Rising interest rates and a less certain business climate have taken the shine off private assets to some extent, requiring investors to think through their asset allocation, diversification and exposure to risks.

Private market investors should exploit a chillier financial climate to acquire assets at prices that might lead to great “vintages” in due course, as well as spread risks and look for low-correlated assets, according to Schroders.

Fundraising, valuations and investment turnover have declined in the first half of this year – and there’s a recession risk as well. 

This situation requires investors to position for opportunities as and when they arise, Nils Rode, chief investment officer, private assets, at the UK-listed firm, said in a note.

“While a general slowdown and the risk of a recession may be concerning, over time they can also create opportunities for new private asset investments. Historically, attractive vintage years have emerged during times of recessions,” Rode said. 

In the first quarter of 2023, infrastructure fundraising experienced a significant correction of almost 90 per cent from the previous year, according to Preqin. However, other asset classes – such as private debt – only declined by 10 per cent over the same period. Private equity buyout fundraising remained unchanged, he said.

“We recommend that investors direct their new investments towards assets that align with long-term trends and exhibit low correlation with traditional investment strategies,” Rode continued. 

Hotter trends
Rode sees “promising” investment opportunities in areas such as sustainability and impact-aligned investments, renewable energy, generative artificial intelligence (AI) and investments in India. 

He said there are also “attractive” opportunities in small and mid-buyouts in certain industry sectors (notably healthcare), seed and early-stage venture capital investments, direct lending, insurance-linked securities (ILS) and microfinance. 

The cycle
As interest rates have risen and credit tightened, this can put some sectors into play, Rode said. 

“We view private debt and credit alternatives across various strategies as an attractive source of opportunities due to the tightening of credit conditions. Additionally, we see emerging attractive opportunities in infrastructure and real estate due to ongoing repricing,” he said. 

There are risks that some sectors will be hit hard.

“We see a heightened risk of valuation corrections for late-stage venture and growth capital investments, the larger end of buyout markets, and commercial real estate investments that have not yet sufficiently repriced. We recommend that investors are particularly selective when considering new investment opportunities in these areas,” Rode said.