Private markets

Quarterly private markets update

March 2024 | Chief Investment Office GWM | Investment research
Contents

03 11 20
At a glance Venture capital Private real estate

04 14
Private equity Private credit

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Private markets 2
 At a glance
„ Private assets can play a key role in long-term investment
plans, with potential benefits both in terms of better risk-
adjusted performance over traditional asset classes and
enhanced diversification.
„ Over the long run, we expect portfolios that include private
assets to outperform those that do not, as less efficient
markets and active ownership should offer greater oppor-
tunities to capture a premium.
„ In private equity, we currently seek exposure to value-ori-
ented buyout and continue to recommend allocations to
secondaries. We also see opportunities in thematic private
equity for those investors seeking long-term growth in
areas such as software, health, and climate-related solu-
tions. We anticipate exit options for portfolio companies to
remain subdued through the first half of 2024 but expect
secondary exit solutions, such as GP continuation funds, to
see a pickup in deal activity. We expect more Limited Part-
ners (LPs) and General Partners (GPs) to turn to the second-
aries market for liquidity solutions across both PE and VC
„ In private credit, we continue to see private debt as attrac-
tive for investors as a portfolio diversifier, particularly given
our soft-landing outlook. With the recent outperformance
of the syndicate market, we look for private credit spreads
to tighten the gap and trend lower in 2024
„ In real assets, the case for private real estate as a diversifier
remains intact. But we stay selective and recommend
focusing on assets benefiting from strong fundamentals
such as logistics, multifamily and data centers. 2024 has
the potential to be a transitional and much more interest-
ing year for private commercial real estate (CRE): the pleth-
ora of dry powder on the sidelines that needs to go to
work, the potential for increased distress in attractive asset
classes—including multifamily, which could begin to unlock
the transaction market—and clarity from the Federal
reserve on the direction of interest rates, with the potential
for several fed funds rate cuts in 2024.
Private markets 3
 Private equity
Summary
„ Private equity (PE) performance for 3Q23, measured by the
Cambridge Associates US private equity index, was +0.6%;
venture capital (VC) performance was –2.5%. While year-
to-date 3Q23 performance for US PE and US VC are lag-
ging the public markets, the long-term performance of US
PE and US VC has outperformed relative to public markets
on a 3-, 5- and 10-year relative basis.
„ We anticipate exit options for portfolio companies to remain
subdued through the first half of 2024 but expect secondary
exit solutions, such as GP continuation funds, to see a pickup
in deal activity. We expect more Limited Partners (LPs) and
General Partners (GPs) to turn to the secondaries market for
liquidity solutions across both PE and VC.
„ Value-oriented buyouts, especially with top-tier managers
who have demonstrated expertise in identifying strong
assets at appealing valuations, remain an area we find
compelling. Entry valuations for new portfolio companies
have come down to be in line with pre-COVID averages,
offering an opportunity to find solid assets.
„ We believe the current environment of high interest rates
and expensive debt has forced managers to adjust to a new
deal-making environment. Managers are prioritizing opera-
tional growth over financial engineering and multiple arbi-
trage, focusing on revenue and EBITDA growth, and posi-
tioning their portfolio companies into the best shape for
exit when the window opens up again.
„ We expect 2024 fundraising in infrastructure to improve
relative to 2023 as 1) current investor allocation (~3%) is
below target (~6%), 2) major participants’ (like BlackRock)
expanding presence signals strong confidence in the asset
class, and 3) we see strong tailwinds around decarboniza-
tion, digitalization and deglobaliza­tion. However our out-
look is not without risks. Continued political uncertainty
around US infrastructure spending could dampen interests.
„ Lastly, investors should not lose sight of long-term growth
opportunities—notably in themes such as the transition to
the green economy, growing healthcare needs, AI and digi-
talization.
Private markets 4
Overview
After a sluggish 2023, private equity (PE) managers are
eagerly awaiting a return to normal. Geopolitical tensions and
regional bank crises exacerbated by increasing interest rates
made 2023 a difficult year for private equity. But positive eco-
nomic signals such as moderating inflation, resilient company
growth, and expected interest rate cuts by the Fed may point
to better environment ahead for PE.
Markets are expecting the Fed to cut rates in 2Q24, which
could unlock pent-up deal flow in the second half of 2024.
With greater visibility on the horizon giving rise to more opti-
mism, buyers may pursue M&A more confidently and pricing
between buyers and sellers could clear more easily. Public
multiples are trading higher than private multiples, potentially
providing a favorable window for IPOs.
We continue to see opportunities in private markets, espe-
cially in the secondaries market where both limited partners
(LPs) and general partners (GPs) alike seek liquidity. We antici-
pate traditional exit options for selling portfolio companies to
remain subdued through the first half of the year and see sec-
ondary exit solutions, such as GP continuation funds, to see a
pickup in deal activity. Investors looking for venture exposure
may find opportunity in venture secondaries. Recently trading
at around 30% discount to NAV, venture secondaries can
offer investors a way to gain exposure to a diversified portfo-
lio at an attractive discount.
We continue to recommend looking to value-oriented buyouts,
especially with top-tier managers who have demonstrated
expertise in identifying strong assets at appealing valuations.
Entry valuations for new portfolio companies have come down
and are now in line with pre-COVID averages, offering an
opportunity to find great assets. We believe the current envi-
ronment of high interest rates and expensive debt has forced
managers to adjust to a new deal-making environment. Man-
agers are prioritizing operational growth over financial engi-
neering and multiple arbitrage, focusing on revenue and
EBITDA growth and positioning their portfolio companies to be
in the best shape for exit when the window opens up again.
Traditional fundraising activity continues to be slow, and we
expect this to continue into 2024 based on the lack of distri-
butions back to the LP. The rise of perpetual funds, targeted
mainly at high-net-worth wealth clients (which has been an
untapped market) is an avenue many large fund managers
have pivoted into in 2023 and we expect even more funds to
come to market in 2024.
Performance
Third-quarter 2023 performance, the latest for which we
have data, continued to see a directionally positive recovery
from 2022, though still at subdued levels. US PE internal rate
of return (IRR) for 3Q23 was 0.6%, while US Venture Capital
was negative (–2.5%) according to Cambridge Associates
benchmarks. On a 1-year basis, the divergence between
returns for US PE and US VC is more pronounced, with US PE
returning 7.3% for the year and US VC losing (10.4%) for
the year. The difficult macro environment has made it difficult
for exits, lengthening the holding period for both PE and VC
asset classes, which should drag down IRR performance.

Figure 1

Performance by asset class

Asset Class Q3 2023 Q2 2023 Q1 2023 Q4 2022 2023 YTD 1-year 3-year 5-year 10-year
US buyout 0.9% 3.0% 3.1% 2.0% 7.2% 9.3% 18.4% 16.3% 16.0%
US growth equity –0.2% 2.1% 1.6% –1.9% 3.5% 1.6% 16.6% 18.9% 17.2%
US private equity 0.6% 2.8% 2.7% 1.0% 6.2% 7.3% 17.9% 16.9% 16.3%
S&P 500 –3.3% 8.7% 7.5% 7.6% 13.1% 21.6% 10.1% 9.9% 11.9%
US venture capital –2.5% –0.5% –0.9% –6.8% –3.9% –10.4% 14.9% 17.5% 16.4%
Russell 2000 –5.1% 5.2% 2.7% 6.2% 2.5% 8.9% 7.2% 2.4% 6.6%
Private credit 3.2% 2.8% 2.7% 2.0% 8.9% 11.1% 10.6% 8.6% 8.9%
Morningstar LTSA US LL 3.5% 3.2% 3.2% 2.6% 10.2% 13.1% 6.1% 4.5% 4.3%
US real estate –1.6% –0.5% –0.5% –1.3% –2.6% –3.9% 11.7% 8.7% 11.0%
NCREIF –1.4% –2.0% 2.6% 5.1% –0.8% 4.3% 6.4% 2.4% 5.6%

Source: Cambridge Associates, Cliffwater Direct Lending Index, Morningstar Direct, UBS, as of 30 September 2023

