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Newsletter | June 2020 |
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Private markets
Why it’s important to pay extra attention now:
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| Valuations on the private markets will not be immune to corrections. While private market investments remain attractive overall and are likely to continue to increase their share within asset allocations, mature portfolios and fully invested funds looking for exits will be particularly affected. |
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| Four drivers are important to success in the period ahead: |
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"Cash is King"
For existing investors as well as new investment programs, the current market environment offers above-average entry opportunities in the medium term for both primary and secondary transactions. |
Focus on growth within Private Equity
Due to less pronounced bidding competition, lower valuations and a possibly stronger outlook, growth capital opportunities are relatively more attractive than the much larger segment of leveraged buyouts that rely on debt. |
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Selected Real Assets
As diversification and ongoing cash distributions become increasingly important, these assets help stabilize portfolios and increase their resilience. |
Differentiated Satellite Strategies
Specialized fund managers with track records in niche sustainability and resource efficiency strategies become even more important by enhancing portfolio growth and returns while diversifying risk. |
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Sustainability as a growth and return factor in the COVID-19 age
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Will sustainability, particularly CO2 reduction, lose importance due to COVID-19 in the medium term?
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| Clearly, no, as it is not an either-or. Rather, the key is integration to address both. According to a recent Bloomberg report, a powerful base of companies, institutional investors, financial institutions, and central banks are calling for CO2 reducing rescue packages. Germany just took a major step forward: its $145 billion stimulus package focuses on climate-friendly industries and technologies (see below). Regulatory drivers will continue to accelerate. After Europe, with its EU taxonomy an essential part of the Sustainable Finance Initiative, the US’s SEC is increasingly recognizing the relevance of sustainability in financial investments and seeks to create more clarity and transparency. |
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| Climate and ecological challenges that further exacerbate social ills are growing larger and more urgent. They are closely linked in many ways. For example, population growth and the dramatic loss of wildlife habitats directly, or indirectly via livestock farming, increase the risk of the emergence of new infectious diseases and their transmission to humans. |
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| Institutional investors are particularly interested in strategies that invest in essential areas of life and forward looking growth segments with environmentally and socially friendly business models. One example is Affordable Housing where, particularly if the strategy is based on solid existing properties, government insurance largely covers rent and regular returns can be distributed. In private equity, for example, growth companies in healthy, plant-based nutrition or intelligent logistics have stable demand.
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| Typical ESG approaches that exclude some particularly controversial areas and companies or focus on "best-in-class" companies do not go deeply enough in evaluating risk/return considerations: removing a few weapons manufacturers and selecting oil companies with high ESG ratings in a world that will to a significant degree replace fossil fuels do not create portfolios with future-oriented growth and higher diversification. On the flip side, excessive weighting of individual sectors that benefit from advantageous sector ESG ratings, such as pharmaceuticals or technology, should also be treated with caution. |
| Tapping into future-oriented growth requires conscious, active investment – for example within the framework of a satellite strategy. To this end, it is important to analyse the sub-sectors of industrial segments in greater detail. It is precisely here that the private markets offer significant diversification opportunities in the face of ever-increasing risk concentration on a few large companies or derivatives as is the case in the public markets. |
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Portfolio construction – diversification, continuity, and insight as success factors
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| Integration of sustainability as a growth and value driver, together with other diversification elements such as industrial sectors and regions, strengthens the portfolio and increases its resilience. In addition, continuity of a long-term strategy over the cycle (vintage year diversification), which now also takes advantage of much more attractive entry prices, pays off. |
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| All of this, however, depends on insight into the substance of a portfolio, driving net return, risk and diversification benefits. The prerequisite is in-depth examination of a strategy right down to the business model level of the portfolio of assets. Unfortunately, it is precisely this analysis that typical top-down allocations of many investors neglect.
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| As our experience has demonstrated, active sourcing, in-depth due diligence, and insight are decisive factors in successful portfolio construction. Selecting proven niche sustainability strategies by experienced fund managers in today's market environment adds value and complements traditional strategies. |
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