Tikehau Capital’s Thomas Friedberger warns the European Investor Summit that growth in the next decade will be slower – but it’ll be more sustainable and less leveraged, writes Nik Pratt.
The increased investment in private assets is a cause for optimism as it will herald a return of the human factor in asset management and a more sustainable risk and return ratio.
However, if asset managers are going to capitalise on this development, they will need to maintain their investment discipline and attention to detail, and they should establish a physical presence in various local markets.
These were the conclusions reached by Thomas Friedberger, deputy CEO of Paris-based alternative asset manager Tikehau Capital, who was speaking at the European Investor Summit held by Societe Generale Securities Services in Paris in June.
Friedberger’s optimism comes amid a number of headwinds facing private markets, such as inflation, interest rate hikes and geopolitical uncertainty. But while it is likely that there will be a much slower rate of growth in the funds industry over the next two decades, it will be more sustainable and linked to the real economy and should therefore be welcomed, said Friedberger.
“It is evident to me that the economic model we have employed since the end of World War II, which is based on infinite short-term growth is not sustainable,” said Friedberger. “It has had a negative effect on biodiversity, climate change and wealth inequality and created financial bubbles.”
There have been some fundamental changes to the global economy and investment world since the pandemic, said Friedberger, one being the acceleration of globalisation and an extended period of low-interest rates, which had allowed companies to over-optimise – be that on tax efficiency, production costs, thin capital buffers, or just-in-time global supply chains.
Resilience
As a consequence of these changes, wealth creation in the coming decades will be more dependent on resilience, said Friedberger. “Globalisation has revealed some weaknesses, as evidenced during the pandemic, and there will be much slower rates of growth in the next one or two decades. However, this will be much more sustainable growth with less leverage.”
In addition to more sustainable growth and an end to financial bubbles, there will be a return of the human factor to private market investing, with returns driven more by alpha than beta and value creation more dependent on stock-picking than asset allocation, says Friedberger.
“For asset managers, only the most disciplined will outperform the market. You need to be plugged into local ecosystems, have offices everywhere you invest, and the alignment of interests will be much more important than before.”
“In private debt, you are often the sole lender to a borrower or issuer. This forces you to have a constant dialogue with the issuer and anticipate issues, and restructure accordingly. This creates financial value. This is the same in real estate. When you know your tenant, you can foresee issues.”
The greater emphasis on the human factor in the private markets of the future will have competitive implications for firms, says Friedberger. “For asset managers, only the most disciplined will outperform the market. You need to be plugged into local ecosystems, have offices everywhere you invest and the alignment of interests will be much more important than before. Attention to detail will also make a significant difference.”
Friedberger’s views and sense of optimism are shared by a number of other alternative asset managers similarly invested in private markets. That said, there is a mixed picture when it comes to the various asset classes within the private markets that will benefit the most from an estimated $2 trillion in dry powder destined for private markets.
Real estate slowdown
As stated by Marco Belletti, CEO of Italian asset manager Azimut, the real estate market has seen a slowdown in certain sub-sectors and geographies but, according to Paolo Rizzuti, Head of Private Markets and General Manager of the pension fund of the banking group Banca, this is not a U-turn in the demand for private assets, but just a change in the cycle as property owners wait for better market conditions.
Infrastructure is seen by Peter Veldman, deputy group head of fund operations at EQT Group, as a natural hedge for the current market conditions, while private equity is also seen as attractive. The credit market also holds some opportunities for non-bank participants, said Veldman.
But it is the impact of private market investments on the real economy that could prove to be the most effective driver of inflows, according to Alexandre Pieyre, head of EDF Invest, the private equity arm of the French energy company. “It is about climate change – our investments in infrastructure and real estate have an impact, especially where we are refurbishing buildings with green technology – converting brown assets to greener assets in order to meet Paris Agreement targets,” said Pieyre.
This is also helping to broaden the investor base to include, in addition to institutional investors, alternative investors and HNWIs. “The 60/40 allocation model is over. Institutional investors have seen private assets as supportive and complementary to a diversified portfolio for quite some time, and this is now coming to a more diffuse base,” said Rizzuti.
In addition, more companies are going private for longer, as it allows them to grow without the short-term pressure of quarterly earnings. For example, the number of listed companies in the US has halved since the collapse of Lehman Brothers and the start of the 2008 financial crisis. So, it is not just that private markets are here to stay, but that the growth will accelerate over the next decade at the expense of the listed market, said Rizzuti.
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