Swiss private bank Union Bancaire Privée has just released its "Private Markets Outlook 2024" outlining how it sees 2024 as a year in transition for private markets.

Soaring rates have reshuffled the distribution of risk premia across public markets, and private markets are not immune to this change. The coming years are extremely unlikely to have any similarity with the past decade, when left tails were artificially suppressed by the “Fed put” and were awash with liquidity, according to Nicolas Roth, head of private markets advisory at Union Bancaire Privée (UBP).

“Markets are now evolving into an environment that is likely to reward a hands-on approach rather than a passive one. In private equity, specifically in venture capital, managers will have to pay close attention to maintaining a strong cash discipline in their portfolios’ companies, whilst buyout investors will face speed bumps on the way out,” Roth said in a note.

After the 2008 financial crash, central bank's massive quantitative easing programmes drove down yields on listed equities and bonds, while a secular shift towards privately held rather than listed firms drove a big rise in private markets. Tighter bank capital adequacy standards also prompted flows into private credit funds. The lower liquidity of private markets - other things being equal - typically come with higher yields. However, the rise in rates since 2022 to curb inflation have taken heat out of the private markets space.

“Private debt managers should expect foreclosures on some loans, take control of assets, and be ready to work alongside companies to repair balance sheets,” Roth continued. “Real estate will become more active, climbing higher up the complexity ladder and executing value-add strategies to reposition assets and extract value.” 

“The natural corollary to this observation is that the world is entering a context that necessitates the thorough selection of managers and deals, as well as realistic underwriting assumptions and expectations,” Roth added. “Recent economic and geopolitical developments hint towards profound fundamental shifts in the investment universe. Investors should expect fewer efficiencies, which typically favour specialised managers rather than generalists.” 

“Private markets have this unique feature to create alpha in this environment and benefit from structural inefficiencies detached from market gyrations. This is what investors should expect from their private market allocations and the time is ripe to deploy capital in such opportunities,” he continued.

Below are UBP's private markets team's detailed convictions across private markets strategies, notably private equity, debt, real estate and infrastructure:

Private equity:  A discerning approach is required, favouring the secondary market as a prime opportunity due to structural factors, relying on managers' value creation abilities rather than resorting to cumbersome financial engineering to generate liquidity. Reserves of disposable cash will enable managers to seize attractive valuations swiftly.

Private debt: The private debt sector is transitioning from traditional direct lending strategies to more diverse and specialised approaches. The resulting challenges such as heightened competition and compressed margins are prompting investors to explore alternative avenues such as hybrid capital and structured financing.

Real estate: The real estate investment landscape is evolving towards greater fragmentation, as traditional stabilised assets such as office and retail spaces may not yield substantial returns. ESG considerations, for example, are impacting office spaces and unexpected resilience has been observed in certain retail segments since Covid. Diversification offers pockets of attractive opportunities.

Infrastructure: Investments leveraging megatrends, with an emphasis on a modernised outlook driven by decarbonisation, circular economy, and digitalisation, offer upside returns with strong regulatory support.

Thorough manager and deal selection, grounded in realistic assumptions, are crucial in this transformed market, UBP concluded.