Report Calls for New Classification of Debtor vs Creditor Economies

(August 11, 2011) — “Buy real assets and businesses, don’t buy hope,” Partners Group, a global private markets asset manager with US offices in New York and San Francisco says, says in its latest research report, which explores the classification of debtor versus creditor economies in the current multi-polar environment.

The firm notes that with a stagflation-type environment in parts of the advanced world, investors should pursue real assets as well as companies in “tangible” (real) sectors that offer stable yields and inherent growth opportunities.”

“In this multi-polar environment, we recommend a highly differentiated and adapted investment approach. Diversification across regions, sectors as well as currencies is increasingly important,” Stephan Schäli, Partner and Head Private Equity and Claude Angéloz, Partner and Co-Head Private Real Estate, told aiCIO, noting that allocation to advanced economies offers stability but with limited upside potential. “As we expect emerging market currencies to continue to appreciate, direct or indirect allocations to emerging Asia or Latin America offer additional upside,” he noted.

Schäli continued: “Finally, with lower trend growth and rising inflation, real assets remain in the sweet spot, offering the most compelling risk-adjusted return. Thus, we re-iterate our recommendation to invest in private real estate, infrastructure and in value companies in ‘tangible’ (real) sectors that offer stable yields and exhibit structural and inherent growth opportunities.”

According to the firm, despite rebounding investment and buoyant exit activity, private equity volumes will decline, and thus investors should deploy a more defensive investment approach. ” In this uncertain environment, it would be prudent to hold investments in stable, cash-generating companies with strong revenue visibility, preferably even with locked-in contractual revenues,” Schäli said.

In terms of private real estate, “now is the time to invest outside of the core space,” the report asserted, noting that investors should focus on markets where GDP and consumption growth are strong, and where the current supply pipelines are insufficient to satisfy the increasing demand for quality real estate. The report explains that in an environment where yields are extremely low, core real estate fails to provide security in all market scenarios. According to Schäli, the markets considered most attractive are tier two and tier three cities in large real estate markets, which still fail to attract global capital flows even where fundamentals are solid.

Meanwhile, the report explained that private infrastructure is experiencing a funding gap and high demand. “Extremely high global demand for infrastructure assets as well as weak financing capacities by governments is leaving a funding gap for private capital. In this stagflation-type scenario we like yielding, brownfield infrastructure assets with inflation-linked revenues in Europe, North America and Australia.”