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In private markets investing, private equity is often the most recognised option. However, there are other asset classes that present interesting opportunities for investors. This article explores four of these classes: private debt, real estate, infrastructure, and natural resources, highlighting their unique characteristics, investment strategies, risk profiles, and reasons for investing.
Private debt, or private credit, is the provision of debt finance to companies from funds, rather than banks, bank-led syndicates, or public markets. Private debt has gained traction since the Global Financial Crisis as banks retreated from riskier loans. This asset class includes various types of debt financing, such as direct loans to companies, mezzanine debt, and distressed debt.
Investment strategies (from less risky to riskier):
Other investment strategy:
Risk and return: Generally presents lower-risk strategies yielding stable returns, with higher-risk options providing greater potential rewards based on the position within the capital structure (ie which part of the debt will be reimbursed first in case of bankruptcy).
Why invest in private debt?
Private debt is viewed as a relatively low-risk alternative to private equity investments, offering predictable returns, portfolio diversification, and the potential to acquire debt below par value.
The private real estate sector has experienced significant growth, with assets under management surging from $64 billion to over $1 trillion globally over the past 50 years. Real estate investing encompasses various types, including residential (single-family homes and multi-family units), commercial (office buildings and retail spaces), listed securities (REITs that trade on stock exchanges), and private equity real estate.
Investment Strategies (from less risky to riskier):
Other investment strategy
Risk and return: Offers stable, moderate returns, with core assets providing predictability, while opportunistic investments can yield higher returns with increased risk.
Why Invest in real estate?
Real estate is appealing for its stable income, potential for capital appreciation, inflation hedging, and diversification benefits, making it suitable for long-term investors.
Infrastructure investments became a distinct asset class in the 1990s, with assets exceeding $582 billion as of 2024 globally. This sector includes the financing of essential facilities and services, such as transportation networks, utilities, and communication systems. Infrastructure project development involves three key stages:
Investment strategies (from less risky to riskier):
Other investment strategy:
Risk and return: Core assets generally provide stable, moderate returns, while value-added and opportunistic strategies offer higher potential returns with increased risk exposure.
Why invest in infrastructure?
Due to the long-term nature of these investments, the asset class is suited to investors with long-term liabilities such as pension funds and insurance companies. Infrastructure is widely regarded as a comparatively low-risk asset class, with a longer-term investment horizon than other alternative investments. Main reasons to invest include diversification, inflation protection, its reliable income stream and low correlation to other asset classes.
With a growing focus on sustainability, the natural resources sector encompasses essential materials like water, energy, and raw materials. As of 2024, the total assets under management in this sector amount to $230 billion.
Investment Strategies:
Risk and return: Considered a higher-risk asset class, with agriculture and farmland typically achieving Internal Rates of Returns (IRR) of 6-10%. Energy strategies present higher risk and return potential, while metals and mining vary based on market conditions.
Why Invest in natural resources?
Natural resources appeal to investors looking for diversification, inflation protection, and resilience during economic downturns, especially given the increasing global demand for essential materials.
Conclusion
The investment landscape extends beyond private equity, encompassing diverse asset classes such as private debt, real estate, infrastructure, and natural resources. Each class presents unique characteristics, strategies, and risk profiles that cater to various investor preferences. By understanding these asset classes, investors can build diversified portfolios aligned with their risk tolerance and long-term goals, enhancing their potential for stable returns and capital appreciation.
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