Geopolitics is no longer a variable that investors observe from afar. Deglobalization no longer necessarily means less economic activity, but rather a redistribution of supply chains; In this sense, infrastructure is no longer exclusively synonymous with roads, airports or regulated services. Today, artificial intelligence is forcing us to rethink even businesses considered defensive, and private credit is beginning to more clearly separate managers capable of originating and managing risk from those who simply benefited from the abundance of capital.
That was, to a large extent, the common thread of the second day of work at the Alternatives Summit by LarrainVial and CIO Invest, in which international investors and managers analyzed everything from the impact of geopolitics on private equity to the transformation of infrastructure and the new challenges for private credit.
The debate began with a conclusion that would have been difficult to imagine a few years ago: macroeconomics and geopolitics do matter—and increasingly—for private capital.
In the panel Geopolitics as a Variable Portfolio: Defense, Industrials & the Reshoring Premium, participants agreed that tensions between great powers, military modernization, the relocation of production chains and the need to have reliable suppliers are directly modifying investment opportunities.
The discussion quickly moved from the macro to the micro. The war in Ukraine, for example, is changing the nature of military activity and creating opportunities for companies capable of transferring technologies developed in Europe to the United States. Among the examples mentioned were German companies linked to missile and drone technologies.
But perhaps one of the most relevant points for Mexico appeared when the debate reached reshoring and friend-shoring. For investors, Mexico remains an attractive alternative for US companies seeking to reduce their exposure to Asia. Even with trade uncertainty, geographic proximity keeps the country in the investment equation.
The logic proposed by the participants is broader than the bilateral relationship between Mexico and the United States: the true axis of reorganization of the productive chains would be, in their vision, the one that divides China and the West, with the United States, Europe and its Latin American allies forming part of an increasingly integrated economic network. The change is not only geographical. It is also changing the attractiveness of certain types of companies.
The managers indicated that they are looking for businesses linked to long-term needs, such as defense modernization, secure communications, space resilience and certain areas of government technology. The objective is to avoid investments whose attractiveness depends exclusively on a temporary political or budgetary priority.
In that context, even a company with a single customer can be considered defensive if its product is critical, there is an installed base that is difficult to replace, and it has long-term contracts or maintenance needs. Concentration, in other words, does not necessarily equate to greater risk if behind it there is a structural demand that is difficult to replace.
Selectivity also appeared in the evaluations. Multiples for defense and electronics-related companies have increased, in some cases approaching 20 times EBITDA, according to participants. Faced with this increase in prices, some managers are willing to pay high prices when they consider that there is sufficient organic growth and acquisition capacity to reduce the entry multiple through buy-and-build strategies. Others, however, prefer to move towards sectors where they still find a better relationship between price and value creation potential.
Along these lines, the potential of artificial intelligence appears as a lever for generating value. The consensus was not that AI is going to indiscriminately replace existing companies, but rather that it is changing the nature of competition. In government technology, for example, it can accelerate the modernization of legacy systems and open space for both incumbents and new entrants. The ability to combine sector experience, technology and customer knowledge thus becomes a source of value.
The same caution appeared in the face of the rise of data centers. Some investors prefer not to bet directly on businesses whose fortunes depend entirely on the capex growth associated with AI. Instead, they look for so-called “picks and shovels”: companies that provide products and services necessary for that expansion, but whose survival does not depend exclusively on the data center boom continuing at the same pace.
Infrastructure no longer fits into a traditional definition
The conversation found continuity in the panel Investing in the Backbone of Tomorrow: Infrastructure in a Changing World. Here the question stopped being what assets are infrastructure and moved on to one that is more relevant to investors: what essential needs of the economy require capital, have barriers to entry, and can sustain predictable cash flows?
The answer considerably expands the universe. Two decades ago, infrastructure could be primarily associated with roads, airports or railways. Then came fiber optic networks, now data centers, batteries, power for digital installations and even certain equipment leasing businesses can be part of that category.
The criterion, the participants explained, should not be the label of the asset but the existence of an essential need, barriers to entry, capacity for growth through capex and predictability of cash flows.
