Skip to main content
PGIM Private CapitalPGIM Private Capital
    • Direct Lending
    • Corporate Mezzanine
    • Energy Mezzanine
    • Investment Grade
    • Infrastructure Debt
    • Below Investment Grade
  • ESG Approach
  • Insights
  • Careers
  • Contact
Abstract image
Alternatives

Allocating to Privates in a Rising Interest Rate EnvironmentAllocatingtoPrivatesinaRisingInterestRateEnvironment

Nov 28, 2023

26 mins watch

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
  • Print

Share

In the face of rising interest rates and inflation, many investors have taken a fresh look at assets with the resilience to weather uncertain economic waters, with the evolution of the secondaries market and the role of institutions in the direct lending space. But against the current backdrop, investors are also cognisant of default risk, deal flow slowdown, liquidity management, and lower valuations. How can they find the right allocation to private assets to meet their overall objectives, whilst being mindful of challenging market conditions?

Quick Take: 5 Key Insights

Opportunities and Risks in a Changing World

The global economy has followed an unpredictable path in 2023. Resilient growth and persistent inflation have kept central banks in a hawkish mood, raising expectations that a new higher-for-longer regime is taking hold. The trade landscape is also changing at a rapid pace, as intensifying competition around the world drives a surge in fiscal support for domestic industries. Meanwhile, conflicts in Europe and the Middle East have made instability a fixture on the global stage.

At the 2023 EMEA Investment Forum in London, PGIM hosted an afternoon of discussion, debate, and peer-to-peer networking  to help investors assess the market outlook, explore the geopolitical forces reshaping the economy, and identify emerging opportunities across public and private markets.  Below are our 5 key insights from the day: 

1. GREAT-POWER COMPETITION IS RESETTING THE GEOPOLITICAL ENVIRONMENT

“The unipolar moment of great moderation is over, and it’s not coming back anytime soon.” 
– Daleep Singh, Head of Global Macroeconomic Research, PGIM Fixed Income

With the era of great moderation at an end, the global economy is entering a period of elevated volatility and shocks. An increase in great-power competition, which raises implications across public policy, the global economy and technological innovation, is creating a more bifurcated world. Fiscal policy now sits centre stage, and legislative-driven fiscal expansion will likely dictate the path for central banks as deficits grow. While this environment increases market risks, the return of industrial policy in the West may introduce new opportunities for competitive advantages.

Globalisation is not gone, but it is slowing. Through industrial policy, the US and Europe are focused on expanding domestic capacity for critical goods, energy and technology, inspired in part by national security concerns and disruptions to global supply chains. Technology has emerged as the main theatre of geopolitical competition, with nations seeking to de-risk from China.

As tensions between China and the West intensify, FDI and portfolio flows may come under greater scrutiny, with the fusion of China’s military and commercial sectors drawing the attention of policymakers. It will also be prudent for investors to brace for recurring periods of imbalance between global energy supply and demand during the transition away from traditional power sources.

2. MACRO OUTLOOK: HOW INVESTORS CAN CHART A COURSE THROUGH VOLATILE MARKETS

“If we think we are in this world of great-power competition, and the world is going to look different going forward, then central banks are going to have to do more of the heavy lifting.”
 – Katharine Neiss, Deputy Head of Global Economics and Chief European Economist, PGIM Fixed Income

The US economy has been more resilient than expected in 2023, defying forecasts for a recession. Consumer spending has underpinned this period of resilience and showcased the positive effect that excess savings can have on overall growth. Structural forces—mainly, an influx of government spending through fiscal policy such as the Inflation Reduction Act—may be masking cyclical weakness, with household savings on the decline and total output appearing soft when compared with GDP growth.

In Europe, the weaponisation of natural gas raised recession fears last winter, but the region was largely able to navigate through a potential crisis. Growth has been stagnant, and the European Central Bank has been aggressive in raising rates to bring down inflation. There’s a risk that next year, Europe faces a more severe recession as a consequence of higher rates.

Recent macro trends have led investors to reassess the market landscape, and a higher-for-longer view has taken hold. A reduction in savings amid higher government deficits, coupled with increased investments in manufacturing, technology and the energy transition, have lifted rate forecasts. The Federal Reserve has adopted a wait-and-see approach with the path for inflation and growth still coming into focus. Market volatility can be expected given this uncertainty around the outlook.

3. AN EVOLVING ESG REGULATORY LANDSCAPE PRESENTS NEW INVESTMENT IMPLICATIONS

“Ignore the noise on SFDR and SDR”
– Vanessa Hodge, Partner and Sustainability Lead, Mercer

In an increasingly complicated and regulated environment, it is becoming more evident that asset owners need clarity in their approach when integrating ESG into their strategic asset allocations. SFDR and SDR leap to the implementation stage, which can detract from the important sustainable investment pathway that should be defined upfront. This means managing ESG in distinct stages, such as: 1) Defining your investment principles and identifying the structural trends that are material to your board 2) Building these principles and accountability for them into your policy definitions and 3) Outlining management, monitoring and reporting processes. Only then should investors think about investing, with a framework against which they can benchmark asset managers from an integration, investment, stewardship or exclusionary perspective. 

4. THE INVESTMENT LANDSCAPE IS CHANGING IN THREE IMPORTANT WAYS

“If we believe we have the right questions, there are analytic ways that we can begin to craft the portfolio around these changes.”
 – David Hunt, CEO, PGIM

By understanding how financial markets and the global economy are evolving, investors can build portfolios that both mitigate risk and capture emerging opportunities. Heading into 2024, three investment themes are emerging. First, the world is becoming more bipolar, elevating geopolitical uncertainty and reshaping global trade. Second, the world is entering a new era in which rates are poised to remain higher for longer, bringing an end to the hunt for yield. Third, private markets are taking up a greater role in institutional portfolios. Economies are increasingly being funded by investors rather than banks, leading to new opportunities in asset classes that may not have previously been part of investors’ portfolios.

