This is a sponsored article from Nuveen.
In this higher-for-longer environment, private assets should continue to be a compelling source of risk-adjusted returns, income and diversification.
More often associated with institutional investors, we expect a key theme in 2024 to be greater access to private markets for private wealth investors. Capital is needed to fund large-scale infrastructure projects, facilitate the energy transition and help grow businesses. Asset managers are creating and adapting investment vehicles that aim to meet the needs of high-net-worth investors.
Private assets, which are not traded on public exchanges, include debt, equity, real estate, infrastructure, farmland and timberland. While covering a broad range of asset types, they share similar investment characteristics in many instances:
- Stability: Private market pricing helps avoid public market noise, reducing volatility.
- Return and income potential: Private markets are perhaps best known for their high return potential compared with similar public assets.
- Resilience: Long-term cash flows are a feature of many private real assets, often with contractual payments that adjust for inflation.
- Diversification: Private real assets generally have low or negative correlations with listed equity and bonds.
What to expect in 2024
- Private credit
Private credit has proven its resiliency in 2023’s high-rate and high-inflation environment, and we expect this to continue. In our view, such challenging fundraising conditions can be the best time to invest.
The technical aspects of deal-making have improved from a lender’s point of view. Higher base rates equate to higher yields. Higher interest costs alongside more conservative capital structures mean new deals are being structured with lower leverage multiples and covenants that are often more favourable to lenders.
Given the macro challenges for borrowers, diversification and selectivity are critical. We favour market-leading companies with stable, recurring cash flows in non-cyclical industries, making them well-placed to service interest payments and pay back loans. We continue to focus on more resilient areas of the market — such as health care, software and business services — all of which, we believe, are relatively well-positioned to withstand economic downturns.
Given the limited funding sources since banks withdrew from direct lending after the global financial crisis, we expect demand from small- to medium-sized businesses will continue to be substantial. As the asset class continues to flourish and larger deals come to direct lenders, we believe managers with size, scale, proven track records and deep industry networks will be best positioned.
- Natural capital
Natural capital’s inflation-hedging characteristics should serve investors well in 2024, with rates and inflation likely to remain elevated. Many of the outputs from farmland and timberland, such as food and building materials, are often components of inflation measures. Higher inflation reflects higher prices for these goods. In the near term, these higher prices improve performance by increasing cash yields. Over the long term, higher prices can also increase the capital appreciation component of return as they are incorporated into asset valuations.
But looking beyond macroeconomic factors, long-term structural trends will likely transform the asset class from a niche investment to a resilient core component of a long-term portfolio.
Investing in sustainable timberland and farmland is a fundamental way to benefit from the growing worldwide demand for resources and support environmentally friendly and socially responsible food, fibre and timber production systems.
Furthermore, as climate action ramps up, timberland and farmland’s respective sustainable, low-carbon production systems and the capacity to generate verified carbon credits are increasingly valued.
- Real estate
We see common themes across the global real estate landscape. Inflation is moderating but sticky, interest rates remain elevated, value losses are subsiding, investment volumes are near 10-year lows, and transactions arising from distress have remained muted despite pressures. However, we also see a lot of variation within markets and sectors, underscoring the potential benefits of a diversified global portfolio in 2024.
Another source of variation is that the significance of climate risk and environmental, social and governance (ESG) factors in investment decision-making varies by region. The structural drivers towards the decarbonisation of real estate continue to increase, and market bifurcation between ‘brown’ and ‘green’ buildings is already observed in some.
We expect retail will be a quiet outperformer. Years of negative sentiment have driven down values, creating a more attractive entry point for new investors. The alternatives sector, including self-storage, manufactured housing and outpatient care facilities, is positioned for future resilience and outperformance in our view. Their fundamental drivers rely less on economic growth and more on demographics, technology and health care. Affordable housing is another attractive sector, with demand outstripping supply in many parts of the world.
Infrastructure should benefit from still-high inflation and looks well-positioned for resiliency in the face of slowing economic growth.
Often these assets provide essential services such as power generation, water and waste management, roads, bridges, communication networks and data centres. Steady demand for their services coupled with limited competition due to their size and capital-intensive nature makes the assets less sensitive to economic cycles and changes in market conditions. They are also a stable source of income with cash flows generated from long-term contracts, which often adjust for inflation or a higher cost of capital, providing further protection in challenging economic environments.
Government incentives to facilitate the energy transition and decarbonise economies globally will continue to create a wealth of opportunity in the infrastructure sector. We expect these measures will help drive capital to projects for grid electrification, solar and wind power, and battery storage in the coming years.
Along with energy production and transmission changes, we see a broad range of investment opportunities as society adapts to a low-carbon economy. These include mass transportation and electric vehicles, more energy-efficient buildings, and the scrapping and recycling of necessary metals and minerals.
Positioning portfolios to benefit
With these opportunities comes risk. Liquidity risk is more significant in private markets than public, and private assets should be considered a long-term investment.
Working with an asset manager with experience and expertise in private markets will help investors understand the role private assets play in a portfolio and manage some of these risks.
Read Nuveen’s outlook to find out more about private assets.
Past performance is not a guide to future performance. Investment involves risk, including loss of principal. The value of investments and the income from them can fall as well as rise and is not guaranteed.
Private equity and private debt investments, like alternative investments are not suitable for all investors given they are speculative, subject to substantial risks including the risks associated with limited liquidity, the potential use of leverage, potential short sales, concentrated investments and may involve complex tax structures and investment strategies.
This information does not constitute investment research as defined under MiFID.
Nuveen, LLC provides investment solutions through its investment specialists.
This is a sponsored article from Nuveen.