmly established itself as a leading toymaker in Germany. However, we recognized that the timeless nature of its products also had a strong international appeal. Under our ownership, we have therefore focused on transforming Schleich into a truly global brand.
In this case study, we look at how Schleich's sales have grown at around 20% per year in the competitive US, UK and French markets since our investment, enabling Schleich to generate a majority of its toy sales outside of Germany for the first time in its history.
Q&A with Todd Miller, Head of Private Equity Health & Life
Identifying transformative trends is key to our thematic investing journey, and one of the giga themes guiding our approach is digitization & automation. As the healthcare industry is 10-20 years behind the economy in adopting new technologies, investment opportunities in innovation are plentiful.
In this Q&A, Todd Miller, Head of Private Equity Health & Life, explains where Partners Group sees opportunity in the Health & Life vertical and how investment, combined with strong governance, can enhance patient care and improve the daily work life of clinicians.
Finding relative value in private markets through active portfolio management
When it comes to private markets, many investors prefer to stick to long-term allocations, but could a more flexible approach, deviating from pre-defined targets, bring additional return?
In the last paper in our series on Building Portfolios for the 21st Century, we argue that it can pay to be tactical with portfolio allocation and adaptive to market opportunities. Through active portfolio management, investors can put themselves in the best position to benefit from relative value over time.
A case study in delivering better, cheaper, and less invasive healthcare at Confluent Health
Our portfolio company Confluent Health, one of the largest occupational and physical therapy provider platforms in the US, is leading the next generation of physical therapy care with its clinician-led approach, delivering more sustainable and stronger outcomes for patients. Read the case study for more.
Portfolio Diversification: No One-size-fits-all Approach
Portfolio diversification is a valuable investment tool, but finding the right balance requires thorough analysis, and a strong investment platform to execute on it. We often hear from clients who are working to achieve that balance – not too little and not too much.
In the third paper in our Building Portfolios for the 21st Century series, we argue that private markets portfolios should not be limited to rigid diversification guidelines but should instead remain flexible, spreading across vintages, investing across multiple assets, and focusing on direct investments.
An ESG engagement case study
During our ownership of PCI Pharma Services, a global provider of outsourced supply chain solutions supporting biotechnology and pharmaceutical companies, we worked with the company to enhance its approach to waste management and health & safety. Read the case study for more.
THE NEXT GENERATION OF DECARBONIZATION INFRASTRUCTURE
Decarbonization is one of the giga themes driving Partners Group's thematic investing. With the increased frequency and intensity of natural disasters costing nearly USD 250 billion per year, combatting climate change has become one of the greatest humanitarian and economic imperatives of our time. But how can we truly achieve global decarbonization objectives and how much will it cost? In this thematic paper, Partners Group outlines its framework for analyzing and assessing decarbonization solutions across sectors, geographies, and technologies.
A case study on transforming the health & safety culture at USIC
In this case study, we outline the initiatives Partners Group has introduced at US portfolio company USIC, a market leader in underground utility locating services, in order to transform its approach to health & safety. These company-wide initiatives have led to a measurable improvement in technician safety, with field injuries and lost-time incident rates halving since our acquisition in 2017.
Evergreen Funds: the Next Frontier for Private Markets Investors?
Since the dawn of investor interest in private equity, traditional closed-end funds have largely served investors well as a means to access private markets investments. But as private markets have evolved, different structures have emerged that can provide investors with new ways to access these markets. In this paper, we argue that open-ended or evergreen structures can help address some of the key structural and cyclical challenges of investing in private markets and should be considered a viable alternative – or complement – to traditional closed-end funds.
Getting the Best out of Private Markets Portfolios
With the number of public companies in the US having fallen by 50% in the last 25 years, it is becoming clear to many investors that the widest range of opportunities now lies in private, rather than public markets. However, with many investors still structurally underweight to private markets, are they making the most of their private markets allocations? In this paper, we argue that investors need to be more active in the management of their private markets portfolios in order to achieve their return objectives.
The Rise of "Governance Correctness"
This paper provides a practitioner’s perspective on the increasing divergence between the corporate governance regimes of public and private markets and the resulting impact on value creation for investors.