Private markets 5
 Private equity

Both US PE and US VC performance lagged the public returns
of 21.6% for the S&P 500 and 8.9% for Russell 2000, respec-
tively. There are a couple of reasons why we saw the lag in
performance from the private market. First, since private
funds are marked to market on a quarterly basis, there can be
a lag in how quickly private valuations reflect public market
movement. This is similar to the more muted fall seen in pri-
vates in 2022 when the S&P 500 was down 16% and PE was
only down 5%. Second, a handful of stocks, commonly called
the “Magnificent Seven,” has been dominating public market
performance. This narrow rally has not provided an environ-
ment for robust exits or valuation comps for the broader pri-
vate companies. And finally, despite the public market
rebound, the venture capital ecosystem continues to struggle
as it works through high valuations from the past few years,
and the muted performance of recent IPOs is making inves-
tors more cautious.
While performance for the first nine months of 2023 for US
PE and US VC came in behind the public markets, the long-
term performance of US PE and US VC has outperformed rel-
ative to public markets on a 3-, 5- and 10-year relative basis.
Over the past 10 years, US PE returned an annualized 16.3%
and US VC returned 16.4%, outperforming both the S&P 500
and Russell 2000 (Fig 1).
Since final benchmark numbers from Cambridge Associates
for fourth-quarter performance won’t be available until late
spring, we look at publicly traded PE managers for a preview
of what 4Q23 numbers could look like. Based on perfor-
mance data from the six US public PE managers, 4Q23
returned a median of 2.8% gross IRR. If final benchmark
numbers for PE trend directionally in line with the publicly
reported manager’s performance, full-year 2023 US PE could
potentially end up close to double digits. Underlying revenue
and EBITDA growth continue to trend positive for the portfo-
lio of companies managed by the publicly traded managers,
supporting quarter-over-quarter growth. The managers also
mentioned an easing of cost pressures signifying that inflation
has cooled, consistent with a soft-landing scenario.
The quilt chart in Figure 2 demonstrates the cyclicality of mar-
kets and the importance of vintage diversification. All asset
classes have periods of overperformance as well as underper-
formance. However, over market cycles, private equity stands
out with strong, stable returns. Private equity, in dark purple,
has been a top performer (in the top or second position) in
12 out of 19 years, returning an annualized 14.8% from
2005–3Q23.

Figure 2

Quilt chart – total returns

2005 - 2023
return
standard
2023 2005 - 2023 deviation
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD return (ann.) (ann.)

32.0% 33.8% 19.3% 5.2% 58.1% 23.0% 10.7% 16.8% 32.4% 13.8% 10.3% 17.5% 27.2% 12.4% 31.5% 29.0% 41.9% 6.3% 13.1% 14.8% 9.6%
Highest return

26.4% 27.7% 18.3% -6.5% 41.4% 15.8% 9.7% 16.0% 23.5% 13.7% 10.2% 12.3% 21.8% 8.1% 21.5% 18.4% 28.7% 2.8% 8.9% 9.4% 3.5%

16.6% 26.7% 16.7% -19.0% 26.5% 15.1% 9.2% 15.5% 15.3% 13.4% 5.5% 12.0% 20.5% 7.3% 19.3% 14.6% 25.3% -4.1% 6.1% 9.1% 16.2%

11.1% 16.4% 11.4% -23.1% 23.3% 15.1% 7.8% 14.6% 14.8% 9.6% 1.5% 11.2% 15.5% 0.0% 18.4% 14.3% 14.5% -4.2% 6.0% 7.7% 10.0%

10.1% 15.8% 10.2% -24.6% 20.0% 15.1% 4.4% 14.0% 13.3% 6.7% 1.4% 7.0% 14.8% -1.5% 17.2% 11.8% 12.8% -11.2% 5.5% 7.0% 8.9%
↕
9.3% 14.2% 10.0% -25.3% 18.1% 12.9% 2.1% 11.5% 12.7% 6.0% 0.6% 6.9% 14.6% -2.3% 14.4% 10.7% 10.2% -11.4% 5.3% 5.9% 10.6%

7.5% 13.7% 9.9% -26.1% 14.5% 11.2% 1.9% 11.5% 12.4% 4.9% -1.0% 5.8% 8.6% -4.4% 10.4% 7.5% 10.2% -13.0% 5.1% 5.5% 10.6%
Lowest return

4.9% 12.9% 7.0% -32.7% 13.2% 10.8% -0.9% 10.1% 9.1% 3.0% -1.1% 5.4% 8.6% -4.7% 9.2% 6.1% 7.8% -16.0% 3.8% 4.8% 7.8%

2.8% 10.8% 5.5% -37.0% 5.9% 10.2% -5.3% 6.4% 7.4% 2.5% -4.6% 4.5% 7.5% -5.5% 9.0% 5.5% 5.3% -16.1% -1.2% 4.5% 18.8%

2.4% 4.3% 2.5% -45.5% -22.9% 6.5% -13.7% 4.2% -2.0% -3.9% -5.7% 2.6% 3.5% -14.2% 8.7% 1.8% -1.5% -18.1% -2.4% 2.8% 4.2%

40% global equities / 30%

US large-cap International US high yield Global private real 60% global equities
US bonds US private equity US private debt Hedge funds US bonds / 30%
equities equities bonds estate alternatives
/ 40% US bonds

Alternatives allocation: 13% PE, 7% private debt, 5% private real estate, and 5% hedge funds.
Note: For illustration purposes. Past performance is no indication of future returns.
Source: Morningstar direct, Cliffwater direct lending index, Cambridge associates, FactSet, UBS, as of 31 September 2023

Private markets 6
 Private equity

Including alternatives in a diversified portfolio can help drive Figure 3

outperformance while providing lower reported volatility. A
hypothetical diversified portfolio of 40% global equities, 30%
US PE deal volume (in USD billions)
US bonds and 30% alternatives would have returned an 1,400
1,185
annualized 7.0% with 8.9% reported volatility. By compari- 1,200
son, a traditional portfolio of 60% global equities and 40% 1,000 915
bonds would have generated 5.5% return with 10.6% 800 663 676 645
reported volatility over the same time period. 581 576
600 483 516 471
369 388
400 283 313
Deal activity 200
148

US PE deal activity ended the year down 30% compared to 0

2021

2022

2023
2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2022, but this was still stronger performance than during the
Global Financial Crisis (GFC) period (Fig. 3). This pullback
reflects rising interest rates and uncertainty in the macro envi-
ronment, as PE managers imposed more restraint in new
dealmaking and focused on managing existing portfolio com-
panies. The low costs of borrowing fueled record dealmaking
over the past years, but as the Fed hiked rates to fight infla-
tion, leverage has become more expensive. Managers have
shifted to structuring deals through operational improve-
ments and lower purchase price multiples rather than relying
on leverage and financial engineering.
The median buyout entry multiple was 10.1x TEV/ EBITDA as
of 3Q23, down from 11.5x in 2022 according to Burgiss data,
while Debt/ EBITDA contracted from 5.9x in 2022 to 5.0x in
2023 according to Pitchbook. Although mega buyout deals
multiples were down the most, smaller add-on acquisition
and carve outs held up better, as they are less dependent on
new debt. Additionally, growth equity has filled some of the
void left by large platform leveraged buyouts. The all-equity,
minority investment structure typical of growth equity deals is
better suited given the high interest rate climate. Growth
equity deals through December 2023 accounted for 13% of
US PE deal volume by value.
Looking into 2024, we expect large take-privates to slow
given high multiples in public companies while smaller take-
privates will continue to perform well. If the fed cuts rates
and IPO windows improve, we expect deal activity to pick up
in the second half of 2024.
2020
US buyout Total
US growth
Source: Pitchbook, as of 31 December 2023
Fundraising
Capital raising for buyout strategies proved more resilient
compared to venture capital funds. According to Preqin, buy-
out strategies raised approximately USD 300 billion through
December 2023. More established managers were also able
to secure capital more easily, while newer or smaller ones
struggled. Mega funds still dominated dollar volumes,
accounting for over 50% of dollars raised. Within buyout
funds, middle-market funds (those that raise between USD
100 million and USD 5 billion) attracted highest interest, with
over 50% of all PE funds closed in 2023, per Pitchbook. Capi-
tal scarcity, however, led to extended closing timelines.
One area of growth in fundraising is in perpetual capital or
evergreen vehicles from publicly traded alternative managers.
At year-end 2023, there was USD 1.4 trillion in AUM at the
seven publicly traded managers, representing 16% growth
year over year, per Pitchbook data. Though the majority of
the capital is in private credit, there are an increasing number
of vehicles being raised in private equity. For example, Black-
stone’s newest perpetual PE vehicle has raised USD 1.3 billion
in less than a year, per Bloomberg, reflecting the strong
addressable market for the private wealth sector. Geared
towards the individual private wealth investor, this new fund
structure is growing in popularity due to immediate capital
deployment, lower minimums, limited period liquidity, and
simplified tax reporting with less operational burdens (i.e.,
lack of capital calls and distributions) than traditional closed-
ended drawdown funds with comparable exposures. Please
see our research publication, “Accessing private equity with
perpetual capital funds,” for additional insights.

