This is a sponsored article from PGIM Investments.
New York-based Dennis Martin, head of global private wealth and client solutions at PGIM Private Alternatives, arrived in Asia to deliver the opening keynote address at Asian Private Banker’s 411-delegate Hong Kong Summit on October 8 with a clear and concise declaration: “Alternatives are the future of private wealth advisory platforms.”
Martin’s belief is supported by a 30-year career history in real estate, alternatives and wealth advisory, as well as the successful growth and development of PGIM Private Alternatives’ US$320 billion platform spanning private credit, real estate and private equity secondaries.
It is also fired by the conviction that private wealth investors are set to close the gap on their institutional counterparts in their accelerating embrace of alternatives. That makes for a multi-trillion-dollar opportunity. It is built on increased portfolio diversification, potentially greater risk-adjusted returns, and reduced volatility, which Martin believes (U)HNWIs will pursue and achieve through investing in alternatives.
“Institutional investors have learned over the past 50 years that alternatives could lead to better portfolio outcomes,” Martin explained. “Yet, 20 years ago, only around 50% of institutions had any alternatives allocation and that did tend to be capped at 5% to 10%. Now the vast majority of institutions allocate to alternatives in the range of 20-30% of their portfolios.”
Martin added that private wealth investors have indeed begun significantly increasing their allocations to alternatives. However, he estimated that allocations, while growing, are comparable to where institutional investors were 20 years ago. “What this equates to,” he said, “is tremendous potential for growth”.
Education will be the key
He is an alternatives evangelist. However, Martin prefers an objective and nuanced approach to his industry. He said that insufficient investor education, along with perceptions around what he calls the complexity and “messiness” of private markets’ underlying asset classes, have slowed their growth and obscured their popularity for private wealth investors.
Martin is calling for a concerted industry-wide response: “Simply put, we need to amplify client education and simplify client access to operations and back-office connectivity.”
How to stay ahead in a changing secondaries environment
He also noted that after 12+ years of exponential growth in private credit and private equity markets, both may now be forced to navigate a series of unwonted speed bumps as their rate of growth slows.
“Private equity secondaries have seen phenomenal growth,” Martin explained, “But that growth has attracted what could turn out to be an oversupply of newer and larger, entrants to the market.”
He points, for example, to a recent trend that has seen a shift away from traditional limited partner (LP)-led secondary transactions to an over-reliance on general partner-led deals with secondary funds providing continuation capital to GPs who want to extend their holding periods or to portfolio companies within those funds.
“Trees don’t grow to the sky. Neither do asset classes. A healthy pause is generally a good thing,” said Martin.
So, what should discerning private wealth investors do to prosper in this challenging new environment? PGIM favours GPs who focus on middle-market deals, including transactions that are originated through proprietary relationships and that are less likely to be heavily brokered and overbid, as well as strategies that skew towards LP-led deals where possible.
Private credit opportunities to pursue
It is a similar story in private credit. There has been a US$2 trillion shift in private direct lending away from traditional balance sheet lenders towards non-bank private lenders and funds markets over the past 15 years. This shift has been supported by largely favourable tailwinds. That’s about to change. “In the next phase of the cycle, portfolios that have not been troubled by stress events will now be tested,” said Martin.
He believes investors should consider strategies that have built truly differentiated origination capabilities based on long-term borrower relationships and shoe-leather research. PGIM has historically focused on portfolios that emphasise non-sponsored rather than sponsored deals and middle-market companies with EBITDA of US$25-75 million that provide a balance between opportunity and yield.
“Long-term success in private credit is all about loss avoidance,’” he said. “Private wealth investors should look for GPs with meaningful track records and that have default rates of closer to 2% than 3% and recovery rates that exceed 80% or 85%.”
“An optimum entry point for real estate”
If private wealth investors in both private equity and private credit face decelerating growth and trickier market conditions, the end of the bear market in real estate should make many sectors of this alternative asset class eminently investable.
“We’re approaching an optimum entry point for real estate in many markets around the world,” said Martin. “We’ve seen a 20-25% repricing after a two-year bear market fuelled by rising interest rates and a substantial pull-back in capital sources. That’s now over.”
Selectivity, along with the timing of re-entry, will be the keys to success. Martin still expresses caution with respect to the office sector, for instance. But high among the demographic themes he is currently prioritising is senior housing across the United States (and beyond) based on an anticipated 20-year increase in demand; and single-family, for-rent housing for burgeoning younger families.
Aspects of the continuing digital transition are also a point of focus. He elaborated: “One of the more immediate opportunities for us is hyperscale data centres, partnering with the top 10-15 operators in the space to help them address the demands of AI, cloud and SAAS (software as a service) growth on their industry.”
This is a sponsored article from PGIM Investments.
