Displaying items by tag: rates

Pacific Investment Management Co. (PIMCO) has been quite pessimistic on private credit and sees major downside if rates don’t fall as expected. This is contrary to many in the industry embracing private credit like Blackstone and Apollo Global. 

In contrast, PIMCO is looking to take advantage of the crisis that it’s forecasting. It also has larger implications for the economy and markets given that private credit has taken the bulk of risky lending which used to come from investment banks. 

PIMCO’s thesis rests on the US economy slowing in 2024 and a hard landing in Europe and the UK. If the economy remains resilient, then rates are unlikely to fall as much as expected. This would put stress on private markets where there is less transparency and price discovery. The firm believes that many borrowers are quite risky and quite exposed to a decline in revenues. They believe that about a quarter of private credit portfolios could face difficulties if rates don’t fall or are less than expected. 

PIMCO spies an opportunity if private lenders face pressure from its creditors based on portfolio values dropping. This would allow PIMCO to squeeze out other lenders by buying into debt at a discount. It would also continue a trend of the firm moving away from its roots of fixed income investing and increasingly into alternative assets. This segment has grown from $32 billion in 2016 to $170 billion in the first half of 2023. 

Finsum: PIMCO is bearish on private credit due to concerns about balance sheet risk with risky borrowers, bearishness on the economy in 2024, and the market pre-emptively pricing in a dovish Fed.

Cohen & Steers believes that 2024 will mark a turnaround in private real estate following years of being plagued by issues like a drop in office occupancies and high interest rates. The firm emphasizes that real estate remains a cyclical business with many indications that we are near a trough in the cycle. It acknowledges that some pain is still coming as large amounts of debt will mature in the next couple of years and require refinancing, likely leading to more defaults and distressed assets. 

However, this will present an attractive opportunity for investors according to Cohen & Steers. The firm sees private real estate following the same trajectory as public REITs, lower prices in the interim before a gradual recovery as the Fed shifts to cutting rates later in the year. 

The firm favors newer properties in the sunbelt over older properties in coastal markets. It sees migration out of high-cost cities and into the suburbs continuing, facilitated by technology and remote work opportunities. 

In terms of various segments, it sees less opportunity in Industrial properties due to high prices and indications of a supply glut and lower occupancy levels. It sees office properties as continuing to struggle given unfavorable secular trends. Specifically, it recommends staying away from older office properties which were built for a different time and workforce.

Finsum: Cohen & Steers believes that private real estate is near the bottom, and that buyers at these levels will be rewarded in the long-term. 

The combination of tighter money and falling valuations have led private equity sales of portfolio companies to their lowest levels since 2009. Now with some signs of thawing in markets, private equity firms are looking to exit positions and return money to investors.

It’s led to a negative cycle for the industry. The lack of exits has adversely impacted investors’ willingness to pledge money for new funds which has hampered the industry’s ability to make deals. 

According to Per Franzen, the head of private capital for Europe and North America at EQT AB, “Private equity players have to face reality at some point. They need to invest remaining capital and go back to the market to raise new funds, which means a need to drive exits and improve distributions.” Reportedly, some big deals are on the horizon such as Hellman & Friedman looking to sell its energy data platform, Enervus, KKR exiting car park operator, Q-Park, and Carlyle finding a buyer for luxury watch parts manufacturer, Acrotec Group

Another consideration is upcoming elections which could complicate efforts to exit positions. This increases the urgency to make moves in the first half of the year. There are also expectations that private equity could be looking to take advantage of any dislocations or discounts as the industry has $1.4 trillion in cash on the sidelines. 

Finsum: Private equity firms are looking to exit positions in the coming months in order to return cash to investors. 

Institutional investors and money managers came together at the annual PERE America Forum and shared some thoughts on the private real estate market. The overall sentiment is that conditions will remain challenging until 2025 due to a large amount of commercial real estate debt that needs to be rolled over or refinanced at much higher rates.

According to John Murray, the head of PIMCO’s global private commercial real estate team, the situation is as bad as the Great Financial Crisis in terms of dislocations in capital markets. He notes that Fed policy is the major headwind, and its ‘crushing’ sentiment and liquidity. 

Sajith Ranasinghe, head of real estate at Church Pension Group, remarked that price discovery has been limited so investors are focusing more on income. He also expressed interest in private REITs which are down over 30% since rates began moving higher in 2022. 

Saul Lubetski, the vice-chairman of Harbor Group International recommends a ‘scalpel approach’ as $1.5 trillion of maturities are set to expire by 2025. He notes that the refinancing has already begun, albeit at a smaller and slower pace which should accelerate this year. However, it’s increasingly evident that borrowers are finally making peace with higher rates. 

Finsum: At the annual PERE conference, institutional investors and money managers gathered to share some thoughts on the private real estate market.

Rich Hill, the head of Real Estate Strategy at Cohen & Steers, shared his bullish outlook for REITs in 2024. He sees falling interest rates, tightening credit spreads, and undervaluation as the biggest catalysts for significant gains over the next year. However, he cautions that office REITs have their own dynamics due to vacancy rates remaining elevated amid the increase in remote and hybrid work.

REITs benefit in two ways from lower rates - their yields become more attractive to investors on a relative basis, and it leads to lower financing costs. Hill points to improving credit markets as another reason to overweight the sector in the coming year. This means REITs will have an easier time accessing credit which will lead to more activity such as acquisitions and new projects. Historically, REITs have outperformed during periods of tightening spreads and falling rates. 

Another attractive component of REITs is that valuations are compelling as prices have declined over the past couple of years, while earnings have remained quite stable due to the economy avoiding a recession. Further, most REITs continue to have a relatively low cost of capital due to refinancing at lower rates in 2021. 

Finsum: Rich Hill of Cohen & Steers is bullish on REITs for next year. He sees falling rates, tightening credit spreads, and an improving credit markets as major catalysts.