Private markets require a different approach

A more differentiated and adapted investment approach is required in a market characterised by stagflation, according to the latest research report from Partners Group (PG).

The report, entitled 'Private Markets Navigator 2011', recommends investing in real assets, as well as in value companies in "tangible" sectors that offer stable yields and inherent growth opportunities.

Institutional investors should go for defensive companies with strong cash flows, particularly family-backed small and medium-sized companies in Latin America, according to PG.

"The mezzanine market is becoming quite an attractive investment because there is an upcoming wall of maturing leveraged loans," PG's Senior Vice President Martin Scott said.

"By investing in the newly created debt, investors are getting a strong yield and equity-type returns for debt risk."

PG believes now is the time for institutional investors to move outside of the core space and into tier 2 and 3 cities, non-core sectors which continue to offer significant risk-adjusted returns.

Fundamentals also remain strong in many emerging markets and PG continues to focus on markets where gross domestic product (GDP) and consumption growth are strong.

Core investing on the other hand has less relative value due to the high price levels of stabilised assets and a lack of strong fundamentals, the report found.

PG also points to Europe, North America and Australia as countries with significant infrastructure asset demand. This demand has left a funding gap for private capital, creating a golden opportunity for investment.

Scott said that high GDP growth support in greenfield asset creation strategies in Asia and Latin America is creating other opportunities.

"Greenfield assets are going to be there for the long run, particularly in emerging markets," said Scott.

As for the energy sector, the report found that ongoing deregulation and privatisation in Europe, and the expansion of gas transmission infrastructure, coupled with the promotion of renewable energy, in the USA, is something that institutional investors should seriously consider when building a strong portfolio.