Conference Presentation, Panel
Blow Wind, Blow: The Sails of Asset Management | Global Conference 2024
- Private equity capital allocation is projected to increase significantly and remain a priority for institutional investors despite high valuations, with over 70 percent of private market investors planning to increase their allocation; growth is expected to continue despite slowing compared to other asset classes, driven by better returns and operational flexibility.
- Transaction volumes are anticipated to rise, fueling growth in the secondary private equity space, while performance dispersion is expected to widen as financial engineering loses efficacy and organic EBITDA growth becomes critical for value creation.
- Private credit is viewed as a catalyst for the next wave of private equity growth and is expected to capture a substantial portion of home builder finance and construction lending shifting from banks, with over 65 percent of investors planning to increase allocations; however, the market faces expectations of an "old school" default cycle and higher default rates as the previous five-year anomaly ends.
- The shift of credit from banks to non-banks is characterized as a secular trend likely to persist for one to two decades, driven by anticipated adjustments or delays in Basel III regulations and widespread partnerships between banks and non-banks, excluding JPMorgan, to originate deals and manage risk.
- Commercial real estate faces specific headwinds, including $1.2 trillion in maturities due within the next two years, permanent reductions in office space demand due to hybrid work, and the likelihood of teardowns for B and C class buildings, whereas industrial and multifamily sectors are forecast to perform well despite potential rent-to-reality mismatches in multifamily projects.
- Geographic and demographic trends suggest Dallas population growth from 8.1 million to 12 million by 2045, spurring a resurgence in corporate relocations and home costs in North Texas, while global private credit allocation is expected to expand in Europe and Asia due to less crowded markets.
- Future strategies for private markets will emphasize organic EBITDA growth over multiple expansion, with a specific focus on sourcing opportunities as price makers and addressing the 4 million home shortage through non-bank lending and infrastructure investment.
- Investment risks include a "tougher time" for the industry as cheap leverage ends, creating winners and losers, with dispersion in private credit returns expected to be more substantial due to lender inexperience, and potential public policy interventions affecting consumer lending and mortgage forbearance.
- Specific asset classes show divergent trajectories: single-family homes and data centers are expected to remain strong performers, senior housing is poised for reinvention to capture demographic shifts, and retail is being avoided due to marketing difficulties, while infrastructure is projected to become the primary source of structural change.
- Market dynamics indicate that the large-cap end of private credit is becoming crowded and competitive, pushing lenders toward the middle market, which is expected to see healthy growth through forward flow agreements and symbiotic relationships, while retail money flows may cause market hesitation.
- Real estate allocation plans indicate that 53 percent of investors intend to increase real estate allocation over the next two to three years, or potentially up to five years, reflecting a strategic shift amidst the transition of credit and evolving market conditions.