Investors are rethinking their approaches to private markets as they assess the value creation dynamics in areas like private equity, according to a report by CREATE-Research.
The Amundi/CREATE report, Seeking returns in private markets and emerging markets in a disruptive era, surveyed more than 150 institutions, with more than €12trn in assets under management.
Launching the report at IPE’s annual conference last week, author Amin Rajan said that while investors were still targeting the benefits of higher returns and lower volatility in private markets, the emphasis is shifting from “quantity” in the form of liquidity-fuelled markets to “quality”, which is defined as delivering sustainable returns based on intrinsic value.
Rajan said: “It is not enough that an increasingly larger share of global value creation is expected to occur in private markets. Extracting their intrinsic worth now matters much more with the end of the cheap-money policies of central banks.”
Rajan believes the shifts in value creation, return profiles and valuation uncertainty have led to a change in manager selection criteria.
He told IPE delegates: “For managers, the selection criteria are probably going through their biggest makeover. The tendency now is to look at two sets of facts. One of them is about track record and a manager’s ability to replicate that track record in the future. ESG goals are also very important.”
Asian emerging markets
The research also found that, over the next three years, the proportion of respondents investing in Asian emerging markets is likely to rise from 62% to 76%, with more emphasis on the unique dynamics of specific countries.
Rajan said the research had found that pension plans saw the emerging markets across Asia as being attractive for three main reasons: good risk-adjusted returns; a triple bottom line (doing well financially and doing good socially and environmentally); and better geographical diversification.
Countries like China, India and Indonesia are expected to become major players in the green economy. This is reflected in respondents’ investment choices over the next three years. Rajan said thematic funds top the list of traditional asset classes, followed by green, social and sustainability-linked bonds.
On the equities side, Indian equities are ranked high and Chinese low, with others in between.
Rajan concluded by warning that there may be a mismatch in expectations when it comes to returns from private and emerging markets.
“The return expectations in the past, for example, for private equity and private debt, were in the low teens. For venture capital, they were in the high teens and for infrastructure and real estate, they were in the high single digits,” he stated.
“Now those expectations have to move down one or two notches, and that is because the strong monetary tailwinds that private markets have experienced have disappeared,” he continued, noting that central banks are withdrawing liquidity, and as a result, there is a more ‘return to the fundamentals’ focus.
Rajan said the fundamentals of these asset classes do not suggest high returns at this point in time, and “there has also been a huge amount of forward investment that is taking place, and so return expectations are likely to be lower”.
One survey respondent said: “A growing share of global value creation takes place in private markets, and companies are also remaining private for longer.” And another said: “We are cautiously optimistic that things will be trending in a better direction once cuts in interest rates progress over the next 2-3 years.”
Read more about the Amundi/CREATE-Research report’s findings on private markets and access the entire digital edition of IPE’s latest magazine
No comments yet