Partners Group is to increase its focus on debt, value-added and secondary investments, the Zug-based private markets investment firm said today in its latest research paper.
According to the firm’s twice-annual Private Markets Navigator report, in which the it describes what it regards as today’s best investing opportunities in the private equity, real estate, debt and infrastructure sectors, Partners Group is prioritising real estate investments that have “shorter duration” characteristics. Specifically, the firm highlighted subordinated debt and selective equity investments with “adequate downside protection”.
Partners Group said it was happy to take a contrary market perspective to many other real estate investors which are currently favouring core investments in top tier cities. “We believe investors have overemphasized prime property locations and exhibited a relative indifference to the premium pricing core properties have commanded,” the firm said.
“We deem the currently ascribed premiums to be largely unwarranted, driven by a combination of risk aversion, economic uncertainty and investor fear,” the firm added, “We welcome this ‘herding’ mentality as it provides us with unique investment opportunities.”
Drilling further into its current investing strategy, Partners Group said investments made at attractive entry points were increasingly being made possible as institutional investors reweight their property portfolios towards core properties. “This special situation in the marketplace has generated a robust pipeline of direct investments, offering attractive, risk-adjusted returns and are only accessible to a relatively small number of strategic buyers who possess the necessary resource, have sufficient capital to deploy and have proven execution skills.”
From a “general capital structure perspective” Partners Group said it favoured debt investments in the US market, describing mezzanine financing investments as “competitive” while preferred equity investments it said are “increasingly attractive”. In Europe, lending scarcity has meant senior lending is consequently “more attractive and worthy of investigation”.
Partners Group said it remained bullish about emerging markets investments with the greatest value to be “uncovered” in affordable, middle-income housing in Brazil, China, India and Mexico. But the firm said: “developing exit markets within these countries may offer more viable opportunities in these commercial real estate markets and selectively outside of these countries going forward.”
In terms of secondaries investments, Partners Group placed a bias towards assets offering visibility, cash flows, exit opportunities and debt servicing. The firm tracked $13 billion of secondaries for sale in the first half of 2012 and more than half of these it said were a result of asset allocation decisions by the owners. Nearly two-thirds of the secondaries for sale were from investment vehicles raised between 2005 and 2008 as many of the world’s property markets were at their hottest.