Partners Group publishes market outlook for H1 2015: with macro uncertainty on the rise, investors must remain disciplined

Partners Group today publishes its semi-annual Private Markets Navigator for H1 2015, 'Realizing potential in private markets as macro uncertainty rises'. The Private Markets Navigator outlines our outlook for all private markets asset classes over the next half-year, within the context of the current macro-economic environment. A snapshot of our views and investment strategies on behalf of our clients is outlined below.

• Macro-economic view: capital markets remain detached from economic fundamentals. Global growth remains restrained, recovery is patchy, leverage remains high and central bank liquidity continues to flood the market. Despite near-term support from low oil prices and the improved economic performance in the US, global growth should remain anemic. The constant climb in asset prices despite sluggish economic growth is running out of steam and we believe asset prices will plateau around current levels. However, outside of any temporary corrections, new central bank liquidity coupled with investors' needs to deploy cash should keep valuations at high levels.
  
• Private equity: financial sponsors must bring position themselves to compete as quasi "strategic" investors. The availability of cheap leverage and USD 1 trillion of dry powder continue to drive competition for deals and record prices across both the US and Europe. In this environment, financial sponsors must have specific perspectives on how to develop individual companies, positioning themselves as quasi "strategic" acquirers wherever possible. We remain focused on assets that can weather these market dynamics, particularly looking for companies which fit into our strategy of growing mid-market leaders internationally, identifying investments with strong downside protection and investing in future growth.
  
• Private real estate: investors broaden their appetite, creating a great market for exits. The wall of liquidity looking for yield, plus extraordinarily low fixed income yields, have continued to drive demand for stable, income-producing core assets and further lifted valuations in most major markets. This combined with strong rental growth and accelerated asset appreciation in most regions bodes well for a pipeline of forthcoming exits. In the current market, our investment approach is most reliant on our ability to execute a "buy-fix-and-sell" strategy, seeking opportunities to exploit supply/demand imbalances and keep investment durations short. In niche market segments, the ability to acquire properties at a discount to replacement cost remains viable. Selectively, we also believe there are compelling opportunities to develop core properties through ground-up construction.
  
• Private debt: "club deals" are in favor after pushback on overly aggressive structures. Debt markets remain characterized by high levels of liquidity, especially in the US. Over-aggressively priced all-senior transactions in the large-cap segment experienced difficulties with syndication in H2 2014 and required a "flex up" in pricing by arrangers. This pushback encouraged borrowers to look to the club markets, where a small number of lenders offer a tailored debt structure, as a more reliable source of financing. We continue to focus on the mid-market, where leverage levels remain stable, looking in particular for companies with limited access to high-yield issuance, or those in attractive niches with appealing risk/return profiles, or needing creative and flexible financing structures.
  
• Private infrastructure: investors must continue to look outside the crowded core space to find true value. High investor appetite for private infrastructure continues to lead to record valuations and underwritten equity returns for core assets remain at or below 8%. Investors justify these acquisition prices by pointing to the quality of the underlying assets and the long-term nature of infrastructure investment. We, however, believe the true relative value in infrastructure investment continues to lie outside the crowded core space and still overweight the following three key investment themes: capturing risk premiums, finding opportunities to create value via operational improvements, risk reduction and asset-scaling, and using the access to transactions generated through our existing investments.

For a full copy of the report or to learn more, please contact Milevka Grceva (milevka.grceva@partnersgroup.com).