Aaron Costello, Head of Asia, and Vivian Gan, Investment Director, Capital Markets Research

Asian and global market volatility surged in early 2025 as US tariffs triggered global growth fears. Given the export-oriented nature of most Asian economies and their sensitivity to global growth and demand, the region may bear the brunt of US tariffs. As such, Asia market volatility is likely to persist in the near term, particularly since US trade policy can shift abruptly.

With the United States and China locked in a tariff standoff, at least for now, a key question is to what extent China and other Asian economies will increase fiscal and monetary stimulus to offset the economic impact from US tariffs. Aggressive stimulus, particularly from China, may help to support growth and sentiments in Asia more broadly.

Considering the current environment of higher uncertainty and volatility, as well as global equity market concentration in US large-cap technology stocks, we view portfolio diversification is key in managing downside risks. We favour strategies that are more attractively priced, are less correlated to the broader market, or are able to capitalise on any dislocations that may result from economic stress.

In this edition of Asia Insights, we highlight:

• Within Public Equities: We view Asia ex Japan value-oriented strategies could add a layer of downside protection, given less demanding starting valuations and a differentiated sector exposure that is less concentrated in technology.
• Across Hedge Funds: Asia event-driven strategies warrant a second look today, given an improved manager competitive landscape and a current macro environment that is supportive of alpha generation. Event-driven strategies also tend to be less correlated to broader equity markets, and therefore could serve as a diversifying strategy amid current market volatility.
• Within Private Investments: We remain constructive on Japanese buyouts, given strong underlying supply and demand fundamentals. Deal flow is likely to remain robust as Japan’s aging demographics and ongoing corporate governance reforms continue to drive corporate actions. It may be further accelerated by dislocations created by US tariffs. Meanwhile, attractive entry valuations today and the availability of cheaper leverage lend support to continued capital inflows.
• For Real Assets: We see increased opportunities in Asia-Pacific value-add and opportunistic infrastructure today, given the region’s maturing regulatory environment and longer-term demand for infrastructure spending. We are positive today on data centers and renewable energy infrastructure, which are backed by strong fundamental demands while also less sensitive to potential growth and trade shocks.

Public Equities: Seek Diversification Through Asia Value-Oriented Strategies

Wilson Chen, Managing Director, Public Equities, and Vivian Gan, Investment Director, Capital Markets Research

Global equities saw heightened volatility in early 2025 as US tariffs added uncertainty to the global growth and inflation outlook. Markets also saw a tentative rotation in leadership from US large-cap technology stocks towards non-US markets. In the current environment, we view that Asia ex Japan value-oriented strategies could add diversification to investor portfolios, given favourable valuations and underlying exposures.

Value-oriented strategies range from deep value to quality value, with managers seeking to identify undervalued segments of the market. Today, we would focus on value managers that invest with a quality lens, as companies that have stronger balance sheets can better withstand economic shocks. Value strategies that emphasise dividend returns may also be poised to benefit as global rates decline amid continued central bank easing.

While markets are in flux following the tariff announcements, active Asia value-oriented strategies tend to overweight China and Southeast Asia and underweight Taiwan and India as of end March. They also tend to underweight IT and communication services in favour of cyclical sectors (e.g., industrials) or more defensive segments of the market (e.g., consumer staples and utilities). While Asian equities as a whole face macro headwinds, the lower valuations for these markets and sectors may ultimately help to limit the downside. They may also see greater upside should Asian economies strike trade deals with the United States, and benefit from increased monetary and fiscal stimulus, particularly from China.

Overall, the market environment remains uncertain, but we still think Asia value-oriented strategies allow for a differentiated and less tech-concentrated exposure to Asia while offering a valuation cushion that could be more defensive in the current environment.

Hedge Funds: A Second Wind for Asia Event-Driven Strategies

Benjamin Low, Senior Investment Director, Hedge Funds, and Vivian Gan, Investment Director, Capital Markets Research

Asia event-driven strategies are starting to look more interesting today as a diversifying strategy amid current market volatility. Heading into 2025, the region had seen a tentative recovery in capital markets activities, with mergers & acquisitions (M&A) and initial public offerings (IPOs) on the rise. At the same time, the closure of a prominent Asia event-driven hedge fund in early 2024 has created a more level playing field for the remaining players and improved the manager competitive landscape.

Event-driven strategies seek to generate alpha from market inefficiencies around corporate events, such as mergers, spin-offs, stock buybacks, and IPOs. While these strategies are typically equity-oriented, managers may invest across the capital structure to add value. Event-driven strategies tend to be less correlated to broader equity markets, and therefore could play a role in investor portfolios as a diversifying strategy.

The opportunity set for Asia event-driven strategies had been improving amid a rebound in the region’s capital markets activities. Managers invest across both developed Asia (e.g., Japan and Australia) and emerging Asia (e.g., China, India, and Southeast Asia). While US tariffs are adding uncertainty to the near-term outlook, we continue to see the environment as favourable for event-driven strategies. Japan remains a key market of interest as ongoing efforts to improve corporate governance and shareholder returns have led to more robust levels of corporate actions, including M&As, take-privates, and spinouts. Managers also note similar opportunities may increase in South Korea following the introduction of its ‘Corporate Value-Up Program’. China and Hong Kong are also of focus. Weaker economic growth in recent years has led to increased deal opportunities from market consolidation and divestments by multinationals, and these trends may actually accelerate should US tariffs create economic and corporate dislocations in Asia.

Overall, we view Asia event-driven strategies warrant a second look today given the likely increase in corporate actions in the region and the added diversification such strategies can bring to portfolios.

Private Investments: Japan Buyouts Remain Attractive Despite Near-Term Macro Volatility

Sharad Todi, Senior Investment Director, Private Equity

Heading into 2025, buyout activity in Japan was on the rise, with the number of transactions reaching 162 in 2024, the highest level in a decade. Although the penetration level of private equity (PE) in Japan remains lower than in other developed markets, the country is emerging as a natural harbour for leveraged buyouts. We see reasons to remain positive on Japan buyouts now despite near-term macro volatility.

On the supply side, deal flow is likely to remain strong. First, several family-owned small- to medium-sized enterprises struggling to find natural successors are turning to PE firms to ensure business continuity. Second, large conglomerates in Japan are streamlining their operations by divesting non-core assets, creating opportunities for PE investors. Third, the Tokyo Stock Exchange’s demand for listed companies to justify their status by improving book value and capital efficiency ratios is also increasing take-private transactions. All these trends may be magnified by dislocations created by US tariffs.

On the demand side, investors are drawn to Japan for several reasons. Unlike most other Asian markets, control is the norm in Japan, allowing investors to shape the company’s journey more effectively. Valuations also remain attractive. According to Dealogic data, median EV/EBITDA multiples in Japan were 12.0x in 2024, compared to 14.4x for broader Asia, and Japan buyout managers can target even lower entry multiples of 10.0x or below. Plenty of low-cost debt is available, with most managers able to secure financing at 40% to 60% of enterprise value at an all-in cost below 4.0%. The terms of leverage are typically investor friendly, with banks being more relationship-focused and cooperative with borrowers dealing with struggling assets. Japan’s low economic growth rate drives corporates to pursue inorganic growth, making strategic buyers the preferred exit route for PE firms. Furthermore, Japan’s attractiveness as a private investment destination in Asia has increased as China’s appeal has waned, providing large pan-Asian funds a stable market to deploy capital. In addition, investors seeking currency diversification from the US dollar may benefit from a strengthening Japanese yen over the coming years.

All in all, we expect these broad macro trends should persist in the near term and lend support to buyout activity in Japan.

Asia Infrastructure: A Maturing Market with Growing Opportunities

Minesh Mashru, Global Head of Infrastructure Investments, and Derek Yam, Associate Investment Director, Real Assets

Asia-Pacific (APAC) is quietly gaining traction as an investment destination for infrastructure funds, supported by the region’s economic growth and demand for infrastructure spending. Historically, much of the region’s infrastructure capital had originated from global or emerging markets funds, while dedicated APAC infrastructure fundraising has been lumpy year to year. However, we view this should change going forward, given an improving regulatory environment and opportunity set, particularly in emerging Asia with increased deregulation and a relaxation of foreign control ownership rules.

