6 March 2023, 10:31PM UTC

Chief Investment Office GWM

Investment Research

Quarterly private markets update

Private markets
Authors: Jennifer Liu, Private Markets Strategist, UBS Financial Services Inc. (UBS FS); Daniel J. Scansaroli, Head of Portfolio Strategy & UBS Wealth Way
Solutions, CIO Americas, UBS Financial Services Inc. (UBS FS); Jonathan Woloshin, CFA, CIO Equity Strategist, US Real Estate & Lodging, UBS Financial
Services Inc. (UBS FS); Christopher Buckley, Portfolio Strategist, CIO Americas, UBS Financial Services Inc. (UBS FS)

• In a challenging market environment, private

investments have continued to demonstrate value
in portfolios by enhancing returns and mitigating
downside risk.
• Value-oriented buyout strategies, in particular
with investments in take-privates and carveouts/
divestitures, are also set to be a growing trend in
2023, in our view.
• We currently favor strategies that can take
advantage of price dislocations, like secondaries.
Source: Getty Images
• Direct lending strategies have insulated investors
from rising rates as bonds have experienced equity-
like declines. But with potentially increasing defaults
and financial stress, we advise investors to look for
opportunities in distressed credit in combination
with direct lending strategies.
• Given the substantial outperformance of private real
estate in 2022, some degree of mean reversion with
public REITs would not be unexpected in 2023.

The global private equity (PE) market has experienced a
stormy year amid volatile financial markets and geopolitical
events. The stimulus from governments in response to the
pandemic fueled a rally in markets and private equity in
2021, but many believe these efforts went too far and
led to instability. As a result, PE deal flow, performance,
and fundraising slowed in 2022. The war in Ukraine has
disrupted energy supplies and driven inflation, while interest
rate changes have impacted both public and private markets
—investing in this environment has been more challenging.
Limited exit opportunities and lack of leverage have affected
distribution back to investors. At the same time, investors
in private markets generally saw their positions experience
smaller markdowns than public markets, resulting in an
increase in the share of privates in their portfolios due
to denominator effects; this created limited capacity to
commit more capital for many individuals and institutions.
Nevertheless, the private equity industry continues to attract
capital, as firms expand offerings in other private asset
classes and tap new investor segments. While uncertainty
remains, private equity continues to present attractive
investment opportunities for long-term, patient capital.
Operating fundamentals for US private equity remain
robust. Both revenue and EBITDA for US PE continues to
grow year-over-year and the gap between public and private
median purchase price multiples for US buyouts continues
to shrink.
We continue to view private markets as a positive long-
term asset class for investors’ portfolios. Putting fresh capital
to work in private markets following declines in public
market valuations has historically been a rewarding strategy.
Value-oriented buyout strategies, particularly investments

This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and
disclosures at the end of the document.
Private markets
in carveouts and divestitures, are also set to be a growing
trend in 2023. We currently favor strategies that can take
advantage of price dislocations, like secondaries, where
buyers are now able to negotiate better prices for assets. We
also like distressed/restructuring debt strategies. Managers
in this space have earned higher returns during periods
of higher corporate default rates, which we expect to
materialize in 2023. In this report, we look at the current
state and trends in private equity, private credit, and
private real estate, and conclude with the opportunities and
evolving risks.
Private equity – market update
Performance
Last year, US private equity through 3Q22 fell (5.5%)
and US venture capital (VC) declined 15.0%, according
to Cambridge Associates benchmarks. Both asset classes
compare favorably against public market indexes. On a
rolling 1-year basis, US PE and US VC returned 0.2% and
-8.5%, respectively, compared to -15.5% and -23.5% for
public indexes. Longer term, US PE is still outperforming the
benchmark by 580 basis points on a 10-year horizon.
Fig 1: Private equity & public equity performance
Source: Morningstar Direct, Refinitiv, Cambridge Associates, UBS. As of
30 Sept 2022.
A hypothetical mixed portfolio, including an allocation to
alternative investments, would have helped to mitigate
losses in 2022 compared to a traditional 60/40 portfolio. The
latter would have generated a negative return of -21.3%
for the first three quarters of 2022, while a portfolio with
30% alternatives would have dropped 15.6% over the same
period, or 5.7% of outperformance.
Fig 2: Private markets tend to outperform public
markets
Alternatives allocation: 13% private equity, 7% private debt, 5% private
real estate, and 5% hedge funds. Source: Bloomberg, Morningstar
Direct, Cliffwater Direct Lending Index, Cambridge Associates, FactSet,
UBS, as of 31 Sept 2022.
That said, we believe there will be additional markdowns
due to further public market deterioration. Despite the
lagged impact, we believe that it is unlikely that private
investments will sell off to the full extent that public markets
have. Operating fundamentals for US private equity remain
robust, while revenue and EBITDA continue to grow y/y and
the gap between public and private median purchase price
multiples for US buyouts continues to shrink (see Valuation
section).
Looking at the past three recessions, we can see that
private equity funds never fully draw down to the level of
public markets, while also recovering faster. During the tech
bubble, US PE (as measured by Cambridge Associates) fell
26.8% from 1Q00 through 3Q02. It then gained back these
losses over the next six quarters, bringing the index back to
precrisis levels. However, the S&P fell 43.8%, followed by a
22.2% gain over the same periods, but didn’t fully return
to precrisis levels until later in 3Q06. While acknowledging
that a lag effect often exists, during the global financial
crisis (GFC), the S&P started to fall in 4Q07 while US PE
fell a quarter later in 1Q08. The peak-to-trough drawdown
in US PE was 28.2% compared to the S&P's 45.9%.
Similarly, private assets gained back the losses and returned
to precrisis levels within six quarters compared to a longer
recovery for the S&P. Finally, during the COVID-19 recession,
PE was down 8.8% compared to the 20.2% decline in the
S&P, again followed by a shorter recovery timeline. Looking
at these three recessionary periods, US PE on average only
reflects 55% of the S&P drawdown.
Fig 3: Historical drawdown of private and public
equities
Source: Refinitiv, Cambridge Associates, Factset, UBS, as of 30 Sept
2022.
Fundraising
Fundraising ended last year more subdued, with global
buyout funds raising over USD 300 billion in 2022—down
from USD 350bn in 2021, but still higher than pre-pandemic
2018 numbers despite the turbulence. Competition for
limited partner capital continues to be intense as supply of
funds outpaces demand with investors are facing a triple
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Private markets

