Baar-Zug, 27 August 2013
It appears that some policy makers and groups of investors seem to believe that unconventional monetary policy and limited structural measures combined with time may solve the fiscal and economic malaise in the advanced world. We disagree. Overindebtedness led to the global financial crisis. Five years into the debt curing process, the overall level of public and private indebtedness has not declined but has in fact increased. Also, structural weaknesses in most regions were only insignificantly addressed in the meantime. We continue to believe in a low-growth environment with a slightly better outlook for the US, stabilizing growth in the Eurozone and emerging market growth fluctuating around lower levels combined with a continuation of “assetflation” on financial markets and a high probability of renewed and frequent flare-ups of market anxiety.
Christoph Rubeli, Partner and Co-Chief Executive Officer, comments: “While the great new value divide that we referred to in our last Private Markets Navigator still prevails and prices across the spectrum have continued to increase, the emphasis we place on developing our private markets assets has evolved even further, in particular given our conviction of a continued low-growth environment. Therefore, it has become even more critical to create value in the individual assets at the micro level.”
According to our semi-annual research publication, the Private Markets Navigator, we believe value creation potential can be found in the following segments:
The most compelling investments are to be found in the middle market, in which opportunities which allow for the active promotion of value creation can be found at reasonable valuations. The large cap market is less attractive as purchase multiples remain elevated. In H1 2013, valuations of quality assets in the large cap space were as high as 12x EV/EBITDA in the US and 13x EV/EBITDA in Europe. With multiples increasing, we believe returns for the overall asset class are likely to drop, but a net outperformance of 5-10% p.a. over public markets is still achievable over the life of investments. Overall, we look for companies that show strong potential for further growth and that are receptive to and benefit from our global perspective, while continuing to favor industry sectors with limited GDP sensitivity.
Private real estate:
The focus is on acquiring quality assets that offer opportunities to create value-based returns through asset management initiatives or to capitalize on compelling development premiums. In Europe, convincing risk-adjusted returns are to be found in markets that continue to generate positive growth. For instance, regional submarkets of London in the UK, class A buildings in tier 2 locations or class B repositionings in tier 1 locations in Germany or - in the Nordics - senior loan financing to European retailers that are expanding into these markets. In the US, properties that stand to benefit from favorable demographic shifts, the rebound in US energy and growing technology centers are compelling. Finally, corporate expansions in Asia-Pacific create opportunities outside traditional business districts in low vacancy areas.
The market offers opportunities to capture excess returns through a focus on projects that require specialist know-how, for instance due to construction elements, while country exposure premiums compensate for additional risk. In the US, opportunities exist in gas boom-related developments including gas-fired power generation, transport and liquefaction driven by continuously low gas prices and capacity constraints arising from ongoing coal plant retirements. Social infrastructure is compelling around the globe with a strong focus on Australia as it remains one of the most buoyant social/PPP markets. In terms of renewables, market developments in the US are increasing the sector's attractiveness. Finding compelling opportunities in this segment comes with several challenges in Europe while emerging markets offer convincing potential.
Covenant-lite issuance in the US has surged, with H1 2013 alone surpassing the record full-year pace of 2007. Despite a strong resurgence of CLOs in the US, the loan market in the region remains fragile. Partners Group continues to seek to create value outside of the broader markets, affording the ability to invest in midmarket, higher-quality and higher-yielding debt investments through developing debt facilities that are tailored to fit the issuer's needs. Opportunities also exist in so-called “club investments”, whereby a small group consisting of one lead investor and two to five additional lenders gets together to finance a transaction, offering the ability to gain greater access to management to do deeper diligence on the borrower, and a meaningful yield premium.
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 (email@example.com).