Private markets 7
 Private equity

Figure 4
We continue to see the momentum in opportunities in sec-
ondaries in 2024, driven by strong buyer demand, record fun-
Historical global buyout fundraising draising, stabilization in markets, and both LP’s and GP’s need
800 800 for liquidity.
700 700
600 600 Figure 5
500 500
400 400
Secondary market portfolio pricing as a % of NAV
300 300 100
200 200 95
100 100 90
0 0 85
2001

2015
2016
2017
2018
2019

2021
2022
2002
2003
2004
2005
2006

2020
2007
2008
2009
2010
2011
2012
2013
2014

2023 80
75
Number of funds (lhs)
Aggregate capital raised (rhs, in USD billions) 70
65
Source: Preqin, UBS, as of 20 February 2024
60
2017 2018 2019 2020 2021 2022 2023
All Real estate
Secondaries Buyout Venture

Source: Jefferies, UBS, as of 31 December 2023

Secondaries ended the year on a strong note, seeing a surge
in activity and improved pricing compared to the first half
2023. Overall volume increased significantly in the second According to Jefferies data, discounts to NAV narrowed to
half of 2023 compared to the first half. According to Jefferies 15% on average at the end of 2023, compared to 20% at
data, 2H23 volume of USD 69 billion was 60% higher than the end of 2022. Buyers preferred younger vintages with
1H volume of USD 43 billion, primarily fueled by LP’s desire to higher potential for upside, which sold at premium compared
generate liquidity and de-risk their portfolios coupled with to older vintages which are likely to see delays in distribution.
narrowing of bid-ask spreads supported by public markets ral- Not all strategies are equal, however. While buyout secondar-
lies. The average pricing for LP portfolios was 85% of NAV in ies saw meaningful repricing, buyers remained concerned
2H, a 400-basis-point improvement from 1H (Fig 5). about the outlook for real estate and venture capital, which
translated into steeper discounts. Regionally, North America
A combination of factors on both the supply side and dominates with near 70% of the market, while Asian LP
demand side drove higher volumes. On the supply side, there stakes saw a moderate increase in demand. This, however,
were more LPs selling and more GP-led supply. The desire to came at the cost of steep discounts, which approached 40%.
generate liquidity for LPs was the primary motivator for sell-
ing assets in 2H. Large pensions were more willing to sell
Figure 6
high-quality managers’ stakes to free up capital for new com-
mitments. On the demand side, we’ve been highlighting the Historical global secondaries fundraising
surge in capital raise dedicated to secondaries helped to cre- 120 120
ate ample dry powder to absorb the supply. The five largest
100 100
secondary buyers raised over USD 95 billion from June 2022
80 80
to December 2023, according to Jefferies data.
60 60
In addition to the supply and demand factors, macro back- 40 40
drop improved in 2H23, which helped further improve trans-
20 20
actions. Improved visibility into interest rates and GPD growth
coupled with the lower likelihood of a recession emboldened 0 0
2001
2002
2003
2004
2005
2006

2008

2013
2014
2015
2016
2017
2018
2019

2021
2022
2020
2007

2009
2010
2011
2012

2023

buyers who had been cautious to deploy capital earlier in the

year. As secondary pricing climbed up closer towards NAV, the Number of funds (lhs)
bid-ask spread between buyers and sellers narrowed substan- Aggregate capital raised (rhs, in USD billions)

tially, bringing more deals over the finish line by year-end Source: Preqin, UBS, as of 26 February 2024

2023.

Private markets 8
 Private equity

Despite the increase in fundraising in the secondary space, Figure 8

the total percentage of secondary AUM as a percentage of
private equity AUM is less than 10%, according to Preqin.
Median North America PE buyout EV/revenue multiples
We anticipate secondary funds will continue do well in 3.0 2.8x 2.7x
fundraising over 2024 to meet demand for liquidity. 2.5 2.3x

2.0 1.9x 1.9x

1.7x 1.7x
Valuations 1.5
1.5x 1.4x
1.3x
After reaching a peak in 2022, US LBO entry valuation has 1.0
been on a downward trajectory. While public markets have
0.5
experienced volatility, with share prices swinging up and
down based on investor sentiment, PE entry multiples have 0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
shown more stability (Fig 7). According to Pitchbook LCD,
Source: PitchBook, UBS, as of 31 December 2023
LBO entry multiples dropped to 8.9x in 4Q23 from 11.4x in
1Q23, though the number of deals were few. The average
LBO entry multiple was 10.4x for full-year 2023, down from In the near term we see compelling opportunities in both
11.5x for full-year 2022. Meanwhile, public valuations have growth equity and value-oriented buyouts. Purchase price
rebounded, potentially signaling an opening in IPOs, where multiples have come down sharply. And with a preference for
exit values may be higher than private M&As. quality, we’re more focused on investing in managers who
can unlock value through operational improvements rather
Figure 7 than financial engineering. We see an uptick in carve-outs,
Private market multiples vs. public market multiples add-ons, and other smaller deals, which are less dependent
on new debt. Additionally, growth equity has filled some of
25
the void left by large platform leveraged buyouts. The all-
20
19.8 equity, minority investment structure typical of growth equity
15.0
15.7 deals is better suited in the current high interest rate climate.
14.0 13.9 13.3 14.5 14.2
15 12.2 13.5
12.2
10.7
10
10.1
10.2 10.2 11.1 11.0 11.0 11.5 10.4
Update on infrastructure
9.3 9.9 9.7
8.4 8.3 8.4
5 Infrastructure fundraising saw highs and lows over the last
few years. After record capital raised in 2022, fundraising
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 slowed for most of 2023 before seeing a rebound in the
US LBO Entry EV / EBITDA fourth quarter. The volatility was driven by economic condi-
Russell 2000 EV / EBITDA tions impacting investor appetite. Still, the asset class is sup-
Source: Pitchbook LCD, FactSet, UBS, as of 31 December 2023 ported by the powerful secular tailwinds around decarboniza-
tion, digitalization and deglobalization. The UN forecasts the
global urban population to increase by over 2 billion by 2050,
Looking at existing portfolio company valuations, the PE
resulting in more demand for resilient transportation and
enterprise value (EV) to revenue multiple is down 32% from
mobility systems as well as uninterrupted access to electricity
the peak of 2.8x in 2021, to 1.9x in 2023. By sector, financial
and water. Digital data usage is also poised to accelerate this
and consumer companies have seen the largest declines in
decade, with smart automation and artificial intelligence
valuation ratios from peak to trough, falling 38% and 57%,
powering the fourth industrial revolution. This implies more
respectively, according to Pitchbook. Technology ratios held
investment in communication assets from fiber to data cen-
up well until early 2023, but have dropped sharply, down
ters and wireless antennas. Importantly, achieving the ambi-
19%, signaling that buyers and sellers have closed the gap
tious target of net-zero emissions by 2050 requires ramping
between what they are willing to pay and accept. Deal size
up efforts in green energy and energy efficiency technologies,
has a strong correlation with pricing, with larger deals
particularly in areas such as solar, wind, hydrogen and battery
demanding higher multiples. PE firms paid higher multiples
storage.
for megadeals over USD 2.5 billion at around 4.1x revenue
versus deals below USD 25 million which traded at around
1.0x revenue.

