"Amid the global economic and market challenges of 2022, I am delighted to say that our fund portfolio remained robust and continued to deliver strong returns. I am also pleased that we have been able to bring clients a selection of new fund strategies that play well in the context of this macro environment: from a range of specialist secondaries funds, turnaround equity to distressed and special situations", says Lorna Robertson, Head of Funds at Connection Capital.
The old world order is changing, as fiscal support offered during the pandemic ebbs away and a low yield, low growth environment gives way to a more volatile, less predictable future, in which protecting capital has become more important than it has been for many years. Added to which, the writing is on the wall for traditional portfolio allocations: according to the Financial Times, 2022 was the worst year for portfolios made up of 50% US equities/50% bonds for 90 years.
There are two important takeaways from all this. One is that now more than ever, investors should aim to construct a thoroughly diversified investment portfolio. Part of this entails focussing on private markets and embracing an element of alternative assets. This helps to capture the upside of significant market trends whilst smoothing out overall portfolio volatility and generating higher potential returns in the long term.
The other is that crises create opportunities. As valuations come down, there are superior returns to be made once market turbulence is over. According to Bain Consulting, private equity consistently outperforms long-term average returns in the years following a downturn, creating the potential for upcoming vintages in private market funds. Times might be tough, but don’t panic. This could actually be an opportune moment to invest, rather than sitting on cash.
For instance, in the private equity fund space, lower valuations continue to be a catalyst for mergers and acquisitions (M&A) activity with companies carving out non-core parts of their business. There will likely also be more quality portfolios for sale in the secondary markets. And we can expect more call for liquidity solutions driving net asset value (NAV) financing strategies, particularly as exit markets remain challenging.
Venture capital appears more attractive than it has been for some time, now that it is possible to snap up good companies at cheaper prices, although for us, the key here is to focus on defensive, knowledge-intensive sectors such as deeptech and biotech.
With recession looming, companies’ debt burden increasing and default rates on the rise, distressed and special situation funds remain an area rich in potential investment opportunities.
In private credit, with traditional sources of capital becoming scarcer, there will be scope for other, more opportunistic strategies to come to the fore. So, we will be looking at credit funds that can allocate to a wide range of debt solutions, providing some downside protection while still offering strong returns profiles.
As real estate values in the UK and Europe continue to recalibrate, our focus will continue to be on strategies that seek out undervalued assets and take value-adding, growth-driven approaches, where attractive opportunities are likely to arise. And, as the recent energy crisis has highlighted, infrastructure and clean energy strategies have a lot to offer as a solution to the ‘trilemma’ of energy security, affordability and sustainability.
As ever, when looking at the merits of all these opportunities, our priority is to work with leading specialist managers with excellent track records in their fields. As well as strengthening our relationships with the likes of Headway Investment Partners, 17Capital, DN Capital, IQ Capital, Barwood Capital and Capital Dynamics, we are also in discussion with other top-tier names. This year, we will continue to bring clients opportunities to participate in a range of carefully-chosen private market funds that have the capacity to deliver impressive returns, whatever the market cycle.