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Alternatives

Private capital: four critical themes for 2024

A goldfish leaps from one fish bowl to a bigger one

We believe 2024 may usher in a new Goldilocks era of growth and opportunity in private capital. Market dynamics should create opportunity for those best positioned to capitalize on four market themes. 

1. New normal rates

With interest rates expected to ease, we anticipate a more forgiving financing environment for private equity sponsors. Considering the depressed levels of merger and acquisition activity in 2023, owners have been slower to achieve realizations for their limited partners. With more favorable all-in debt costs, equity returns should start improving, accompanied by a more accelerated deployment of dry powder for 2024.

These trends are also tailwinds for portfolio performance. A lower benchmark should return interest and fixed charge coverages to more comfortable levels and allow borrowers with payment-in-kind (PIK) instruments to activate cash-pay options.

2. Key market participants

We think winners in today’s market have distinct attributes:

Asset managers with scale, diverse investment capabilities, diverse sources of dry powder and sustainable deal-sourcing advantages should thrive.

Private equity firms with dry powder and proven valuation discipline should prevail as the buyer of choice for the best platform investment opportunities.

Portfolio companies with prudent balance sheet structures or leveraged bifurcated financing strategies that offer PIK flexibility should be best suited to pursue growth opportunities.

3. Stay alive to thrive

What goes into creating portfolio excellence?

Diversification must be evaluated across several dimensions, including sector, deal structure, leverage profile, sponsor relationships and company model. Low position size is critical.

Flight-to-quality should always be a focus. By consistently backing strong businesses, investors may enjoy sustained growth despite a tough environment.

Clear alignment has been crucial to mitigating risk. General partners not only bring experience creating value through market cycles, but also have meaningful stakes in the outcome, typically through an equity investment.

4. Next gen private capital 

Lower interest rates in 2024 will likely create more advantageous conditions for liquid loans. In such conditions, banks typically invade the higher end of the middle market, with higher leverage, unitranche, covlite structures and tighter pricing.

However, today the largest private debt managers have armed themselves with hold levels above $1 billion for cov-lite term loans and created capacity in specialized industries like retail, software and technology. For traditional middle market borrowers, direct lenders have benefited from a wildly skewed ratio of private versus public financings.

In this issue
Alternatives Beyond bricks: Innovation is driving the future of real estate
Looking beyond the horizon in real estate. Select real estate presents investment possibilities.
Alternatives Interval funds swim in less liquid waters
Examining the benefits of interval funds. Tailored strategies may offer investors an illiquidity premium.
Alternatives CityWatch: Charlotte
Charlotte, the queen city. Charlotte shows resilience and a dynamic market for business.

Endnotes

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

Important information on risk

All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk, and income risk. As interest rates rise, bond prices fall. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity, and differing legal and accounting standards. These risks are magnified in emerging markets.

As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. As an asset class, agricultural investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Agricultural investments will be subject to risks generally associated with the ownership of real estate-related assets, including changes in economic conditions, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.

Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.

Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well. ESG integration incorporates financially relevant ESG factors into investment research in support of portfolio management for actively managed strategies. Financial relevancy of ESG factors varies by asset class and investment strategy. Applicability of ESG factors may differ across investment strategies. ESG factors are among many factors considered in evaluating an investment decision, and unless otherwise stated in the relevant offering memorandum or prospectus, do not alter the investment guidelines, strategy or objectives.

Nuveen, LLC provides investment services through its investment specialists.

This information does not constitute investment research as defined under MiFID.

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