Introduction
The Preqin conference on private markets, which we attended on September 24, 2024, highlighted the key trends for this year. According to the Preqin report presented by Jonathan Furer, Head of LP Solutions, and Paul Sinthunont, VP, Research Insights, political instabilities are influencing private markets—particularly private equity and real estate—and impacting their respective performances in a shifting global landscape. Here is what to remember about the resilience of European private equity funds and the adjustments in real estate strategies.
Context and Impact of the “Four Ds”
The report frames 2024 around the “Four Ds”—Demographics, Decarbonization, Digitalization, and Deglobalization—which are transforming investment strategies among major financial institutions. Deglobalization, for example, is driving the relocation of supply chains and the formation of regional economic blocs, directly influencing investment choices in private equity and real estate.
Private Equity: Continuous Growth in Europe, Caution in the United States
harts show a steady increase in institutional funds allocated to private equity, rising from 4.3% in 2019 to 6.9% in 2023. This growth reflects the sustained appeal of private equity to investors seeking to diversify portfolios and maximize returns in a financial environment that has performed strongly over the past decade. Particularly in Europe, private equity appears robust. European funds now outperform their North American counterparts—a surprising trend attributed to two main factors:
• Entry Multiples and Use of Debt: In North America, high entry multiples and extensive use of debt increase transaction costs amid rising interest rates. This complicates transaction profitability, unlike European funds, which adopt a more cautious approach with lower multiples and less reliance on debt.
• Transaction Slowdowns and Exit Delays: U.S. managers sometimes face challenges in exiting investments at attractive valuations. Many choose to wait for a more favorable market to maximize returns, even if it means delaying planned exits.
Real Estate: Real Estate Debt as a Safe Haven
The charts highlight a notable difference between the performance of direct real estate investments and real estate debt funds. The real estate sector has shown some lag due to post-pandemic challenges in the office sector. However, certain areas within real estate, especially the hospitality sector, have benefited from forced savings during successive lockdowns and an inflationary context.
Comparison with Global Benchmark Indices (S&P 500, Russell 2000, MSCI)
Another key point in Preqin’s charts is the comparison between private asset performance (private equity and real estate) and public market indices. While private equity has maintained a lead in 5- and 10-year returns, all other sectors underperformed compared to the S&P 500, which has significantly benefited from tech stocks’ surges, including the FAANG (Google (Alphabet GOOG), Apple (AAPL), Facebook (Meta), Amazon (AMZN)), or in the extended “Magnificent Seven” (Microsoft (MSFT), Tesla (TSLA), and NVIDIA (NVDA)), where tech stocks make up over 25% of the index.
Toward a Strategy of Resilience and Adaptation
For investment professionals, 2024 marks a strategic turning point. Amid rising rates and global transformations, private equity and real estate must adapt. European private equity demonstrates admirable flexibility but needs to remain vigilant of market cycles. For real estate, debt costs have become a crucial component for securing returns in volatile markets. The ability of funds and asset managers to adapt to new economic realities by prioritizing regional and segmented strategies could well determine the success of these two key sectors in the years ahead.