Which assets are likely to be most and least resilient in 2024?

Macroeconomic, regulatory, and geopolitical forces are likely to cause strategic changes in asset management strategies this year, said a panel at Private Markets Investor | Europe.

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Clockwise from top left: Sartorio, Sproule, Cain, and Rajagopal.

How investor allocations are changing in a more challenging environment was the topic of discussion at Private Markets Investor | Europe 2024 in London on 21 March in a lively panel moderated by Michelle Sartorio, Founder, True Value Creation – with panellists Anand Rajagopal, Private Markets Sustainability Lead at Phoenix Group, James Sproule, Chief Economist, UK at Handelsbanken, and Elizabeth Cain, Head of Debt Origination at Pension Insurance Corporation (PIC).

The discussion focused on resilience and synthesised the increasing importance of private markets, as well as the trajectory of recent years – and what has changed in terms of investor profile, investor allocation, offering, competition growth, and geographies. The panel examined the biggest issues in private markets allocation both currently and in the longer-term.

“Private debt in 2023 saw banks retrenched. Now, in 2024, banks have come back into this space,” said Sartorio. This meant, she added, that there were more opportunities in terms of what could be done, particularly around transition finance, which indicated that the lending space could see an impact on smaller private debt lenders – though this was still a ‘what if’ scenario.

“Asset supply and demand is still healthy, though. In insurance, in volatile times,
you have to be agile and embrace diversification.”

“Previously, you only had limited kinds of debt [available to investors for private markets],” said Sproule. He added that a change to this scenario could mean more opportunities to build more resilient portfolios. “Regulation is a driver, but not on purpose, because private markets were more appealing."

Rajagopal agreed, saying that the trajectory was messy and hard to predict because geopolitics were “complicating” matters. “Inflation is being persistent, and the rate environment is part of it, too,” he said. “Asset supply and demand is still healthy, though. In insurance, in volatile times, you have to be agile and embrace diversification.”

Cain noted that asset supply and demand issue was related to how much investment grade (IG) opportunities were focused on the private debt space. She added that maintaining a difference in private debt and private equity – when trying to take advantage of the growing importance – was also critical.

She emphasised that, despite the trajectory of this market, PIC’s strategy was centred around largely investing in the heavily-regulated public areas that had largely dried up over the past couple of years. This in turn meant that the company had had to widen its spread to find good opportunities, which had brought challenges and complications along with it.

Resilience in 2024

The panel also discussed how private capital – which would normally stay in the UK – was now seeking investment in foreign markets. The question of how the UK could reverse this situation, especially from an asset class perspective, was top of mind in a market grappling with high interest rates, low returns, and reduced M&A activity reported from 2022 to 2024.

“Geopolitical fragmentation, sticky inflation, and Houthi Rebels
have made [this situation] worse."

Rajagopal said that to combat these market issues, there needed to be more long-term thinking and discipline in terms of viable investments. Assets needed to be judged on the merits of what they were able to withstand and offer over a longer cycle – not only in terms of the conditions occurring whenever the deal was being made.

“Geopolitical fragmentation, sticky inflation, and Houthi Rebels have made [this situation] worse and you need to have assets that stand the test of time and make it to duration in terms of cycles,” he said.

Sartorio asked the panellists how these considerations feed into the Just Transition goals, where economic progress should not mean the destruction of nature and the environment – a developing force in the market that has driven some capital to emerging markets in 2024.

Cain said the risk of stranded assets around emissions-producing markets was an issue that had to be factored into long-term thinking. This, she specified, must also be looked at when assessing one’s portfolio from a decarbonisation lens – especially if certain industries, such as oil and gas and other extractive sectors, were to become less in demand. The potential financial burden there needed to be considered thoroughly.

These issues are ongoing. The lobby group, Carbon Tracker Initiative, said in 2023 that the risk from lower future [of oil and gas] demand is that long-term commodity prices will be lower than anticipated – meaning that numerous projects would fail to generate returns and become stranded. Clearly this would result in a marked fall in returns for shareholders,” said Carbon Tracker’s report. “This was exactly what happened after 2014 following the industry capex-binge between 2010-2014.

Cain also expounded on flood risks and how they could completely alter the market as sea levels rise and the effects of climate change compound over the coming decades.

Conversely, Sproule noted that real estate was a safe asset to invest in despite almost all eventualities – particularly in the UK.

Asset class growth

The panel discussed which asset classes and industry sectors were likely to grow in appetite in 2024 and beyond, with most of the panellists saying a long-term view would win out.

“Anything with long-tailed cash flow, such as commercial ground rent and transportation,” was a key area as noted by Cain.

“The investment has to be able to stand on its own two feet."

Rajagopal said that the most recent COP last year in the UAE – which was criticised as less successful – was having a quiet impact on asset class viability in 2024 and beyond. “COP was quite effective in tipping the scales for renewable energy; we tripled renewable energy promises,” he said.

However, the fallout from a potential Trump return to the White House in the US later this year was less clear – especially as the Inflation Reduction Act (IRA) has most benefitted the states likely to vote for him. “The Policy has to support the investment area,” Rajagopal said but stressed that the regulation can’t just enable a situation where investments are made to make the company look good. “The investment has to be able to stand on its own two feet [from a fiduciary standpoint],” he said.

Increasing resilience

The panel firmly agreed that more needed to be done to increase resilience in private markets – and that the UK’s regulatory and financial environment, alongside global macroeconomic markets, needed more cohesiveness to achieve goals.

“It might not be possible for emerging markets yet,
but it will have to be eventually.”

Enhanced discipline around credit and pricing was needed, said Cain, adding that this would make the UK more attractive to long-term investors.

Rajagopal emphasised the shift to carbon neutrality, necessary in the coming years. “The net-zero transition cannot happen unless you bring emerging markets into the mix as well to create more low emissions energy projects,” he said, building on his theme of more inclusive and holistic policy around the investment ecosystem. “It might not be possible for emerging markets yet, but it will have to be eventually.”