APAC value-add and opportunistic infrastructure have the potential to deliver returns in the mid-teens and above, albeit requiring careful management and local knowledge. These strategies involve greenfield risks tied to development activities and operational complexities, as opposed to core infrastructure, which focuses on brownfield assets. The opportunities are broad based across developed Asia (i.e., Australia and Japan) and emerging Asia (i.e., India and Southeast Asia). However, given that Asian economies are more reliant on trade and, therefore, vulnerable to US tariffs, investors need to be discerning when investing in APAC infrastructure. Economically sensitive and trade-related segments, such as ports and logistics, may be especially impacted.

In the current environment, we favour sectors that are less exposed to trade while backed by strong fundamental demands. Data centers are one, given the region’s increased digitalisation and growing adoption of cloud computing. Current supply of data centers still lags the rapidly expanding demand by local enterprises, as well as hyperscalers seeking to expand their cloud service offerings across both traditional and secondary markets ¹ . Renewable energy infrastructure is also attractive, given low current penetration rates and a strong regulatory push towards decarbonisation. Opportunities range from regional solar assets across broader APAC to offshore wind farms in Taiwan, although an understanding of local regulations and onshoring requirements is key. The expansion of cross-border power trading in markets such as Southeast Asia has also bolstered the region’s renewable energy development.

In sum, despite the economic headwinds from US tariffs, we view there remains growing opportunities for APAC infrastructure, given the region’s maturing regulatory environment and structural tailwinds for infrastructure demand.

David Kautter also contributed to this publication.

Footnotes

1. Traditional markets include Tokyo, Sydney, Seoul, Hong Kong, and Singapore. Secondary markets include Mumbai, Johor, Jakarta, Kuala Lumpur, Bangkok, Ho Chin Minh, and Manila.

The post Asia Insights: Managing Risk Through Diversification appeared first on Cambridge Associates.

While we wait for the geopolitical and macroeconomic dust to settle, it is likely that private market transaction activity will slow down. Unfortunately, the anticipated slowdown could not be happening at a more inopportune time, as the ongoing distribution drought and short-term return underperformance have already been weighing on the private markets, dampening activity and sentiment, including fundraising. This pause is going to amplify all of these elements.

Compared to the public markets, private markets deliver far more comprehensive exposure to the economy, from start-up companies to established companies large enough to go public that have opted to stay private, and everything in between, across all sectors. It is possible that the impact of tariffs and other government actions, including second order effects, may be felt further and more deeply in the private markets due to this depth and breadth.

A market slowdown also means the managers waiting to deploy nearly $2 trillion of dry powder have time to absorb the changes and incorporate adjustments ahead of expected deployment. Given the risks outlined above to the capital “in the ground” (i.e., already invested), private investment managers are hyperaware of the need to generate competitive returns on their next set of investments. First and second order effects, as they take hold, could also create additional investment opportunities. Private strategies potentially positioned to benefit during this period include secondaries, deep value industrial, and distressed, among others.

We advocate maintaining private market allocations. Investors should assess their exposures by manager, strategy, company stage, sector, and geography, and prepare to make adjustments to benefit their portfolios. Dry powder may vary by investor, but that capital—at a minimum—will go to work in the market ahead, capturing whatever benefits the current situation may yield. On top of that, we recommend maintaining investment pacing and, therefore, exposure going forward. From a market-wide cash flow perspective, we have observed that capital calls tend to outpace distributions when activity in general contracts to one degree or another. Investors should monitor their private market portfolio liquidity requirements. Maintaining a long-term perspective, which is required for private investing, should serve as a focal point during this tumultuous period.

Andrea Auerbach, Global Head of Private Investments

Footnotes

1. Traditional markets include Tokyo, Sydney, Seoul, Hong Kong, and Singapore. Secondary markets include Mumbai, Johor, Jakarta, Kuala Lumpur, Bangkok, Ho Chin Minh, and Manila.

The post Private Markets Bracing for Tariff Impacts appeared first on Cambridge Associates.

In today’s dynamic environment, strategic thinking and flexibility are essential. This edition of VantagePoint revisits the core principles of best-in-class investment strategies, exploring how investors can allow wealth to compound by remaining disciplined, diversified, and focused on long-term opportunities while adapting to change. We explore the fundamentals of investment policy development, including conducting an enterprise review to understand investment goals and objectives, setting a flexible policy framework, and revising policies as needed. Additionally, we highlight best practices in portfolio construction and examine how investors can adapt their strategies to navigate today’s challenges and seize emerging opportunities.

Good Investment Policy Starts with Understanding Objectives and Constraints

Successful investors share a key trait: the discipline to adhere to a long-term strategy through both favorable and challenging times. However, there is no universal strategy that fits all. Each investor’s approach must be tailored to their unique return objectives, risk tolerance, financial constraints, investment expertise, time horizon, and resources.

The foundation of any investment plan begins with an enterprise review—a comprehensive evaluation of financial circumstances, risk attitudes, and governance considerations. This process clarifies objectives, constraints, and potential vulnerabilities, helping to mitigate surprises during crises. For institutions, this might involve assessing how asset pools support operating budgets or reliance on endowments. For families, it could mean prioritizing wealth building for future generations, current consumption, or philanthropic goals.

These priorities must also account for evolving portfolio requirements, particularly under stress. For example, institutions facing reduced government financial support may require more support from endowments, while higher interest rates may prompt pension sponsors to accelerate liability hedging as funding ratios improve.

Key considerations include operating liquidity, balance sheet flexibility, liabilities, debt structure, external liquidity access, cost structure, and income or revenue streams. Qualitative factors, such as stakeholder risk tolerance, are equally critical. Balancing short-term portfolio volatility with long-term purchasing power, addressing illiquidity constraints, and aligning with spending, debt management, and other priorities are essential to effective investment planning.

The Primacy of Policy

After completing the enterprise review, the next step is to develop an investment policy, including the formulation of a strategic asset allocation (SAA). An investment policy serves as a ten-year business plan, providing guiding principles and direction, while remaining flexible to adapt to evolving market conditions, assumptions, and execution. SAAs are not fixed anchors but dynamic frameworks that should be reviewed and refined periodically to account for long-term trends.

Historically, SAAs have regularly adapted to changing conditions as reflected in the median target policy allocations below. The most notable shifts have been large increases in target allocations to private equity and venture capital (PE/VC) that provide significant value-added return potential, funded primarily by reductions in public equities. By increasing these allocations, investors have been able to maintain high return expectations even as falling interest rates lowered return expectations for bonds.

Similarly, actual allocations across endowments and foundations in our database reflect sensible shifts. For example, as bond return expectations fell, investors reduced bond allocations and reallocated hedge fund exposures toward absolute return strategies less correlated with equity risk, while trimming equity long/short strategies.

In addition to adapting to capital market circumstances, changes in investment policy often reflect evolving circumstances, such as tax considerations, significant endowment gifts, or shifts in financial strength. Flexibility in portfolio targets and allocations is critical to improving the likelihood of meeting performance objectives as conditions change.

Investment policies should align with the investor’s philosophy and governance structure. Greater latitude for portfolio implementers (e.g., investment staff, outsourced CIOs, or advisors) and longer evaluation horizons typically require less detailed asset allocation policies, allowing for more flexibility in execution.

We begin building investment policy with a foundational framework, such as a 60% equities/40% bonds or 80%/20% volatility-equivalent profile. From this base, we seek opportunities to enhance returns, while maintaining or lowering risk. Some investors may define SAA simply as a stock/bond policy, while others incorporate more detailed categories based on asset classes, objectives (e.g., growth, diversifiers, liquidity reserve), or a hybrid mix. For example, growth assets may be divided into public and private investments. This level of detail fosters alignment among stakeholders, ensuring a shared understanding of objectives, risk parameters, and strategy. Strong governance and clear expectations help keep portfolios on track and aligned with the investment committee’s intent.

Best Practice Portfolio Construction Features

Successful investment strategies begin with a well-designed policy tailored to investor needs and flexible enough to adapt to changing market conditions. Whether through adjustments to SAA, implementation decisions led by portfolio management, or through external asset managers, the following best practices guide our approach to compounding wealth over time:

• Maintain a long-term horizon to capitalize on illiquid asset classes with more potential for value-added returns.
• Use external best-in-class managers and foster lasting partnerships.
• Diversify to enhance long-term risk/return characteristics beyond a simple stock/bond portfolio.
• Adopt contrarian positions with asymmetric return potential by investing in undervalued assets and dislocated markets.
• Define and manage key risks aligned with constraints and objectives identified in the enterprise review.