The expansion of data centers is perhaps the best example of this transformation, which began to invest in the segment since 2016, when the expansion of the cloud began to generate structural demand for critical facilities. But, the message was equally clear: a great topic does not guarantee a good investment.
Investors must consider the location of the asset, energy availability, supply chain, financing, inflation, customer concentration and the management team’s ability to execute complex projects. An asset can be in an extraordinarily attractive sector and still be a bad investment.
Deglobalization also appeared here in a different perspective. For infrastructure managers, the fragmentation of supply chains does not necessarily destroy opportunities: it can create new resilience needs in manufacturing, distribution, logistics and warehousing.
«Deglobalization is a factor of disruption, but it does not mean that it will cut economic activity; it simply redirects it,” was one of the central ideas of the panel. And that redirection is also changing the concept of infrastructure. Services considered secondary a decade ago can become essential assets as companies and governments seek to reduce vulnerabilities in their supply chains.
Infrastructure, therefore, begins to acquire a role that goes beyond offering performance: it becomes a way of investing in the resilience of the economy.
Private credit enters a stage of selectivity
The last big topic of the day carried that same logic to private credit. In the panel Private Credit: Separating Signal from Noise in a Crowded Market, the discussion started from a market that for years received increasing amounts of capital and that now faces a different stage: lower spreads, greater competition, pressure on some portfolios and a rate environment different from that which accompanied a good part of the recent originations.
The conversation indicated that the market went from a situation of abundance to one of greater scarcity. During the period of abundant capital, competition to place money led to a relaxation of terms, higher levels of leverage and, in some cases, a lower credit quality of new operations. The current shift, paradoxically, may be good news for more selective managers: less capital chasing deals may translate into wider spreads, better documentation and better terms for lenders.
The real test, however, is in the 2021 and 2022 vintages, originating in a context of extraordinarily low rates. Which put the emphasis on something that can be decisive in differentiating the managers: the credit analysis does not end when the loan is signed.
Early detection of signs of deterioration, the ability to intervene before a problem becomes a crisis and having specialized restructuring teams are all part of risk management. Internal culture also matters: Analysts should have incentives to notice when a deal is starting to deteriorate, rather than hiding the problem because they were originally involved in approving it.
AI added another layer to the discussion. Software remains attractive to private credit for its recurring revenue, margins and cash generation, but technology is creating winners and losers. Therefore, the evaluation can no longer be limited to observing the historical growth of a company. Managers are looking for businesses with a moat strong enough to resist technological substitution: operations-critical software, with sensitive data, regulatory barriers or high switching costs.
In other words, the risk is not necessarily in lending to a software company; is lending to the wrong software company. And that was perhaps the message that ended up connecting the different debates of the second day: in a market where great narratives abound—defense, reshoring, infrastructure, data centers, AI or private credit—the manager’s challenge is not to discover the trend, but to distinguish between a structural trend and an expensive fad.
From chasing trends to understanding needs
The different panels ended up converging on the same idea. The new environment of private markets requires a much more sophisticated combination of macro vision and micro analysis. Geopolitics can determine where a factory is built; deglobalization may create a new need for infrastructure; AI can turn a technology company into a winner or a loser; and a change in rates can reveal hidden weaknesses in a credit portfolio. But none of these factors, by themselves, guarantee a good return.
The second day of the Alternatives Summit thus left a less complacent vision of private markets. There are opportunities, and many of them, but there is also plenty of capital chasing some of them, valuations that already reflect much of the enthusiasm, and risks that don’t always make the headlines.
The response of the managers seems to be to return to quite traditional principles: deeply understand the asset, know the team that operates it, analyze the duration of demand, protect against adverse scenarios and, above all, distinguish between structural growth and temporary euphoria.
In defense, that means looking for needs that can survive several political cycles. In infrastructure, assets that respond to essential needs and have predictable flows. In credit, lend to companies capable of withstanding the cycles and having the ability to detect problems before they become losses.
And that may be the most important takeaway from the second day: in an increasingly uncertain world, the advantage of private markets will not necessarily be in taking on more risk, but in knowing where it is worth taking.
Source: www.fundssociety.com
