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Real Assets Portfolios - CIOs’ Investment Strategies

We believe that market conditions and structural factors will continue to support the demand for real assets in both emerging and developed countries. There is a clear shift to private illiquid assets with fund-raising recovering its pre-crisis level amid $600bn of inflows in 2016 to private equity, real estate, private debt and infrastructure.

The AuM of those asset classes reached a record high of $7.7tn in 2016, and PwC estimates that so-called ‘alternative’ assets will reach $13.6-15.3tn in 20201.


In a low yield environment, with structurally high demand for income, we believe investors are likely to continue to seek to diversify their portfolio exposure to potentially capture illiquidity premium to enhance returns. Beyond markets, prudential regulation (Solvency II for insurers, Basel III for banks) and demographic shifts (such as life expectancy and urbanisation) are driving the demand for alternative sources of financing to complement banks’ intermediation in financing the real economy.


With an outlook of interest rates trending higher in the medium term, as a reflection of stronger growth and inflation, real assets can be seen, with a long-term perspective, as a hedge against inflation. With this purpose, real estate and infrastructure are the most appealing strategies. Real assets can also be considered as an interesting potential substitute to fixed income, albeit keeping the higher liquidity risk in mind.

In fact, some real assets have a pattern of very predictable cash flows, on the back of a stringent contractual framework (private debt, core/core+ real estate, infrastructure).

Read more on Real Assets Portfolios

December 2017

Decembre 2017

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Private debt is a segment of the traditional fixed income universe, and is
used within the credit continuum to cover assets resulting from banking
market disintermediation. This market has seen strong growth over the
past five years. We estimate that corporate financing in Europe exceeded
€100bn last year. Since the 2008 crisis, the credit supply from banks has
been extremely constrained by national and international regulations,
such as Basel III. In such an environment of long and extremely low rates,
many investors are looking for returns and diversification that the private
debt asset class delivers.
Private debt has similar drivers to fixed income with stable and predictable
cash flows and principal preservation. However, it captures other return
premiums (sourcing, complexity, size, etc.) and increases diversification,
thus reducing concentration risks to credit portfolios with access to both
corporate assets and real assets (real estate, infrastructure, aircraft, etc.),
not available on traditional debt capital markets.

Real estate performance is affected by two main factors: property
valuations and rent variations. The European economic recovery could
favour real estate as demand for space is expected to increase from tenants,
pushing rents upwards as it is expected to do in France. Rent trends could
become the new driver of real estate performance, while the past five
years have seen real estate prices driven essentially by yield compressions.
However, prices could be affected by a potential interest rate increase in
Europe, for certain assets, despite the expected preservation of attractive
real estate risk premium. Investors should consider that real estate covers
a wide range of strategies (core, core+, value-added to opportunistic) with
a highly varied range of assets (offices, retail, logistics, residential). Each
of these specific factors has an impact on both the investment profile and
exit strategy, and therefore its liquidity. In our view, active real estate
management strategies (e.g., leasing-up, renovating or total refurbishing)
are more crucial than ever in order to deal with current high valuations
and the future risk of higher interest rates.



Private equity is one of the best performing asset classes in asset
management history, with an attractive illiquidity premium (up to 400bps
versus local comparable listed equity markets). On the back of this strong
historical performance, it has become the second-largest alternative
asset class with $2.5tn assets under management. This popularity has
created an unprecedented amount of money committed by investors, but
not invested: dry powder in private equity has reached a record high of
above $800bn. We therefore question whether the strong performance of
the asset class can be maintained at a time of highly priced transactions,
and whether private equity managers can find attractive new investment
opportunities. High valuations may be beneficial to fund managers that
are able to exit their investments at the current prices. Overall, investors
should keep in mind that value creation in this asset class needs time, and
private equity should not be used under a 10-year investment horizon.
As a reward for this high level of illiquidity – and no cash-back before
seven years on average – we believe that private equity remains the best
investment solution to maximise returns.

As the need for a transition from cyclical to a more structural recovery
will be at the forefront for policy makers in the years to come, we believe
that infrastructure investing may provide an interesting opportunity to
both diversify risks and enhance returns. Investor satisfaction with the
asset class has reached a three-year high with 89% of investors now
having a positive view. As the demand for infrastructure investing is very
high, the case for selection is even more important to find investment
cases at reasonable price. The asset class is very heterogeneous, some
infrastructure solutions are risky by nature because they are linked to
economic cycles or commodities price (e.g., airports, oil sector, merchant
exposure), while some others provide excellent predictable cash flows
– owing to a very strong and long-term contractual framework (e.g.,
French energy transition). However, investing in this asset class is complex
– especially when considering liquidity and exit possibilities: some
infrastructure assets can be sold in a couple of months, while some others
benefit from special tax or regulatory conditions and have to be held for
20 years.

1.PwC Market Research Centre analysis based on Preqin, HFR and Lipper data. PwC report published in June 2015: “Alternative Asset Management 2020 – Fast forward to centre stage”. All other data in this page are from Prequin.

ARIAS Pedro Antonio , Global Head of Real & Alternative Assets
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Real Assets Portfolios - CIOs’ Investment Strategies
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