Playing the Long Game

Maintaining a long-term investment horizon is one of the most challenging yet essential aspects of successful investing. Understanding the historical behavior of markets helps investors set realistic expectations for portfolios and resist the impulse to sell assets or managers based on short-term underperformance. For example, a diversified portfolio with a nominal expected return of 10% and a standard deviation of 13% would see annual returns ranging from -3% to 23% two-thirds of the time. While short-term volatility is inevitable, the range of expected returns narrows over longer horizons.

A long-term perspective enables investors to access illiquid asset classes—such as
PE/VC—which offer greater value-added return potential compared to liquid, efficient public markets. As demonstrated below, the best-performing investors over the long term have consistently maintained higher allocations to these private investments.

Additionally, a long horizon also allows investors to capitalize on undervalued investments. Doing so requires a strong stomach; sharp market dislocations can be quick to reverse, but absent those, valuation disparities are often slow to revert to fair value. Thus, careful judgment is required to avoid value traps. In general, absent other criteria that may serve as catalysts, a seven- to ten-year horizon is advisable. Momentum is also a powerful force and can be a helpful supplement to identify turning points.

Sourcing Best-in-Class Managers

Even the best managers experienced a difficult period relative to passive benchmarks, especially in the large-cap US equity market, given the concentration of performance in the Magnificent Seven heavyweights in recent years. Greater dispersion of returns across stocks globally should increase the ability of skilled managers to outperform. We believe active management can outperform passive benchmarks, particularly in less efficient markets, if investors: 1) employ a rigorous manager research process, 2) exercise patience, and 3) build well-diversified portfolios to reduce unintended risks. Building outperforming portfolios using active managers is hard work but worth the effort.

Engaging in deep research to identify firms with a repeatable competitive edge and strong organization that can stand the test of time is far more relevant than analyzing short-term performance. As the technology and regulatory environments have leveled the playing field for accessing corporate information, managers must work harder to gain an edge. Technology acumen can provide an advantage, but managers must continually invest to maintain their lead. Experience and judgment also go a long way to set managers apart. From an organizational perspective, we advise partnering with firms that have good governance, thoughtful alignment, a strong culture, and a well-diversified customer base of a high caliber. Securing fee structures that enable investors to retain most of the value-added returns also increases the odds of earning excess returns over the long term.

Patience in active management is key, as even the best managers experience periods of underperformance. Behavioral mistakes, such as firing managers after short-term losses, can erode returns. Staying the course through cycles is essential for long-term success.

Dispersion of long-term returns varies by asset class, with more inefficient asset classes exhibiting greater dispersion across managers. The following exhibit shows the importance of manager selection, especially for private investments where manager return spreads are materially wider than for liquid, more efficient asset classes. ²

Sticking with Diversification

No one can argue with the fact that putting 100% of risk capital in US equities over the 15 years ended 2024 would have been a brilliant strategy. The MSCI US Index returned 13.9%, outperforming the MSCI All Country World Index by 4.1 percentage points (ppts) per year, in US dollar terms. However, such concentrated positioning is risky and subject to sharp reversals amid any change of fortune. Indeed, year-to-date through April 8, lofty valuations combined with prospects for implementation of the highest effective US tariff rates in more than 100 years have seen US equities underperform global ex US equities by roughly 12 ppts, in US dollar terms.

Diversification is a long-term strategy. While a simple portfolio may outperform periodically, a diversified portfolio is expected to generate higher returns over time at a given level of risk—the proverbial free lunch. To better understand the value-added potential of diversified portfolios, we compare the return profile of a simple portfolio of 70% global equities and 30% US government bonds to a highly diversified portfolio constructed to have roughly the same level of volatility as the 70%/30% portfolio. The highly diversified portfolio is expected to outperform the simple portfolio by 100 basis points (bps) over the long term, but could underperform by as much as 100 bps to 200 bps per year over shorter periods. Based on a conservative estimate using indexes to represent asset class returns, over periods of five years or longer ended in 2024, a representative diversified portfolio has outperformed the simple portfolio despite underperforming over the last three years.

The higher expected return for the diversified portfolio reflects the ability to earn incremental returns from various sources, including private investments and pursuit of more diverse market risks. Even after spending more over time, ³ highly diversified portfolios are expected to create more wealth through the benefits of compounding. This effect is particularly pronounced over longer horizons.

Tilting Tactical

Another lever that can be used to build returns is tactical asset allocation. This typically involves shorter-term horizon positions that require in-depth analysis, a disciplined process, and risk controls. To develop an investment thesis and exit strategy, it’s important to carefully analyze the historical relationship between the overweight and underweight positions and the environments in which the positioning tends to outperform. Positioning should be sized thoughtfully, scaled by the degree of risk inherent in the position. Ideal positions have higher upside than downside, which is usually derived by relatively attractive pricing for the overweight position. Market dislocations often provide opportune times for initiating tactical positions, so studying asset class relationships and being prepared to take opportunities when they arise is beneficial.

Measuring and Managing Risks

The fundamental purpose of risk management is to provide a clear path for risk assets to compound and build wealth over time. Understanding the portfolio requirements to meet associated spending and liabilities is critical to successful portfolio management. Effective portfolio construction requires identifying and managing risks—such as illiquidity, equity beta, total portfolio standard deviation, drawdown risk, and pension funding shortfall risk—directly, rather than relying on heuristics. For instance, not all public equity portfolios are equally liquid, with emerging markets small-cap and frontier markets equities among the least liquid and US large caps, among the most liquid. Key risks should be identified during the enterprise review and incorporated into investment policy. Management of these risks should focus on taking the right amount, not just limiting risk. Failure to take enough risk could result in underperformance.

Stress testing portfolios to evaluate their resilience under a range of challenging scenarios is a critical component of policy setting and ongoing risk management. The ability to navigate bear markets depends on several factors, including portfolio liquidity, diversification, liquidity needs during periods of stress, and access to external liquidity sources. Such assessments should be repeated regularly over time as conditions change. For example, investors have increased their equity exposure and portfolio illiquidity over the last decade. Understanding how these changes relate to any changes in liquidity requirements especially during times of stress is a core component of portfolio management.

For instance, as demonstrated below using a stylized portfolio reflecting index returns, a $500 million long-term investment pool entering a 2008-like bear market would have meaningfully less portfolio liquidity available to meet cash needs if it had a 50% allocation to illiquid assets compared to a 25% allocation, despite outperforming by about 5 ppts during the drawdown. A high allocation to illiquid assets may be desirable, particularly if the institution can construct a high-performing private investment portfolio. Sustaining such a high allocation requires careful attention to liquidity sources and uses.

The example below shows asset allocation changes before any assets are sold to support cash needs. The ratio of liquid assets including stocks and high-quality bonds to annual cash needs would be 3x, compared to 5x for the less illiquid portfolio. The relatively high allocation to high-quality bonds would have provided a lifeline for the more illiquid portfolio, covering nearly two years of cash needs. Higher cash needs would constrain the ability to maintain a high allocation to illiquid assets, while lower cash needs facilitate such positioning. As a general guideline, bear markets tend not to last longer than three years without recovery, so 3x coverage of cash uses with cash sources (inside and outside the portfolio) following a bear market decline is a reasonable target. Under conditions of limited liquidity, the ability to capitalize on market dislocations would largely depend on existing managers, a factor that should be carefully considered during portfolio construction.

Risk management also extends to implementation. Using external managers to add value requires understanding how individual managers interact and align with benchmarks. Unintended risks—such as geographic, currency, economic sectors, and factor exposures (e.g., value, momentum)—can undermine returns if not carefully managed.

Adapting to Change

Portfolios have historically evolved in response to long-term trends, such as US equity and dollar outperformance since 2010, falling interest rates since 1982, and declining geopolitical risk since the 1990s. These shifts have led to increased allocations to large-cap US equities, greater US dollar exposure, reduced fixed income, and fewer hedge funds. As we move through 2025, diversification is showing signs of renewed value, and investors must assess how their portfolios would fare in the event of a reversal of these trends. We review changing economic and market conditions on an ongoing basis, regularly sharing our views on investment implications. All of these long-term trends have potential to shift the investment landscape in unforeseen ways as they evolve and interact with each other. Indeed, the evolution of global trade conditions will influence fiscal and monetary policy, the ability of countries to finance their debt, and the cost and access to materials and technology to fuel AI developments. We focus here on key implications of the end of ZIRP, challenges and opportunities in private investments, and the role of AI. Other increasingly significant factors that can influence markets and investment outcomes include shifting global trade dynamics, geopolitical risks, and climate change. Investors should remain diversified and vigilant, and incorporate these considerations into their strategic planning.