Private markets 9
 Private equity

Infrastructure fundraising hit a record in 2022, raising USD
177 billion globally, but dropped off in the first three quarters
of 2023 as the rush of capital in 2022 tempered demand. Ris-
ing interest rates also made other asset classes like fixed
income and private debt more attractive, hurting allocations,
according to Preqin. And finally, moderating inflation, though
still a continued concern, reduced the desire for infrastructure
as an inflation hedge. However, 4Q23 saw a rebound in fund-
raising with USD 57 billion raised, though the majority of this
is attributed to one fund (Brookfield Fund V’s USD 26 billion
raise).
In the context of portfolio construction, infrastructure assets
exhibit low correlation to other investments, which can serve
as a powerful diversifier. Many infrastructure assets (e.g., con-
tracted/regulated) show limited correlation to the economic
cycle and resilience to inflationary environments. In the cur-
rent environment, we recommend investing in core/core plus
assets that benefit from robust, predictable, and inflation-
linked cashflows; that are less exposed to cyclical pressures;
and have adequate leverage levels.
Figure 10

Estimated volatility of private asset classes, in %

We expect 2024 fundraising to improve relative to 2023 given
1) current investor allocation (~3%) is below target (~6%) 10.5
Global private equity
(Fig 9), 2) major players’ (like BlackRock) expanding presence 9.5
Direct lending
signals strong confidence in the asset class, and 3) strong tail-
Estimated return 8.5
winds around decarbonization, digitalization and deglobaliza-
7.5
tion. However, our outlook is not without risks. Continued Private real estate 100% global equity
Infrastructure
political uncertainty around US infrastructure spending could 6.5

dampen interests. 5.5

100% US bonds
4.5
Figure 9 3 5 7 9 11 13 15 17
Estimated risk
Current vs. target infrastructure allocation for Note: Asset allocation does not assure profits or prevent against losses from an investment
North American (Preqin) portfolio or accounts in a declining market. See Important Information section,
Wealth Management USA Asset Allocation Committee and the UBS Capital Market
7 Assumptions and Strategic Asset Allocation Models, for more information.
Source: UBS Wealth Management USA Asset Allocation Committee, as of 5 February 2024
6

0
Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23
Average allocation, in %
Averge target allocation, in %

Source: Preqin, UBS, as of January 2024

We believe infrastructure can play a diversifier role in an

investor’s portfolio. Along with the secular tailwinds, infra-
structure as an asset class is stable, long duration, and can
provide attractive income streams with lower volatility com-
pared to public markets. Private infrastructure also tends to
have low correlation to other asset classes, which can help
increase portfolio diversification.

Private markets 10
 Venture capital

Summary
„ Overall, 2023 was an extremely difficult year for venture „ Given the continued surplus of dry powder and slower
capital. Particularly following the collapse of Silicon Valley pace of new investments, we expect fundraising to remain
Bank at the start of the year, this turbulence carried relatively flat in 2024 while the time to close a fund and
through the entire year, as deals, exits, and fundraising time between fund raises continue to lengthen. However, if
across all sectors and stages struggled. the IPO window opens and is proven to be successful, we
anticipate fundraising could accelerate in the second half
„ We see the VC industry as going through a necessary cor- of 2024.
rection to adjust valuation and growth expectations to sus-
tainable levels, establishing a foundation for healthier
growth ahead. Our long-term outlook for VC has it outper-
forming other alternative assets according to the latest UBS
CMAs.

„ In today’s environment, we recommend investors looking

for venture exposure may find opportunity in venture sec-
ondaries. Recently trading at around a 30% discount to
NAV, venture secondaries can be one way for investors to
gain exposure to a diversified portfolio at attractive dis-
counts.

Private markets 11
 Venture capital

Overview
Overall, 2023 was an extremely difficult year for venture capi-
tal. Particularly following the collapse of Silicon Valley Bank at
the start of the year, this turbulence carried throughout 2023
as deals, exits, and fundraising across all sectors and stages
struggled. Amidst high interest rates and uncertainty in the
macro environment, there are over 700 unicorns held in the
private market waiting to exit, according to Pitchbook. How-
ever, there are reasons for optimism in 2024. Lower interest
rate cuts, the rise of AI, the potential reopening of exit mar-
kets, and ample dry powder waiting to be deployed may cre-
ate a more favorable environment for VC investing.
Fundraising and deal activity declined significantly in 2023
compared to the previous years, with early stage faring
slightly better than late stage. Valuations across both early
stage and late stage are down, correcting towards a normal-
ization after deep down-rounds, but showing signs of stabiliz-
ing. Our long-term outlook for VC has it outperforming other
alternative assets according to the latest UBS CMAs.
Federal programs like the Inflation Reduction Act (IRA) and
CHIPS can help to incentivize deep tech and climate tech,
potentially powering innovation and job creation. Artificial
intelligence is a bright spot within venture, promising
immense value across the economy. One third of all VC dol-
lars invested in 2023 went towards AI companies.
Fundraising
Venture fundraising activity slowed dramatically in 2023 with
~USD 130 million raised, according to Preqin. This pullback in
fundraising was driven by a liquidity drought among the LPs,
resulting from a lack of exits, rising interest rates, and falling
performance, leaving some LPs hesitant to recommit to the
strategy. Returns in VC in 2023 have been under pressure
with IPOs and acquisitions remaining muted. Other asset
classes, like private credit and fixed income, have offered
more attractive risk-adjusted returns amid higher interest
rates, adding to the pullback from investors. Furthermore,
VC funds raised large amounts of capital in the past 2 years,
reducing the need for quick re-ups into new vehicles. With
fewer dollars available to commit to VC, LPs focused their
allocations to established managers with proven track
records. Despite the slowdown in fundraising, dry powder in
VC is at an all time high at over USD 500 billion, according to
Preqin. Given the continued surplus of dry powder and slower
pace of new investments, we expect fundraising to remain
relatively flat in 2024 while the time to close a fund and time
between fund raises continue to lengthen. However, if the
IPO window opens and is proven to be successful, we antici-
pate fundraising could accelerate in the second half of 2024.
Figure 11
Historical global venture capital fundraising
3,500 400

We saw the VC industry go through a necessary correction to 3,000 350

300
adjust valuation and growth expectations to sustainable lev- 2,500
250
els, establishing a foundation for healthier growth ahead. Dry 2,000
200
powder in venture still remains high at over USD 500 billion 1,500
150
globally, according to Preqin. The abundance of un-deployed 1,000
100
capital positions venture managers to invest through cycles at 500 50
lower prices and capture the best new prospects that emerge
0 0
from the volatility. We expect performance to remain mixed
2001

2021
2022
2002
2003
2004
2005
2006

2013
2014
2015
2016
2017
2018
2019
2020
2007
2008
2009
2010
2011
2012

2023

over the next 12–18 months, but lower valuations, improving

macro conditions and a more favorable exit environment Number of funds (lhs)
Aggregate capital raised (rhs, in USD billions)
could present opportunities.
Source: Preqin, UBS, as of 20 February 2024

In today’s environment, we recommend investors looking for

venture exposure may find opportunity in venture secondar-
ies. Recently trading at around 30% discount to NAV, accord-
ing to Jefferies, (Fig. 5) venture secondaries may offer inves-
tors a way to gain exposure to a diversified portfolio at
attractive discounts.

Private markets 12
 Venture capital

Valuation
Median early-stage pre-money valuation stayed flat for two
quarters at USD 40 million for both 4Q23 and 3Q23. Still
below the peak of USD 53 million in 1Q22, it is up from USD
35 million in 2Q23. Though it is too early to call the bottom
yet, the flattening valuations could indicate a potential trough
before recovering upwards for early-stage deals.

The median pre-money valuation for late-stage venture rose

to USD 62 million in 4Q23 from USD 50 million in 3Q23.
Though still below the peak of USD 80 million in 3Q21, it is
up from the recent low of USD 48 million 1Q23.

