Equity capital is active and ready to invest: Three questions with Josephine Jones

Q1: From your regular contact with global investors from sovereign wealth funds, to public and private pension funds, to traditional private equity real estate players, what are the top trends you are currently seeing within the equity market?

Firstly, it is flight to quality. Investors today no longer wish to play a broad sector, or a geography. They want to find best-in-class operators, developers and managers to deliver a very specific strategy in a scalable manner.

In the last cycle, strategies could deliver a reasonable proportion of returns from cap rate compression. The current market no longer supports that assumption. Any base case relying on cap-rate compression is now heavily scrutinised. This translates to the requirement for a deeper understanding of the underlying cash flows and getting under the hood of every element of rental and operational assumptions.

Secondly, new returns translate to new definitions. The market is still in the process of landing on what constitutes a core, core plus, or value-add return. However, liquidity for opportunities returning IRRs below 15% on a levered basis is thinner, and below 12% is in direct competition with debt returns.

Overall, we’re seeing positive signs that there is significant equity capital ready to invest and that investors are ready to make high conviction decisions in the sectors they favour.

Q2: And turning to the debt market - are there any major themes that you’re seeing?

Debt costs have broadly stabilised. Both the ECB and the Bank of England have, or are, expected to leave rates where they are for the time-being. The market has been slow to respond to inflation, with a forward curve that until recently expected rates to fall again soon.

We have been saying for two months that rates will stay higher for longer. This is now beginning to be priced in, but what’s noticeable is that the volatility in the curve has reduced forming a stable base upon which to form investment assumptions – and this is having a positive knock-on effect on equity sentiment

Similar to what we are seeing in the equity markets, liquidity is strong. The dearth of transactions in the first half of the year, combined with the size of fundraising is compelling lenders to deploy.

Q3: One of the big stories of the last few years has been the arrival on the scene of alternative lenders. How do you think that’s going to continue to playout?

We’ve had a huge change in the spectrum of the lending universe with a proliferation of new non-bank lenders. Anecdotally, we now see 75-80% of transactions being completed by non-bank lenders. These lenders can compete with banks on pricing and are often more flexible when it comes to structure, offering a compelling base of liquidity for borrowers.

What we’re also seeing, is that for a short period of time, it seemed as though the balance of return was more toward the debt side on a risk-adjusted basis versus the equity side. This has propelled private equity buyers to come into the debt side.

The question is: do they then disappear once the market normalises? The answer is no, they have become a core component of our financing ecosystem. I think growth and consolidation will be the next phases.

Markets go through cycles. There are cookie cutter transactions when the market is developed; then the cycle shifts and there are more creative structures. We’re at the beginning of a new cycle now and it’s ripe for creativity in a way that it wasn’t four or five years ago.

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