![]() ![]() In this scenario, cash flow would be redirected from equity (and potentially also junior debt) tranches due to internal test breaches. In the long run, however, the increasing cost of debt may translate into higher default rates and collateral quality deterioration. Since the beginning of 2022, three-month Libor increased from 0.21% to the current 2.20% (27 June) and given the record-high inflation (the US CPI hit a 40-year high of 8.5% in March 2022) the consensus expectation is for the Federal Reserve to continue raising rates throughout 2022. In the near term, the rising interest rates should have a positive impact on collateralised loan obligation (CLO) cash flow generation, especially by increasing the residual cash flow to CLO equity tranches. Increasing interest rates support CLOs’ cash generation in the near term The underlying assets include commercial, residential and agricultural real estate in the United States, Europe, Asia as well as South America. Real estate-related investments made up 13% of Tetragon’s NAV at end-2021 and comprise investments in BentallGreenOak-managed funds, assets managed by third-party managers as well as a 13% stake in BentallGreenOak itself. Residential real estate remains the world’s most significant store of wealth (US$258.5tn) and increased by 8% in 2020. However, a revival of the market was seen in 2021 as life gradually returned to normal, as reported by JLL, with 21% y-o-y growth in leasing volumes globally. The decrease is associated with the global economic contraction induced by the pandemic, amplified by the adoption of working from home and uncertainty over office space going forward. The total value of global commercial property amounted to US$32.6tn in 2020 and was down 5% y-o-y (Savills). ![]() Similarly, commercial and residential real estate investments are garnering interest as a potential hedge against inflation according to Savills. Real estate is considered an inflation hedge Tetragon’s indirect exposure to infrastructure investments is its 75% stake in Equitix, which manages US$10.8bn of infrastructure assets and accounts for 25% of Tetragon’s net asset value (NAV). According to Global Infrastructure Hub, the gap between infrastructure investments needed to keep pace with economic growth (and meet the committed sustainable development goals) and government spending amounted to US$445bn globally in 2020 and is expected to widen to US$820bn by 2040. ![]() This is coupled with unmet need for infrastructure investments. Although the increased investor interest brought the dry powder in the sector to US$230bn in 2020 (after growing by 13% pa since 2010), it represents less than the global deal value in 2020 (and compares to the private equity market with about two years’ worth of deal value currently, according to Preqin). As a result, Preqin expects it to become the largest real assets strategy by 2026 (overtaking real estate). Infrastructure investments (which Bain & Company estimates in its Global Private Equity report 2022 attracted US$120bn of new capital in 2021) are sought by many investors for stability in the face of economic uncertainty and are also considered a natural hedge against inflation. One such low correlation asset is the global private infrastructure market, estimated at c US$1tn in 2019 by PwC. Private infrastructure rises in popularity ![]()
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