Offense remains the best defense Private Markets Navigator Outlook 2021 Tina Jessop Senior Economist | Charles Rees Private Equity Europe Table of contents Private markets outlook 04 Private equity 10 The industry view 18 Private real estate 21 Private debt 27 Private infrastructure 32 Liquid private markets 37 Portfolio perspectives 38 Contacts 46 Important information This material has been prepared solely for purposes of illustration and Partners Group expressly disclaims any obligation or undertaking to discussion. Under no circumstances should the information contained update or revise any projections, forecasts, or estimates contained in herein be used or considered as an offer to sell or solicitation of an offer this material to reflect any change in events, conditions, assumptions, to buy any security. The information contained herein is proprietary and or circumstances on which any such statements are based unless so may not be reproduced or circulated in whole or in part. required by applicable law. All information, including performance information, has been prepared Private markets investments are speculative and involve a substantial in good faith; however, Partners Group makes no representation or degree of risk. Private markets investments are highly illiquid and are warranty, express or implied, as to the accuracy or completeness of not required to provide periodic pricing or valuation information to the information, and nothing herein shall be relied upon as a promise investors with respect to individual investments. There is no secondary or representation as to past or future performance. This material may market for the investors’ interest, and none is expected to develop. In include information that is based, in part or in full, on hypothetical addition, there may be certain restrictions on transferring interests. Past assumptions, models, and/or other analyses of Partners Group or any results are not indicative of future performance, and performance may of its affiliates (which may not necessarily be described herein), and no be volatile. representation or warranty is made as to the reasonableness of any such Whether or not explicitly mentioned in the text, all Partners Group assumptions, models, or analyses. The information set forth herein was investments mentioned herein were made on behalf of the firm’s gathered from various sources that Partners Group believes, but does clients, not on behalf of Partners Group Holding AG or any of its not guarantee, to be reliable. Unless stated otherwise, any opinions affiliates. expressed herein are current as of the date hereof and are subject to change at any time. All sources that have not been otherwise credited Material notes to readers based in the United States of America: this is have derived from Partners Group. a publication of Partners Group AG and is for informational purposes only. It is not an offer to sell or solicitation of an offer to buy any security. The projections, forecasts, and estimates of Partners Group contained Products or funds mentioned in this publication are not available to US- herein are for illustrative purposes only and are based on Partners based investors. Group’s current views and assumptions, which are subject to change at any time. Such projections, forecasts, and estimates involve known For use with institutional investors only. Not for use with retail investors. and unknown risks and uncertainties that may cause actual results, performance, or events to differ materially from those anticipated in the All images are for illustrative purposes only. summary information. © 2020 Partners Group, all rights reserved. PRIVATE MARKETS NAVIGATOR Welcome to Partners Group’s Private Markets Navigator for 2021. The Private Markets Navigator shares Partners Group’s economic outlook and investment preferences for all private markets asset classes. Outlook 2021 | 3 PRIVATE MARKETS OUTLOOK Private markets outlook Creating resilience in challenging times. Against the unprecedented backdrop of the COVID-19 pandemic, the global economy has stuttered its way through 2020. Although the economic outlook for 2021 is uncertain, we are confident of finding opportunity in adversity and reiterate our belief that “offense remains the best defense” in private markets investing. The coronavirus pandemic has pushed the global economy into distancing and remote working, for example, has accelerated the sharpest and fastest economic contraction since the Great the digitization of companies and industries, while disruptions Depression. The disruption is still ongoing as new COVID-19 to global supply chains have played into the rise of outsourcing cases have been rising since the middle of October, resulting in with a near-shoring setup. Uncertainty has also allowed lighter lockdowns in many advanced economies. On a positive platform companies to create significant value by purchasing note, the rollout of a vaccine seems imminent. In the meantime, add-ons at attractive valuations. Our portfolios naturally we expect that the recovery may be highly