Figure 12

US venture capital pre-money valuations, in USD million

Early-stage valuation

150

100

50

0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Late-stage valuation

400

300

200

100

0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Median
Average

Source: PitchBook, UBS, as of 31 December 2023

Private markets 13
 Private credit

Summary
„ The inherent floating rate nature of private credit proved an
invaluable hedge against the large rise in interest rates that
began in 2022.
„ Private credit expanded by USD 400 billion in 2023, repre-
senting USD 200 billion in fundraising combined with over-
all AUM growth, including dry powder, making private
credit the fastest growing private asset class.
„ The increase in interest rates, as a result of the market shift
in rate cut expectations in 2024, has been a contributor
to the effective yield offered on private credit, which, at
over 10%, will prove a substantial tailwind to future total
return.
„ Private credit defaults remained below both high yield and
loans in 2023 which suggests that experienced private debt
managers are equipped to manage through high rate or
volatile markets in ways that some public credit funds have
found challenging.
„ We continue to see private debt as attractive for investors
as a portfolio diversifier, particularly given our soft-landing
outlook. With the recent outperformance of the syndicate
market, we look for private credit spreads to tighten the
gap and trend lower in 2024.

„ With the market anticipating the next Fed move as a cut,

alongside loosening financial conditions, banks have re-
entered the marketplace pulling some market share from
private credit. Issuers can save over 100bps on margin with
banks, reducing their interest costs.

Private markets 14
 Private credit

2023 has been called the “golden age” for private credit, Figure 1
given the ability of private lenders not only to raise debt
financing beyond their historically smaller middle-market
Heightened volatility impacted fundraising in private
niche, but also to support the activity of larger deals that had credit in 2023, in USD billions
been once solely designated to the syndicated loan market. 300
The inherent floating-rate nature of the private credit sector 250
also proved to be an invaluable hedge against the large rise in
200
interest rates that began in 2022. To top it off, following USD
200bn in fundraising and an overall growth in the sector, 150

including dry powder, assets under management (AUM) 100

expanded by USD 400bn in 2023, according to JPMorgan. 50
This made private credit the fastest-growing private asset
0
class last year. 2019 2020 2021 2022 2023 YTD
Syndicated
Now, investors are labeling the current environment as a Private credit

“Goldilocks” scenario for private credit. For one, the market’s Source: Pitchbook: UBS, as of 31 December 2023
economic outlook has shifted toward a soft landing, acknowl-
edging that both higher-for-longer interest rates and tighter
lending standards have yet to materially thwart growth. For Despite the lower fundraising volume in 2023, the distribution
another, the rising fear factor of increasing defaults has not among private credit strategies remained fairly stable, with
proved to be an impediment to the overall performance of senior debt making up 40%, followed by junior credit with
credit. Looking ahead, a solid backdrop of above-trend 36% (Fig.2). Distressed strategies, according to PDI, occurred
growth, declining inflation, and easing monetary policy mainly in larger loan amounts, fueling the growth of the most
should be supportive of risk assets and continued higher established fund managers who can raise much larger vehicles
yields (carry) should prove to be a tailwind for total return versus a declining pool of smaller funds. There remains a big
investors. divide between North America and Europe in terms of private
credit fundraising given the impact of geopolitical risk (Fig.3).
While the recent inflation data reinforced that we should not While it has not been easy in the US, favorable data have
expect a continued linear trend lower, the stickiness in infla- enabled the success of new fundraising, and we continue to
tion should not eliminate the likelihood that the Fed will cut believe capital will be deployed at a measured pace. Given the
rates this year and into 2025. We look for 75 basis points of abundance of dry powder, (Fig.4) in the private credit market,
cuts in 2024, starting in June. While the timing of the cuts we think the sector will remain a significant source of funding,
may be uncertain, markets are fairly confident that the federal and deploying capital in a more patient and opportunistic
funds rate has reached its peak and that another hike in 2024 manner should be a tailwind to future performance.
appears unlikely. Given the renewed expectations of lower
Figure 2
rates thanks to a less restrictive Fed, spreads in public markets
have compressed, increasing the gap between public and pri- Distribution of fund volume has remained stable over
vate financing rates, alongside investor income as investment the past 3 years
banks have started to reengage in the marketplace.
240
220
200
Issuance and fundraising 180
160
The negative economic sentiment in the first half of 2023, 140
120
alongside rising borrowing costs, heightened volatility, and 100
geopolitical concerns, impacted fundraising in private credit 80
60
(Fig.1). However, direct lending LBO volume totaled USD 40
57.8bn in 2023, or 59% of the overall loan volume for lever- 20
0
aged buyouts and an all-time high, surpassing the 45% share
2021
2006
2001
2002
2003
2004

2007
2008
2009

2017

2019
2020
2005

2010
2011
2012
2013
2014
2015
2016

2018

2022
2023

in 2022. Syndicated LBO volume, on the other hand, totaled

Distressed and special sits Mezzanine
USD 39.9bn last year, 65% lower than 2022 and the lowest
Direct lending
since 2009, according to LSEG.
Source: JP Morgan, UBS, as of 9 February 2023

Private markets 15
 Private credit

Figure 3 and loan markets throughout 2023 (Fig.6). Last year’s

euphoric projections on the magnitude of Fed cuts (which
US continues to dominate private credit, with APAC drove the large spread compression in the public markets),
and Europe growing, Private Debt AUM (in USD billions) alongside the recent healthy demand in collateralized loan
1,800 obligations (CLOs, which make up 60–70% of the loans in
1,600 the broadly syndicated market), became a strong tailwind to
1,400
performance in the loan market. Today, the market antici-
1,200
1,000
pates 80bps of Fed cuts in 2024 starting midyear, far below
800 the 170bps priced in just four weeks ago.
600
400 Figure 5
200
0 Loans have outperformed private credit over the
2010

2011

2023F
2012

2013

2014

2015

2016

2017

2018

2019

2021

2022
2020

short term, in %
North America APAC Diversified multi-regional 14 13.1%
Europe Rest of world
12 11.1%
10.2% 10.6%
Source: UBS, as of 31 December 2023
10
8.9% 8.6% 8.9%
8
6.1%
6
4.5% 4.3%
Figure 4 4

2
Private credit/ middle market loan assets surpassing
0
US leveraged loans and high yield (incl. dry powder) YTD 1y 3y 5y 10y

5,000 Direct lending

4,500 Leveraged loans
4,000 Source: Cliffwater direct lending index, Morningstar direct, UBS, as of 30 September 2023
3,500
3,000
2,500
2,000
1,500 Figure 6
1,000
500 While the cumulative returns in BDCs have dominated
0 30
08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 28
26
MM CLOs Priv credit: dry powder US lev. loans 24
BDCs Priv credit: invested capital US high yield 22
20
18
Note: HY and Loans are updated through end of 2023. 16
Private credit data is through early 2024 14
12
Source: UBS, as of 26 February 2024 10
8
6
4
2
Performance and performance trends 0
–2
Jan-23

Feb-23

Mar-23

Apr-23

May-23

Jun-23

Jul-23

Aug-23

Sep-23

Oct-23

Nov-23

Dec-23

Jan-24

Feb-24

Market sentiment in 4Q23 shifted dramatically after the

10-year US Treasury yield reached 5.01% in October. As US
High yield cum. TR Cliffwater BDC index cum. TR
economic growth remained strong and inflation declined, the Lev. Loan cum. TR
Fed officially pressed the pause button on hiking rates during Source: Goldman Sachs, UBS, as of 3 January 2024
the December FOMC meeting, resulting in a large decline in
yields alongside a material compression in spreads in the pub-
lic market. Consequently, direct lending underperformed With this shift in market expectations, base rates are once
loans in 2023—a bit of a payback from the years prior (Fig.5). again rising. The increase in interest rates has contributed to
However, the BDC market—covering business development the effective yield offered on private credit, which, at over
companies, which are capital providers to middle-market issu- 10%, will prove a substantial tailwind to future total return.
ers—managed to outperform both the high yield bond (HY) While spreads on private credit deals have recently shown a

Private markets 16
 Private credit

downward trend as the soft-landing narrative has taken hold, Figure 9

the long-awaited recession has yet to materialize. We show
Bankruptcy filings have declined in public and private
the spread differential and combined averages of the direct
markets, bankruptcy filing count (4-week MA)
lending and syndicated loan markets over the past seven years
(Fig.7), alongside the impact on margins and subsequent 16

yields in private credit at the time of deal closing over the past 14

two years, as reported by JPMorgan (Fig.8). While rising fed 12

10
funds (SOFR) rates have been viewed as a performance head-
wind given that the higher cost of capital and lower interest 8
6
coverage ratios may fuel rising defaults and potential bank-
4
ruptcies (discussed below), the number of bankruptcies
2
recently has actually declined sharply in both the public and
0
private markets thanks to the continued strength of the econ- Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Mar-23 Sep-23
omy, corporate balance sheets, and equity markets (Fig.9). All Private
Public

