Renewed Opportunities in Private Markets | Global Investors’ Symposium Hong Kong 2024

Macroeconomic Shifts and Market Dynamics

• The post-2008 "tailwinds" driving private markets—low rates, peace dividend, globalization, and fiscal stimulus—are unwinding, forcing a reset of valuation expectations.
• Public equity and fixed income markets are becoming "flow-driven" with 60-70% of equities and 30-40% of fixed income being passive, rendering price discovery non-existent in these sectors.
• Investors are shifting toward private markets to generate alpha through fundamental analysis rather than passive flow participation.
• Banks have divested from lending and operational businesses since 2008, pushing safe, investment-grade assets into the alternative marketplace and inverting the traditional "public is safe, private is risky" narrative.

Strategic Shifts in Private Credit

• Investment Thesis: Apollo Global Management views investment-grade private credit as a core strategy to replace bank lending, noting that 80% of US buyouts are now financed by private credit.
• Differentiation: Pure LBO financing and mid-market credit (risk-taking) differ significantly from broader private credit; the latter requires investment-grade capital pools (banks/insurers) to be sustainable.
• Market Size: Matt noted that while current sponsor lending is a trillion-dollar market, $20 trillion in assets is coming off bank balance sheets in the next 5-10 years, creating a massive opportunity.
• Future Outlook: Matt predicts that in five years, the private credit landscape will be dominated by Asset-Backed Securities (ABS), with all major firms holding an ABS allocation.
• Asia Strategy: Apollo is building a private credit business in Asia that fills gaps between equity and banks (hybrid/senior equity) or addresses areas banks avoid, such as development lending and bespoke investment-grade lending for long-duration CapEx.

Private Equity Trends and Sector Focus

• Primary Focus: TPG is prioritizing "public-to-private" opportunities, citing the Australian market as a prime example where public funds offer efficient exit routes compared to emotional founder-led sales.
• Quality over Quantity: TPG is shifting toward larger, higher-quality opportunities rather than chasing volume, particularly in healthcare and Asia consumer sectors.
• China Outlook: Partners Group (Kevin) anticipates tremendous growth in RMB-onshore opportunities, noting RMB fundraising is already 7-8x larger than US-dollar fundraising and growing at 24% annually.
• China Risk Assessment: Kevin views China's current economic headwinds (real estate, export, consumption) as a convergence of old problems rather than new ones, expressing optimism that the government will prioritize long-term structural solutions over short-term stimulus.
• Mid-Market Focus: Saladin Partners (Donald) identifies the Asia mid-market as a prime opportunity for operational transformation, targeting companies in transition via technology and business model innovation.
• Valuation Dislocation: Saladin highlights significant value dislocations, citing Japanese companies trading below book value and Asian ADRs trading at negative enterprise values.

Infrastructure and Sustainability

• Infrastructure Growth: Infrastructure is emerging as a distinct asset class that offers a spectrum from "core" (credit-like) to "core-plus" (equity-like) exposures.
• Climate Investing: TPG has launched a dedicated climate fund and a "Global South" initiative focusing on self-sufficiency, energy storage, and EV battery production in Asia, Africa, and the Middle East.
• Impact Scale: Partners Group launched a $1 billion "PG Life" impact fund, emphasizing the necessity of delivering dual returns (financial and impact) and scale to attract institutional LPs.
• Power Constraints: Saladin notes that AI data center expansion is creating unexpected power constraints, opening opportunities in renewable energy and grid infrastructure beyond just chip manufacturing.

Sustainability and Operational Transformation

• Technology Integration: Saladin is applying generative AI and automation (3D printing, knitting tech) to traditional manufacturing (e.g., footwear) to shift from low-margin wholesale models to high-margin, on-demand, direct-to-consumer models.
• Supply Chain Efficiency: Technology adoption allows for smaller batch sizes and 100% sell-through, reducing waste and increasing margins in the "workshop of the world" (Asia).
• Innovation Commercialization: Strategic investments are being made in sustainable material suppliers (e.g., recycled yarns) to solve go-to-market barriers for startups by leveraging the distribution networks of large tier-one suppliers.

Industry Consolidation and Future Predictions

• Consolidation: Saladin does not foresee a rush to become the "largest" firm but aims to maintain a small-firm culture while expanding product offerings; however, others (like TPG) are actively acquiring secondary and credit businesses.
• Prediction (Kevin): RMB onshore fundraising in China will see a resettling and significant growth, providing opportunities for global GPs previously hesitant about onshore人民币 funds.
• Prediction (Gannon): Capital allocators in the Asia and Middle East region will increasingly focus on local economic developments and reinvestment, rather than just seeking global returns.
• Prediction (Donald): A five-to-ten-year outlook favors an explosion of specialized, smaller firms competing in a capital-scarce environment, which he believes will generate superior returns compared to flush-capital eras.