The number of private equity portfolios in the secondary market is increasing as both fund managers and investors in private equity funds seek liquidity opportunities.
In its private markets outlook, BlackRock focuses on private equity, private debt, infrastructure and real estate. “Given the long lead time between the decision to sell a private equity asset and the sale, we expect more of these opportunities in 2023.”
The need for liquidity was clear in 2022, BlackRock said, referring to the record amount of purchases and sales of existing positions by investors in private equity funds in the first half of the year. “We expect this to continue. On the LP (Limited Partner, an investor in a private equity fund) side, many investors are finding themselves forced to invest in illiquid asset classes due to the broad decline in public equities and fixed income. This denominator effect is compounded by a slowing exit environment, causing LPs to pressure their GPs (General Partner, fund manager) for realisations.”
Investors in private equity funds usually hold onto their positions for the entire term of the closed-end funds, often ten to 12 years. A so-called secondary transaction can still make this illiquid investment liquid, if a secondary investor buys the first investor’s stake and “sits out” the rest of the fund’s term.
Traditional exits declining
With traditional exits declining, GPs are turning to this secondary market for support, BlackRock analyses. “With less than a year of ‘dry powder’ available, further disruptions are expected to enhance already attractive buying opportunities.”
In 2021, the volume of secondary transactions reached 132 billion dollars, and in the second quarter of this year there was 94 billion of dry powder.
BlackRock itself invests 3 percent - or some 230 billion dollars - of its 7.960 billion dollars in assets under management in private markets. It opts for the use of “a broad funnel” with both traditional and non-traditional transactions as far as the secondary market is concerned.
Greater alpha
More generally on the private equity category, BlackRock said the best periods for private equity typically follow recessions. “And PE performs in periods of distress with greater alpha.”
Of the other private markets categories, BlackRock’s team sees particular opportunities in infrastructure, as the category can benefit from continued investment in renewable energy and energy security. “From roads to airports and energy infrastructure, these assets are essential for both industry and households, and can benefit from macro trends such as the energy crisis and digitalisation.”
In addition, it can play a role as a non-correlated inflation hedge. In both low-growth and high-growth environments, infrastructure historically performed well in a high-inflation period. On a 20-year basis, the category achieved returns of 17 percent (high growth/high inflation) and 23.2 percent (low growth/high inflation). For global equities, the figures are 14.9 percent and 2.2 percent, respectively.
Property revaluation
Meanwhile, real estate is being revalued in response to higher financing costs, shifting tenant demand and investor allocation adjustments. BlackRock expects further price revisions in the category in 2023. ‘Occupancy rates across all sectors are still high - something that could change as we get deeper into the economic cycle. And there remain valid questions about the extent to which the rise in interest rates will distort property prices, especially if occupancy rates fall.’
The asset manager is positive on logistics, niche real estate segments such as student accommodation and senior housing, as well as retail. Opportunities do vary by region, though, as the US, for example, has a much stronger “away from office” trend than other regions - mainly Asia. Meanwhile, the need for multifamily housing in the US and Europe will continue to rise, BlackRock expects.
Finally, on private credit, the fund house writes that the risk-return profile of private credit may be more attractive than ever, with higher interest rates, wider spreads and greater call protection. “Although the turmoil of the past year has shaken markets, companies continue to need financing and are increasingly turning to private lenders. But should conditions deteriorate further, we expect it to spread across sectors.”
This article was originally published on InvestmentOfficer.nl.