threat of a ballooned denominator effect, slowdown in
distributions, and over-commitment pacing in the last five
years.
Fig 4: Historical buyout fundraising
equity returns are often lagged relative to public markets,
both on the upside and the downside. This is because
private equity valuations are more directly tied to underlying
operating performance of the portfolio companies, rather
than short term market fluctuations. Underlying operating
performance for US buyout continues to be strong amidst
increasing headwinds. According to Burgiss, year-over-year
Q3 2022 median revenue growth was 19% and year-over-
year median EBITDA growth was 12% (Fig 6). Both revenue
and EBITDA continue to perform above pre-pandemic rates
but have slowed compared to 2022 full year metrics.

Fig 6: Historical revenue & EBITDA growth

Source: Preqin, UBS. As of 31 Dec 2022.

Cash flows
Through Q3 2022, limited partners are net cash flow
negative, meaning they are contributing more cash than
they are receiving in distributions. This is a reversal in
trend from 2021 when limited partners were net cash flow
positive. This is due to the slowdown public markets in 2022
with fewer IPOs and exits occurring in 2022 compared to
2021 when market were strong and exit activity was high.
Given the current market conditions and expectations for
2023, exit activity is likely to remain muted. Furthermore,
speaking to managers, given the resetting in valuations,
they are still finding and making attractive investments. This
continued contribution coupled with limited distributions
is worth monitoring closely for investors to manage cash
flow. For limited partners, this slowing exit environment
and reduction in cash distributions means their returns from
private market investments may underperform relative to
underwriting expectation, and it may take longer to achieve Source: Burgiss, UBS. As of 31 Sept 2022.
full realization from their investments.
As mentioned earlier, EBITDA growth is the top indicator for
Fig 5: Global private equity cash flows value creation. When it comes to EBITDA growth, PE buyout
in billions managers typically have a financial advantage over public
companies as they are able to cut costs, delay capex spend,
and use other levers such as securing additional financing or
injecting additional equity during difficult times to preserve
EBITDA. Most private equity managers use three methods
to determine the fair value of their holdings. The three
methods used are
1. public market comparables
2. private transaction comparables, and
3. discounted cash flow models (DCF).
Most private equity managers use a weighted average of
Source: Burgiss, UBS. As of 31 Sept 2022.
these three methods to assess the value of each portfolio
company. Transactional comparables and DCF are generally
Valuation
stickier than public comparables and hold their value better
While public markets have experienced volatility, with share
as they are less impacted by market news flows and investor
prices swinging up and down based on investor sentiment,
over reactions. Sponsors are not forced sellers in a market
private equity markets have shown more stability. Private