Figure 7 Source: UBS, as of 13 January 2024

While spreads have been trending lower in both direct

lending and loans Performance trends
1060
Proskauer’s private credit default index came in at 1.6% in
1040
1020 4Q23, slightly above the 1.4% in 3Q23 but below the 2.15%
920 witnessed in 1Q23. This suggests that experienced private debt
820 managers are equipped to manage through high rate or vola-
720 tile markets in ways that some public credit funds had found
620
challenging in 2023. Private credit defaults remained below
520
420
both high yield bond and loan defaults, which ended 2023 at
320 3.8% and 2%, respectively. Proskauer recently reported
2017 2018 2019 2020 2021 2022 2023 2024 defaults by size of company, (Fig.10): In 4Q23, the default
Direct lending Combined average rates for companies with greater than USD 50mn of EBITDA
Syndicated loans
was 2.3%; those with USD 25–49.9mn in EBIDTA came in at
Source: PitchBook LCD, UBS, as of 3 January 2024
2.2%; and those under USD 25mn in EBITDA were at 0.7%.

Figure 10

Figure 8 The default rate across EBITDA levels was lower than
Margin and yield-to-maturity at private credit reported by the broader market, in %
transaction close 3.0

14 2.5
12.43 12.45 12.61 12.37 12.00
11.98 12.01
12 11.40 12.39 12.42 12.56 12.28 12.31 2.0
11.45 11.92 11.79
10 9.57 10.62
8.33
1.5
7.72 7.61 9.10
8
7.68 6.50 6.75 6.75 6.75 6.63
7.46 7.50
6.00 6.25 6.25 6.00 6.00 5.75
1.0
5.75 6.75 6.75
6 6.25 6.00 6.00 6.00
6.50 6.50 6.50 6.50 6.25 6.25
6.00
0.5
4

2 0
< USD 25mm USD 25mm – 49.9mm ≥ USD 50mm
0
1Q23 3Q23
Jul-23
Aug-23

Oct-23

Dec-23
Apr-23
May-23
Jun-23

Sep-23

Nov-23
Jul-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
Jan-23
Feb-23
Mar-23
Apr-22
May-22
Jun-22
Jan-22
Feb-22
Mar-22

Jan-24

2Q23 4Q23

Source: Proskauer, UBS, as of 18 January 2024

Margin Base Rate (SOFR)
YTM

Source: JP Morgan, UBS, as of 9 February 2023

Private markets 17
 Private credit

These defaults remain lower than most credit rating agencies Outlook
had forecasted heading into the year. Leverage in direct lend-
ing has been trending lower over the past year, and now sits There is enough for everyone. Over the past few years, as
only slightly higher than in the loan market (Fig.11). However, bank lending standards have tightened, less capital has
with lower defaults and higher recovery, the total credit loss flowed into the public market, benefiting the private credit
for private markets remains well below public markets, given landscape. With expectations of the next Fed move being a
greater covenants (Fig.12). rate cut, alongside loosening financial conditions, banks have
reentered the funding space, pulling market share from pri-
vate credit amid a resurgence in public capital market activity.
Figure 11
According to Bank of America, the first month of 2024 saw
Direct lending vs. Loan new deal total leverage has close to USD 10bn of debt being refinanced out of direct
converged lending deals where the spread premium remains elevated;
6 this gap has now reached 200–250bps (Fig.13). With the cap-
ital markets reopening from their 2023 doldrums, issuers can
save over 100bps on margin, reducing their interest costs.
5 According to Bank of America, this USD 10bn of refinancing
in January is higher than similar private-to-public activity in
4
2023 and 2022 combined.

Figure 13
3
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 The spread gap between public and private markets
Leveraged loan total leverage continues to widen
DL total leverage
350
Source: UBS, as of 31 December 2023 325
300
275
250
Figure 12
225
200
175
When taking into account default and recovery 150
credit losses remain low, in % 125
100
75
12 50
25
10
Feb-17
Jun-17
Oct-17
Feb-18
Jun-18
Oct-18
Feb-19
Jun-19
Oct-19
Feb-20
Jun-20
Oct-20
Feb-21
Jun-21
Oct-21
Feb-22
Jun-22
Oct-22
Feb-23
Jun-23
Oct-23
8
DL premium (all loans)
6
DL premium (B rated)
4 Source: BoA, UBS, as of 31 January 2024
2

0
With the private market facing a bit more competition today
2017

2018

2019

2021

2022
2006

2020
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2023

than in years past, market participants wonder if this will

HY credit loss Middle market credit loss (estimate) mean looser covenants in the future as more lending options
Lev loan credit loss become available. We do not see this as an issue at the
Source: ICE BofA, UBS, as of 31 January 2024 moment and believe private credit spreads will start com-
pressing toward the tighter levels witnessed in the syndicated
market. The spread gap should begin to close over the year,
We continue to expect a bifurcation in terms of manager perfor-
and we anticipate both markets to continue to coexist, with
mance, with the more disciplined and conservative managers
private credit maintaining a larger share of the pie. With
outperforming. However, bifurcation could be a positive evolu-
ample dry powder, private credit should continue to be an
tion for the asset class, as it will reaffirm the importance of disci-
important driver of refinancing, particularly given flexibility
pline and caution (i.e., when deploying dry powder) in delivering
around deal structures.
a stable and defensive income. It will also reaffirm the role that
direct lending can play in a portfolio—i.e., that of a resilient asset
class, generating an attractive floating-rate illiquidity premium.

Private markets 18
 Private credit

Maturity walls Conclusion

This type of deal flexibility will be a tailwind with the upcom-
ing maturity walls in both private and public markets (Fig.14).
Debt acquired when interest rates were at historically low lev-
els are now terming out and coming due over the next few
years. While it is likely that the days of zero-for-longer interest
rates are not coming back anytime soon, we believe the
headlines around maturity walls has been a bit overdone, and
the recent refinancing in the capital markets is a testament to
this. Refinancing occurred through “amend and extend”
arrangements in the loan market throughout 2023, and the
recent refinancing surge in both HY and loans has been met
by strong investor demand. In fact, the projected future
maturities derived in 2023 for the 2024 period for HY has
been cut in half as the capital markets remain open.
Figure 14
High yield credit, loans, and private lending face
increasing maturities, in USD billions
600
Direct lending funds can now yield a gross return of 10–12%,
and we estimate that it can rise as high as 14% when utiliz-
ing leverage. As Fitch reported, BDCs were “well positioned
to benefit from rising rates given floating-rate portfolios and
increases in fixed-rate funding in recent years. Earnings grew
in recent quarters, which should help to weather the
expected uptick in amendment activity, payment-in-kind (PIK)
interest and credit losses in BDC portfolios, as underlying
portfolio companies deal with higher debt service burdens.”
We continue to see private debt as attractive for investors as
a portfolio diversifier, particularly given our soft-landing out-
look. We also continue to prefer private credit managers who
have strong underwriting discipline, experience, and historical
performance, as well as the flexibility to understand opportu-
nistic value areas, such as distressed. With the recent outper-
formance of the syndicated market, we look for private credit
spreads to tighten the gap and trend lower in 2024.

500

400

300

200

100

0
2024 2025 2026 2027 2028 2029 2030 2031
Loans Private lending
High Yield

Source: PitchBook, BofA, UBS, as of 15 February 2024

In a recent reported titled “2024 Maturity Wall Is a Myth,”

KBRA (Kroll) Private Credit estimated that only 10–15% of
the total loans in the market are scheduled to mature over
the next two years, like what the market is anticipating for
the more traditional corporate issuers. While private credit is
facing larger maturity walls in 2028, which could create more
uncertainty within the private credit marketplace, we are not
concerned about short-term maturity walls; and assuming
there is not an unknown macro event forcing idiosyncratic
risks, we believe the Fed will hold a much more accommoda-
tive stance over the next few years.

