The appeal of private assets in 2024

Private credit has proven its resiliency in 2023’s high-rate and high-inflation environment, and we expect this to continue in 2024. In our view, such challenging fundraising conditions can be the best time to invest.

The technical aspects of deal making have improved from a lender’s point of view. Higher base rates equate to higher yields. And higher interest costs alongside more conservative capital structures mean new deals are being structured with lower leverage multiples and covenants that are often more favourable to lenders.

Given the macro challenges for borrowers, diversification and selectivity are critical. We favour market-leading companies with stable, recurring cash flows in non-cyclical industries, making them well placed to service interest payments and pay back loans. We continue to focus on more resilient areas of the market — such as health care, software and business services — all of which, we believe, are relatively well-positioned to withstand economic downturns.

Natural capital’s inflation-hedging characteristics should serve investors well in 2024 with rates and inflation likely to remain elevated. Many of the outputs from farmland and timberland, such as food and building materials, are often components of inflation measures. Higher inflation reflects higher prices for these goods. In the near term, these higher prices improve performance by increasing cash yields. Over the long term, higher prices can also increase the capital appreciation component of return as they are incorporated into asset valuations.

But looking beyond current macroeconomic factors, long-term structural trends will likely transform the asset class from a niche investment to a core, resilient component of a long-term portfolio.