As we approach 2024, Delano spoke with William Guilloux, chief investment officer at Cedrus & Partners, who discussed Luxembourg’s private equity market, addressed major risks for the space, identified key 2024 trends and proposed ways for private equity investors to navigate the expected challenges.
Guilloux said that private markets have changed, and that investors can find resiliency and opportunities in the liquid space. “When I say liquid space, I mean the listed assets and liquid assets. The main competitor for everyone right now is cash, so money market funds yielding something between 4% and 4.5% in cash, and if you are a global investor and you have access to the USD currency, you can plan to generate cash yield between 5% and 5.5%.” That’s the asset class Guilloux favours for 2024.
“That’s the new reality for a lot of investors, because the level of risk-free asset is clearly very high right now.” He believes with the high risk and patience by private market investors, the return will be very high.
Addressing uncertainty
However, global uncertainty remains a key challenge facing growth. The latest macroeconomic outlook by Eurostat, published 23 November 2023, states that the economic situation in the EU is characterised by a high level of uncertainty. But Guilloux believes uncertainty comes with a potential upside, stating, “I guess uncertainty is not always bad, right? Because the financial market is compensating you for going through this uncertainty, by offering opportunities and giving you return.”
2024 trends
That being said, aiming to find resiliency, Guilloux thinks that investors need to adjust their investment approach to prepare for changes in the private market, to “focus on risk management, focus on pure mid-market and managers that can transform assets and focus on strategy that tends to be either defensive or opportunistic.” He added that “you can also find some resiliency in infrastructure, in what we call transition net zero, mainly the reduction of carbon emissions, and mega trends like healthcare. You can find good opportunities in private equity secondaries.”
Guilloux said, “I would expect the private market to [slow down]. But [it] will take time to adjust, refinancing will be in 2026, and we will see some refinancing in 2024 and 2025.”
Managing investors’ expectation is crucial in hard times. Guilloux advises investors “to be more realistic about what we can expect from private markets right now, we are expecting 12% to 14% private equity return as opposed to 18% return over the past 10 years,” given the higher cost of capital and less abundant liquidity.
Cedrus & Partners is an investment advisory firm that mostly advises family offices and non-profit organisations, who are long-term investors, with €10bn in assets under management, of which €3bn are private assets and €7bn are listed assets.