2023 Private Markets Outlook: A new era for investors

Below is an excerpt from the full report sharing insights on the optimistic yet cautious outlook for the new year from our BlackRock Alternatives leaders.

Introduction - in turbulence, optimism

Investors had little reason to love 2022. It was a year that brought market upheavals, geopolitical instability and economic conditions that few could have foreseen. Although 2023 is expected to bring with it some turbulence, at BlackRock Alternatives the outlook for the new year is one of cautious optimism.

Near-term uncertainty presents an opportunity for investors to achieve their long-term objectives, by continuing to invest in durable global trends such as the transition to a low-carbon economy, ever-expanding technology adoption and emerging demographic shifts.

Key takeaways

• A new era of higher inflation, rates and volatility has roiled public markets, creating opportunities across private markets.
• The role of private assets in a portfolio is becoming more important than ever, as many are uniquely poised to take advantage of significant global trends.
• Private credit continues to expand as public financing retreats and more companies seek capital.
• Infrastructure should benefit from continued investment in sustainable energy and energy security. It can also play a role as a non-correlated inflation hedge.
• In private equity, we see lower valuations, increased buyout, carveout and M&A activity, and more quality portfolios for sale in the secondary markets.
• Real estate values are resetting in response to changing tenant demand and higher financing costs, which is leading to disparate returns among regions, sectors and property types.

Considering that the investment period of a new fund vintage can extend from one to three years, the prospect of lower entry valuations is an attractive quality right now. 

Infrastructure

Essential assets

From roads to airports and energy infrastructure, these assets are essential to industry and households alike, and can benefit from macro trends such as the energy crunch and digitalization.

Infrastructure has the potential to diversify returns and provide stable cashflows. Assets like power plants and toll roads are often funded through long-term contracts, helping to insulate them from economic cycles, and have CPI-linked costs and prices – making them a hedge against the effects of inflation.

We believe the global transition to a low-carbon economy – US$125 trillion of new investments by 2050, according to the IEA – represents a major opportunity for infrastructure investors around the world.

Private credit

Calm amid the storm

We believe that rising rates, inflationary pressures and economic uncertainty offer a few unique advantages for private credit investors.

The increase in interest rates in many countries has caused turmoil in the capital markets. But it could be a boon in private credit because of the flexibility of capital to react to changing market conditions.

The amount of dry powder in both private equity and private credit – more than US$1 trillion as of August 2022, according to Preqin – suggests that many companies should continue to have access to funding through a downturn. Those that struggle, however, may prove attractive investments for opportunistic or distressed strategies, which have about US$136 billion ready to invest, according to Preqin.

Private equity

Seizing the moment

Volatility creates opportunity – and in our view few can execute better on that opportunity than private equity investors. Given the current backdrop, the next 12 to 18 months will be about patient capital and selectivity, as buyers capitalize on changing market dynamics.

Real estate

Changing foundations

Real estate is in a state of adjustment, as the drivers of tenant demand shift markedly and investors adjust their portfolio allocations.

Occupancy levels across sectors are still high – something that could change as we get deeper into the economic cycle. And valid questions persist about how profoundly the rise in interest rates will disrupt property prices, especially if occupancy rates drop.

Logistics remains a bright spot. And living sectors are coming to the fore. There are also demographic trends bolstering demand in niche real estate segments, such as student housing, childcare and senior living.

The drivers of real estate returns are changing in 2023 as occupancy trends respond to the mixed demand outlook and rental incomes rise with inflation, while yield spreads tighten with higher funding costs.