Panel, Conference Presentation
Renewed Opportunities in Private Markets | Global Investors’ Symposium Hong Kong 2024
- Macro tailwinds such as peace dividends, low rates, and globalization are unwinding over the next 10-15 years, creating an environment where generating alpha will require alternative investments rather than relying on historical drivers.
- Passive capital now constitutes 60-70% of the S&P and 30-40% of fixed income, leading to a bifurcated market with negligible price discovery in equities and fixed income.
- A new investment paradigm is emerging where banks have divested risky products, shifting safe assets to the private market and leaving risky assets in the public market.
- Private credit is projected to finance 80% of US buyouts as banks reduce large-scale commitments, with the sector expected to reach $1.5 trillion in five years and absorb $20 trillion off bank balance sheets over five to ten years.
- The 2023 deployment and distribution environment was characterized by slow activity due to rapid interest rate hikes from zero to five percent, with adjustments anticipated to push returns toward a new baseline reset by higher rates.
- Partners Group intends to focus on larger opportunities with fewer companies, prioritizing quality over quantity as public funds adjust quickly compared to founder-led businesses.
- Secondaries deal flow is expected to grow two to three times driven by the mathematical accumulation of fund commitments over 20 years, slower realization rates, and rising costs of capital, with Partners Group launching a $10-12 billion secondary strategy.
- Inflation, currency depreciation, and business growth are identified as primary return drivers in markets like India, where leverage has not been widely utilized, while infrastructure is developing as an asset class offering both equity and credit structures.
- De-globalization and geopolitical tensions are expected to create inefficiencies in the global economy, offering sophisticated players opportunities to extract returns from assets, particularly in China where long-term issues like real estate and low domestic consumption are expanding without a major stimulus.
- Asia's mid-market firms are positioned to capitalize on value dislocations, such as Japanese companies trading below book value, by adopting global supply chains, adjusting to AI and sustainability trends, and shifting from mass volume to on-demand direct-to-consumer models.
- Generative AI and automation are expected to transform low-margin manufacturing into high-margin businesses by enabling small batches and reducing inventory waste, while power constraints for AI data centers will drive demand for renewables and power grid infrastructure.
- Private capital is expected to grow significantly as public allocators have a long runway for expansion, with a specific emphasis on local economies in Asia and the Middle East and a projection that RMB fundraising in China will be 7-8 times larger than USD fundraising.
- The landscape is expected to see an explosion of specialized smaller firms that can generate great returns by becoming cheaper and more interesting investment opportunities in a capital-scarce environment.
- Apollo aims to maintain a small-firm culture and build long-term client relationships while expanding, rather than pursuing scale for its own sake, alongside continued growth in the private credit and secondary sectors.