Private Markets Investing| Barita Insights | May 24, 2022

The last two decades have seen a growth in private markets through funds pooled together from institutional investors to be managed by asset managers, stemming from demand in longer investment time horizons needs and a low interest rate environment. Private markets refer to non-bank debt and equity investments across different asset classes, primarily in Private Equity, Credit, and Real Assets such as infrastructure and real estate. Private markets fundraising was up by nearly 20 percent year over year in 2021, to reach a record of almost $1.2 trillion, according to McKinsey’s Private Markets Annual Review, as dealmakers were active after facing a year of headwinds due to the COVID-19 pandemic. Assets under management saw an increase of 32% year over year to reach an all time high of $9.8 trillion as the year saw $3.5 trillion being deployed across asset classes.

What are the strategies that make up the Private Market?
There are three main strategies that make up the private markets in respect to their different sub-asset classes; These includes Capital Growth, Enhanced Income, and Stable/Core Income. This more narrowed spectrum of strategies include: 1) Capital Growth – Buyouts, Venture Capital, Distressed & Special Situations, Opportunistic Real Estate, Greenfield Infrastructure; 2) Enhanced Income – Mezzanine Corporate Debt, Venture Debt, Core Real Estate, Value-added Real Estate, Subordinate/Junior Real Estate Debt, Brownfield Infrastructure; 3) Stable Income – Direct Lending, Senior Real Estate Debt, and Infrastructure Debt. Private markets investing and access comes with several benefits such as a broader investment strategies than public markets, and long-term investment horizons along with liquidity premiums.

Investment Outlook
Private Equity funds have continued to lead private markets in driving global growth, with fundraising rebounding globally, and record assets under management (AUM) of $6.3 trillion,. Private equity was the highest performing private market asset class with a net internal rate of return performance of 27% in 2021. Private Equity makes up a large percentage of the capital growth strategy, with high-risk strategies such as a buyouts, venture capital, and distressed investing. Distressed investing can take from in multiple ways such as Distressed mergers and acquisitions, loan to own strategies, deep value carveouts, and structured equity solutions. This involves investing in stressed and troubled companies directly through an equity injection, or indirectly through the company’s debt. The pandemic has shown the fundamental value and importance for infrastructure, and other real assets such as renewables. Assets exposed to tourism and air travel suffered increased headwinds in the pandemic and will continue to face uncertainties transitioning out, while assets with contractual revenues and/or growth linked revenues have been resilient. Private infrastructure debt typically provides a hedge against inflation, with inflation linked cashflows, or inflation linked interest rates. In 2021, Infrastructure reached all time highs in fundraising, and global AUM passed the $1 trillion mark. Investors continue to fund environmentally friendly and sustainable projects as ESG investing continues to become more prevalent. The disruption from the pandemic saw investors’ appetite for real estate sectors shift from office and retail spaces, to primarily residential and industrial. Providers of junior and senior real estate debt curtailed on leverage amounts as risk levels and uncertainties prevailed, which saw loan-to-values (debt capital to property value) ratios falling to lower levels than the 2008 global financial crisis. Fundraising for opportunistic and value-added real estate strategies saw an increase as investors positioned themselves for potential buying opportunities. Credit as an asset class, across all strategies, continues to see growth in fundraising, as it has seen resilience and diversity, resulting in it being the fastest growing asset class by fundraising. Direct lending for 2020-2021 has seen a compounded annual growth rate (CAGR) of 65% and has seen outsized growth since the 2008 crisis. Direct lending is an income strategy where investors provide senior floating rate 1st lien and 2nd lien to companies primarily in the lower middle market to upper middle market. Direct lending tends to generate attractive returns while providing downside risk protection due to its seniority in the capital structure among companies it provides capital to, and protection from interest rate risk due to shorter durations than fixed rate debt.

Conclusion
As economic uncertainty prevails, businesses and consumers alike continue to face supply chain, as well as inflation issues, and central banks are faced with the challenges in navigating this macroeconomic environment. After a period of favorable financial market conditions which saw valuations stretch and leverage rise, investors are now expected to face lower risk-adjusted returns and increased volatility. However, private markets have demonstrated over the years to offer portfolio diversification and lower volatility due to long-term strategic orientation and aligned interests with investors, creating room for alpha, as well as fostering economic growth and development for developed and emerging markets coming out of the pandemic. Private capital is usually deployed through closed-end funds with long term commitments, which alleviates fund managers from short term pressures, bolstering resilience among shocks in investment portfolios. Barita Investments continues to create different products and avenues to allow for investors to participate and take advantage of these strategies to generate above average investment returns.