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CIO Academy: Private Equity Outlook – The Importance of Diversification

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CIO Academy: Private Equity Outlook – The Importance of Diversification

by Dave Lowery, Head of Alternatives Research, HSBC Asset Management, Huw Morgan, Private Markets Investment Specialist, HSBC Asset Management and Pari Shah, Private Markets Investment Specialist, HSBC Asset Management
Dec 4, 2024

  • Market Dynamics: The private equity market is experiencing a slowdown in exit activity, leading to reduced distributions and negative cash flows for many investors. A significant portion of assets are being held longer than needed due to weaker exit conditions, with about one-third of net asset value (NAV) held for over seven years. This environment underscores the importance of diversification across different vintages and industries to mitigate risks associated with overexposure to specific market segments
  • Signs of Recovery: Despite the current challenges, there are early indications of a potential recovery in the private equity activity. Deal-making in the US has shown a 12 per cent improvement in the first half of 2024 compared to the previous year, suggesting that the decline in deal activity may be stabilising. Exit values have improved, with a 15 per cent year-on-year increase, although the number of exits remain largely unchanged, indicating a cautious recovery
  • Strategic Recommendations: Investors are encouraged to adopt a high conviction approach by partnering with General Partners (GPs) known for value creation, while also diversifying across fund vintages and sectors. This strategy aims to optimise capital deployment and manage risks effectively in the currently uncertain market landscape. While the market is presently challenging, we believe it will recover over time, with managers utilising creative solutions like continuation funds and NAV loans to navigate the current environment in the meantime

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The information in this document is for general information only and is intended for HSBC Private Bank clients. It does not constitute, and should not be construed as, legal, tax or investment advice, or a solicitation, offer, or recommendation to buy or sell any financial products or services.

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