5. PRIVATE MARKETS AND NEW TECH PRESENT A BROAD SET OF OPPORTUNITIES

“We are in this permacrisis sort of environment. What does that mean for markets? No one has a crystal ball...but these episodes of volatility for long-only and long-duration investors present real pockets of opportunity to lock in those increment deals and provide certainty to the borrowers that crave it.” – Michael Eakins, CIO and Group Executive Committee Member, Phoenix Group

The current environment calls for greater diversification, making an allocation toward private markets attractive. Institutional investors can uncover opportunities across infrastructure and real estate, particularly as distressed assets create higher return potential going forward. In private credit, investors can work more closely with borrowers to restructure existing assets during periods of volatility. But identifying managers who have the expertise to identify opportunities and challenges in private markets—and manage existing assets—through the current cycle is critical.

Meanwhile, the evolution of AI and the tech sector will have broad implications across the investment landscape in the years ahead. Advancements in generative AI, blockchain and other innovations are poised to set off a surge in productivity. However, winners and losers will no doubt reveal themselves. Companies, sectors and regions that are slow to adapt will be less likely to emerge as winners in the AI era.

Watch All Sessions
2023 EMEA Forum

PGIM’s flagship institutional event for EMEA featured PGIM thought leaders, industry experts, and senior investors.

Watch All Sessions

Read Bio
Josh Shipley

Managing Director

Read Bio

  • Alternatives

    • Corporate Mezzanine
    • Energy Mezzanine
    • Direct Lending
    • Sustainable Power
  • Private Fixed Income

    • Investment Grade
    • Below Investment Grade
    • Infrastructure Debt
  • PGIM

    • Overview
    • Leadership
    • History
    • Inclusion and Diversity
    • Global Locations
PGIM Private Capital
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • Cookie Preference Center

SFDR Renumeration Policyopens in a new window       ESG Principal Adverse Impacts Statementopens in a new window       Sustainability-Related Disclosuresopens in a new window

For Professional Investors only. All investments involve risk, including the possible loss of capital.

This material is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM, Inc., is the principal asset management business of Prudential Financial, Inc. (“PFI”) and is a registered investment advisor with the US Securities and Exchange Commission. Registration with the SEC does not imply a certain level of skill or training.  PGIM is a trading name of PGIM, Inc and its global subsidiaries. PGIM Private Capital is a trading name of PGIM, Inc.  and it is also a trading name of PGIM Private Capital Limited and PGIM Private Capital (Ireland) Limited. 

In the United Kingdom information is issued by PGIM Private Capital Limited, an indirect subsidiary of PGIM, Inc, with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR.  PGIM Private Capital Limited  is authorised and regulated by the Financial Conduct Authority of the United Kingdom (Firm Reference Number 172071) and registered in England No. 1331817. In the European Economic Area (“EEA”), information is issued by PGIM Private Capital (Ireland) Limited with registered office: IDA Business Park, Letterkenny, Co Donegal, Ireland F92 FP83, Ireland. PGIM Private Capital (Ireland) Limited is authorised and regulated by the Central Bank of Ireland and registered in Ireland under company number 635793 operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Private Capital Limited in reliance of provisions, exemptions or licenses available to PGIM Private Capital Limited. This information is intended only for persons who are professional clients or eligible counterparties for the purposes of the Financial Conduct Authority’s Conduct of Business and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II). 

In Japan, investment management services are made available by PGIM Japan, Co. Ltd., ("PGIM Japan"), a registered Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is presented by representatives of PGIM (Hong Kong) Limited, a regulated entity with the Securities and Futures Commission in Hong Kong to professional investors as defined in Part 1 of Schedule 1 of the Securities and Futures Ordinance. In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. ("PGIM Singapore"), a Singapore investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of "institutional investors" pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA") and "accredited investors" and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors. In Canada, pursuant to the international adviser registration exemption in National Instrument 31-103, PGIM, Inc. is informing you that: (1) PGIM, Inc. is not registered in Canada and is advising you in reliance upon an exemption from the adviser registration requirement under National Instrument 31-103; (2) PGIM, Inc.’s jurisdiction of residence is New Jersey, U.S.A.; (3) there may be difficulty enforcing legal rights against PGIM, Inc. because it is resident outside of Canada and all or substantially all of its assets may be situated outside of Canada; and (4) the name and address of the agent for service of process of PGIM, Inc. in the applicable Provinces of Canada are as follows: in Québec: Borden Ladner Gervais LLP, 1000 de La Gauchetière Street West, Suite 900 Montréal, QC H3B 5H4; in British Columbia: Borden Ladner Gervais LLP, 1200 Waterfront Centre, 200 Burrard Street, Vancouver, BC V7X 1T2; in Ontario: Borden Ladner Gervais LLP, 22 Adelaide Street West, Suite 3400, Toronto, ON M5H 4E3; in Nova Scotia: Cox & Palmer, Q.C., 1100 Purdy’s Wharf Tower One, 1959 Upper Water Street, P.O. Box 2380 - Stn Central RPO, Halifax, NS B3J 3E5; in Alberta: Borden Ladner Gervais LLP, 530 Third Avenue S.W., Calgary, AB T2P R3.

PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. 

PGIM, the PGIM logo and Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.

The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.

© 2024 Prudential Financial, Inc. and its related entities.

PGIM Private Capital
PGIM Private Capital

You are viewing this page in preview mode.

Edit Page