Private markets 19
 Private real estate
2024 will not be boring

Summary
„ 2023 ended with a whimper for the private commercial „ A deep dive into banks’ exposure to CRE loans shows us a
real estate (CRE) market. As measured by the NFI-ODCE less dire picture than press headlines would suggest. In
Equal Weighted Index (gross of fees) in the fourth quarter addition, bank exposure to the office market appears rela-
of the year, private CRE had a net return of –5.22%. By tively low and manageable.
comparison, public REITs, as measured by the S&P Real
Estate index, had a total return of 18.8% in 4Q23. „ 2023 marked a significant decline in CRE values and it
appears that a stabilization is potentially beginning to
„ We believe the dichotomy in performance is attributable occur. This is likely being aided by a slight easing of lend-
to several factors, including a dearth of private market ing standards across the CRE spectrum.
transaction activity, backwards-looking appraisal method-
ologies employed by many funds and ongoing redemption „ We believe 2024 will be a period of transition for CRE,
requests from private CRE funds that potentially led to the and that patient investors with capital and liquidity could
disposal of assets at suboptimal prices. see a number of very attractive risk-adjusted return oppor-
tunities appear over the next several years.
„ 2024 has the potential to be a transitional and much
more interesting year for CRE: the plethora of dry powder
on the sidelines that needs to go to work, the potential
for increased distress in attractive asset classes—including
multifamily, which could begin to unlock the transaction
market—and clarity from the Federal reserve on the direc-
tion of interest rates, with the potential for several fed
funds rate cuts in 2024.

Private markets 20
 Private real estate

2023 ended with a whimper for the private commercial real Figure 2
estate (CRE) market. As measured by the NFI-ODCE Equal
Weighted Index (gross of fees), in 4Q23 private CRE had a net
Private market CRE transaction volumes 2002–2023
return of –5.22% (Fig.1). By comparison, public REITs, as 200,000 300
180,000
measured by the S&P Real Estate index, had a total return of 250
160,000
18.8% in 4Q23. 140,000
200

120,000 150
100,000 100
Figure 1
80,000 50
NFI-ODCE Equal Weighted Index returns 1Q10–4Q23, in % 60,000
0
40,000
8 20,000 –50

6 0 –100
Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Jan-17 Jan-20 Jan-23
4
Monthly transactions (lhs, in USD millions)
2 Year-over-year change (rhs, in %)
0
Source: MSCI real capital analytics, UBS
–2
–4
–6
–8 Figure 3
Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Mar-20 Mar-22
Appreciation return
CRE transaction by product type, in USD billions
Total return 900
Source: NCREIF, UBS 800
700
600
We believe the dichotomy in performance is attributable to 500
400
several factors, including:
300
200
• The ongoing dearth of CRE transaction volume is making 100
price discovery extremely challenging (Fig. 2). The decline in 0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
transaction volume was particularly acute for some of the
Office Retail Other
stronger CRE classes, including multifamily and industrial Industrial Multifamily
(Fig. 3)
Source: MSCI real capital analytics, UBS
• Despite declining 10-year Treasury yields during 4Q23, most
private CRE funds were employing appraisal-based valua-
tions which are both backwards looking (thus incorporating
higher interest rates) and influenced by the uptick in dis- Figure 4

tressed asset sales, particularly in the office sector. Private market CMBS delinquency rates
• CMBS delinquency rates continue to increase, particularly September 2008–February 2024, in %
for select asset classes (Fig. 4).
25
• Redemption requests in private CRE funds remained ele-
vated in 4Q23, likely putting pressure on some funds to 20
divest assets at suboptimal prices. In addition, monthly sales
15
of private REIT products continued to decline on a rolling
12-month basis, further depriving the market of a key CRE 10
investor.
5

0
Sep-08 Sep-11 Sep-14 Sep-17 Sep-20 Sep-23
Industrial Office Hotel
Multifamily Retail

Source: Trepp, UBS

Private markets 21
 Private real estate

With the lackluster performance of 2023 in the rearview mirror,

Figure 6
what can CRE investors look forward to in 2024? Many words
come to mind: challenges, volatility, confusion and opportunity. Unlevered dry powder held by private equity for
The one word we do not believe will be operative is boring. CRE investment, in USD billions
450
We believe a key area of focus for investors will be the signifi- 400
cant CRE debt maturities facing the market between 2024– 350
2028. As can be seen in Fig. 5 a total of USD 1.96 trillion in 300
CRE debt is coming due between 2024–2026, with more 250
than 47% due in 2024 alone. One of the key contributors to 200
150
the rapid rise in 2024 maturities from prior estimates was the
100
volume of CRE loans that were extended from 2023.
50
0
Figure 5 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Feb-24
Value added Debt Core/Core+
CRE debt maturities 2024–2028, in USD billions Opportunistic Distressed Other
1000 Source: Preqin, UBS
900
800
700
600 Figure 7
500
400
Unlevered dry powder held by private equity for
300 CRE investment by investment style, in %
200
100 90
0 80
2024 2025 2026 2027 2028 70
Banks CMBS/CDO Debt Funds & Other 60
Insurance GSE 50
Source: NMRK, Trepp, UBS 40
30
20
One obvious concern we have is whether or not there will be 10
enough capital to refinance all of this maturing debt. We 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Feb-24
don’t believe so, and some degree of total loss among lend-
Value added Debt
ers and investors is a reasonable expectation. We then need Opportunistic
to ask ourselves if we are staring down a repeat of the 2008– Source: Preqin, UBS
2009 global financial crisis (GFC)? In our opinion, the answer
is no. Without being overly optimistic or pollyannish regard-
ing the significant challenges facing CRE in 2024, we believe Figure 8
there are several mitigating factors that significantly distin-
guish the current cycle from the GFC. Unlevered dry powder held by private equity for
CRE investment by target region, in %
Capital – The ‘weighting’ is the hardest part! 100
90
With all due respect to Tom Petty fans, the plethora of capital 80
70
that has been raised in the private equity world, particularly
60
over the past 12–18 months, remains largely on the sidelines. 50
The private equity (PE) firms that raised this capital are not 40
paid to manage cash and the weight of this capital sitting on 30
20
the sidelines tells us it will likely begin being deployed in ear-
10
nest in 2024. As can be seen in Fig. 6, there is more than USD 0
400 billion of unlevered dry powder in the hands of global Dec-10 Dec-12 Dec-14 Dec-16 Dec-18 Dec-20 Dec-22 Feb-24

private equity. Digging a bit deeper into the data, almost North America Asia
Europe Other
80% of this capital is oriented towards value add, opportunis-
Source: Preqin
tic and debt (Fig. 7). Furthermore, some 65% of the total dry
powder is oriented towards the US CRE market (Fig. 8).
Private markets 22

