Cate Ambrose

Investors and allocators must find pockets of opportunity that present relative value in an increasingly uncertain environment, says Cate Ambrose.

Recent bank failures in the US and Europe are only the latest piece of bad news that market actors have absorbed over the last year. A war in Europe, persistent high inflation, commodity market upheavals and an increasingly acrimonious US–China relationship are all weighing on investor sentiment.

Most crucially, the steady ratcheting of interest rates initiated by the US Federal Reserve is forcing a rethink for allocators of capital. The short-term pain is most visible in bank balance sheets and publicly traded asset prices, but the long-term effect could be most profound for private equity, venture capital (VC), infrastructure, real estate and other segments of private markets.

In the past decade, rock-bottom rates have steadily driven institutional investors to increase their allocations to private capital, while also acting as a tailwind for asset prices, fuelling ever-higher deal multiples. With cheap debt becoming rarer, energy inflation and labour costs affecting margins, and competition authorities emboldened, the conditions that have propelled the boom in private capital across the US and the most advanced European economies no longer seem to hold.

Global rebalancing

Yet private capital is not a monolith. A global rebalancing of risk is underway, and investors and allocators must find pockets of opportunity that present relative value in our new, more uncertain environment and align with long-term structural trends.

Across economies in Asia, Latin America, Africa, central and eastern Europe (CEE) and the Middle East, private capital investors and entrepreneurs are long accustomed to a lack of cheap debt for acquisitions and expansion. In many nations, inflation and financial market volatility are historical realities that have forced companies to be nimble and adaptive.

The default environment is marked by capital scarcity and a reluctance by global and local banks to extend credit to middle-market businesses — which means less competition and better terms for private capital investors in overlooked markets.

Private credit best exemplifies this dynamic right now. Global Private Capital Association (GPCA) data shows that private credit deal value across the global markets we cover increased 89% year-on-year in 2022 to reach the highest level on record. 

Fund managers are funding an array of opportunities as businesses seek creative financing solutions, including infrastructure loans (Concesionaria Vial Unión del Sur, Mumbai International Airport, Genser Energy); non-performing and distressed opportunities concentrated in Asia and Latin America (Yes Bank, Subic Bay Shipyard, Grupo Aeroméxico); and senior/mezzanine financing for middle-market businesses, such as BluePeak Private Capital’s $20m investment in Ghanaian company, IEng.

Any investor that wants to be part of a real climate solution must tackle the challenge of delivering greener energy

Infrastructure activity is being driven not only by gaps in networks, but also by the response to the climate crisis. Regions outside North America and western Europe represent most of global growth in electricity consumption and will be most affected by climate change. Any investor that wants to be part of a real climate solution must tackle the challenge of delivering greener energy to consumers and businesses in markets where legacy coal plants and diesel generators are all too common.

Energy transition investment

Many are taking notice. Private capital investors deployed nearly $26bn in 2022 across Asia, Latin America, Africa, CEE and the Middle East in companies that are part of the energy transition, including renewable power platforms and electric vehicle start-ups. This was double the total investment in energy transition assets of the previous year and an all-time record.

This increase in private investment in the energy transition follows in the wake of some of the biggest names in global private capital raising dedicated climate vehicles. The attitudes of global institutional investors have shifted decisively when it comes to sustainability and climate, and capital is following suit.

The global energy transition is also dovetailing with a wave of digital transformation across global markets, which accelerated with the onset of the Covid-19 pandemic, encompassing everything from data centres and enterprise software to telemedicine and fintech. VC deal activity in the markets that GPCA covers reached a record high of $149bn in 2021, before falling by almost a third in 2022.

However, the recent drop in VC activity should not distract from the long-term trajectory of tech-enabled businesses across global markets, which have steadily expanded over the past decade as entrepreneurs solve intractable local problems with unique business models.

The headwinds that private investors will face over the next decade — in the form of inflation, higher rates, retreating banks, shifting supply chains and geopolitical rivalries — are likely to pose serious challenges to a ‘business-as-usual’ approach to deploying capital in private markets. With a renewed focus on overlooked markets beyond the US, investors can position themselves to counter these mounting risks and fund long-term global growth.

Cate Ambrose is CEO of the Global Private Capital Association.


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