Partners Group, the Swiss private markets specialist, warned in a note this week that private markets are going through a period of “asset price inflation”.
The Swiss firm attributed this phenomenon – which it first flagged up in 2009 – to a cocktail of low interest rates and excessive liquidity:
“We are in a period of asset price inflation where the excess liquidity injected by central banks has driven up asset prices and will continue to do so; it began in the bond markets, followed by core real estate and core infrastructure and finally public equity markets as evidenced by last year’s blue-chip rally. However, the traditional measure of inflation (the consumer price index) will barely indicate any inflationary pressure and will take years to catch up,” Partners noted.
Alfred Gantner, Partners Group co-founder and executive chairman, also drew attention to what the Swiss firm is calling the “great new value divide”:
“With the currently still elevated risk aversion, investors are piling into perceived safety, pushing the risk premium of supposedly safe assets to historically low levels. As a result, the flow of ‘safe-haven-but-yield-chasing’ liquidity has broken the link between perceived versus actual risk and has resulted in large valuation gaps. In this value divide, perceived and actual risks diverge sharply and investors will have to thoroughly search for real value to separate the wheat from the chaff.”
When it comes to infrastructure investing, Partners Group believes the “wheat” can be reaped by gaining exposure to certain country and greenfield investments. “Exposure to diversifiable micro risks of greenfield projects and country premiums enhances returns without increasing sensitivity to systematic market risks while generating optionality (to lock in premiums early on or pursue a longer-term hold strategy).
The “chaff”, meanwhile, is most likely to be found in “competitive auction-based core transactions”, which are suffering from upward price pressure. Already last fall, Partners Group warned that a “rush for core assets in core markets” had pushed long-term levered equity internal rates of return for these assets down to between 8 and 10 percent.
The private markets specialist found the contraction in returns, particularly for large cap brownfield assets, exposed investor equity heavily to regulatory changes, especially where large premiums to regulated asset base were paid.