Private assets might have dropped significantly in value since the “good years” of 2020 and 2021, but despite a bad year in 2022, they’re still outperforming public market returns by quite a margin, explained Schroders Capital’s chief investment officer Nils Rode at his firm’s private assets 2021 outlook this week. History shows that private assets investors could have a strong year in 2023 despite the bad overall macroeconomic conditions, he argued.
Covid-related monetary and fiscal stimulus measures during 2020 and 2021 fuelled a real boom in private assets, explained Rode during the virtual event. By contrast performance since the end of the stimulus, over the first three quarters of 2022, was flat or negative.
But Rode compared private equity favourably with the public stock markets. There were significant stock market corrections during 2022, with an average decline of about 25 percent in the third quarter, he said.
Less than a third
Real estate private infrastructure debt had a flat or even slightly positive performance, while private equity was down 7 percent. But, Rode pointed out this is much less than the one-third drop in value that comparable stock markets had shown.
Even venture capital/growth capital, an area of private assets that Schroders pointed out in its last 2022 outlook being at risk of overheating, with late stage venture valuations having risen by 800 percent, did relatively well with a drop of 14 percent by the end of September.
Stable valuations
Asked about why private asset valuations haven’t come down as much as public assets and whether he expects further price decreases in the near future, Rode attributed the strong valuation resilience to a combination of fundamental reasons and technical valuation practices, as well as differing strategy by strategy.
“It’s a mix of fundamental and technical factors, but a big part of the resilience that we see is fundamentally driven,” he said.
Rode noted that recessionary risks have reduced in recent weeks, but that continuing high inflation rates and low unemployment make for a “certain likelihood of recession.”
No bad thing
If a recession were to start in 2023, “for private asset investments, that is not necessarily a bad thing for new investment activities,” Rode said. Historical data demonstrates that recession years have historically shown “pretty good vintage year performance.” A vintage year in private equity/venture capital is the year in which capital was deployed to a particular company or project.
“In a recession, there’s typically less fundraising, there’s typically less competition for deals,” he said. Investments made during a recession will likely not be sold in another recession, he argued.
“Vintage year diversification is something that we’d recommend to all investors, but especially the recession years – for those who can invest – are years where it’s good not to miss them.”
Democratisation
For those who cannot yet invest – in private assets – Rode spoke of Schroders’ commitment to the democratisation, while acknowledging that it’s early in the process. “Not everybody can invest in private assets. And if it’s opened up to individuals, then it’s opened up primarily to wealthy individuals that still need to fulfil certain criteria.”
Rode emphasised long-term trends, given that private assets are held for long periods. Schroders identified five trends as especially relevant for new private assets investments: 1) climate change and decarbonisation, 2) the technological revolution, 3) changing lifestyles, especially in relation to sustainability, 4) aging populations and 5) the growth of emerging and frontier markets.
Underestimating the pace
In terms of technology, he said “there’s always a risk to underestimate the pace at which it continues.” He cited artificial intelligence firm OpenAI’s launch last November of its ChatGPT chatbot.
Rode also mentioned quantum computing, using advanced physics to solve problems beyond the scope of classical computers, as well as the potentially world-transforming fusion energy technology, which had a breakthrough in generating more energy than was injected at year-end last year.
Speaking during the same event, Maria Theresa Zappia, Schroders’ head of sustainability and impact, pointed to the development of guiding principles for Schroders investment process and best practices on a platform level. She explained how Schroders today has about a third in sustainability and impact products and strategies, but looking at the product development pipeline, as much as 80 percent could be classified as such.