The end of ZIRP has significant portfolio implications. Higher rates suggest improved fixed income returns, but investors must carefully evaluate credit risk. Weaker credits that borrowed short term with an expectation that rates would remain low indefinitely may find their balance sheets stressed. Indeed, the market sell-off has started to pressure credit spreads in some segments of the market. We would seek to take advantage of such opportunities once spreads reach more distressed levels, including through credit opportunity funds or distressed managers that have requisite experience through investing over prior distressed cycles. Strategies like asset backed lending and insurance-linked securities can help diversify away from corporate credit risk and offer attractive spreads.

We regard high-quality sovereign bonds, particularly US Treasury bonds, as the primary part of a deflation hedge or liquidity reserve allocation. However, we acknowledge that such bonds could come under pressure due to rising interest expenses and fiscal imbalances absent successful efforts to improve debt dynamics. Treasuries served their role well this year until this week, providing much needed ballast to portfolios. However, this week saw significant Treasury volatility for technical reasons, amid an unwinding of leveraged positions. The US dollar has been reasonably stable after initially softening this year. However, US dollar weakness may resume for several reasons including concerns over US growth prospects and the tarnishing of the US exceptionalism consensus that has poured capital into US capital markets over recent years. With prospects for more fiscal and monetary stimulus in the EU and China and heightened policy uncertainty in the US, diversified global equity allocations are more compelling. US Treasury bonds remain a core defensive asset, yet diversifying with other defensive assets like inflation-linked bonds and trend-following strategies can provide similar returns with stronger downside protection.

Higher rates also enhance the appeal of hedge funds. In the early 2010s, endowments and foundations allocated nearly 25% of portfolios to hedge funds, a figure which has since dropped to 16%–17%. Equity long/short hedge funds (ELS) saw the largest decline, but we anticipate a brighter future for these strategies. Higher rates improve returns on collateral, short rebates, and equity dispersion, creating opportunities for skilled stock selection. Disruptive trends—such as shifting global trade relationships, advancements in AI, and the energy transition—are likely to sustain this dispersion, benefiting active managers with strong shorting capabilities. While the HFR Equity Hedge Index still underperformed long-only global equities in higher rate periods, equity dispersion provides the opportunity for strong manager selection to close the gap. Indeed, what matters is achieving equity-like returns over the investment cycle, not matching equity returns in any one period.

And of course, higher rates pose challenges for leveraged strategies like buyouts, requiring general partners to focus on improving operating margins and revenue growth to offset higher capital costs. While valuations remain elevated, they have moderated from ZIRP-era highs.

More broadly, we expect private investment performance to improve as the impact from funds’ rapid deployment of capital into overvalued assets in 2021–22 recedes. Current conditions will likely see some improvement in relative performance as market corrections have a lagged and muted impact on private investments relative to public markets. Yet, the widely expected improvement in IPO and merger & acquisition prospects may need to wait as the current environment is not conducive to improvement in the exit environment. These conditions are ripe for bringing attractive buying opportunities in the secondary market.

Disciplined investors should not be deterred by the recent underperformance of PE/VC relative to public markets. Private markets continue to offer compelling opportunities, particularly for managers with strong operational expertise. The advantages of operating outside the public market’s quarterly reporting pressures remain intact. However, investors should be mindful of the growing retail interest in private investments, which could lead to crowding at the larger end of the market. Further, investors must be exceptionally discriminating if considering investing in supersized funds, given the significant revenue to these managers through management fees relative to carry and the greater difficulty in delivering top quartile returns with very high assets under management. In private investments, effective implementation is critical to generating value-added returns that justify the illiquid, long-term exposures and the significant resources required for success.

Technological advances in AI have potential to create significant value across all sectors over time. To date, much of AI’s impact has been concentrated in public companies—namely chipmakers (e.g., Nvidia, Taiwan Semiconductor) and hyperscalers (e.g., Amazon, Alphabet)—and venture capital. Over time, opportunities will expand as AI integrates into broader industries. Private equity strategies can leverage AI to unlock value in low-margin businesses, while public companies across sectors—such as security, data analytics, and software—will increasingly adopt AI tools. Hype around generative AI’s capabilities has lifted valuations in the near term, but longer term, the transformative potential of AI underscores the importance of staying attuned to technological developments.

Conclusion

In the face of uncertainty, the investment planning process should embrace humility and avoid the pitfalls of overconfidence. For high total return–oriented investors, our approach combines the stability of a predominant allocation to equities and equity-like investments with a diversified and flexible approach. While the aggregate allocation to these growth-oriented assets should remain relatively constant, their composition should be diversified and adaptable, evolving in response to attractively valued opportunities and focusing on identifying best-in-class managers. Without adequate diversification, portfolios risk becoming overly concentrated and excessively volatile. Similarly, diversifying assets should encompass a range of strategies, with allocations shifting toward the most compelling opportunities as they arise.

For taxable investors, the cost of adjusting asset allocations can be significant, shaped by factors such as trust structures, tax status, and the availability of losses to offset realized gains. As a result, any shifts in asset allocation should be carefully evaluated, ensuring that the expected benefits outweigh the associated costs.

In a world defined by shifting economic regimes, technological disruption, and evolving market dynamics, investors must embrace a strategic, flexible, and forward-looking approach to portfolio construction. By adhering to core principles—such as maintaining discipline, embracing diversification, and managing risks thoughtfully—investors can navigate uncertainty and capitalize on emerging opportunities. Adapting to change is not just a necessity but a competitive advantage, enabling investors to build resilient portfolios that align with their long-term objectives. As the investment landscape continues to evolve, those who remain vigilant, innovative, and committed to their strategy will be best positioned to succeed.

Celia Dallas, Chief Investment Strategist
Grayson Kirk and Graham Landrith also contributed to this publication.

Footnotes

1. Traditional markets include Tokyo, Sydney, Seoul, Hong Kong, and Singapore. Secondary markets include Mumbai, Johor, Jakarta, Kuala Lumpur, Bangkok, Ho Chin Minh, and Manila.
2. Comparisons of private investments and public investments are not quite apples-to-apples. We show private investment manager returns using horizon returns based on internal rates of return and compare them to time-weighted returns for liquid investments. While imprecise, the analysis is directionally correct and consistent with our investment experience.
3. We assume both portfolios have a beginning market value of $100 million and spend 5% of a 12-quarter moving average of ending market values.

The post VantagePoint: Strategic Portfolio Construction in a Changing World appeared first on Cambridge Associates.

First Half 2024 Highlights

• Both private asset classes have struggled to keep up with the public indexes over the past three years as large-cap information technology (IT) companies have dominated the market. Over longer time periods, PE/VC indexes have performed well vis-à-vis public peers.
• By market value, public companies accounted for similar percentages of the VC and PE indexes (about 7% and 6%, respectively), as of June 30, 2024. Non-US companies represented a bit more than 20% of PE and a little less than 15% of VC.

US Private Equity Performance Insights

Vintage Years

As of June 2024, eight vintage years (2015–22) were meaningfully sized—representing at least 5% of the benchmark’s value—and, combined, accounted for 86% of the index’s value. Six-month returns among the key vintages ranged from 1.3% for vintage year 2016 to 7.5% for vintage year 2022 (Figure 2).

Investments in industrials were far and away the largest contributor to the strong performance for the 2022 vintage, while returns across the largest sectors for the 2016 funds were muted—slightly positive for IT and slightly negative for industrials.

LP Cash Flow

During the first two quarters of 2024, fund managers distributed and called roughly equal amounts of capital, $67.4 billion and $66.6 billion, respectively. If this cash flow pattern holds for all of 2024, the year would be markedly different than 2022 and 2023, a two-year stretch when managers called nearly $64 billion more than they distributed.

Four vintage years (2021–24) in the prime of their investment periods represented 83% ($55 billion) of the capital calls, with the three more mature vintages (2021–23) drawing down at least $14.8 billion in first half 2024. Five vintage years (2015–19) distributed 65% ($44 billion) of all capital returned to limited partners (LPs), led by the 2017 vintage’s nearly $12 billion total. There were seven other vintages that distributed at least $1 billion, going back as far as the 2009 cohort.

