Infrastructure looks to be one of the big growth stories of 2023 as LPs reconsider long-held underweights. The asset class is proving attractive in an inflationary environment for its ability to pass through rising costs, while several global policy shifts are opening up a raft of infrastructure investment opportunities. Top of the list is the Biden administration’s Inflation Reduction Act which will incentivize projects related to de-carbonization and energy security, with experts predicting $4trn of investment in US energy supply infrastructure in 2032. Digital infrastructure is also top of minds for LPs going into 2023.
Rising rates, diverging global monetary policies and volatile markets have provided fertile ground for several hedge fund strategies, notably multi-strats, macro and CTAs. But With is also seeing far greater dispersion between the best and worst performers, which will likely mean rough ride from investors for the latter. Higher interest rates are also leading allocators to question the role of hedge funds as fixed income replacements, although on the plus side LPs are boosting their risk-mitigation sleeves and we are seeing more allocators look to long/short equity managers for exposure to specific themes, particularly in Europe.
China exposure is one of the biggest talking points for CIOs entering 2023, with Russia’s invasion of Ukraine sharpening minds when considering the impact of possible future military conflicts and government crackdowns in areas such as tech and education.. LPs With has been speaking to are increasingly carving out China from their emerging markets exposure, a trend that will continue this year. But there is also a big split between those who are steering clear of China due to political risks and those who find current valuations in public and private markets too attractive to resist.
Despite the growing attractiveness of traditional fixed income to LPs, we expect another strong year for private credit, particularly with the syndicated loan market all but frozen. After being burned in previous cycles, investors are favoring opportunistic credit as a nimble way to take advantage of any distress, while gaining exposure to other credit strategies. Yields are also improving for traditional middle-market lending, an area previously getting squeezed, although signs of rising default rates will be a top priority for allocators quizzing GPs this year. LPs are also expected to increasingly embrace evergreen structures, while a growing insurer appetite for private credit will be a top priority for many IRs.
Increasing political, regulatory and publicity risks around ESG have made both allocators and GPs take a step back from what was previously one of the most heavily marketed areas of asset management. While the death of ESG investing is greatly exaggerated, the growing global importance of energy security, steep falls in ESG-linked tech stocks, confusion over terminology and greenwashing concerns have triggered rethinks and stymied flows. Expect tougher questions and increasing transparency demands from LPs around ESG this year, although significant money will still pour in to stand-out alpha opportunities in areas such as energy transition.
As private equity allocators struggle with the denominator effect and a more sober set of return expectations compared to previous years, you’d be forgiven for predicting a quieter year for PE. However, while we are seeing pacing plan reductions and the skipping of re-ups, there is still strong activity among certain LPs who are increasing PE targets across growth, buyouts, venture and, increasingly, secondaries. Valuations have become more attractive as we’ve shifted to a buyers’ market, while turnaround funds are also getting more attention given the potential for distress. At the same time LPs are busy quizzing GPs on the impact of rising rates on their buyout portfolios and nervously awaiting portfolio company revaluations.
2022 was a strong year for multi-strategy hedge fund platforms, with several big names topping the performance charts. The biggest firms are increasingly closed to new allocations, locking up capital for longer and some are returning capital to investors, trends that will create more opportunities for smaller and emerging peers and may trigger more high-profile spinouts. Elsewhere, multi-asset ‘solutions’ are going to become an ever more important tool in the sales armory of the largest active managers, particularly those who have been buying into alternatives in recent years through M&A.
A zero-rate world left allocators scrambling for alternative yield opportunities, but with investment grade credit now offering 5%-plus yields, traditional fixed income is finally delivering again. After a tough 2022, views on the direction of prices depend on your outlook on inflation. But With has been hearing from a range of large investors looking to increase their exposure to IG, with active managers often favored, and some looking up the risk scale at high yield and emerging markets debt. On the asset manager side expect more active fixed income ETFs to come to market and take significant flows as they increasingly become the vehicle of choice for wealth managers.
Higher financing costs, price falls and the impact of post-Covid working habits are weighing heavy on the minds of real estate investors heading into 2023. With is hearing from more LPs looking to increase exposure to opportunistic or distressed strategies, while niche strategies that are more likely to weather current headwinds are still in vogue. Trends such as US re-shoring are also creating bubbles of opportunity. Expect private infrastructure strategies to start taking a larger share of real asset portfolios due to the Inflation Reduction Act in the US and several other global drivers, while industry watchers will be keeping an eye on the size of redemption queues at large core funds, several of which have been making big portfolio pivots.
A large secular move of wealth money into privates and other alts has been a top prediction of industry consultants in recent times, with trillions of dollars on the table for GPs. Negative headlines around probably the most successful private markets wealth product has rattled the cages of some. But we don’t see momentum slowing down, quite the opposite. PE-led consolidation among top RIAs is creating a more institutionalized marketplace, with larger portfolios able to write bigger tickets and attract higher quality investment staff. New technologies, alts platforms, regulatory changes and innovative product developments are all making it easier for wealth firms to access private strategies to better diversify the portfolios.