The global events of the past few years have made planning for the future trickier than ever. Now, with soaring inflation, increasing interest rates, collapsing stock markets and imminent recessions, scoping the horizon for investment trends requires a steady hand and a strong stomach.
Ahead of embarking on Titanbay’s Horizons Conference, a forum bringing together industry leaders to discuss navigating the waters of private markets and understanding what the next 12 months will look like, Titanbay’s head of investments Alex Bozoglou casts a weathered eye on what’s in store for the year ahead...
According to Campden Wealth’s new European Family Office Report 2022, private equity has come centre stage, representing 27% of the average family office portfolio. In 2021, private equity funds delivered an average return of 17%. Do you think the desire to increase allocations will continue into 2023?
We expect investors to continue to increase private equity allocations in 2023. The main reason is a simple one - the ability of the asset class to consistently outperform public markets. At the heart of that is the advantage of active ownership and longer time horizons evident in private equity. Times of stress in markets prove to be good times to test an investment thesis and really observe which gross profit margin (GP) is best placed to navigate challenging times and deliver outperformance. Up until 2021, the environment was relatively benign and lifted all boats. I believe in 2023, investors will be more selective.
“A combination of factors including a termination of hostilities and greater visibility on the course of interest rates would certainly contribute to a more robust deal-making environment.”
The same report found that of all investment risk currently troubling family offices, inflation is the most commonly cited (according to 78% of respondents), with increasing geopolitical tensions (61%) and rising interest rates (54%) also proving to be ongoing worries. Do you think these concerns will continue far into this year or will confidence start to return?
Despite a tail-off in the inflation rates in Europe and the US, we expect these factors to continue to be top of investors’ concerns. Different parts of the markets react in different ways - the mega buyout segment that is more reliant on debt financing has been slower than the mid-market where private equity investment activity has continued at a brisker pace. A combination of factors, including a termination of hostilities and greater visibility on the course of interest rates, would certainly contribute to a more robust deal-making environment. Even excluding these exogenous factors, private equity investors are even now able to access opportunities with more attractive entry multiples in certain market segments.
Exposure to private equity markets has increased to 27% of assets under management (AUM) (from 26% in 2021). This upward trend is likely to continue since 45% of respondents are looking to increase their allocation to direct private equity, setting it apart as the most popular asset class for new investment. 41% of European family offices intend to increase their exposure to private equity funds, and 39% to venture capital. What’s the appeal of this strategy would you say?
Long-term outperformance of this asset class is the critical reason for this shift. Leading managers are active owners of assets, able to transform companies, accelerate their growth and improve profitability in the private domain. Importantly, if investors want to access some of the best risk-adjusted returns, private markets offer optionality - for example 97% of software companies are in the private domain. An investor that has a thesis on the software space cannot ignore the private sphere.
In 2021/2022, popular strategies to mitigate inflation risk include increasing exposure to equities (49%), real estate (33%), commodities (33%), and reducing the duration of bond portfolios (28%). Will these strategies continue to be effective in 2023?
Private equity portfolios offer investors the opportunity to adopt a far longer-term horizon. Within that, managing inflation becomes more effective. For example, focusing on strategies where the underlying businesses have significant pricing power and are less reliant on volatile commodity prices as input costs. Equally greater exposure in floating rate notes through private debt vehicles will offer some protection. These are important considerations as inflation will continue to be a feature of markets in 2023.