IPM – Edition December 2022

3Q22 was a challenging one for private markets. Spreads between risk-free rates have narrowed or even reversed, leverage costs have soared and the economic outlook has weakened further. In this environment, it is crucial existing portfolios are positioned against some of the headwinds we know are coming next year.

Business’ or assets’ capacity to pass on inflation to customers and tenants will be a determining factor for performance. We expect niche sectors such as life sciences, cold storage and self-storage real estate and energy and sustainability focused infrastructure, to see the strongest structural drivers of demand – providing the crucial pricing power in setting rents and terms. But with market uncertainty always comes opportunities for investors who are willing to make a call on pricing before stability returns.

Sharp rises in interest rates around the world are feeding through to real estate yields and cap rates. Buyers and sellers are adjusting price expectations accordingly. Real estate returns have slowed, and transaction activity has fallen as some deals agreed at prices prior to the slowdown have been aborted.

In infrastructure, investors can no longer count on cheap credit to boost investment returns. Looking ahead, more reflection and rigor are needed in their investment and asset management strategies to deliver positive outcomes. In addition, the increasingly complex energy transition investment landscape means investors must adapt to rising competition, new technologies, and changing policies. We also look at how long-term private markets investors should factor in physical risk when looking at the future performance of a market.

Private equity so far is holding up in the face of uncertain markets, and we see sponsors and private equity-backed companies making positive adjustments to remain resilient in the current economic environment.

And while still small compared to the private equity industry, the private credit market has become an important part of our functioning financial ecosystem.