LPs upbeat on opportunities amid rising inflation, interest rates

'We shouldn’t be afraid of inflation or volatility because it does create opportunities,' Denise Le Gal, chair of Brunel Pension Partnership, said at PEI’s Women in Private Markets Networking Day.

Market inflation and volatility can lead to investment opportunities, according to investors at Private Equity International’s Women in Private Markets Networking Day last week.

“Volatility brings great opportunity. We shouldn’t be afraid of inflation or volatility because it does create opportunities,” Denise Le Gal, chair of the UK’s Brunel Pension Partnership, said at the virtual conference.

Private debt funds are attractive because they are “floaters and they reset, so it’s a good way to ratchet up if you are having inflation creep”, Le Gal said.

She also singled out opportunities in distressed assets. “Once [government schemes] start unrolling in Europe, there are some companies that will survive, but others are practically zombies that have been kept going for the wrong reasons.”

“There are winners and losers – we just hope we’ll be aligned with the winners,” Le Gal said.

Brunel Pension Partnership manages roughly £30 billion ($42.4 billion; €34.8 billion) on behalf of member funds, including Buckinghamshire, Devon, Environment Agency and Somerset. It has committed to funds including those managed by Intermediate Capital Group and Capital Dynamics, according to PEI data.

Le Gal added that growth in the tech sector may not continue to be as “exponential” as before and may result in a “rotational shift towards industrials”.

“We are seeing that already – it’s not necessarily mainstream, but it’s certainly happening,” she said.

More opportunities

Similarly, Lorna Robertson, head of funds at London-based fund of funds manager Connection Capital, said the prospect of rising inflation and interest rates will filter down to grassroots funds and investments that LPs are involved with.

That means pressure on long-term borrowing, inflated asset pricing and potentially an increase in the number of defaults, Robertson added.

“Some of it will be good, and one thing is for sure: it will create opportunities. As we know there is nothing worse than a benign, boring environment with low rates, low inflation, no growth. None of us want that.”

For her part, Sarah Farrell, Allstate Investments’ head of private equity in Europe and Asia, said she does not anticipate a reallocation in the insurer’s roughly $94 billion investment portfolio that covers private equity, real estate, public markets, opportunistic, and agriculture.

However, Farrell said Allstate is “very mindful of the implications of the current environment as well as very high asset pricing”.

While tech-enabled businesses – those that are high-growth, high margin and with high cashflow conversion – are benefitting from the market environment, Farrell noted that it all comes down to being “very careful” around GP relationships. “If you are allocating to that particular space, you have got to be careful that you are working with a partner who can still continue to add value at very high prices,” she said.

Along with backing growth managers, Allstate has recently committed to GPs and deployed co-investment capital that benefit from a more “stressed type of environment”, Farrell said.

For Sunsuper’s Maria Guo, an investment manager for private markets at the roughly A$70 billion ($54 billion; €44 billion) superannuation fund, the environment has meant more stress investing and paying more attention to downside scenarios, especially when purchasing assets with higher valuations.

“There is so much capital chasing the same assets,” Guo said. “We have seen returns on these become very, very competitive.”