Segmenting the dry powder by which firms hold the funds
provides some very interesting results. Of the funds that are
closed to new fund raising, the top 10 and 25 funds have
20.4% and 30.4% of the total AUM of the top 500 PE funds
dedicated to CRE investment, yet they hold 34.8% and
44.5% of the dry powder, respectively. Furthermore, of their
total AUM, 77.1% and 66.2%, respectively, remain uncom-
mitted and primed for investment. In addition, we identified
another 422 funds that are currently raising capital or have
recently announced fundraising efforts. As of January 2024,
these funds have unlevered AUM of USD 150 billion. In short,
while this capital alone is not sufficient to address the entire
USD 1.96 trillion of maturing debt, we believe these funds
represent some of the largest, most sophisticated investors in
the world who will significantly help mitigate what might
otherwise be a very challenging situation.
Setting the record straight on CRE debt and
bank exposure
With collapse of several banks in 2023 and the challenges cur-
rently being faced by New York Community bank there is con-
cern that the CRE market is on the precipice of another GFC, a
narrative the media has be only too happy to run with.
Although we do not wish to minimize the risks across the CRE
lending spectrum, we believe a complete understanding of the
CRE debt exposure, particularly at the bank level, is essential.
Fig. 10 contains a breakdown of the USD 5.7 trillion is out-
standing as of YE 2023. As the data indicate, banks account
for just over 50% of total outstanding CRE loans.
Segmenting bank CRE loan exposure by asset size paints a
clearer picture of potential risks to the banking system. As the
data in Fig. 9 highlight, the vast majority of larger banks have
relatively small exposure to CRE loans. The biggest CRE expo-
sure among banks is held by banks with assets less than USD
20 billion – 28.5% or USD 1.6 trillion of CRE exposure.
Although this is a significant figure to be sure, it is far from
the substantially larger figures that have been reported in var-
ious press and research reports.
Another key question we hear from investors relates to the
banks’ exposure to the office sector. This is a tougher figure
to nail down as it requires each bank to explicitly provide
detailed disclosure. Based on figures from those banks that
have disclosed the data as well as estimates from several
large, reputable debt analytical firms, it is estimated that bank
CRE exposure to the office sector is between 2–4%. We
should emphasize that this figure is a broad average and is on
Private real estate
the lower end for the larger banks while likely higher for
smaller banks. This would reinforce our view that there is an
increased risk of defaults at smaller banks, However, given
both the large pool of dry powder previously discussed com-
bined with willingness of larger banks (at least so far) to work
with the FDIC and other federal institutions to purchase select
CRE loan portfolios, albeit at a discount, we do not believe a
GFC-style banking crisis is a high probability.
Figure 9
Bank CRE loan exposure segmented by
asset size – data as of 4Q23
As of 4Q 2023
Total CRE loans % of total % of total
outstanding bank CRE loans CRE loans
Bank asset base in USD millions outstanding outstanding
> $250 billion in assets $639,401 22.1% 11.1%
$100 billion–$250 billion $206,695 7.2% 3.6%
in assets
$20 billion–$100 billion $407,513 14.1% 7.1%
in assets
< $20 billion in assets $1,636,391 56.6% 28.5%
Source: SNL financial, UBS
The other area of debt exposure that investors have
expressed concerns about is the CMBS/CLO market. As the
data indicate, office represents the largest portion of private
market CMBS/CLO loans at approximately USD 180 billion,
or 25.6% (Fig. 10). We believe it is likely that this is an area
where default rates will continue to increase (as evidenced by
the data in Fig. 4). Without minimizing the risks involved
here, we believe several potential mitigants exist that could
lessen the pain from increased office defaults. First, there has
been significant capital raised to acquire distressed CRE debt
(previously highlighted in Fig. 6). Second, not all office build-
ings are in dire straits and many buildings, particularly high-
quality trophy/class A+ buildings, have been able to secure
new financing, albeit with some new equity required and at
higher interest rates. Third, a number of sophisticated dis-
tressed CRE investors have been approaching banks and
other lenders about recapitalizing better-quality office build-
ings utilizing an A/B note structure whereby banks offer to
sell buildings at discounted rates with lower-cost first mort-
gages and take a “hope note” that is at the bottom of the
capital structure that would allow them to participate in any
potential upside. We don’t want to give the impression that
this is happening on a regular basis, but at the margin it is
helping reduce the risk of greater stress.
Private markets 23
 Private real estate

The other data from Fig.10 we found intriguing was the sig- Figure 12
nificant exposure the CLO market has to the multifamily sec-
tor (MF). MF represents 17.5% of total outstanding CMBS/ Multifamily private market cap rates 1Q10–4Q23
CLO loans but more than 70% of the USD 83 billion CLO 7.0
6.6%
market. Many of these loans were made to syndicators who 6.5
purchased multifamily properties later in the cycle at
6.0
extremely low cap rates and utilized short-term, floating rate
5.4%
debt. In Figs. 11–12 we highlight the differential in MF trans- 5.5
5.2%
action activity between 1Q10–4Q23. 5.0 4.8%

4.5
Figure 10
4.0
Private market CMBS/CLO outstanding balances by 1Q’10–4Q-17 1Q’18–1Q’20 2Q’20–3Q’22 4Q’22–4Q’23

property type as of YE 2023, in USD billions Source: MSCI real capital analytics, UBS

180
160
140
Risk breeds opportunity
120 An initial read of the above data would paint a fairly dire out-
100
look for a significant portion of the multifamily sector. However,
80
60
we believe it is important for investors to differentiate between
40 operational and financial distress. We believe that a significant
20 position of the office market is suffering with structural and
0 operational challenges. However, we are also of the opinion
Industrial Hotel Multifamily Office Retail Other
that the supply/demand fundamentals for the MF sector will
Conduit CRE CLO
SASB brighten substantially in 2025 and beyond. As such, although
Source: Trepp, UBS some lenders and investors who overpaid for MF assets
between 2018–2022 and financed them poorly are at risk for
significant losses, a substantial portion of these assets are of
good quality and located in solid, long-term growth markets.
Figure 11 As such, we believe the significant amount of dry powder we
Multifamily transaction activity 1Q10–4Q23 have previously discussed will be carefully scrutinizing these
assets for potential high risk-adjusted return opportunities. If
1,000,000 45
40.0% we are correct, then it is likely the fallout from distressed MF
900,000 40
800,000 33.1% 35
loans will be significantly lower than many are predicting.
700,000 30
600,000
500,000 19.1%
25 Are CRE values beginning to flatten out?
20
400,000
300,000 15 At the risk of dating ourselves, we are reminded of the old
200,000 7.9% 10 newspaper adage “if it bleeds it leads.” Although many
100,000 5 newspapers have been replaced by electronic forms of com-
0 0
1Q’10–4Q-17 1Q’18–1Q’20 2Q’20–3Q’22 4Q’22–4Q’23 munication, the adage still holds for us. We believe that
Total MF transactions (lhs, in USD millions) downside risks remain for some CRE values. That said we
% of Total (rhs) would make two observations: 1) from their peak, CRE values
Source: MSCI real capital analytics, UBS (as measured by Green Street’s Commercial Property Price
Index) have declined substantially (Fig. 13); and 2) although it
has only been a couple of months, it appears that there is
some stabilization in CRE values (Fig. 14).

Private markets 24
 Private real estate

Figure 13 Figure 15

Green Street Commercial Property Price Index value Net percentage of domestic banks reporting tightening
declines from peak values for select CRE asset classes, standards for non-farm, non-resi CRE loans
in % 80

0 60

–5 40

–10 20

–15 0
–15.9%
–20 –17.5% –20
–21.6% –40
–25
–30 –60
–29.5%
–35 –80
Oct-13 Apr-15 Oct-16 Apr-18 Oct-19 Apr-21 Oct-22
–40 –37.8%
Industrial Strip Center All Property Apartment Office Net % of domestic banks reporting tightening standards for non-farm, non-resi cre loans
Net % of domestic banks reporting increased demand for non-farm, non-resi cre loans
Source: Green street advisors, UBS
Source: Federal reserve, UBS

Figure 14
Figure 16

Green Street Commercial Property Price Index value Net percentage of domestic banks reporting tightening
trends January 2022–January 2024 for select CRE standards for multifamily loans
asset classes
80
275 60
250
40
225
20
200
0
175
150 –20

125 –40
100 –60
75 –80
50 Oct-13 Apr-15 Oct-16 Apr-18 Oct-19 Apr-21 Oct-22
Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23 Jan-24 Net % of domestic banks reporting tightening standards for multifamily loans
Apartment Office All Property Net % of domestic banks reporting increased demand for multifamily loans
Industrial Strip Center
Source: Federal reserve, UBS
Source: Green Street Advisors, UBS

Figure 17

What about access to capital? Net percentage of domestic banks reporting tightening
One of the unfortunate hallmarks of the GFC was the effec- standards for construction & development loans
tive shutting of the capital markets. We recognize that the 100
cost of capital has risen significantly over the past 18 months 80
60
and variables such as loan-to-value, debt service coverage
40
ratios and NOI debt yields have tightened considerably. That 20
said, there is still a significant amount of capital available. As 0
we discussed previously there is a plethora of dry powder on –20
the sidelines, a number of office properties have successfully –40

refinanced mortgages and CMBS origination activity is picking –60

–80
up. Further, public REITs have raised more than USD 100 bil- Oct-13 Apr-15 Oct-16 Apr-18 Oct-19 Apr-21 Oct-22
lion, largely in the unsecured debt markets, over the past two Net % of domestic banks reporting tightening standards for construction &
years. We would also note in Figs. 15–17 the lending stan- development loans
Net % of domestic banks reporting increased demand for construction &
dards for CRE loans are beginning to loosen up, with demand development loans
for CRE loans picking up as well. Source: Federal reserve, UBS

Private markets 25
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Private markets 28