Over the past decade, private assets have become a cornerstone of institutional investment portfolios. From private equity to private credit, infrastructure to real estate, these asset classes have provided diversification and strong returns, often outpacing public markets. However, as global economic conditions shift and financial markets recalibrate, investors find themselves navigating an increasingly complex landscape.
The recent HedgeNordic Round Table discussion, held in Stockholm in January 2024, brought together leading investors and asset managers to dissect the performance, challenges, and future prospects of private assets. The conversation was shaped by the perspectives of institutional allocators such as Ulrika Bergman of the Nobel Foundation, Magdalena Högberg of Swedish pension fund AP4, and Mikael Huldt of Afa Insurance, alongside asset managers including Nadia Nikolova (AllianzGI), Raman Rajagopal (Invesco), Olivier Keller (PineBridge Investments), and Zeshan Ashfaque (Man Varagon). Moderated by Jonas Andersson of Navare Invest, the discussion painted a picture of resilience, adaptation, and caution as private markets enter a new era.
The Evolution of Private Markets
The rise of private assets in institutional portfolios can be traced back to the aftermath of the 2008 financial crisis. With low interest rates fueling an abundance of capital, private markets thrived for more than a decade. However, in 2022, this environment began to shift as central banks raised interest rates in response to inflationary pressures. While this policy change slowed activity in many corners of the private market, it also created opportunities in others.
The year 2023 was, in many ways, a tale of two cities. Private credit emerged as a standout performer, benefiting from rising base rates and more lender-friendly conditions, while private equity faced mounting headwinds, including a sluggish M&A environment and difficulties in securing attractive exits. Meanwhile, infrastructure investments proved resilient, whereas real estate valuations came under pressure as higher interest rates reshaped market dynamics.
Private Credit: A Strong Performer
One of the most compelling narratives in the private asset space has been the rise of private credit. With banks retrenching from corporate lending, private lenders stepped in, offering capital under increasingly favorable terms. Mikael Huldt of Afa Insurance noted that private credit was the best-performing private asset class in 2023, a sentiment echoed by AP4’s Magdalena Högberg and the Nobel Foundation’s Ulrika Bergman.
According to Raman Rajagopal of Invesco, 2023 was a particularly attractive year for private credit investors, with direct lenders able to underwrite yields exceeding 11-12% on senior secured positions. However, despite strong fundamentals, one major challenge remained: capital deployment. The slowdown in transaction volumes made it difficult for investors to put capital to work at scale, particularly for larger funds looking to deploy significant sums. This divergence in opportunity underscored the importance of manager selection in the private credit space.
Private Equity: A More Challenging Landscape
Private equity, traditionally a high-performing asset class, faced a more challenging backdrop in 2023. The combination of rising interest rates, economic uncertainty, and reduced M&A activity led to slower deal-making and a tougher fundraising environment. Emerging managers, in particular, struggled to attract capital, as investors gravitated toward established players with proven track records.
Despite these headwinds, long-term private equity returns remained strong. Bergman noted that while 2023 was a muted year for private equity, the asset class still performed well over a three-to-five-year horizon. Similarly, Högberg explained that AP4 considers private equity as an extension of public equity, and while returns were not stellar in 2023, they did not experience significant downside either.
Olivier Keller of PineBridge Investments highlighted that while fundraising was slow, valuations did not decline as much as some had expected. Many investors found themselves over-allocated to private equity due to the strong performance of public markets, leading to an increase in secondary market activity. Looking ahead, private equity firms will need to rely less on financial engineering and focus more on operational improvements to drive returns.
Real Assets: A Divided Market
The real assets sector presented a mixed picture. Infrastructure investments, particularly those with inflation-linked revenues, remained attractive to investors. In contrast, real estate faced more pronounced challenges. Högberg observed that after real estate valuations held steady in 2022, a correction took place in 2023, particularly in office spaces impacted by the shift to remote work.
Huldt shared a similar perspective, pointing out that capitalization rates—used to value real estate assets—were well below interest rates, putting downward pressure on valuations. Despite this, infrastructure assets continued to perform well, with their inflation-linked revenue streams providing stability in a volatile market.
The Growing Influence of ESG and Impact Investing
Another theme that emerged from the discussion was the increasing importance of ESG and impact investing. While ESG integration remains uneven across markets, it is becoming a more prominent consideration for institutional investors.
Nadia Nikolova of AllianzGI noted that impact private credit funds are gaining traction in Europe, supported by blended finance techniques that reduce risk for private investors. However, she highlighted the challenge of mobilizing capital toward sustainable investments in emerging markets. Despite significant pledges from global asset owners, actual capital flows have been slower than anticipated.
For institutional allocators, ESG is now a key factor in manager selection. Högberg emphasized that sustainability is deeply embedded in AP4’s investment strategy, not just as a compliance requirement but as a fundamental driver of long-term returns. However, Ashfaque cautioned that ESG implementation in private credit still faces hurdles, particularly in the U.S., where political factors and concerns over greenwashing have created resistance.
Looking Ahead: Key Trends in Private Markets
As investors look toward the future, several key trends are expected to shape private markets. In private equity, M&A activity and distributions are likely to pick up in 2024 as interest rates stabilize. However, Keller warned that the era of easy leverage is over, and private equity firms will need to focus more on operational value creation.
In private credit, while interest rate cuts may be on the horizon, the asset class remains well-positioned due to its attractive income profile and downside protection. However, Rajagopal pointed out that rising base rates will create increased dispersion in credit performance, making manager selection even more critical.
Another area of opportunity is distressed investing. Rajagopal and Ashfaque both noted that rising default rates could create openings for distressed credit strategies. However, these windows of opportunity tend to be short-lived, requiring managers to act quickly.
In emerging markets, impact investing is poised for growth, but Nikolova stressed that success will depend on structuring investments in a way that mitigates risk for private capital. Blended finance solutions, which combine public and private capital to fund sustainable projects, are likely to play a key role in unlocking investment opportunities in these regions.
The Importance of Manager Selection
One of the overarching takeaways from the discussion was the critical importance of manager selection. With private markets evolving rapidly, investors must be discerning in choosing partners who can navigate uncertainty and capitalize on emerging opportunities. Högberg noted that AP4 looks for niche strategies that offer differentiated exposures, while Bergman emphasized the value of strong, long-term relationships with managers.
Huldt summed it up best: “Rome was not built in a day. Successful private market investing requires patience, discipline, and a keen understanding of structural trends.”
As private markets continue to evolve, investors who remain adaptable and focused on long-term value creation will be best positioned to succeed.
