Outlook 2022: Private Assets


Fuelled by Covid-induced monetary and fiscal stimulus, as well as strong past performance, interest in private assets has been rising sharply. We expect this to continue. This has brought fund raising levels in some areas significantly above their long-term trend.

We therefore believe that the illiquidity premium is under pressure whilst other private asset-specific drivers of outperformance – such as the complexity and size/smaller investment premia – remain intact. In such an environment, our view is that – besides adherence to a long-term strategy and investment discipline – there are three main determinants of success, details of which are in our full “Outlook 2022: Private Assets” report:

  1. High level of selectivity
  2. Focus on the complexity premium
  3. Diversification within private assets

To achieve all three, it is especially important to make use of the full breadth of the private asset universe and its different size categories. We observe that certain trends that were already in play have been accelerated by the pandemic.

In the below, Schroders investment experts share their views on opportunities and challenges in some of the major categories of private assets in 2022.

Private assets solutions

David Seex, Head of Private Assets Solutions

As investors’ private asset allocations keep growing, we see investors increasingly seek solutions in the form of full-service mandates and separate accounts.

By definition these solutions are fully customised according to a client’s objectives and restrictions regarding return,
risk, sustainability/impact and liquidity. We have seen strong client interest in solutions that are based on what we
have previously described as “Private Assets 4.0”: a focus on generating a complexity premium (in addition to an
illiquidity premium), an increased interest in better diversification within private asset classes and through
multi-private asset solutions, an increased focus on impact (especially related to climate change and based on carbon
emission targets) and an interest in innovative structures with new liquidity options that advance the democratisation of private assets.

Private equity

Tim Creed, Head of Private Equity Investments

We continue to see healthcare, technology and consumer as the three most interesting sectors within buyouts.

Even though competition for such deals has further increased given the boost that the pandemic has given to these sectors, we continue to see attractively priced opportunities in the small and mid-sized segment of the market.

We also observe that strong alignment of investments with the UN Sustainable Development Goals contributes positively to investment performance, especially where highly active private equity managers make transformational improvements to companies.

Private debt

Nicole Kidd, Head of Private Debt, Australia

As banks are adjusting their risk appetite, there is an opportunity for direct lending to step in and fill the gap.

We see attractive direct lending opportunities in the US, Europe and Asia-Pacific. Australia is a particularly attractive market for private debt, for example, as institutional capital is playing an ever more important role in the Australian financing landscape. Borrowers are increasingly appreciative that institutional investors are better placed to align with business growth objectives and provide supportive working capital for equity. In doing so, borrowers are more likely to pay higher margins, which is therefore in the best interests of investors. We see that, in Australia, both an illiquidity premium and a complexity premium can be captured in private debt.

Real estate

Sophie Van Oosterom, Global Head of Real Estate

Within real estate we see the best opportunities in the subsectors where we can improve sustainable income and drive value through our operational expertise.

This means having the expertise to increase income through the offering of additional services, optimising contractual arrangements with tenants and minimising environmental impact and waste. Accordingly, we see interesting investment opportunities in the hospitality sector, living sector (including social housing), but also office and “last mile” industrial/logistics that benefit from the new trends in working, living and playing.

Infrastructure

Chantale Pelletier, Global Head of Infrastructure

The energy transition, digitalisation and essential infrastructure are the most interesting sectors within infrastructure in our view.

Strong investor interest has put upward pressure on valuations and downward pressure on spreads. However, we have seen that for mid-sized deals, dynamics are more attractive than for large transactions, both in terms of valuations and in terms of the ability to deploy capital in a timely manner.

Impact

Maria Teresa Zappia, Head of Sustainability and Impact

The market of impact investments has been growing from billions to trillions, according to the International Finance Corporation’s Global Impact Investing Market 2020 report.

This highlights the focus of mainstream investors on combining financial returns with intentional environmental and social impact in their portfolios. Private assets remain core to the goals of actively delivering sustainable and impactful strategies in key areas that affect people and the planet. Regulatory requirements, particularly in the EU, are also casting the spotlight on the importance of disclosure and transparency in the pursuit of sustainable and impact investments.

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