DIVERSIFICATION • ASSET ALLOCATION • INVESTMENTS
After an incredibly strong year for equities in 2024, we are consistently getting the question from financial advisors of how to diversify client portfolios and where to put capital in order to protect their clients from what is likely to be a choppy 2024 with concerns around elections, wars, interest rates, and issues within the banking sector. In this blog post, we will delve into several investment opportunities within the private markets we believe can potentially perform well in 2024 even if we do enter a more challenging environment.
One of the most compelling risk versus reward opportunities we have seen in the market is Renewable Infrastructure. We are currently witnessing the largest capital investment cycle in history as global efforts intensify to electrify the economy and stabilize energy prices. Projections indicate that over $30 trillion in global investments will flow into this sector between now and 2050.
One of the key advantages of renewable infrastructure investments is their track record of delivering stable returns across various economic cycles. Additionally, these investments have more recently benefited from the estimated ~$400 billion in tax credits provided by the Inflation Reduction Act, meaningfully increasing potential returns in the sector. The growth and stability of this asset class is partially a result of major corporations like Amazon, Microsoft, and Google’s commitment to carbon neutrality by 2030. As such, these and other corporates enter into 20-30 year energy “off-taker” agreements to secure their power supply for their data centers. With AI taking 4x the energy of a normal data center, it is likely they will have to dramatically increases these energy purchases over the next decade to hit their goals.
Another attractive asset class in the private market landscape is affordable and workforce housing. This sector has proven to be a stable and consistent source of returns. In recent years there has been a surge in demand for this type of housing, driven by factors such as high-interest rates and limited supplies of new housing units. Notably, even large players like Blackstone have recognized the potential in this space and have established their own funds.
One of the strengths of affordable and workforce housing is its resilience during economic downturns. These investments offer housing below market rates, ensuring high occupancy rates even in challenging economic conditions. In some cases, this can lead to the growth of Net Operating Income (NOI), making it a defensive asset class.
Agriculture, specifically investing in farmland, has showcased remarkable resilience and diversification benefits over an extended period. The NCREIF Farmland Index Report for Q4 2022 highlighted positive returns in farmland investments for the last 31 years. With a continuously growing global population and a sustained focus on health and wellness, opportunities in this asset class remain abundant.
Investing in farmland can provide a unique blend of stability and growth potential, making it an appealing choice for those looking to diversify their portfolios. The inherent value of land and the demand for agricultural products ensure that farmland investments remain relevant in today’s market.
While concerns persist in traditional private equity, there are select opportunities in private credit that make sense. The preference underleveraged managers. Did you know you are actually second lien to the senior holder [the leverage provider] in most brand-name private credit strategies? Finding managers with top tier underwriting capabilities who are actually implementing covenants is key.
In contrast to the opportunities outlined above, private equity faces several challenges in the current market environment. The high-interest rate environment presents difficulties for financial engineering, a common practice in private equity deals. Additionally, pricing has mostly remained unattractive in the M&A market, and the prospect of successful exits is still quite challenging especially as large corporates pull back in the market. These items coupled with the potential for a recession make us concerned with the majority of managers in the asset class.
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