uneven by sector, experienced some degree of volatility in H1 2020, but our and, in many cases, even by subsector. investment strategy has created stability and facilitated a quick return to growth, which may even be higher in the medium to Despite the severity of the contraction, we believe that pre- long term as a result of the crisis. pandemic output levels should be within reach into 2022 for many sectors as they continue to recover – this is our Valuations rebound base case scenario. However, there are many other paths the Capital market valuations have recovered rapidly after seeing economy could take, and these will depend on a number of the steepest drop on record in the early days of the pandemic. factors, mostly driven by how individual economic stakeholders This is largely down to the unprecedented monetary and fiscal react to the ongoing COVID-19 disruption and the resultant response from central banks and governments worldwide, impact on consumption, hiring, capex and fiscal measures, as which prevented the global economy from falling into a well as the rollout pace and efficacy of a vaccine. Downside depression and has also helped the faster-than-expected risks dominate, as we outline below. economic rebound. Following the rally, valuations for many Opportunity in adversity asset classes are back at pre-pandemic elevated levels. Elevated prices can be rationalized – to a degree – on the The uncertainty we see today creates challenges, but also basis that interest rates are likely to remain particularly low for opportunities, for companies and their investors. In this climate, an extended period of time. However, we remain cautious in we firmly believe that offense remains the best defense. Our our valuations outlook because of the breadth of the rebound. thematic investment strategy, which targets transformative Valuations in sectors more materially affected by COVID-19, trends, combined with hands-on value creation at the asset such as the S&P 500 restaurant subindex, have also recouped level guides our investment efforts and helps us to steer declines. Over the coming period, valuations will therefore be our portfolios through these choppy waters. Indeed, the susceptible to changes in discount rates and future growth pandemic has amplified many of the transformative trends that expectations. are integral to our investment strategy. The need for social 4 | Outlook 2021 PRIVATE MARKETS OUTLOOK Michael Studer Chief Risk Officer and Co-Head Portfolio Solutions | Andrew Deakin Private Equity Europe S&P 500 index is trading at an elevated P/E-ratio The medium- to long-term dynamics will become more visible in 30 2022 and 2023, when the post-COVID-19 economic structure becomes clearer and we see how monetary policy response has 26 shaped up. This uncertainty means that we are taking a prudent 22 approach to the medium-term outlook. Trend growth rates 18 P/E-ratio should remain at modest levels. 14 On the upside, the acceleration of digitization and automation 10 is expected to increase efficiency in some sectors and 2008 2010 2012 2014 2016 2018 2020 Forward-looking P/E Long term average Backward-looking P/E bring about a modest rise in capital expenditure. Further, a Source: Bloomberg, November 2020. more constructive stance on foreign policy under the new US administration removes uncertainty. On the downside, Our base case scenario: recovery to pre-pandemic supply chain near-shoring, halting globalization and increasing output levels into 2022 government intervention is expected to impede the productivity The economic assumptions that feed into our underwriting are and competitiveness of many advanced economies. based on near-term, as well as medium- to long-term dynamics. Partners Group’s base case and asset testing scenarios The COVID-19 crisis will most likely not just disappear, even with the probable rollout of a – potentially highly efficient Base case Asset testing scenarios Stock Recovery, with Conserva- – vaccine in the near future. At the time of writing, many Stagflation market high volatility tive case societies remain in lockdown. However, we are optimistic on rally the prospects for recovery after these lockdowns end. We Real GDP growth* 2.5-3.5% 1-2% 1-2% 2.5-3.5% project strong catch-up tailwinds and the release of pent- (next 5-year average) Inflation* up demand in 2021 as companies and individuals continue 1-2.5% 0.5-1.5% 2-4% 1-2.5% (next 5-year average) to adjust to life with COVID-19. The creation of a vaccine Change in Fed +50 to +100 to +50 to will unlikely provide an immediate solution. Roll-out will take funds rate 100bps Unchanged 250bps 150bps time and, in the meantime, there may be more COVID-19 (in 5 years’ time) (to c. 0.8-1.3%) waves. But one should not underestimate the power of Market valuations** 0-10% 5-15% 10-20% 0-10% (in 5 years’ time) lower lower lower higher positive momentum and rebounding confidence, supported *The 5-year average includes further catch-up effects in 2021 with more modest growth by record amounts of monetary and fiscal stimulus and thereafter.