Alternative investments, Private markets Quarterly private markets update

Direct lending strategies have insulated investors from rising rates as bonds have experienced equity-like declines. But with potentially increasing defaults and financial stress, we advise investors to look for opportunities in distressed credit in combination with direct lending strategies.

Given the substantial outperformance of private real estate in 2022, some degree of mean reversion with public REITs would not be unexpected in 2023.

The global private equity (PE) market has experienced a stormy year amid volatile financial markets and geopolitical events. The stimulus from governments in response to the pandemic fueled a rally in markets and private equity in 2021, but many believe these efforts went too far and led to instability. As a result, PE deal flow, performance, and fundraising slowed in 2022. The war in Ukraine has disrupted energy supplies and driven inflation, while interest rate changes have impacted both public and private markets—investing in this environment has been more challenging.

Limited exit opportunities and lack of leverage have affected distribution back to investors. At the same time, investors in private markets generally saw their positions experience smaller markdowns than public markets, resulting in an increase in the share of privates in their portfolios due to denominator effects; this created limited capacity to commit more capital for many individuals and institutions.

Nevertheless, the private equity industry continues to attract capital, as firms expand offerings in other private asset classes and tap new investor segments. While uncertainty remains, private equity continues to present attractive investment opportunities for long-term, patient capital.

Operating fundamentals for US private equity remain robust. Both revenue and EBITDA for US PE continues to grow year-over-year and the gap between public and private median purchase price multiples for US buyouts continues to shrink.

We continue to view private markets as a positive long-term asset class for investors’ portfolios. Putting fresh capital to work in private markets following declines in public market valuations has historically been a rewarding strategy.

Value-oriented buyout strategies, particularly investments in carveouts and divestitures, are also set to be a growing trend in 2023. We currently favor strategies that can take advantage of price dislocations, like secondaries, where buyers are now able to negotiate better prices for assets. We also like distressed/restructuring debt strategies. Managers in this space have earned higher returns during periods of higher corporate default rates, which we expect to materialize in 2023.

Main contributors: Jennifer Liu, Daniel J. Scansaroli, Jonathan Woloshin, and Christopher Buckley

Read the full report Quarterly private markets update (6 March 2023), which looks at the current state and trends in private equity, private credit, and private real estate, and concludes with the opportunities and evolving risks.

This content is a product of the UBS Chief Investment Office.