Uncertain times, times for private assets

By Joseph Gawer,PhD and Philippe Faget,CAIA

During the last 20 years in Europe and in the US money has been quite free and when the
money is at these levels, it is very easy for investors to take risks, because it doesn’t cost a lot
to take risks. So even if an investor didn’t succeed in getting the high return that he or she was
expecting, it was possible to get a quite good return, because of the low cost of the money.
Today, this unusual situation has completely changed and we are entering in the traditional
way where you have to pay for your money. What does it mean? That maybe private asset is
the asset class ready to deliver a high return, but what is more important now is to diversify
rather than to take the risk of being in one single asset, because the probability of success is
weaker now than it was before.
Empirical studies show clearly that there is a sensitivity of the return of private assets to the
phase of the business cycle. And what our indicators are telling us is that, for instance, for the
United States we’re expecting a 2.2 % growth of the GDP for 2023 and a 0.7% for the next year
2024, a huge slowdown. If we look at the eurozone, it is also expected a slowdown. So, for us,
we’re in a slowdown period. We’re not expecting a recession, maybe there could be some
technical ones, such as in Germany, but not a recession. In addition to that, we expect a high
level of inflation, even if it decreases a little bit it will remain high. But what we also see is that,
in 2025 we may encounter recovery. This scenario is very important for us because if we use
the past as a guide, past experiences tell us that the better time to invest in private assets is
when the economy is low, as it is currently. Most of the economists today do not see a strong
recession, that would be the worst-case scenario. So even if we don’t know precisely how long
this period will last, we think it’s quite interesting to take some risk.
So definitely it is a good moment to invest in riskier assets and we see several drivers for
portfolio construction: a diversified allocation in private equity, private debt and
infrastructure. Real Estate investment could be as well progressively added in order to increase
the diversification. Why in infrastructure? Because this kind of asset provides returns linked to
inflation and we don’t expect inflation to come down dramatically. On the other hand,
infrastructure benefits from a lot of government support in Europe and US for all the plans
related to energy transition.
Having said that, in the current environment, performance has become key. If private assets
are to be allocated in a portfolio, they need to deliver a high performance. In an environment
where not only peripheral bonds such as the Spanish Government Bond or the Italian
Government are performing so well, but also the safest assets such as the German bond are
performing well, private assets need to deliver the “next return”, in order to compensate for
their illiquidity. In any case, there is a big trend in this market which is that the secondary
markets for private assets are growing at very high speed. The secondary market on private
assets is growing very, very fast. That could offer to fund managers and their investors very
interesting investments at relevant discounts and, at the same time, open a door to sell some
investments in the secondary markets to address liquidity requirements from investors when it
is necessary. On liquidity, which is one of the investor’s main concerns, the fund managers
who are able to combine public and private assets in the same portfolio to offer tailored
solutions make the difference.

Last, but not least, as private assets are a long-term investment by nature, a good
diversification among all the private asset classes is absolutely key. In conclusion, we see that
the current environment of high uncertainty may be the appropriate time for private assets,
but always with the help of someone who is an expert guide in these complex investment
universes.