During the IPE annual conference in Vienna this week, 63% of the audience attending the chief investment officers’ panel – Investment leaders respond to global challenges – believed private market returns would “disappoint” going forward. But it is not yet time to give up on alternatives, as selective opportunities remain, according to the panel speakers.
Appetite for private markets has been cooling down this year, as IPE reported recently, but pension funds still find opportunities.
“Nobody likes private equity today, but there’s still a lot of outperformance,” said Olivier Rousseau, co-chief executive officer of the French national pension fund Fonds de Réserve pour les Retraites (FRR), summarising the speakers’ mood.
“We continue to see a lot of opportunities, especially in domains where prices have corrected,” said Elena Manola-Bonthond, CIO at the pension fund of CERN, the European organisation for nuclear research. “Vintages of this year may therefore turn out to be very good ones,” she added.
Peter Lindegaard, CIO of Danish pension fund Industriens Pension, also sees the opportunities in private equity but cannot take them. “I would love to buy secondary private equity, but we are still coping with the denominator effect, hence we don’t have room to increase our alternatives exposure,” he said. “But if you have room, I would strongly suggest to buy secondary private equity.”
Private debt – mixed views
Views on private debt were more mixed. “Private debt has been a very good investment. It helped marking up the value of your fixed income portfolio when interest rates rose,” Rousseau said.
However, Manola-Bonthond said investors should be cautious with private debt going forward. After all, if rates were to drop again, the floating rate advantage of private debt would turn into a disadvantage.
Investors should also be mindful whether companies will continue to be able to service rising debt loads.
“The risk of defaults will rise as the economy worsens, so you have to do a very good manager selection,” Manola-Bonthond said. Most of the pension fund executives’ audience, however, did not believe that interest rates will come down substantially. Some 78% agreed with the statement that rates “will stay elevated”.
AXA Investment Managers CIO Chris Iggo noted, however, that the sheer amounts of capital that investors are ready to commit to private debt “should sustain the performance for some time to come”. With interest rates at current high levels, Industrien’s Lindegaard also prefers debt over equity. “I now prefer something where I receive interest over something where I’d have to pay it,” he said.
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