Sectors

Figure 3 shows the Global Industry Classification Standard (GICS®) sector comparison by market value of the PE index and a public market counterpart, the Russell 2000® Index. The breakdown provides context when comparing the performance of the two indexes. The PE index has a significant overweight to IT and communication services as well as a meaningful underweight in “real assets,” including energy, real estate, and utilities (reflected in the “Other” category), while the public market has long been overweighted to financials.

As of June 2024, at roughly 37% of the index’s value, IT remained the largest among the six meaningfully sized sectors. Combined, the next three sectors by size—industrials, healthcare, and consumer discretionary—accounted for another 39% of the index’s value. Among the key sectors, first half returns were lowest and mostly negative for healthcare, while all others posted low to mid-single-digit results.

US Venture Capital Performance Insights

Vintage Years

As of June 2024, nine vintage years (2014–22) were meaningfully sized and combined, accounting for 81% of the index’s value. Performance for the key vintages during the first half of the year was mixed, ranging from -1.4% (2015 and 2016) to 9.1% (2022) (Figure 4). While the VC index was up slightly for the full six months, it was down in the second quarter, marking the eighth negative quarter since the beginning of 2022.

For the youngest and best-performing large-sized vintage (2022), write-ups were widespread but most impactful in the vintage’s two largest sectors: IT and healthcare. In the two lowest-performing vintages, 2015 and 2016, write-downs were most pronounced in IT, but the 2015 group also suffered losses in communication services. Write-ups in healthcare in both vintages—and financials for 2016 funds—helped to offset some of the write-downs.

LP Cash Flows

In first half 2024, VC managers called $20.4 billion from and returned $11.4 billion to LPs, which represented a slight uptick in cash flow activity over the prior year. US VC managers have called more capital than they have distributed in nine of the ten previous quarters (covering the time period of January 2022 to June 2024), at a ratio of calls to distributions of 1.4x.

Three vintages (2021–23) accounted for nearly 80% (almost $16 billion) of the total capital called during the first six months. While each called more than $4 billion, the 2022 group called the most, $7 billion. Distributions were much less concentrated than contributions, with every vintage from 2011 to 2022 accounting for at least 5% of the distributions during the six-month period. Three vintage years, 2015 and 2017–18 distributed more than $1 billion each, representing about one-third of all capital returned to LPs.

Sectors

Figure 5 shows the GICS® sector breakdown of the VC index by market value and a public market counterpart, the Nasdaq Composite Index. The breakdown provides context when comparing the performance of the two indexes. The chart highlights the VC index’s substantial relative overweight in healthcare and notable higher exposures to financials and industrials. The VC index’s exposure to IT was historically higher than that of the Nasdaq, but starting in 2023, that dynamic shifted in conjunction with tech’s strong performance in the public markets coupled with modest returns in the sector in VC. Exposures to communication services and consumer discretionary companies are also much higher in the Nasdaq than in the VC index.

As a group, the five meaningfully sized sectors made up 91% of the VC index. Communications services earned the lowest return and industrials and more so financials had strong performance.

Caryn Slotsky, Managing Director

Drew Carneal, Associate Investment Director

Wyatt Yasinski, Associate Investment Director

Figure Notes

US Private Equity and Venture Capital Index Returns

Private indexes are pooled horizon internal rates of return, net of fees, expenses, and carried interest. Returns are annualized, with the exception of returns less than one year, which are cumulative. Because the US private equity and venture capital indexes are capitalization weighted, the largest vintage years mainly drive the indexes’ performance.

Public index returns are shown as both time-weighted returns (average annual compound returns) and dollar-weighted returns (mPME). The CA Modified Public Market Equivalent replicates private investment performance under public market conditions. The public index’s shares are purchased and sold according to the private fund cash flow schedule, with distributions calculated in the same proportion as the private fund, and mPME net asset value is a function of mPME cash flows and public index returns.

Vintage Year Returns

Vintage year fund-level returns are net of fees, expenses, and carried interest.

Sector Returns

Industry-specific gross company-level returns are before fees, expenses, and carried interest.

GICS® Sector Comparisons

The Global Industry Classification Standard (GICS®) was developed by and is the exclusive property and a service mark of MSCI Inc. and S&P Global Market Intelligence LLC and is licensed for use by Cambridge Associates LLC.

About the Cambridge Associates LLC Indexes

Cambridge Associates derives its US private equity benchmark from the financial information contained in its proprietary database of private equity funds. As of June 30, 2024, the database included 1,607 US buyout and growth equity funds formed from 1983 to 2024, with a value of $1.4 trillion. Ten years ago, as of June 30, 2014, the index included 937 funds whose value was $478 billion.

Cambridge Associates derives its US venture capital benchmark from the financial information contained in its proprietary database of venture capital funds. As of June 30, 2024, the database comprised 2,537 US venture capital funds formed from 1981 to 2024, with a value of $417 billion. Ten years ago, as of June 30, 2014, the index included 1,500 funds whose value was $138 billion.

The pooled returns represent the net end-to-end rates of return calculated on the aggregate of all cash flows and market values as reported to Cambridge Associates by the funds’ general partners in their quarterly and annual audited financial reports. These returns are net of management fees, expenses, and performance fees that take the form of a carried interest.

About the Public Indexes

The Nasdaq Composite Index is a broad-based index that measures all securities (more than 3,000) listed on the Nasdaq Stock Market. The Nasdaq Composite is calculated under a market capitalization–weighted methodology. The Russell 2000® Index includes the smallest 2,000 companies of the Russell 3000® Index (which is composed of the largest 3,000 companies by market capitalization). The Standard & Poor’s 500 Composite Stock Price Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the US economy. Stocks in the index are chosen for market size, liquidity, and industry group representation.

Footnotes

1. Traditional markets include Tokyo, Sydney, Seoul, Hong Kong, and Singapore. Secondary markets include Mumbai, Johor, Jakarta, Kuala Lumpur, Bangkok, Ho Chin Minh, and Manila.
2. Comparisons of private investments and public investments are not quite apples-to-apples. We show private investment manager returns using horizon returns based on internal rates of return and compare them to time-weighted returns for liquid investments. While imprecise, the analysis is directionally correct and consistent with our investment experience.
3. We assume both portfolios have a beginning market value of $100 million and spend 5% of a 12-quarter moving average of ending market values.

The post US PE/VC Benchmark Commentary: First Half 2024 appeared first on Cambridge Associates.

Private Investment Performance Should Continue to Heal Itself in 2025

Andrea Auerbach, Global Head of Private Investments

As we head into 2025, many of the factors that had an outsized effect on the private investment (PI) market environment in 2021–22 are retreating into the background.

That said, overall private market performance for the next several years will reflect the effects of overinvestment that occurred in 2021 and early 2022, prior to the end of Zero Interest Rate Policy (ZIRP). Investors that committed to 2020 and 2021 vintage year funds saw them deploy half of their capital during this overinflated period. The amount of invested capital was twice the long-term annual average and deployed at a peak in valuations for both private equity and venture capital. Then interest rates climbed, debt costs increased, valuations corrected, and transaction activity slowed considerably over the subsequent years, impacting both limited partner (LP) returns and distributions. The capital overweight to this time period is impacting short-term performance, as shown in the one-year and now three-year rolling benchmark returns.

Moving into 2025, the private markets continue to tick back to their long-term trendlines from a fundraising and capital deployment standpoint, as have valuations. While managers are working hard to deliver returns on the ZIRP-era cohort of invested capital, they are also working hard to successfully invest their remaining capital. Indeed, the capital overhang stands at its highest amount ever by our estimation, and it is being deployed into these more favorable market conditions by managers that have added or acquired dog years of experience during this market cycle. LPs that pulled back on commitments more recently will also benefit from the deployment of their program’s dry powder into the current market.

ZIRP-era investments will take time to fully work their way through programs. While that is happening, investors will continue to steadily build their program exposures by vintage year, strategy, and sector among other factors to continue to make progress toward achieving the long-term returns the private markets are known to deliver.

Private Markets Should Continue to Propagate Public Market Options in 2025

Andrea Auerbach, Global Head of Private Investments

While it was again observably quiet in the institutional private equity (PE) markets in 2024, with muted transaction and fundraising activity plus a decades-long low in distribution yields, there was a substantial uptick in creating pathways for individual investors—retail, accredited, qualified—to access the private markets. Success in these endeavors could drive an overwhelming amount of capital into the space that could overpower current market dynamics and impact returns, particularly in the upper registers of the private markets. Long-standing private markets investors may be best served migrating their capital away from where this constituency is likely to set up shop.

