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As the global economy enters what will almost certainly be one of the largest recessions on record, how will private assets perform compared to the public markets and what lessons can be learned for future portfolio construction?
The global impact of the COVID-19 pandemic has caused both equity and bond public markets to collapse, and whilst the markets are recovering, it remains to be seen what the long term economic environment means for the capital markets.
Investor appetite for private assets has been increasing over the last ten years with Preqin forecasting the alternatives market to be worth $14trn by 2025, growing at around £1trn per annum.
According to Bloomberg, a number of firms including JP Morgan Asset Management and Fiera Capital are pointing out the benefits of private assets during these turbulent times.
Investors are attracted to the positive characteristics of private assets which can include:
JP Morgan has stated that “Real assets with reliable non-cyclical cash flows are likely to receive renewed attention from asset allocators.” Given the current climate, which assets are most likely to be non-cyclical? It is probably fair to assume that industries like logistics, telecoms infrastructure and renewable energy technology will weather the storm better than other sectors like commercial real estate, as demand for these services will not be as impacted by social-distancing.
It is also true that some private assets are exposed to sectors, like office-space, which will be materially impacted by social distancing measures. It remains to be seen how quickly offices re-open across the globe but we can be almost certain that working habits have changed forever and landlords will need to be innovative in the way they respond. What will this mean for commercial real estate funds?
An important question for investors to consider is whether public or private markets will recover faster. Data from Cambridge Associates and Preqin shows that historically, private debt has not outperformed public debt consistently and private equity beats the public markets over the long term, but not during or after a recession. The benefits of private assets are therefore more nuanced than whether they perform better than their public counterparts. It seems that one of the most significant benefits that private assets give long term investors is the ability to target exposure to specific areas of the economy that will have different cyclical behaviour and will be more or less tolerant to different kinds of economic downturn.
Whilst it is likely too late for investors who are suffering the impact on their portfolios right now, these lessons will need to be learned when allocating capital in the future. Investors will therefore potentially be looking to work with niche investment managers that can demonstrate a deep understanding of the economic characteristics of the sector they are investing in and how this contributes to the overall construction of a portfolio.