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Investing in private assets: what does the future hold?
Private Bank
Following uncertainty on listed markets in 2022, volatility has continued in 2023. How have private, unlisted assets fared? After several years of outstanding performance, particularly in private equity, should we worry about a possible crisis?
We examine the outlook with Thierry Célestin, head of Private Asset investment solutions for our private clients.
How do private assets tend to behave when times are difficult for financial markets?
Historically, the best years for private equity have often been the crisis years – 2001 or 2008 for instance. While listed markets are quick to feel the effects of an economic downturn, a difficult geopolitical context, or rising interest rates, private markets react more slowly due to their illiquidity and lack of price predictability. In the last few months, valuations in certain segments have been adjusted downwards, offering attractive entry points for deploying capital. With listed assets, however, market timing is very difficult. It is therefore essential to adopt a disciplined approach and to invest selectively and progressively, in order to smooth out the allocation process over time.
What is the outlook for private assets?
The issue for everyone at the moment is to ascertain how serious a potential recession might be. Institutional investors are taking a “wait and see” approach. Indeed, over the past two years we have seen lower business volumes and we are currently seeing a slowdown in raising new funds. With extremely volatile listed markets for both equities and bonds, private clients are alert to the advantages of an allocation in unlisted assets in their portfolios. One of the main questions clients have concerns the early-stage funding segment – raising venture capital for start-ups. With sustained trends driving new business opportunities, such as the digitalisation of the economy, we are constructive on this segment of private investments.
More generally, most fund managers have sufficient capital to support their companies. However, in a more difficult economic environment, the selection of managers is crucial due to the huge disparity between the performance of different funds. This disparity is far greater in private equity than in the listed universe.
Read also: A new era for private credit – what does it mean for investors?
What proportion of today’s portfolios should be allocated to private assets?
I don’t think there is an absolute figure. It has to be ‘made to measure’, according to the investment objectives, time horizon, liquidity requirements, risk appetite, and even life plans of each client. We recommend exposure to private assets when feasible, as this type of asset makes it possible to diversify portfolios and has constituted a major source of performance over the last few years. The aim of our approach to our clients’ private assets is to ensure broad diversification in terms of managers, geographical areas, sectors, strategies and, very importantly, length of time invested.
In addition to private equity, investments in private debt, real estate and infrastructure are growing. What is your view on these?
We already have proven expertise in these segments. The market is growing steadily, providing more investment opportunities for our clients, which is why we are constantly strengthening our offer and expertise. Lombard Odier has built up wide-ranging expertise in unlisted assets over the last 15 years and has a dedicated team of over 30 experts. This number is likely to double over the next few years. Our aim is to best cover all the opportunities offered by private assets for our clients, including in both private equity and companies at an earlier stage of development (ie venture capital and investment capital).
Private debt offers broad diversification for the traditional liquid bondholder and increases the current yield of private asset portfolios, especially in the context of rising interest rates. Real estate may be attractive at present, despite the rise in interest rates, because it has more features that make it a natural inflation hedge, owing to the fact that property assets generate income and rents are normally indexed to inflation. Lastly, we also see attractive opportunities in infrastructure, especially renewables.
Read also: Private assets, public appeal – will these investments weather rising rates?
How can we incorporate sustainability when investing in private assets?
This is complex as sustainability is still at an embryonic stage in private assets. That said, investors in private equity can have greater ability to move a company towards more sustainable practices, thanks to their proximity to the company and the long-term nature of shareholder engagement. Moreover, many of the leading companies in the field of sustainability are unlisted. A number of them are start-ups that are growing rapidly. Private assets can thus provide access to technology companies that will facilitate the sustainability transition.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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