Many managers have been preparing to serve this market, actively acquiring private market strategies to create a full suite of PI offerings on their platforms. In 2024, there was an increase in the launch of interval funds, private fund offerings, and private business development companies. Independent distribution platforms providing fund access to qualified purchasers and accredited investors also expanded their beachheads and increased their offerings. Not to be left out, several registered investment advisors announced acquisitions of/investments in private markets–focused advisors to add the capability to their existing platforms. These trends are expected to continue in 2025.

From a “careful what you wish for” perspective, successfully reaching these investors is not without its challenges. There is an estimated $56 trillion in US household assets alone. If just 5% of that capital is redeployed into private investments, an additional $2.8 trillion is on its way. For reference, Cambridge Associates reported a grand total of $2 trillion in net asset value across its US Private Equity and Venture Capital benchmarks as of December 2023; for the same period, Preqin reported private credit assets at $2 trillion. Increasing supply by that magnitude will impact returns for the managers investing that additional capital and amplify the demands and needs of that constituency.

It is entirely possible the individual investor—as a cohort—becomes the most important investor class, shifting expectations around manager alignment with long-standing institutional investors. Implications of this capital migration include the likelihood of more regulation, a significant increase in demand for secondaries as much of this capital needs to be invested immediately, and heightened headline risk for these platforms as these individual investors make their interests known.

Buyout Transaction Activity in Japan Should Increase in 2025

Sharad Todi, Senior Investment Director, Private Equity

The number of buyout transactions through September 30, 2024 reached 102, more than the total deal count in calendar year 2023, indicating an upward trend. Although the penetration level of private equity in Japan remains lower than in other developed markets, the country is emerging as a natural harbor for leveraged buyouts. We expect buyout transition activity should increase in 2025.

On the supply side, three primary sources of deal flow are contributing to this growth. First, several family-owned small- to medium-sized enterprises struggling to find natural successors are turning to PE firms to ensure business continuity. Second, large conglomerates in Japan are streamlining their operations by divesting non-core assets, creating opportunities for PE investors. Third, the Tokyo Stock Exchange’s demand for listed companies to justify their status by improving book value and capital efficiency ratios is also increasing take-private transactions.

On the demand side, investors are drawn to Japan for several reasons. Unlike most other Asian markets, control is the norm in Japan, allowing investors to shape the company’s journey more effectively. Entry multiples in Japan usually range between 6x and 10x EV/EBITDA, lower than the typical 10+ multiples seen in other buyout markets. Plenty of low-cost debt is available, with most managers able to secure financing at 40% to 60% of enterprise value at an all-in cost below 4.0%. The terms of leverage are typically investor friendly, with banks being more relationship-focused and cooperative with borrowers dealing with struggling assets. Japan’s low economic growth rate drives corporates to pursue inorganic growth, making strategic buyers the preferred exit route for PE firms. Furthermore, Japan’s attractiveness as an investment destination in Asia has increased as China’s appeal has waned, providing large pan-Asian funds a stable market to deploy capital.

We expect these broad macro trends should persist into 2025, which will support increased PE activity levels in Japan.

Venture Capital Fundraising and Investment Activity in China Should Increase in 2025

Scolet Ma, Senior Investment Director, Private Equity

In 2024, China’s USD-denominated venture capital fundraising and investment activity sank to a decade low, driven by sluggish domestic economic growth and ongoing US-China geopolitical tensions. We are likely to see fundraising and investment activities in China VC rebound in 2025 from the 2024 lows, albeit remaining at moderate levels.

More Chinese venture capital firms are expected to return to the market for fundraising in 2025. In 2024, China VC firms came back with smaller funds, more reasonable terms, clearer investment strategies, and enhanced transparency. We expect this trend to continue in 2025. The smaller fund size is appropriate for the current market and will force VCs to be more disciplined in their investment selection.

Geopolitical risks persist for US investors. US LPs are expected to continue withdrawing from China VC due to restrictive foreign investment rules. This presents an opportunity for non-US LPs to engage with high-quality managers. However, these non-US LPs are unlikely to completely fill the void left by their US counterparts, which will leave fundraising levels at a lower level than the peak of 2020–22.

China’s stimulus packages are anticipated to stabilize economic sentiment, but it will take time for China’s structural economic issues to resolve. The CSRC’s new rules have relaxed listed Chinese companies’ merger & acquisition restrictions, creating more exit opportunities for VC portfolios. They may also support more domestic listings. This reality, along with the fact that entry valuations have adjusted downward, make for a more conducive investing environment.

This supportive environment is complemented by talented, experienced founders in many sectors from a highly competitive market. China is emerging as a global innovation center in life sciences, as evidenced by recent global acquisitions of Chinese assets.  For a host of reasons, it has also become a hub of innovation in AI, robotics, and smart manufacturing. For these reasons, VC fundraising and investment activity should increase in 2025.

Continuation Vehicles Should Become an Even More Important Exit Path for Private Equity Sponsors in 2025

Nicolas Schellenberg, Managing Director, Private Equity

In recent years, general partners (GPs) have significantly increased their use of continuation vehicles (CVs) as an exit path for portfolio companies. This trend is partly due to reduced activity in traditional exit markets such as strategic M&A and IPOs, and the need to provide liquidity to LPs. While traditional exit paths may reopen in 2025, we anticipate CV volume will continue to grow, becoming an even more vital exit route for GPs. This growth is driven by greater investor interest and increased understanding and use of CVs by mid-market PE managers.

CVs are now a recognized exit path for PE funds. More GPs have become comfortable with them and see their benefits. Specifically, it allows managers to hold on to their best assets, while at the same time offer cash to LPs that are in need for liquidity through a process that might be less complex to run than a traditional auction process. In the mid-market, smaller assets compared to large-cap buyouts lead to smaller CVs, which are easier to syndicate.

The investor landscape for CVs is rapidly evolving. For LPs of the selling funds, CVs can pose challenges, as time periods to choose between staying invested or taking liquidity are often too tight to adequately assess the merits of a CV for their program. Secondary buyers are increasingly raising funds focused on GP-led transactions, often investing solely in CVs, some exclusively in single asset CVs. Additionally, traditional PE sponsors are developing secondary buyside strategies for CVs, viewing their primary capabilities as synergistic. These institutional fund managers are raising more and more capital from LPs that are attracted by the promise of better risk-adjusted returns and shorter holding periods.

Given the benefits CVs offer to LPs, GPs, investors, and underlying companies, we believe their importance as an exit path for PE sponsors will continue to grow, reaching a new record percentage of total sponsor-backed exit volume in 2025.

Figure Notes

Focus on the Compass, Not the Clock
Pooled private investment periodic returns are net of fees, expenses, and carried interest. Private equity includes buyouts and growth equity. Modified Public Market Equivalent (mPME) replicates private investment performance under public market conditions. The public index’s shares are purchased and sold according to the private fund cash flow schedule, with distributions calculated in the same proportion as the private fund, and mPME NAV is a function of mPME cash flows and public index returns. MSCI All Country World Index (ACWI) returns are net of dividend withholding tax. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.

Deal Activity in Japan Has Been on the Rise
Data for 2024 are through September 30. Data retrieved on November 22, 2024, and may revise.

USD-Denominated Venture Capital Activity in China Slowed in 2024
Fundraising data reflect capital raised by USD-denominated, China-based VC funds. Deal activity data reflect all VC investments made in China that are denominated in US dollars, including investments made by global/regional funds, as well as China-based funds. Data for 2024 are as of September 30.

Continuation Vehicle Usage Has Grown Quickly
Sponsor-backed exit volume includes M&A and IPO proceeds, plus estimated continuation fund volume. Percentage represents continuation fund transaction volume (numerator) over sponsor-backed exit deal volume (denominator). Expected annual volume for 2024 is based on first half 2024. Global continuation transaction volume for 2024 is based on first half actual and second half projection.

Footnotes

1. Traditional markets include Tokyo, Sydney, Seoul, Hong Kong, and Singapore. Secondary markets include Mumbai, Johor, Jakarta, Kuala Lumpur, Bangkok, Ho Chin Minh, and Manila.
2. Comparisons of private investments and public investments are not quite apples-to-apples. We show private investment manager returns using horizon returns based on internal rates of return and compare them to time-weighted returns for liquid investments. While imprecise, the analysis is directionally correct and consistent with our investment experience.
3. We assume both portfolios have a beginning market value of $100 million and spend 5% of a 12-quarter moving average of ending market values.

