Main asset classes Private markets Shifting opportunities As growth slows and interest rates rise, asset prices are likely to remain under pressure. Private markets should see more moderate declines than public markets, while lower asset prices will likely present opportunities for fresh investments. A highly selective approach is key. Slowing economic growth and rising interest rates Co-investments: are putting asset valuations under pressure – a Tailored approach with lower fees situation to which private equity (PE) is not immune. For more seasoned and risk tolerant investors, we For already invested private capital, we expect highlight co-investments. Co-investors take minority further broad-based declines, though less substan- stakes alongside the manager and actively under- tial than in public markets. For fresh investments take the deal selection and portfolio construction and funds in the investment phase, the de-rating of process. This offers a more tailored, highly selective equities and volatility in capital markets will likely and proactive approach with significantly lower fees translate into better investment opportunities. and expenses. An investor can target a region, Additionally, record levels of committed but uninvest- industry or manager, while also matching the pace of ed capital (i.e., “dry powder”) provide capacity and commitments with their cash flow needs. Due to flexibility to invest at improved valuations. It is worth lower fees and expenses, such investments – when noting that vintages (i.e., capital) deployed at lower successful – outperform private markets consistently. points in the business cycle tend to perform better That said, the volatility and drawdowns associated than those deployed at higher points. with co-investments are higher than in private markets, but still lower than in public markets. Secondaries and private debt: Improved return prospects Stay selective and well diversified In light of elevated volatility and more attractive asset Recent turbulent years have taught us that diversifi- pricing, we highlight active vehicles that specialize in cation, differentiation and specialized expertise are acquiring companies at lower entry points – second- essential. Private market investing is grounded upon ary managers. Such funds offer diversification with knowledge, skills and a hands-on entrepreneurial more than 200 positions, pricing visibility (given that approach, with returns reliant on the specific their portfolios are well-funded) and lower loss ratios. manager’s ability to skillfully navigate an investment Larger discounts to net asset values (NAVs) this to a successful outcome regardless of the prevailing year are also supportive. Private debt (PD) offers capital market conditions. In our view, continuous another solution, as rising benchmark rates and risk allocation to well-selected, experienced managers premiums improve its future return potential, particu- across sectors, geographies and vintages forms the larly given its floating rate nature. However, higher basis of a resilient portfolio. returns are somewhat offset by higher default rates in a weak macro environment. We thus highlight direct lending – its more resilient component – due to its seniority in terms of the capital structure, lower defaults and typically better recovery rates.