This is a sponsored article from Nuveen.

Authors:
Randy Schwimmer, vice chairman and co-head of senior lending at Churchill Asset Management from Nuveen

What can investors expect from private capital markets?

The higher-for-longer interest rate environment in the US means investors and borrowers alike are navigating a slowdown in dealmaking, valuation discrepancies and higher borrowing costs. This has led to a pivot of buyout financings from public to private credit.

Private capital – both private credit and private equity – is in the spotlight. With low or negative correlations with listed equity and fixed income, these investments offer diversification and the potential for attractive risk-adjusted returns. But what can investors expect from private capital markets in 2024?

Four trends emerge from the current market dynamics that will significantly impact deal-making and fundraising.

1. New normal rates: The new macro and what it means
   Investors have become accustomed to an ultra-low-rate environment since the 2008 financial crisis. Now, however, they face a new higher-rate landscape.

   Tighter systemic liquidity is seen as favourable to credit buyers, given the structures, lower leverage and expanded pricing. It also keeps market conditions from becoming too frothy.

   Considering the depressed levels of merger and acquisition activity during 2023, owners have been slower to achieve realisations. With more favourable all-in debt costs, equity returns should start improving, accompanied by a more accelerated deployment of dry powder for 2024.

   These trends are also tailwinds for portfolio performance. Lower benchmarks will bring interest and fixed charge coverages back to more comfortable levels and allow borrowers with payment-in-kind instruments to activate cash-pay options. In the first half of the year, the US Federal Reserve is expected to avoid aggressive approaches to achieve a perfect 2% inflation landing. Investors could face a more balanced economy with rates closer to old averages.

2. Winners and losers: Continued dispersion from multiple market dimensions

   In 2024, expect continued dispersion across three key market participants: private capital asset managers, private equity firms and portfolio companies. As we navigate the risk of slowing economic growth, volatility and geopolitical shocks, it is even more critical to identify the attributes of both winners and losers in a rapidly changing environment. The winners in today’s market have a variety of distinct attributes.

   For asset managers: Those with scale, diverse investment capabilities, diverse sources of dry powder and sustainable deal-sourcing advantages will thrive.

   For private equity firms: Those with ample dry powder and a proven track record of valuation discipline will prevail as the “buyer of choice” for the best platform investment opportunities.

   For portfolio companies: Those who have adopted prudent balance sheet structures or leveraged bifurcated financing strategies that offer payment-in-kind flexibility will be best suited to pursue organic and inorganic growth opportunities.

   The strategies winners adopt – embracing scale, cultivating diverse capabilities, leading with true sourcing advantages, exercising valuation discipline and maintaining conservative and flexible balance sheet structures – will highlight a brighter roadmap for success in 2024.

3. Stay alive to thrive: Portfolio excellence sustains investment activity

   The gap between winners and losers will only accelerate as today’s winners continue to thrive in the current market. Private capital managers with healthy, high-quality portfolios can and will continue to play offence and take market share.

   What goes into creating portfolio excellence? We believe it is by following the below principles:

   Diversification as a shield: Diversification must be evaluated across numerous dimensions: sector, deal structure, leverage profile, sponsor relationships, company model and so on. Absolutely fundamental is position-level diversification.

   Flight-to-quality approach: Prioritising high-quality assets should always be a focus, irrespective of economic conditions. By consistently backing strong businesses (in both bull and bear markets), investors can have a durable portfolio that continues to see sustained growth despite a tough environment.

   Clear alignment: Investing behind sponsor-backed portfolio companies has been crucial to mitigating risk. GPs bring deep experience in creating value through market cycles and, more importantly, have meaningful stakes in the outcome, typically through an equity investment.

   By maintaining a diversified portfolio, focusing on resilient sectors and mitigating risk through strong alignment, private capital investors will survive challenges and thrive amid uncertainty.

4. Next-gen private capital: A new world of financial process

   The Fed’s efforts to tackle inflation all but drained liquidity from various sources. Buyout financings pivoted from public credit to private as a result. Lower interest rates will likely create advantageous conditions for liquid loans.

   Private debt managers today have armed themselves with attractive, Covid-era-styled loan terms. They also create expertise and capacity in specialised industries, such as retail, software, and technology. Middle-market direct lenders have benefitted from a skewed ratio of private versus capital financing, likely leading to refinancing and new leveraged buyouts for the long term.

Conditions may be just right

These themes present opportunity and risk for investors in today’s market. However, with a balance between steady economic growth and moderated inflation, current market conditions could reflect a “just right” Goldilocks-era scenario. And as such, with careful navigation, this could be the beginning of a golden age for private capital.

For more insights on private credit from Nuveen and to see our full investment capabilities, visit our website here.
 

Important Information
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.

Nuveen, LLC provides investment solutions through its investment specialists. GAR-3559508PF-O0424W

This is a sponsored article from Nuveen.