The post 2025 Outlook: Private Equity & Venture Capital appeared first on Cambridge Associates.

In dieser Folge erfahren Sie unter anderem:

• Funktionsweise : Wie funktionieren ILS und welche Rolle spielen sie im Finanzmarkt.
• Risikomanagement: Wie sind die ILS-Märkte von Klimaereignissen beeinflust und wie können Risiken diversifiziert werden um stabile Erträge zu erzielen.
• Markttrends & Chancen: Wir analysieren die aktuellen Entwicklungen und Herausforderungen im ILS-Markt und identifizieren welche Möglickeiten sich für institutionelle Investoren ergeben.

Footnotes

1. Traditional markets include Tokyo, Sydney, Seoul, Hong Kong, and Singapore. Secondary markets include Mumbai, Johor, Jakarta, Kuala Lumpur, Bangkok, Ho Chin Minh, and Manila.
2. Comparisons of private investments and public investments are not quite apples-to-apples. We show private investment manager returns using horizon returns based on internal rates of return and compare them to time-weighted returns for liquid investments. While imprecise, the analysis is directionally correct and consistent with our investment experience.
3. We assume both portfolios have a beginning market value of $100 million and spend 5% of a 12-quarter moving average of ending market values.

The post ILS Strategien appeared first on Cambridge Associates.

Aaron Costello, Regional Head for Asia, and Vivian Gan, Associate Investment Director, Capital Markets Research

With the global economy showing signs of cooling and Chinese economic momentum remaining weak, the outlook for Asian markets is increasingly mixed. Certain markets have been more resilient, such as India, where domestic growth is still robust, and Taiwan, which has benefitted from the global rally in semiconductor and artificial intelligence (AI)–related stocks. However, elevated valuations in these segments pose a concern for investors, prompting a reassessment of opportunities elsewhere. In the current environment, a rotation towards markets that may be more defensive and where shifts in market dynamics are supportive of longer-term prospects is warranted. In this edition of Asia Insights, we highlight:

• Within Asia Public Equities, there is a growing emphasis on shareholder returns and a rise in the number of companies increasing dividend payouts and initiating share buybacks. This trend comes amid a market rotation towards high dividend–yielding companies, as investors seek stable income returns given rising uncertainty and overvaluations in certain segments of the market.
• In Asia Private Credit, capital has rotated away from China and towards developed markets such as Australia and South Korea, while India also remains a destination for capital. Broadly, the Asia private credit market remains underpenetrated and is less crowded but poised for growth, presenting an interesting opportunity for investors to gain a diversified exposure.
• India Venture Capital (VC) is also starting to look more attractive today given a favourable macroeconomic backdrop, an improving start-up and manager landscapes, and a broadening of exit channels. In contrast to India public markets, which have run up and appear frothy, India VC activity has cooled alongside global VC markets. As a result, India VC valuations are moderating, making now a more opportune time for investors considering access.
• Across China Private Investments, fundraising activity remains frozen given uncertainty over geopolitical tensions and pending US investment restrictions. However, deal-level opportunities still exist in certain segments of the market, particularly for buyouts where the current macro environment is conducive for market consolidation and control opportunities.

Asian Public Equities: A New Era for Shareholder Returns

Wilson Chen, Managing Director, Public Equities

In Asia, we have seen an increased emphasis on shareholder returns and a notable rise in the number of companies initiating share buybacks and increasing dividend payouts. Japan, driven by regulatory changes and increased shareholder activism, has led this shift. Reforms introduced by the Tokyo Stock Exchange in January 2023 have put pressure on Japanese companies that trade below book value to take action to narrow their valuation discount, largely through increasing dividends and conducting shares repurchases. Such measures have helped to boost Japanese companies’ return-on-equity and supported upward stock price revaluations, creating positive tailwinds for the market. The small-cap segment could see greater benefits from reforms, given wider valuation discounts.

In South Korea and China, similar efforts are now being observed. South Korea’s ‘Corporate Value-up Program’ seeks to improve capital efficiency and equity valuations of firms through the voluntary disclosure of plans to enhance shareholder value. In China, more firms are responding to regulatory calls to increase dividends and share buybacks and others are re-listing on more favourable exchanges or spinning off units to unlock value and boost investor confidence.

From a total return perspective, dividends have always played a crucial role, although their importance has been magnified in markets such as China, which has seen weaker earnings growth and depressed valuation multiples. In the current environment, investors have rewarded companies able to generate high, stable income returns, a rotation that is reflected in the performance of the MSCI AC Asia ex Japan High Dividend Yield Index, which has outperformed its parent index by 4.2 percentage points (ppts) year-to-date and 9.4 ppts over the trailing one year. The trend of increased emphasis on shareholder returns in Asia is positive for investors and may also be a more defensive strategy given rising uncertainty and overvaluations in certain segments of the market, such as semiconductors and AI-related stocks.

Asia Private Credit: Growing Momentum for Asia ex China Strategies

Vijay Padmanabhan, Managing Director, Credit Investments

Private credit in Asia (including Japan and Australia) remains an underpenetrated market relative to the size of the region’s economy and demand for capital. Private credit and other forms of non-bank credit represent approximately 20% of the total Asia credit market, as compared to 65% in North America. Meanwhile, fundraising by Asia-based private credit funds amounted to just 5% of total capital raised by global private credit funds in the trailing five years ending 2023.

Fundraising activity slowed sharply in 2023, with lacklustre activity in part due to ongoing weakness in China’s property market. Many pan-Asian general partners had been overweight China prior to its real estate crisis, and the performance of these strategies, as well as that of dedicated China funds, has continued to struggle since.

Outside of China, however, the opportunity set remains robust. Managers are increasingly pivoting to developed Asia markets such as Australia and South Korea, which are credit-friendly jurisdictions in which banks are retrenching and high-quality collateral is available. The presence of higher sponsor activity in these markets creates space for sponsor-backed lending opportunities, while credit opportunities in sectors such as real estate are also rising given a trend of tightening liquidity from traditional lenders. Across emerging Asia, India is a bright spot for managers given its resilient economic growth outlook and improving credit regulations and credit landscape. India private credit had predominantly leaned towards distressed credit due to its legacy non-performing asset challenges and, more recently, in the aftermath of its NBFC (non-bank financial company) liquidity crisis. However, the strategies have since broadened to include performing credits in the underserved, midmarket segment, and solution capital to businesses for share buybacks and growth or acquisition financing.

Lower penetration and competition today create a compelling environment for Asia private credit strategies, as these allow for deals to be executed at better terms, pricing, and covenants. Overall, the market is poised for growth and presents an interesting opportunity for investors seeking to gain a diversified exposure across both developed and emerging Asian credit markets.

India Private Investments: The Growing Attractiveness of India Venture Capital

Vish Ramaswami, Head of Asia-Pacific Private Investments and Sharad Todi, Senior Investment Director, Private Equity

Amid a mixed economic outlook for Asia, India has stood out for its resilient economic growth. As a result, India public equity markets have run up and appear frothy, making some investors cautious about entering the market. In contrast, India’s VC market is cooling in terms of fundraising and deal activity alongside a shakeout in global VC markets, and valuations have moderated, particularly for later-stage VC. Given India’s long-term growth potential and favourable government policies, today may be a more attractive entry point for India VC in our view.

Dedicated India VC fundraising totaled only $1.8B in 2023, down sharply from more than $10B in 2022, and remains small compared to total global VC fundraising at $201B. Yet, India VC is benefitting from an improving start-up landscape in terms of the quality of founders, business models, and technology. The Indian government has spearheaded the creation of a digital public infrastructure or ‘India stack’, which has been widely adopted by start-ups to create disruptive new business models and tools. Consumer focused start-ups have moved away from cash-guzzling business models and towards profitable, sustainable growth. Enterprise technology start-ups are setting global standards in sectors such as software-as-a-service and financial technology.

Meanwhile, the manager pool has matured significantly. Progressing from a generalist mindset, managers are taking distinct market positions and have developed capabilities beyond simply sourcing deals to enhancing value and risk management. While India VC fund distributions have lagged their global counterparts, this may improve going forward as India’s capital markets broaden. In addition to initial public offerings, new exit routes are emerging, including merger & acquisitions deals and sales to financial sponsors and large family offices.

