As I’ve been testing using AI to track and summarise some of the GPs outlooks for 2025, I thought I would share as they come through.
I’ve highlighted some common themes and then individual summaries below.
So 2025 will look like ……
1. Macroeconomic Conditions:
? Soft Landing & Reduced Inflation: Multiple GPs predict (hope) for a soft landing for economies, with inflation moderating and central banks easing monetary policies.
? Rate Cycles: A consistent theme is the continuation of higher long term rates, though with a general expectation of rates declining. Obviously nice for borrowers by improving debt serviceability and making debt more affordable.
? Economic Growth: A shift from contraction to expansion is noted, with some optimism for a more balanced and healthier economic environment, benefiting various private market sectors.
2. Private Market Activity:
? Increased Private Market Dealmaking: A more favorable macroeconomic environment is expected to drive private market dealmaking, including private credit, secondaries, and private equity transactions.
? Liquidity and Valuations: Many highlight the importance of liquidity, with increased demand for liquidity from LPs and a better pricing environment. Valuations are expected to stabilize as markets normalize, creating opportunities for investment.
? Private Credit : Direct lending remains an attractive sector, although the return expectations have moderated slightly. Private credit is also seen as a key alternative to public markets, with better risk adjusted metrics.
? Favorable Sectors: Certain sectors, such as technology, logistics, energy transition, AI are highlighted as benefiting from the economic environment, as well as more cyclical names which is a change.
? Geopolitical and Market Risks: Geopolitical tensions and trade protectionism are consistently noted as risks that could impact the global economic environment. These factors influence valuations and market behavior, especially in private markets.
? Credit Risk: Some reports note an increase in credit defaults and a potential rise in borrowing costs, especially as banks re-enter certain debt markets. However, private credit markets are seen as benefiting from these dynamics, offering stable cash flows.
5. Strategic Investment Considerations:
? Diversification into Private Assets: A recurring point is the need for diversification, particularly into private assets, to avoid risks associated with public market volatility and tight fixed income spreads.
? Manager Selection: Manager selection is emphasized as crucial, particularly in alternatives, where the potential for alpha generation is significant.
So in no particular order…..
- Better macro visibility, soft landing, Fed looser monetary policy and moderate inflation?
- Pick up in M&A due to lower costs and pressure from PE LPs for liquidity?
Coller Capital - Secondaries?
- Positive macro leads to reduced uncertainty about private valuations relative to public valuations on other side of rate cycle means bi-ask spread contraction increases transaction volume??
- Secondaries benefit from shortfall in distributions to LPs, driven by a shortage in underlying M&A and a shortage in capital markets activity.
- Over allocations by LPs to PE is reversing - will seek exits on secondaries market many first time sellers broadening market participant base
- LP dominated but GP increasing in credit??
- Widespread need for liquidity, an abundance of assets in the market, and pricing is in a sweet spot for both buyers and sellers.?
- Benign macro leads to lower inflation and interest rates?
- Loans market retains capital(muted outflows) as rates decline = lower risk of default?
- Implied terminal rate of 3.5% still above historical avg - strong income?
- Implied terminal still above historical avg - high single digit returns?
- Rate cuts create some tailwinds - lower borrowing costs allow MM borrowers to take on more leverage and increases buyout transactions? PC natural beneficiary??
- Favour sectors - IT & software,logistics, semi-conductors and manufacturing?
- Optimism for more settled political picture and brighter economy despite “speedbumps” around low growth, inflation surprises and geopolitics
- Rate reductions means PE buyout models look better, 63% use PC in acquisition finance, in Asia structured being the most popular 75%
- Junior debt ranks highest in increased usage by PE ?
J.P. Morgan Asset Management?
- Transition from low growth,interest world to healthier economy with higher long-term growth,interest rates,returns
- Gov fiscal activism risks bond volatility and inflation absent immigration and labour reforms
- Assets with inflation protection provide utility
- AI to boost productivity and provide annual 20bps boost to corp earnings/ p.a
- Alternatives set to recover from asset markdowns to offer compelling returns and diversification, with manager selection crucial?
- Opportunity for alpha generation is significant offering superior risk-adjusted returns against public market volatility
- Direct Lending return assumption declines to 8.2 from 8.5%
- Borrowers have found balance of lowered cost public vs complex private with split being cyclical reflecting credit availability?
- Private vs public spread fall from 200bps to 180bps due to rise in AUM
- Increased credit cost means avg defaults rates rise from 190 to 250bps with 50% recovery rate implies a 125bps impact and a unlevered yield of 9.25%
- Banks reentering into senior and unitranches may mean GPs focussing on lower rated debt
- Macroeconomic balances have diminished, base case for soft landings with inflation near target allowing CBs to continuities easing cycle with key risks from trade protectionism and geopolitical conflicts
- Terminal higher rate than historical avg still being supportive of fixed income, border equities allocations away from US concentrated markets and diversifying assets such as private markets.
- A more balanced economy in 2025 to spur private market dealmaking and ease some valuation and liquidity pressures.?
- Private credit, after demand for floating rate debt has tightened spreads falling rates may mitigate supply/demand imbalance and normalise spreads
- Lower rates to help debt serviceability, mitigate stress, for an avg deal done in 2021 for a borrower with avg growth a 2% decline in rates would reduce service costs to day 1 levels so fundamentals will drive dispersion
- Around 80% of 2024 loan activity was for refinancings, repricings and extension with record activity of A&E and PIK to help companies manage cash flow, as rates fall this activity will reduce.
- Anticipate continued LP interest in private credit to correct historic under allocations?
- Global dispersion as growth, inflation, and interest rates across the world’s economies are set to head in very different directions over the next 12 months
- US mid to late cycle can create volatile but a pro business administration good for risk assets but requires correct investment choices.?
- Valuations of past winners are high, but lower interest rates will benefit capital-intensive industries and cyclicals outperform.
- Tariffs and US fiscal deficit will increase inflation higher meaning higher terminal rate than market exp. around 3.5%
- Fixed income tight spreads?are priced for benign economic conditions there is a case that less optimistic scenarios are being underpriced, also makes the case for diversification into private assets.
- Senior direct lending returns to remain compelling but falling from 10-11% when credit supply was tight to 7-9%
- 2025 to be a promising for private market investments as favourable cycle alignments offering return and income potential
- Amidst geopolitical tensions, private markets are key for portfolio resilience
- Trend towards decarbonisation continuing, with private markets playing a pivotal role
- Reduced fundraising has meant reduced competition for deals meaning better entry values and performance
- Private markets early investor in AI, energy transition sector?
- Economic cycle moving from contraction to expansion benefiting private markets?
- Banks seek improved capital ratios, US regional banks navigate commercial real estate leverage challenges, and insurers face pressures from past inflation
- 2025 modest reinflationary pressures,normalisation of CB rates, enhanced economic growth mean steeper yield curves and income opportunities
- Liquid markets offer minimal risk premiums, private credit deliver attractive alternative income sources and stable cash flows and better risk premium in 2025
#Privatecredit #privatemarkets #outlook2025
BTW suppose I should say use at you own risk and I can’t guarantee I haven’t made a typo.
Managing Director, Country Manager - UK & Ireland
2 个月Thanks for sharing!!