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After a volatile 2022, this year looks set to offer both challenges and opportunities to private market investors. Here’s Moonfare’s pick of the top five trends that will define 2023.

Applicable strategies in a challenging economic environment are likely to be more value-oriented.

These include buyouts, infrastructure, real estate, secondaries and private credit, including distressed and restructuring specialists.

1. Shelter From Volatility

All provide something of a shelter from volatility. Value-oriented buyouts generally target businesses that require more heavy lifting from an operational perspective, which means they can be acquired at lower prices. In real assets and infrastructure, the energy transition is providing a strong tailwind. Traditional secondaries meanwhile can be highly diversified, which offers protection from volatility.

2. Operational Expertise Coming to the Fore

In the absence of cheap debt and rising valuations, private equity managers will need to reduce reliance on financial engineering and focus more heavily on operational improvements to drive value creation and returns. Areas of focus will include cost control, supply chain optimization, risk management, workforce optimization and – increasingly – climate awareness.

Through 2023 and beyond, we also expect the dispersion of returns between the best and worst performers to increase sharply. Those experienced and skilled at supporting portfolio companies and building businesses through periods of uncertainty will post the strongest results.

3. Distressed Opportunities Will Emerge

The number of turnaround and distressed deals is likely to rise through 2023 on both the credit and equity sides as some companies come under financial and operational pressures. Turnaround specialists will therefore see abundant opportunities throughout the year; however, these deals are not for the faint-hearted.

To be successful, GPs will need specific expertise in restructuring and risk management, while also being highly selective and ensuring investor protection is built into deal structures.

4. Lower Valuations Will Persist

As we’ve explored previously, recessionary periods have historically been some of the strongest vintages for private equity returns. This is driven in part because GPs continue to deploy capital through cycles, and can therefore selectively acquire businesses at lower valuations in more challenging times.

We expect company valuations to continue declining, at least through the first part of 2023. This will particularly be the case in private markets portfolios since the falling valuations seen in public markets have yet to fully filter through to the private side. There is always a lag when prices correct.

5. Utilities and Energy Will Benefit From Tailwinds

Utilities and energy are naturally well-positioned to weather inflation and are less affected by swings in consumer spending. Energy transition to renewable sources will also drive investments to these sectors, in particular as energy security has risen up the agenda over the past 12 months.

As the sector is most affected by market turbulence, the outlook for technology may remain uncertain in the near term. However, the secular trends of digitalization across the economy and the adoption of new technologies, such as automation, are going nowhere. The long-term prospects of technology for returns remain strong.

2023 Investor Playbook 

Focus on value creation. Monetary tightening and uncertain inflationary and geopolitical outlooks will favor strategies with an active approach to value creation.

Prepare for lower distributions. A more muted exit environment may bring longer holding periods and lower distributions. However, distributions are likely to come from secondary buyouts, some M&A transactions, and GP-led secondary deals.

Choose funds carefully. In private markets, return disparities widen during downturns.1, 2 Investors should take time to evaluate a fund manager’s strategy, team, and performance, to form a view on whether they believe the GP can deliver the risk-return profile they are seeking.

Keep a long-term mindset. During a typical eight-to-twelve-year lifespan of a private markets fund, there are likely to be periods of economic turbulence. With this in mind, investors need to keep a long-term perspective and avoid timing the market.
  • Read the entire outlook and other insights in the Moonfare blog.

Sources
1 cepres.com
2 institutionalinvestor.com

Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorized advisor. Past performance is not a reliable guide to future returns. Your capital is at risk.