The Decade Ahead
Capture growth with private markets
Messages in Focus
19 January 2024: This investment view is now outdated. Reach out to your advisor for our current views.
A new world will see significant investments in healthcare, digitalization, and energy. But high government debt levels mean public funding for innovation is likely to be constrained. Private market managers, with their ability to provide equity or debt capital to companies at different lifecycle stages, have a key role to play. Private markets offer attractive return potential and differentiated access to the real economy, in exchange for lower liquidity.
Private markets provide access
Private markets provide access
Gaining exposure to fast-growing and innovative businesses through listed equities is becoming harder due to the shrinking supply of new listed firms. More companies are choosing to stay private, delay listings, or avoid them altogether, a trend we do not expect to reverse in the decade ahead. Similar dynamics apply in debt markets, where traditional lenders’ market share is declining in favor of private debt, particularly in funding small- and mid-sized businesses.
Private equity
Private equity
Value and middle-market buyout. In the middle market, entry multiples for acquisitions have declined to 10.3x enterprise value relative to EBITDA, down from 12.8x on a trailing 12-month basis. Add-on strategies, meanwhile, remain a powerful tool in offsetting growth and interest rate pressures given their potential for exploiting valuation differences, driving efficiencies, and accelerating growth. We also expect carveout and divestiture volumes to pick up further as the economic environment slows and companies spin out noncore or underperforming assets at potentially compelling acquisition prices.
Secondaries. With many investors still seeking to generate liquidity, secondary market managers that specialize in acquiring stakes in existing funds or portfolio companies that are, or are close to, generating cash flows remain attractive, in our view. Discounts are still above historical norms (16% to NAV as of June), bid-ask spreads have narrowed, and transactional activity is picking up.
Thematic growth. For investors seeking to capture long-term secular trends in areas such as software, health, education, and climate, thematic growth PE funds present an opportunity as improved pricing offers an attractive entry point.
Private credit
Private credit
Private credit faces some near-term challenges but still presents structural opportunities, in our view. Existing loans may come under pressure as interest coverage ratios have deteriorated, and defaults could rise given the lagged effect of higher interest rates on the economy. However, private lenders can dictate better terms on new loans and negotiate stronger lender protections, which may include stricter covenants, lower leverage levels, and higher equity contributions. At current levels, private loans yield close to 12% on an unlevered basis and offer an attractive carry pickup over high yield and leveraged loans that should compensate for potential credit losses. We recommend focusing on experienced managers who are prudent at underwriting. Managers with turnaround capabilities or experience in taking equity ownership may also have an edge in this environment.
Real assets
Real assets
In infrastructure, developing new assets and modernizing existing ones are key to several structural trends, including digitalization, decarbonization, and deglobalization. Governments around the world are trying to spur capacity expansions (notably in renewables) while enhancing current and future project economics and competitiveness. The exponential rise in data creation arising from generative AI could fuel additional need for assets such as data centers. Apart from being a thematic opportunity, infrastructure assets have unique characteristics—high barriers to entry, demand inelasticity, and consistent cash flows linked to inflation—that can be a strategic source of capital appreciation and income in multi-asset portfolios.
Investors should consider the risks inherent to private markets before investing, including illiquidity, long lockup periods, leverage, and overconcentration.
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This report has been prepared by UBS AG, UBS AG London Branch, UBS Switzerland AG, UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS AG Hong Kong Branch, and UBS SuMi TRUST Wealth Management Co., Ltd..
