- A challenging year ahead: According to our 2022 Investment Outlook, next year will feature growth deceleration, persistent inflation pressure and asynchronised central bank action. 2022 will also be a pivotal year for the transition to carbon neutrality and the development of a more inclusive growth model. In this environment, real assets and private markets have an important role to play in investors’ portfolios: they can help enhance diversification with a focus on inflation protection, they offer some of the best risk/return prospects for the next decade1 and, finally, they provide a direct lever for allocating capital to projects and companies that fulfil a broader social and environmental agenda.
- Private debt: The financing earmarked for the recovery will create opportunities in the private debt space, but selectivity will be paramount. Indeed, there is a divergence between the best credits, where competition is fiercer than ever, and more complex situations in sectors where visibility remains poor. We are observing a flight to quality, as investors wish to protect themselves from the situation potentially deteriorating as government support winds down. This is driving a search for conservative investments with limited risk. Private debt has been an important contributor to economic growth, thanks to the support it provides to the real economy as a complement to banking intermediation. This trend should accelerate, creating appealing investment opportunities for long-term investors.
- Infrastructure: With governments relying on infrastructure investment to stimulate economies, the asset class has been a bright spot throughout the Covid-19 crisis. Private capital is needed to complement public funding and is giving infrastructure investments strong momentum. The pandemic has not only brought the need for health and communications infrastructure to light, but also stressed the urgency of the energy transition. A significant share of the EU 2021-27 multi-year budget and of the Next Generation EU plan has been committed to the green transition and digital infrastructure. In 2021, we have seen a sharp acceleration in the number of transactions, especially for energy transition assets that are likely to attract significant private capital flows.
- Private equity: Record numbers continue to be hit thanks to strong post-pandemic growth on the back of a steeper-than-expected recovery. Post-crisis periods are historically the best times to invest in private equity, as demand for capital from unlisted companies increases significantly. With many companies weakened by the crisis, sector consolidation has been accelerating, creating plentiful investment opportunities for private equity funds. The adoption of existing technological or environmental trends has been accelerated by the pandemic and investors are willing to bid up the valuations of companies on the right side of these changes. The Covid-19 crisis has shone a light on several market disruptions in technology, the environment, demographics and relocation.
- Real estate: The steeper-than-expected recovery could boost the leasing market and 2022 could be a solid year for real estate. The keys for success will be to focus on quality and the repositioning of properties to match tenants’ post-pandemic needs in terms of technology and make environmental, social, and governance (ESG) a key operational component of investment and management procedures. Offices will remain an important part of investors’ real estate portfolios, mainly due to the depth of this market. However, the adjustment cycle for offices will be long. Demand for office space is likely to be concentrated on modern buildings in major cities and inter-city centres that are close to transport links. Logistics has been among the big winners of the crisis. The sector is still experiencing strong demand on the back of booming e-commerce and more fragmented supply chains and this should continue in 2022. Residential: demographic changes have accelerated, impacting the residential market, with many provincial towns (with a good level of transportation connectivity to the main cities) experiencing a resurgence. There is still a demand-supply mismatch for second-tier urban areas, which is creating some tension in a competitive market.
The role of private capital will be crucial in Europe’s recovery from Covid-19 and the transition to carbon neutrality, as well as the development of a more inclusive growth model.
Aided by unprecedented levels of government support, the economy is experiencing a steep recovery that hides divergences and fragmentation at a sector level, as well as a period of intense disruption in the economic system, as shown in statistics on energy prices, automobile production and sea freight. After decades of disinflationary forces, we see a resurgence of inflation on the back of shortages and hyper-consumption. While the market debates if this will be temporary or structural in nature, the ruptures in supply chains and the consequences of these on the rate of inflation could endure and complicate the task of central banks in the coming months.
In this context, real assets and private markets can be seen as a haven of stability for investors, which is reflected in market figures. According to Preqin, AUM of real and private asset funds in Europe grew by almost 19% in 2020 to reach €1.486 billion (excluding hedge funds)2 , and fundraising in H12021 reached 59% of the 2020 total – which represents the second highest level on record. Europe now represents 24% of global alternative AUM3 .
However, in this uncertain and disrupted environment, where dispersion of performance is high, investing successfully in real assets involves a long-term horizon, powerful deal sourcing, stringent asset selectivity, robust operational infrastructure and financial robustness. This framework is more critical than ever for selecting assets with the best risk-return profiles, capturing the different expected return premiums and building resilient portfolios.
We believe that investors should consider ‘core’ strategies which have historically proved to be less volatile and shown more stable income generation, including during times of crisis: ‘core’ and ‘core plus’ assets in real estate and infrastructure, senior secured instruments in private debt, primary buyouts and growth capital in private equity.