Navigating the ‘brave new world’
The global economy is projected to experience moderate real growth amid persistent inflationary pressures
AS WE approach 2025, financial markets are adapting to a new era marked by macroeconomic volatility and heightened uncertainty. This “brave new world” necessitates a strategic emphasis on value creation through asset transformation and identifying investment themes aligned with long-term secular trends.
The global economy is projected to experience moderate real growth amid persistent inflationary pressures. Major central banks, including the Federal Reserve and the European Central Bank, are expected to continue easing interest rates – though not to pre-Covid lows. This environment underscores the importance of strategic asset allocation and disciplined investment approaches.
The private-equity sector is poised to benefit from anticipated interest rate reductions, particularly in the buyout space where leverage plays a crucial role.
Improved leverage conditions are expected to spur transaction activity, though the full impact on investment dynamics may take time to materialise. Entry multiples are slightly above 2023 averages but remain below pandemic-era valuations. Investors should focus on sectors with strong growth potential and operational resilience, emphasising value creation through asset transformation.
Attractive opportunities continue to emerge
In the secondaries market, early signs of recovery in exit activity and lower interest rates have led to a contraction in discounts. However, recent earnings calls from publicly traded private-equity firms indicate a strategic shift towards acquiring new portfolio companies rather than divesting existing ones. This trend is likely to benefit general partner-led secondaries strategies, such as continuation funds, as sponsors use these vehicles to generate liquidity and retain quality assets for extended periods.
While attractive opportunities continue to emerge, selectivity within the secondaries market is becoming increasingly crucial. Additionally, political uncertainty has had an impact on the exit environment, but there are emerging signs of recovery in the initial public offering market. The incoming administration of US president-elect Donald Trump may also foster a more favourable climate for mergers and acquisitions, further influencing market dynamics.
Despite recent rate cuts, private credit is poised to deliver high-single-digit returns, as base rates are unlikely to revert to post-global financial crisis lows. Lower borrowing costs may create more opportunities, especially in the mid-market, positioning private-credit lenders favourably compared with traditional banks, which often face limitations in supporting high leverage.
Additionally, lower rates can stimulate buyout transactions, offering more opportunities for lenders. A disciplined underwriting approach is essential, focusing on businesses with recurring revenues, strong customer relationships and robust cash generation. Sectors such as IT, software, logistics, and manufacturing in Europe, along with larger software businesses in the US, present attractive opportunities. Rightsizing debt packages and establishing appropriate legal terms are crucial for managing risks in this evolving investment landscape.
Multi-faceted approach
The infrastructure sector is set for significant growth, propelled by decarbonisation and digitalisation themes. A multi-faceted approach, with investments in areas such as energy efficiency, renewable energy, carbon capture technologies and electrification, is essential to tackling global decarbonisation challenges. The digitalisation trend, especially in cloud computing and data centres, is expected to continue its rapid expansion. However, the increasingly volatile geopolitical environment affects the infrastructure market. While strong regulatory support for energy transition and energy security is anticipated, current conditions introduce important nuances.
Net-zero efforts remain prominent but are increasingly moderated by concerns over energy security and affordability. Investors should adopt an approach to decarbonisation that considers factors beyond carbon emissions, such as energy security and affordability. For instance, investments in companies such as Gren – a European district heating company providing low-cost, locally sourced heat – can support both energy security and decarbonisation goals.
The real estate market is expected to stabilise, with property values recovering in most sectors, except offices. The prolonged high-interest-rate environment demands a focus on value creation and operational intensity to meet occupiers’ evolving needs and adapt to shorter lease contracts. Investors must adjust to an industry becoming more operationally intensive, emphasising value creation.
Thematic research to identify long-term secular trends, such as ageing demographics, supply chain disruption and housing affordability, is crucial. Developing a deep understanding of local markets and employing on-the-ground management teams can enhance vertical depth and operational efficiency. The living and logistics sectors, supported by strong demand and limited supply, offer attractive investment opportunities. As the real estate sector approaches a turning point, 2024 and 2025 are anticipated to be promising vintage years, particularly within high-conviction themes. We see a robust pipeline of both direct and secondary opportunities, focusing on thematic research and vertical depth to navigate the investment landscape.
Royalties, a new asset class in Partners Group’s investment platform, aim to offer portfolio diversification and stability with long-term capital preservation and upside potential. Structured to withstand cost inflation, our royalty investments tend to see revenues increase in tandem with inflation.
This strategy, implemented for several years, has shown that royalties serve as both a portfolio diversifier and stabiliser, generating attractive returns with a focus on long-term capital preservation and growth. Royalties provide access to predictable income streams and exposure to high-growth sectors, enhancing portfolio diversification due to their low correlation with traditional asset classes.
The writer is head of private wealth for Asia, Partners Group
Decoding Asia newsletter: your guide to navigating Asia in a new global order. Delivered to your inbox. Free.
Copyright SPH Media. All rights reserved.
