The September quarter presented a mixed picture for growth alternatives, a new report from Perpetual has revealed, with traditional asset classes continuing their rally while unlisted assets experienced more subdued performance.
According to the investment manager, infrastructure saw softening demand over the September quarter, with deals taking longer to attract buyers and pricing becoming less aggressive due to the higher cost of debt.
At the same time, Perpetual said not to discount the asset class as an important element of a diversified portfolio.
“Infrastructure’s role in the portfolio remains clear: to provide consistent and stable cash flows, and inflation-hedging properties,” the firm noted.
“We are comfortable with our exposure to regulated assets and grateful for their contribution during the recent inflation spike.”
As such, Perpetual affirmed its commitment to increasing its exposure to volume-linked assets with strong cash flow profiles that can deliver attractive returns in the current environment.
Turning to real estate, the firm characterised the current market conditions as “exhibiting turbulence”, noting that transaction volumes remain weak despite a modest increase in Q3 2024.
“Sentiment among institutional investors towards real estate allocations remains tepid,” it added.
However, Perpetual anticipates that the magnitude of markdowns will moderate between now and the end of the year, potentially leading to increased deal activity later in 2025 and into 2025.
“We are particularly focused on opportunities arising from the current market dynamics. As some investors seek liquidity, we are seeing real estate funds being offered at attractive discounts to their prevailing net asset value (NAV).”
Income alternatives paint a varied picture
Notably, demand outstripped the supply of private credit in 3Q24, and as such, market sentiment remained broadly positive.
This comes as M&A activity in the corporate sector has remained sluggish, as noted by Perpetual, limiting the potential for new private credit opportunities.
“We estimate that 90 per cent of private debt activity is still refinancing existing deals as opposed to the growth of new credit opportunities,” the firm pointed out.
“This strong market technical meant that credit spreads in the private credit space continued to compress while increased leverage by private companies remained well supported.”
Meanwhile, default rates, while marginally higher, are still below the long-term average.
“Outside of an exogenous shock, we believe the private credit markets will continue to remain healthy.”
Perpetual noted that interest rate cuts by the European Central Bank and the US Federal Reserve are generally supportive of this trend, as declining interest costs positively impact corporate earnings and enhance credit quality.
“However, given investor demand, we will likely see increased leverage by companies that can service ongoing interest payments,” it added.
Moreover, what the firm hasn’t seen play out in private credit markets yet is the “lender-on-lender” violence being observed within the broader syndicated loan space.
Expounding on this, Perpetual explained that, within this market, distressed investors continue to maximise returns at the expense of senior and subordinated lenders.
“We have not seen this type of behaviour in private credit markets yet, as the typical deal structure provides existing lenders with significant control, and the private nature of the deals introduces information asymmetry.”
Turning to asset-backed finance, the firm observed continued growth in this asset class as banks have scaled back due to higher capital requirements, which have historically constituted the largest component of bank balance sheets.
Now, institutions have continued to cede market share as regulatory capital costs have affected the profitability of these segments.
“Compared to corporate lending, asset-backed finance remains less popular due to complexity, and thus spread compression has not had the same level of impact on this sector,” Perpetual pointed out.
“Over the quarter, we continued to deploy cautiously. We are less constructive on some segments of private credit given tighter spreads but are quite positive on asset-backed finance,” the firm concluded.
