The year 2023 is expected to see heightened investor interest in private credit, infrastructure, and secondaries, according to Hamilton Lane’s 2023 Market Overview report released on Thursday.
In the secondaries market, supply has been outgrowing demand. The dynamic for buyers is likely to continue improving as more supply gradually hits the market. Hamilton Lane’s secondary deal flow stood at $240 billion last year, whereas the secondary market volume stood at $108 billion.
Private credit is also an investment opportunity as returns here have demonstrated historical consistency throughout all market environments. “Previous periods of rising interest rates have meant better yield for these securities,” Hamilton Lane said in the report adding that it expects the current period to be no different.
The report also noted that there will be opportunities for investors in infrastructure, with heightened interest in investing in energy transition assets.
Energy transition assets will also grow as it provides a hedge against inflation. New Energy investing has been growing in Asia, which emits the biggest volume of carbon, equivalent to approximately half of the world’s output. China and India rank first and third for most carbon emissions worldwide respectively.
Rising interest rates and inflation led to a downturn in 2022, but Hamilton Lane data shows that as of Q3 2022, overall private markets demonstrated more resilience than public markets. For example, buyout outperformed the S&P 500 by almost 2,050 basis points, while infrastructure and real estate outperformed the FTSE All Equity REITs Index by more than 3,400 basis points, according to the report.
Over the last four years, capital raising has not been keeping pace with deployment, the report said. This could be due to several factors, which include the denominator and numerator effect, as well as what the report calls “the fear effect”, which is when a weakness in public markets causes some investor pullback in illiquid investments.
Valuations were also found to be generally accurate across most industry sectors, while exit deals were found to be at a premium to reported value, the overview said. The number of exits has also declined as investors hold out for better market conditions and returns on their investments.
The report also noted the growing access to private markets for non-institutional investors. Private market funds have been targeted towards retail investors, specifically high-net-worth individuals (HNWIs).
Hamilton Lane has launched two products — the Global Private Assets Fund for non-US investors and the Private Assets Fund for US investors — for retail investors. Each fund is made of a blend of direct private equity and credit investments and secondaries.
Net asset value (NAV) in the retail space was found to be dominated by a few large players, with more than half of assets under management (AUM) concentrated among the three largest managers in 2022. “This presents some amount of risk, where the future of semi-liquid funds will inevitably be tied to the success of a few managers,” the report said.
Volatility is expected to persist throughout this year, as investors cope with inflation, interest rate fluctuations, and ongoing geopolitical tensions. Private markets, however, “have continued to provide the attractive returns that investors seek, with distinct areas of opportunity in the year ahead,” the report said.
Hamilton Lane is a US-based firm that provides private equity investment management services. It employs nearly 600 professionals across North America, Europe, Asia Pacific and the Middle East.