IPM – Edition March 2023

2023 started with optimism for private markets. The eurozone allayed fears and grew slightly in 4Q22, while the US economy maintained a good pace of expansion. Warm weather curbed energy use in Europe and natural gas tanks remained close to full. Optimism also flowed in China following the government’s rapid ditching of its zero-COVID-19 policy. In addition, inflation has fallen globally and looks to have peaked, but remains far above the central banks’ 2% target. A stronger than expected economy and labor markets which remain tight may mean central banks have to hold interest rates at high levels for longer.

In 4Q22, investment volumes pulled back further, down sharply across all regions and sectors as uncertainty gripped the market, buyers pulled out of deals, refinancing became harder and prices started to adjust. 4Q22 performance data released so far showed significant capital value declines. APAC real estate valuations turned out to be relatively resilient in 2022. Potential sellers have been able to hold out with little to no distressed selling. However, this could be a function of timing according to debt and fund maturities.

In sustainability, despite a challenging environment, global sustainable fund flows were resilient, and with new strategies launched there was a clear preference for sustainable versus non-sustainable, a trend likely to continue with new regulatory requirements especially in Europe.

In infrastructure, the shift to renewables poses risks and rewards for investors venturing this sector. 2022 was marked by events such as the War in Ukraine, whose consequences for the energy and renewables industry will be felt in 2023 and beyond. We can expect this year to involve a lot of back and forth between the government, industry groups and legal experts around actual policy implementation on renewables. Therefore, investors should approach this rapidly growing field with caution and strategy.

For private equity, while valuations could still trend modestly lower into 1H23, we expect pressures to be more modest than those in 2022. Mark-downs are likely to be concentrated among those companies that have widely been considered over-valued in recent quarters, particularly those which are trading at inflated multiples of “adjusted” revenue and EBITDA. At the same time, market environments like the one in which we find ourselves today frequently produce outperforming fund vintages.