Volatile markets have been a challenge to navigate for many investors in 2022, but it has improved the outlook for alternatives, according to BlackRock.
In its 2023 outlook, the firm said that many companies are increasingly turning to private markets for capital, creating an appealing entry point for investors looking to buy alternative assets at good multiples.
Edwin Conway, global head of BlackRock Alternatives, said: “Near-term uncertainty presents an opportunity for investors to achieve their long-term objectives by continuing to invest in durable global trends.
“More and more companies are turning to the private markets for their capital and financing needs, enlarging the field of potential investments.”
Here, Trustnet breaks down BlackRock’s outlook for private markets in the coming year, looking at a range of asset classes.
Infrastructure
With global inflation at its highest rate in decades, the contractual nature of infrastructure assets offers some protection against inflation within investors’ portfolios.
Many infrastructure projects, particularly in the energy space, are financed trough long-term contracts, which protects inflows from rising costs and helps them remain consistent during economic cycles.
Indeed, infrastructure is at the heart of long-term trends such as the transition to net zero, although a possible recession could delay new renewables projects next year, the report warned.
Recessionary pressures may well lead to tighter spending on clean energy projects, but some regions have bigger drivers than others.
The Inflation Reduction Act became effective in the US as of August and promotes partnerships between public and private parties to accelerate the approval of infrastructure projects.
This and the $125trn (£101.8trn) committed to renewables by 2050 make BlackRock confident in the US as a market for infrastructure investment despite short-term headwinds.
Depressed values in today’s market could give investors the chance to hop onto these long-term trends whilst prices are lower.
Forecast US spending on energy infrastructure
Source: BlackRock
Private Credit
Rising interest rates and inflation have led many banks to reduce their lending, but companies require financing through the cycle.
With many businesses turning to private credit for funding, investors have an opportunity to lend to companies at a high yield. This does come with the risk of higher default risks, however, so investors should be disciplined when lending in the current environment.
The report said: “Should conditions further deteriorate, we expect dispersion between industries. Some business models may not financially work at a higher cost of capital.”
It listed healthcare, software, technology, consumer staples and business services as some of the most inflation resilient businesses to lend to, given their ability to pass on costs to customers.
Annual private credit fundraising
Source: BlackRock
Private equity
The private equity space is one of the best places to find opportunity in volatile times, according to the report.
Corporate carveouts (which involve companies selling off parts to private buyers) increase during recessions as companies focus on supporting their core business and boosting top-line growth.
This opens up a much wider pool of opportunities for investors to pick from, with private equity prices remaining below public valuations.
The report said: “Given the current backdrop, the next 12 to 18 months will be about patient capital and selectivity, as buyers capitalize on changing market dynamics.”
Indeed, private equity tends to outperform public markets through difficult market cycles, so could offer a buffer against further market downturns.
Private equity vs public index returns during volatile cycles
Source: BlackRock
Real estate
Adjustments in the real estate sector are ongoing, with the report offering little insight into how interest rates will disrupt property prices.
Occupancy levels remain high, but that could well change as markets approach a recession. Retail spaces are already struggling from reduced consumer spending and the rise of ecommerce, with offices lowering in demand now that many businesses work remotely.
Source: BlackRock
However, logistics continue to be resilient as supply chains continue to catch up from covid backlogs and consumers order more online than in person.