India VC also provides a different sector exposure compared to Indian public markets, which may be more reflective of the future growth drivers of the Indian economy. Given a cooling of the market, now may be a better time for investors to refresh their assessment of India VC for potential opportunities to gain access.

Chinese Private Investments: Frozen Fundraising, but Deal-Level Opportunities Remain

Vish Ramaswami, Head of Asia-Pacific Private Investments, Scolet Ma, Senior Investment Director, Private Equity, and Linlin Zeng, Investment Director, Private Equity

Fundraising for Chinese private equity and venture capital (PE/VC) slowed further in first half 2024 from the already depressed levels seen in 2023. Total capital raised by USD-denominated Chinese PE/VC funds fell to $1.0 billion in first half 2024, down from $16.9 billion in 2023 and $30.1 billion in 2022. Muted levels of fundraising largely reflect uncertainty over geopolitical tensions and pending US investment restrictions on China, although investor sentiments have also been buffeted by a weaker outlook for China’s economic growth and public markets.

Slowing economic momentum and a poor environment for exits have also weighed on VC and growth equity deal activity and exits, particularly for sectors, such as semiconductors and AI, that are subject to pending US investment restrictions. However, pockets of opportunity remain. Healthcare and biotech, for instance, have seen continued foreign investor activity even in the face of the proposed US BIOSECURE Act ⁴ .  A rise in the development of innovative drugs and devices from China has spurred an increase in out-licensing activities and acquisitions by global pharmaceutical companies. Across other sectors, opportunities are similarly present, particularly given some recent downward valuation adjustments. Limited partners that possess a longer investment horizon (i.e., beyond a typical PE/VC fund life of ten years) and have the patience and ability to tolerate uncertainty may be able to take on certain co-investments to capitalize on current attractive valuations.

Meanwhile, Chinese buyout activity picked up in first half 2024, with 19 deals completed as compared to 31 in all of 2023. The current macro environment bodes well for market consolidation and control opportunities. Weaker economic growth in China has created more willing sellers across both domestic founders, as well as multinationals looking to divest from China. Valuation gaps between buyers and sellers have narrowed, and lower borrowing costs in China imply availability of leverage. Although the Chinese buyout market remains less proven, the current environment is favourable in supporting the building out of such strategies.

Derek Yam also contributed to this publication.

Footnotes

1. Traditional markets include Tokyo, Sydney, Seoul, Hong Kong, and Singapore. Secondary markets include Mumbai, Johor, Jakarta, Kuala Lumpur, Bangkok, Ho Chin Minh, and Manila.
2. Comparisons of private investments and public investments are not quite apples-to-apples. We show private investment manager returns using horizon returns based on internal rates of return and compare them to time-weighted returns for liquid investments. While imprecise, the analysis is directionally correct and consistent with our investment experience.
3. We assume both portfolios have a beginning market value of $100 million and spend 5% of a 12-quarter moving average of ending market values.
4. The pending US BIOSECURE Act identifies five Chinese biotech companies that would be prohibited from obtaining US government contracts or deriving revenue from US companies and agencies that receive US government funding. The proposed guidelines do not impose restrictions on US PE/VC investments into Chinese biotech.

The post Asia Insights: Seeking Stable Returns appeared first on Cambridge Associates.

Long-term capital flows into climate solutions reflect market-driven structural tailwinds. The drivers of this increasing demand for climate solutions range from the rapidly growing demand for clean energy from artificial intelligence (AI) to the climate adaptation needs driven by increasingly volatile weather patterns. With power consumption from generative AI expected to skyrocket by 70% annually through 2027, ⁵ companies are looking to sustainable infrastructure managers for reliable sources of renewable energy and to venture capitalists for promising early-stage technologies that improve energy efficiency. Meanwhile, the changing global climate has created an urgent need to adapt our existing built environment to withstand increasingly volatile and extreme weather.

In addition to market trends, governments have taken decisive actions to foster investment in climate solutions, policies that are not easily undone. The economic impacts of the Inflation Reduction Act (IRA) of 2022, along with the Infrastructure Investment and Jobs Act (IIJA) (2021) and CHIPs and Science Act (2022), have begun to be felt across the United States. More than $18.4 billion of federal investment ⁶ was deployed into clean energy and transportation projects in fiscal year 2023, which stimulated private investment in climate across manufacturing, energy, and industry. The total investment for these areas grew by 67% in 2023, compared to the 12% year-over-year increase in 2022. While these early indications are encouraging, most of the projected $1.2 trillion federal investment has yet to be spent and should further stimulate private investment flows. ⁷

The economic benefits of these climate policies have touched communities across geographic regions. More than three-quarters of announced clean energy investments have been made in Republican congressional districts, ⁸ and many are projects that some Republican lawmakers have indicated they will defend. ⁹ Full repeal of the IRA under a Trump administration is unlikely, given these attractive economic benefits and any amendment to the law must be passed by Congress. That being said, risk of amendment is higher under full Republican control of Congress. Provisions that likely have lower risk of amendment by a Republican-led Congress include solar and wind tax credits, as well as some technology tax credits (e.g., carbon capture, biofuels, and nuclear-related) with bipartisan support. Other tax credits and rebates (e.g., electric vehicles, energy efficiency) and loan/grant programs are likely at higher risk of amendment. Separately, a second Trump administration could weaken the IRA through interpretation and, subsequently, implementation. The US Supreme Court’s overturn of the 1984 Chevron Deference, which has substantially weakened the power of federal agencies, may further weaken IRA implementation. However, it is worth noting that 2020, the final year of the first Trump administration, marked the first time on record that renewable energy sources surpassed both nuclear and coal in the United States. ¹⁰

Regardless of the political environment, the landscape for climate-focused investors remains attractive, which should continue to encourage flows into the space. Well-positioned managers combine their technical expertise, operational experience, and investment discipline to invest in disruptive technologies that seek to replace incumbent processes on a purely economic basis. For example, Cruz Foam’s bio-based packaging materials seek to replace conventional single-use plastics in the multi-billion dollar packaging industry while being 30% cheaper. ¹¹ Meanwhile, the latest Energy Innovation study finds that 99% of US coal plants are more expensive to operate compared to replacement by renewable energy. ¹² In addition, demand from limited partners remains strong as investors have become increasingly focused on climate as an investment theme, with 77% of respondents to Cambridge Associate’s 2022 Sustainable and Impact Investing Survey investing in the theme compared to 38% in 2018.

Experienced long-term investors should remain committed to investing in climate solutions regardless of the short-term political shifts. Even with the uncertainty of an election year, US investors and businesses cannot afford to be left behind in the global energy transition. Given the market demand for climate solutions, supportive US government policies, and a robust investment landscape, we expect that private capital flows into climate solutions will remain strong in a second Trump administration.

Di Tang, Senior Investment Director, Sustainable and Impact Investing

Alice Blackorby, Senior Investment Associate, Sustainable and Impact Investing

Footnotes

1. Traditional markets include Tokyo, Sydney, Seoul, Hong Kong, and Singapore. Secondary markets include Mumbai, Johor, Jakarta, Kuala Lumpur, Bangkok, Ho Chin Minh, and Manila.
2. Comparisons of private investments and public investments are not quite apples-to-apples. We show private investment manager returns using horizon returns based on internal rates of return and compare them to time-weighted returns for liquid investments. While imprecise, the analysis is directionally correct and consistent with our investment experience.
3. We assume both portfolios have a beginning market value of $100 million and spend 5% of a 12-quarter moving average of ending market values.
4. The pending US BIOSECURE Act identifies five Chinese biotech companies that would be prohibited from obtaining US government contracts or deriving revenue from US companies and agencies that receive US government funding. The proposed guidelines do not impose restrictions on US PE/VC investments into Chinese biotech.
5. https://www.morganstanley.com/ideas/ai-energy-demand-infrastructure
6. Excluding retail investment; https://rhg.com/research/clean-investment-monitor-q4-2023-update/
7. https://www.markey.senate.gov/imo/media/doc/five_years_in_a_green_new_deal_world_-_020624pdf1.pdf
8. https://www.cnn.com/2024/06/16/climate/clean-energy-investment-republicans/index.html
9. https://www.bloomberg.com/news/articles/2024-08-05/red-state-republicans-say-they-ll-defend-biden-era-green-jobs?sref=IUS5JOJ3
10. https://www.eia.gov/todayinenergy/detail.php?id=48896
11. https://www.atoneventures.com/portfolio
12. https://energyinnovation.org/publication/the-coal-cost-crossover-3-0/

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