Category Investments

Outlook 2023, Private assets: three areas of focus in challenging times

12 January 2023 Dr. Nils Rode, Chief Investment Officer at Schroders Capital
Dr. Nils Rode, Chief Investment Officer at Schroders Capital

Dr. Nils Rode, Chief Investment Officer at Schroders Capital

2023 is set to be difficult. We outline three things private asset investors can focus on to maximise resilience and optimise long-term return potential.

In 2023, private asset investors face a complex mix of challenges and risks.

The likelihood of a prolonged recession is significant. Inflation is high. Interest rates are rising, while overall debt is elevated. The war in Ukraine continues, as does the resultant energy crisis. Even if these factors disappeared overnight, ongoing issues like social inequality and populism remain.

Nevertheless, private assets are long-term in nature. It’s more appropriate that investors assess the medium-to long-term outlook before making any decisions. Over this longer timeframe, numerous durable, long-term trends mean we remain optimistic.

In particular, five long-term megatrends should provide tailwinds:

• Climate change and decarbonisation
• Technological revolution
• Sustainable lifestyles
• Aging populations
• Growth of emerging and frontier markets

The short-term challenges investors face today don’t affect the urgent need to tackle climate change and decarbonisation. No economic backdrop – no matter how turbulent - will stop the technological revolution, nor the shift towards more sustainable lifestyles.

The global population also continues to grow older and larger, changing supply and demand patterns as a result. We expect the combination of aging populations and low birth rates to put pressure on real interest rates over the longer-term as they reduce the available labour force in many countries. Emerging and frontier markets will also continue to grow, with the countries leading this growth likely to evolve over time.

Other forces shaping private markets are not thematic, but relate more to developing trends in investor demand and behaviour. For example, we expect the transition to what we refer to as “Private Assets 4.0”, to continue, if not accelerate. Private markets have evolved rapidly from the mid-80s, and transitioned through several forms as they have done so. In this new phase, access is improving for a huge number of investors previously excluded, as “democratised” solutions continue to develop.

Even so, the near-term is undoubtedly going to be difficult. Here are three key things investors can focus on to ensure private asset allocations are as resilient as possible to short-term market challenges.

1. Steady investment pace

Keeping up a steady investment pace may be difficult. Nevertheless, investors who can make new fund investments in 2023 are well advised to do so. Recession years tend to be particularly attractive vintage years, according to our analysis.

Structurally, funds can benefit from “time-diversification”, where capital is deployed over several years. This allows funds raised in recession years to pick up assets at depressed values as the recession plays out. The assets can then pursue an exit later on, in the recovery phase, when valuations are rising.

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