The private markets offer opportunities not only for those investors seeking relative stability away from wider market volatility, but also for those looking for sustainable strategies. That is the firm conviction of Nick Haaijman, Global Head of Private Asset Solutions at Fidelity International.

How attractive are private markets for institutional investors given a looming recession, high inflation and the current geopolitical turmoil? 

Nick Haaijman: ‘‘We recognise the challenges facing investors this winter and beyond, but private markets assets have a few features that should protect them from the worst of the storms. Firstly, there is less volatility across private markets, so investors should be able to expect a steady, predictable income stream. 

Private credit products, for example, are floating rate, which may be a hedge against inflation. And because many traditional lenders are under stress, we are seeing more investment opportunities in the private markets. This puts private lenders in a much stronger negotiating position. The move away from traditional sources of capital is accelerating, so for investors private markets are becoming increasingly attractive. It is an incredibly exciting time to look at private assets.“

What are the pluses of private markets compared to public markets? And vice versa? 

‘‘In a period of high volatility, the fact that private markets do not mark to market and do not have a secondary market can make them an attractive investment opportunity. They are sheltered from the worst sudden pricing moves that macroeconomic or geopolitical developments cause in the public markets. One potential benefit of public markets over private is the transparency available. Private assets can still be quite opaque and that can be challenging for investors. Where do you go for quality? How do you find the best option for you out there?“

In your view, what are the biggest opportunities when looking at the main asset classes within private markets? For example, Real Estate? 

‘‘Personally, I would look at new direct lending opportunities for the next year. As mentioned earlier, we are unlikely to see much appetite from traditional lenders, so terms for alternative providers of capital may be attractive and covenants could be very tight. Given that lenders are dealing directly with the borrowing companies, we can negotiate those terms exactly to our requirements, resulting in more stability. And of course, you have protection from wider market volatility and rising rates due to the floating rate nature of the product. 

For those with more risk appetite, stressed credit could present an interesting opportunity given we expect more defaults and stress in the public markets next year. But you need to have the stomach for that. 

In the Real Estate space, we are seeing a huge opportunity in diversified sustainable assets across Europe. Demand for green buildings has been resilient, even over the pandemic. Not only can they demand higher rents (which for the occupier is counterbalanced by much lower energy costs), but green assets are also future-proofed, ready for any regulatory changes.‘‘

What do you see as the biggest challenges in private markets? How can institutional investors deal with them? 

‘‘The shortage of liquidity across private markets can be challenging. You must have a strong conviction in your strategy and trust your manager to do a good job – especially given that you are locked in for a longer time period. In return, private investors do get an illiquidity premium over the public markets, but it can be a leap of faith.

Currently, there is also a challenge presented by the denominator effect. Due to the fall in value of the public markets, investors’ relative allocation to private assets has increased and some can be limited on new private market commitments. However, when the new financial year comes, investors tend to reset their tactical asset allocations. And when public markets show signs of normalisation, this could be a short-term issue.’‘

Are private markets interesting from an ESG investing perspective? Why? 

‘‘Yes, private markets offer so many opportunities for investors taking a sustainable approach! According to PwC¹, the total AUM in private markets ESG-linked assets doubled between 2017 and 2020, and the total may reach between € 776 billion and € 1.2 trillion by 2025, accounting for 27% to 42% of the entire private market. 

For investors focused on ESG, private markets should be central to their strategies. Private investing often means taking on a much larger role within the assets themselves, whether that is buying a larger ownership stake in a building or being the sole direct lender to a company. The relationships that private investors have to these assets is very close, with more potential to influence change than in the public markets. 

We obviously have a lot more control over the carbon footprint of a building we own than if we had a stake in a listed real estate investment trust, while the opportunity for us to engage with companies positively is much greater if we have a relationship directly with them, rather than trying to make our voice heard even as a large shareholder. 

These relationships are not short-term. Private market investors typically have longer holding periods, and that means that we can commit to improving an asset through a long-term strategy of positive engagement.’‘

How can institutional investors best build an ESG strategy into their private market portfolios? 

‘‘It can be a challenge. There are a lot of products out there that are said to champion sustainability, and have a convincing ESG policy to show to clients, but it is not always an authentic part of their philosophy. Investors need to find funds where ESG is core to the culture, where it is really believed in, not just an afterthought or retrofitted onto existing strategies. 

You have to find an investment partner that shares the same sustainability values, and that can show you how they apply those values to their underlying holdings and then report the outcome back to you. You are not just looking for a private markets strategy that can provide some shelter from the volatility or a hedge against rising interest rates, but one that can deliver to your sustainability goals on top of that.‘‘

¹ 2022 EU Private Markets: ESG Reboot’, PwC, 2021
 

This interview article was initially published by Financial Investigator (Wim Groeneveld), edition 7/2022.

Risk Warnings

• Investments in private markets are highly illiquid and therefore unsuitable for investors who cannot hold their investments for a long time (at least 10 years).
• The value of investments and the income from them may fall or rise, so investors may get back less than the amount invested.
• Past performance is not a reliable indicator of future returns.

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