Private markets mid-year outlook: Uncertainty, discipline and megatrends

The below is the introduction to our private markets mid-year outlook, which you can read here.

Executive summary:

• Interest rate uncertainty has contributed to restrained transaction volumes across private markets.
• In our view, the high volume of dry powder requires a disciplined approach to transaction underwriting at this point in the cycle.
• For many of our clients, we believe pooled private market funds have been their primary way to secure access to private markets.
• Marked valuation corrections may provide an attractive entry point to real estate and venture capital.
• We think tactical views need to be supplemented with longer-term tilts in favour of specific

The surge of interest in private markets over the past decade can be attributed to a number of structural factors. We see this trend as having further to run, particularly for noninstitutional investors who are often modestly allocated.

However, there’s no avoiding the fact that the interest rate cycle has fundamentally altered the investment landscape over the past 18-24 months. The pace of fresh capital allocations slowed in 2022, and again in 2023. We also saw wide bid-offer spreads in the underlying investment markets, and low levels of transactional activity, which limited liquidity.

While there are some specific areas where activity is picking up, for example European clean energy, the overall picture has yet to change materially. Across private markets (debt, infrastructure, real estate and private equity), the volume of transactions and originations in the underlying investment markets for calendar year 2023 was 40% below the average for the prior five years.¹ Higher-frequency data show little improvement in activity levels – in Q1 2024, US private equity exits were 40% and global real estate transactions 53% below their five-year averages.²

The median holding period for private equity buyout-backed exits rose from 5.3 to 6.1 years between 2021 and 2023 as the exit environment became more challenging.³ For closed-ended structures in particular, there is building pressure to divest assets where funds are reaching their scheduled termination dates.

At the same time, the volume of dry powder (capital committed but not yet invested) has been rising. While this inevitably varies by asset class and geography, the overall quantity of dry powder remains at the highest level on record.

If there is one theme that should be in all our minds, in our view, it is the need to be disciplined with respect to transaction underwriting. Pressure to deploy, wedded to a high degree of macro and geopolitical uncertainty, means we believe it is more important than ever to adopt a scenario approach to revenues and interest rates that build resilience against a range of outcomes.

The above is the introduction to our private markets mid-year outlook, which you can read here.

Sources

1. Preqin as at 31 December 2023.

2. Pitchbook as at 31 March 2024 and CBRE as at 31 March 2024.

3. Preqin & Pitchbook, as at 31 December 2023.