Nuveen’s Team Sees Opportunities in Private Markets — But Disagrees on How Much

“You need to be careful about picking private equity managers that are investing in the right areas,” Nuveen CIO Saira Malik said.

Chris Ratcliffe/Bloomberg

Chris Ratcliffe/Bloomberg

With so much uncertainty about where markets are headed, even colleagues within a single asset management firm disagree on what will happen in the private markets. The consensus at Nuveen: Proceed with caution.

In its fourth quarter outlook released Monday, the asset manager’s global investment committee — made up of heads of various asset classes — split into two camps over the extent to which private assets will “reflect the pain felt in public assets.” Those who advocated for a greater allocation to the private markets cited the space’s attractive return potential and its ability to shield portfolios from the effects of market volatility. Their more wary colleagues pointed to the fact that many asset owner portfolios are already overweight private assets as a result of public market pullbacks. These critics also noted that adopting more illiquid assets could bar allocators from future opportunities in the public markets.

“The question was: Will private assets play catch up in the sense that they catch up to public [markets] and price in the less positive scenario that we are seeing in the economy and the market? Or will private asset classes continue to provide portfolio protection, as they’ve tended to do in prior cycles?” Saira Malik, Nuveen’s chief investment officer, told Institutional Investor.

Nuveen concluded that while risk is ever-present, the private markets offer some attractive opportunities, particularly in the current market environment. Despite their disagreements, the members of the global investment committee said they felt more positively about private equity investments in the fourth quarter than they did last quarter. Malik said this is because the asset class tends to be more resilient and less volatile.

But manager selection is crucial, she added.

“You need to be careful about picking private equity managers that are investing in the right areas,” Malik said.

According to Malik, these areas include healthcare, but not technology, which she said tends to be “cyclical.”

The Nuveen committee also indicated higher conviction in investment-grade fixed income, real assets including farmland, and private real estate. Farmland and private real estate are areas that can benefit from an inflationary environment and tend to be less correlated with the performance of other asset classes.

“One main point of pain for clients this year has been that typical 60-40 equity-fixed income portfolio, which has been highly-correlated this year with negative return,” Malik said.

The committee additionally maintained its positive view on opportunities in private credit that it held during the third quarter. This is largely due to the asset class’s strong deal flow, according to Anders Persson, CIO and head of fixed income at Nuveen.

“Top-tier private equity buyers are focusing on defensible assets right now, which enhances the risk-adjusted return proposition of the loans,” Persson wrote in the report.