Additional Material

PRIVATE ASSETS

Private equity: a good time for infrastructure

Markets are still growing. The activity in private assets, which slowed down in 2023 due to economic uncertainties, has been stabilising this year. Within private equity strategies, the purchase valuation multiples show a significant reduction, consistent with a persistently higher interest rate environment. After a slight decrease in 2022, the performance of buyout funds, which take controlling stakes in profitable companies, rebounded due to the solid fundamentals of the held companies, which were able to pass on inflation to their customers.

Private debt strategies continue to offer attractive returns for investors, but these may soften if the anticipated interest rate decrease occurs. Infrastructure strategies remain driven by structural capital needs.

Private equity: Performance driven by operational value creation: Within buyout strategies, the reduction in valuation multiples and the need for some managers to sell assets present opportunities for funds in the deployment phase, particularly in certain cyclical sectors that were overlooked recently. In this context, fund performance will continue to largely stem from the operational profit growth of their companies. Furthermore, a more normal trading environment could emerge for larger companies if interest rates decrease. One of the challenges for this asset class remains the relatively low distribution rates of funds, due to weak exit volumes over the past two years. A recovery is expected to occur over the course of the year.

Infrastructure: A favorable environment: Infrastructure funds invest in essential assets and services for the economy's functioning, spanning sectors like Energy, Telecom networks, Transport, and Social Infrastructure. This asset class has several advantages: performances are partly decorrelated from the economic cycle, long-term contracts ensure steady cash flow, and income is partly indexed to inflation. The current environment is particularly attractive for this asset class for several reasons: 1) underinvestment in infrastructure by public authorities. 2) massive needs for the energy transition and decarbonisation of the economy. 3) digitalization of the economy requires significant investments in digital infrastructure and 4) demographic changes require social infrastructure for healthcare and aging populations.

It's important to remember that private assets are inherently illiquid. However, 2024 continues to present opportunities for investors, provided they are selective and willing to commit for the long term.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 13/06/2024, publication completion date. Past performance does not prejudge future performance. Investments may be subject to market fluctuations, and the price and value of investments and the resulting revenues may fluctuate downward and upward. Your capital is not protected, and original investments may not be recovered.

REAL ESTATE

Falling rates should give property markets a fillip

France's residential property market should recover some of its mojo in the second half of the year.

Real estate has been in the doldrums since early 2023, hit by a combination of interest rate hikes, squeezed buying power and high prices. Prices have only fallen modestly (-5,2% year-on-year in Q1-24) but volumes have plummeted (-23% year-on-year to Q1-24). This pattern of low sales and falling prices looks set to continue for some months yet as economic growth remains lacklustre and interest rates remain high. The easing of ECB rates, likely to continue in the second half of the year, should gradually restore some vigour to the market and we should see volumes pick up. Prices will continue to be squeezed by generally slow growth in the economy.

Green shoots in a corporate property market that continues to wait and see.

Since July 2022, corporate property – offices, retail space, warehousing, etc. – has been held back by the rise in interest rates. Investment volumes have fallen back hard as investors wait for prices and hence appraisal values to adjust to the new state of affairs. In a bid to restore the segment's appeal, property risk premiums were partly restored in 2023. The property risk premium is the gap between the rental yield on property assets on acquisition and the risk-free interest rate, measured as the 10-year OAT yield which was 3.44% in Q3-23 compared to 2.54% in Q4-23. Logistics was paying 4.75% and commercial property 4.5% in Q4-23. As for the office market (Paris Central Business District), returns were 4.50% in Q4-23, compared to 2.60% in Q4-21. In H2-24, the stabilisation of inflation and fall in central bank policy rates should help revive the competitiveness of corporate property, restoring some visibility to the market and hence some confidence to investors, assuming the world economy remains stable.

France is around the euro area average with a moderate decline in house prices. In Germany and the United Kingdom, prices have fallen further, but after larger increases.