Key points
- The slow-motion liquidity crunch across the private markets landscape
- How to rethink private equity as the exit environment stalls
- Why the PE secondaries market is shifting into high gear
- How a new rate regime is creating a resurgence in private credit opportunities
- The real estate sectors benefiting from alignment with five major macro themes.
Investors faced several challenges in 2023, including a gradual liquidity squeeze in private markets. As we move forward, it's crucial to pause and reassess investment strategies for 2024. While private market investing is inherently long term, the current environment presents flexible investors with what we believe are compelling risk-return opportunities through the deployment of additional capital.
Franklin Templeton's Private Markets Outlook highlights what we see are the best opportunities across various private markets. These include robust secondary private equity markets, growth potential in private credit and selected real estate sectors.
Private equity: stuck in low gear
Private equity, long seen as the engine for private markets, has faced challenges in recent years. Exit activity, a crucial indicator of market health, has slowed dramatically, impacting fundraising and capital allocation. Despite this, lower valuations and a recovering public market are expected to spur IPO and M&A activity in 2024. The disappearance of new "unicorns", venture-backed companies valued at over $1 billion, underscores the need for reassessing venture capital strategies, with a focus on fewer companies with clear exit plans.
Private equity secondaries: shifting into higher gear
While private equity experiences a slowdown, secondaries present a contrasting picture of resilience. 2023 saw record secondary volumes, indicating sustained investor interest. In 2024, secondary managers are poised to capitalise on ample inventory and institutional demand for liquidity, enabling them to acquire attractive assets at favourable prices. This trend offers investors the opportunity to diversify across various stages, regions, and industries, mitigating risks and the prospect of enhancing returns.
Private credit: set for renaissance
After years of cheap debt and relaxed lending standards, the pendulum swung in favour of private lenders in 2023. The collapse of traditional banks and reduced lending in the middle market have strengthened the position of private lenders. In 2024, these dynamics are expected to drive growth in the private credit market. Direct lending will remain fundamental in a growing European market, while niche opportunities such as European special situations are well positioned to benefit from the combination of the looming steep debt walls and the pullback of traditional bank lenders.
Real estate: seeking alternatives amid market dispersion
Real estate investors grappled with a correction in property valuations amid rising debt costs in 2023, with transaction volumes also falling sharply. Looking ahead, we believe that there will be ongoing market dispersion with sector and geographical allocation driving returns. Alignment with major macro themes – demographics, technology, deglobalization, housing affordability/shortage, sustainability – will also prove important over coming years. We see the industrial sector, and particularly logistics, as a key beneficiary. We also find pockets of opportunity in alternative real estate sectors. For example, social infrastructure is vital in meeting society's fundamental needs and cuts across several of the macro themes.
In conclusion, despite ongoing challenges, 2024 offers those investors flexible enough to provide liquidity or deploy additional capital some compelling risk-return opportunities. In the past era of low rates and stable distributions, institutions could ride the private markets beta wave without fully testing assumptions about liquidity management, portfolio construction, value creation (alpha), and manager selection. However, we believe the current environment requires a different approach, with focus on manager selection essential due to historical wide manager dispersion over full market cycles.
For Institutional Professional Investors only – not for distribution to retail clients
Investments entail risks, the value of investments can go down as well as up and investors should be aware they might not get back the full value invested.
Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London, EC4N 6HL. Tel +44 (0)20 7073 8500. Authorised and regulated in the United Kingdom by the Financial Conduct Authority.
www.franklintempleton.co.uk
