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Dissecting the risks of investing in private markets – given how they have changed – has become a major part of a responsible portfolio manager’s role over the past twelve months. This is especially the case due to the inflation rate rise, stagflation, the risk of a recession outlook, interest rate rises, and geopolitical issues.
“From a historical point of view, the private market industry has constantly
been developed from leveraged to responsible investment."
Tobias Winter, Senior Portfolio Manager, Private Equity, UNIQA, discussed how insurance investment teams can ensure that they successfully navigate these shifting landscapes. Winter was speaking at the recent Insurance Asset Management DACH 2022 virtual event, hosted by Clear Path Analysis, where he discussed the challenges and opportunities of the private markets arena in the central European/German-speaking regions – and what could be expected going into 2023.
“From a historical point of view, the private market industry has constantly been developed from leveraged to responsible investment,” he said.
A BlackRock report from earlier this year said that general macroeconomic volatility was a great opportunity for private markets. “The amount of dry powder in both private equity and private credit – more than US$1 trillion as of August 2022, according to Preqin – suggests that many companies should continue to have access to funding through a downturn,” said Blackrock in its “2023 Private markets outlook: A new era for investors” report. “Those that struggle, however, may prove attractive investments for opportunistic or distressed strategies, which have about US$136 billion ready to invest.”
Winter said the exposure could be a blessing and echoed many of these points. “The general partners pick the sweet spot with regard to geography; sectors the exposures they want to get and where they see the highest possibility to generate value.”
He added that you do get an alignment of interests and these players do put their own money on the table – which means that there is a strong willingness to create value because they want to raise the next fund.
"In the existing portfolio that you have, you are going to be hit
in the short term because there is no way out.”
“As a limited partner (LP), one also needs to develop a certain trust that the industry will adapt to challenges and there will be a lot of brain power used to find a solution and create value going forward,” he said. “We have seen this in history, and the vintages that went into the crisis were the best performing but those that were launched during or briefly after the crisis were good performing.”
He went on to add that the market believed that there will not be a long recession, and that, as an industry, it will make its way out of it.
He also added that most think that Russia’s invasion of Ukraine will end soon. “The private markets will find their way to create value during this time of recovery.”
This idea was reiterated when Winter was asked if there are long-term versus short-term applications that investors should be looking at. “On the existing portfolio that you have, you are going to be hit in the short term because there is no way out and public multiples are a reference point and part of the valuation that is referred to,” he said. “However, public valuations are mostly referred to with a discount, so you have some buffer.”
But, he added, if the overall market is coming down, there will be no way to hide although it will probably hurt to a lesser extent. In the long term, especially in the buyout world, Winter said there was less outperformance in the private versus the listed equities.
"In the long run, it is the place to be, if, as an insurance company
you can afford it from a strategic asset allocation.”
This area was key to others as well. “Strategies with natural resilience to inflation, such as value-oriented buyouts, infrastructure, real estate and private credit look set to benefit as investors also weigh the prospect of recession,” said Moonfare in its 2023 outlook.
“This has historically been somewhere around 600 basis points and the higher the markets go up the smaller the outperformance is but, in the long run, it is the place to be, if, as an insurance company you can afford it from a strategic asset allocation,” said Winter.
