The power of innovation – From niche to norm

Innovations in the private markets space and growing niche sectors are taking this space by storm, addressing many of today’s topical issues such as renewable energy, food security, transportation and healthcare. Joe Azelby, Head of Real Estate & Private Markets within UBS Asset Management takes us through the current climate and the challenges and opportunities for investors in the private markets space.

Private markets investments are re-pricing downward to reflect higher interest rates, volatile stock markets and a mini but concerning banking crisis. Transaction volumes have dropped across private markets and liquidity comes at a high cost. And for investors focused on both sustainability and financial returns, private markets investments can offer an opportunity to deploy capital toward incremental, measurable impact that goes beyond what is generally achievable in public markets. The trick is identifying strong growth sectors and when to enter these new markets as an investor.

From a thematic perspective, life sciences is seeing strong growth given the huge supply and demand imbalance in the sector. That growth has been driven by a number of factors, but one of them has been a significant increase in venture capital (VC), which has been deployed into university spin-out companies to help accelerate their growth and discovery of new treatments.

This originally started in the US. But we’ve seen it in more recent years in the UK, particularly in the markets around London, Oxford and Cambridge, which form the Golden Triangle. And we’re also seeing the same sort of positive dynamics start to develop across a number of European markets.

Second, the private sector has been a key catalyst to supporting food security. The VC community also invests in food technology, such as agriculture technology, drones and robotics on farms, or water technology. Infrastructure capital, however, is really the most important capital source here. Growth equity and VC are investing in very innovative ideas.

However, infrastructure capital is what brings size and scope, has long-term impact and brings down costs. Long term, it is this type of infrastructure capital – not growth equity – that will bring down the cost of food in scale. Food investing only works when there is an endgame that supports scale and lower costs.

Third, the past year was marked by several major events that will influence the energy and renewables industry in 2023 and beyond. The most crucial one was obviously Russia’s invasion of Ukraine, which led to elevated commodity prices around the world and has accelerated the rest of the world’s drive to diversify its energy sources. Strategies are also embracing newer technologies, such as energy storage, eco-transport, green building technology, renewable natural gas (RNG / biomethane), hydrogen, etc., as there is increased conviction that these investments will further de-risk and become more mainstream in the long term, especially with the policy tailwinds.

For many investors, what they keep versus what they earn is more important. And so we’re seeing the added value that a strong tax strategy can harness across the private markets space and can bring to an investment portfolio in terms of legal structure, asset selection, management decisions, and fund terms. Such strategies can also be strongly aligned with sustainability initiatives due to their long horizon and tax incentive synergies.