03
Private markets

downturn and this helps to provide price stability. Due to feedback will not always be available. However, the lack of
these reasons, investors who are currently holding private transparency has historically been worth the wait, as private
investments will likely see less severe mark downs. markets have demonstrated the ability to deliver outsized
returns with lower levels of volatility.
However, private equity markets are not fully insulated
from broader economic conditions. As interest rate rise,
borrowing costs for private equity firms and their portfolio
Private equity – outlook
companies have also increased. Higher rate also lead to
We see value-oriented buyout strategies, in particular with
higher discount rates used in private market valuations.
investments in take-privates and divestitures, to be a
While private equity markets have weathered the current
growing trend in 2023. Value-oriented buyout strategies
environment well, a prolonged downturn or high interest
focus on acquiring majority or significant control of mature,
rate environment would impact operating fundamentals,
established companies that are profitable but typically low
and ultimately performance of private funds. The dynamics
growth. These are companies with proven business models
around private equity markets show that they have
and a customer base in a stable industry. As such, value-
unique characteristics relative to public markets. With its
oriented buyout firms are relying on the resilience and
longer time horizons and valuations based on business
defensiveness of the companies’ cash flows, even during
fundamentals versus public sentiment, private equity may
economic downturns. While the growth may be modest,
be more resistant to short-term volatility. However, private
the stability of cash flows in strong or weak markets is
equity is not fully separate from macro conditions, and a
appealing.
highly challenging economic environment could reveal more
stresses.
With the resetting in public market valuations, value-
oriented buyout managers have looked towards take-
The gap between Private Equity buyout valuations and
privates to find discounted deals. Take-private deals are
public valuations have narrowed. The public EV / EBITDA
those where a publicly traded company is acquired and
multiples are now closer to private entry multiples. While
taken private, or no longer traded. According to Pitchbook,
public companies are imperfect proxies, they help provide
there were 79 PE-led take-privates announced in 2022.
pricing private assets, which typically trade below public
Those deals were done at an average discount of 8.5% to
equities due to illiquidity, the long-term nature of the assets,
the 52-week high of the target company’s share price. This
and often, built in conservatism by the manager. Private
has been the strongest two-year run for take-privates in
Equity managers still paid up for quality assets. PE managers
15 years. For limited partners, these value-oriented buyout
indicate that larger, more mature businesses with stable
strategies aim to seek exposure to more stable companies
income stream, particularly those in IT, still commanded high
that can better withstand a recessionary environment.
valuations.
Within the value-oriented buyout space, we like investments
Fig. 7: Private market multiples vs. public market in sectors with stable cash flows and growth potential such
multiples as technology and healthcare. In the current environment
of higher inflation and a tight labor market, one investment
theme is the use of technology to solve for labor shortages.
Managers investing today are looking for companies that
have defensive characteristics relative to inflation risks, such
as a low labor component and low supply costs. Another
area of focus for PE managers is strong, growing businesses
with low levels of cyclically, strong market positions, and low
reliance on volatile input costs.

Historically, Healthcare and IT have driven the greatest

performance compared to other GICS sectors. According
to Cambridge Associates performance data, IT had the
Source: FactSet, Pitchbook, LCD, UBS. As of 30 Sept 2022. strongest performance and Energy had the lowest relative
performance (Fig 8).
Private equity funds are intended for a long-term investing.
The patience of capital creates a strategic edge that allows
managers to execute multi-year value creation plans and
capitalize on longer-term market trends to outperform
public markets. A proper evaluation of performance
requires patience and an understanding that immediate

04
Private markets

Fig 8: Since inception private equity performance Fig 9: Operating metrics by GICS sector
by sector

Source: Refinitiv, Cambridge Associates, UBS. Data from Jan 2000 - Mar
2022.

Technology, in particular, continues to be the favorite in

inflows and deal volumes. IT continues to demand high
purchase price multiples because the sector also produced
top revenue and EBITDA growth (Fig 8). Healthcare follows
as a close second though with slightly lower valuations and
lower use of leverage. EBITDA growth continues to be the
primary driver for value creation and IT and healthcare are
the top two performers. Managers continue to put money
to work in sectors that demonstrate that growth and will
pay up for quality assets. In contrast, sectors with high debt
levels or exposure to interest rate pressures like consumer
have fallen out of favor. Given the economic slowdown, it
is our view that investors should focus on value- oriented
buyout funds which tend to be more robust to higher rates
and the economic cycle and offer a premium over public
market equities.

Healthcare – Drug development, AI, genomics

Global secular trends provide strong tailwinds for the
healthcare sector.
1. Demographics: Aging population, higher incidence of
chronic diseases, growing middle class seeking better
quality, and individualized healthcare.
2. Technological innovation: new therapies, mRNA
technology, AI, and lowered cost of gene sequencing.
3. Increased spend: pressure to find affordable products
and services, increased spend by government, and fast-
track processes for drug development as evidenced by
the US Covid response.
We still continue to favor healthcare companies that are
Source: Cambridge Associates, UBS, as of 31 Mar 22.
established, cycle tested, have positive EBITDA, strong Multiple & margin data represent acquisitions between Jan 2000 - Dec
differentiated assets with a secured pipeline of revenue and 2020. Revenue & EBITDA growth data from Jan 2008 - Dec 2020.
low cap-ex spend.

05
Private markets

Technology - Digitalization, software, cybersecurity 2. GPs who are fundraising want to show distributions
The deal environment for IT is likely to remain favorable, and return capital to LPs will look to more GP-led
given the long-term trends in increased digitalization secondaries.
and tech innovation that will drive attractive growth
3. IPOs continue to be slow and GPs will look to exit
opportunities in the sector. Tailwinds such as a tight
through GP-led secondaries.
labor market drive the need for automation and labor
efficiency. Managers are likely to remain active buyers of Momentum in fundraising is likely to pick up in 2023 with
tech companies despite headwinds from the rising cost several large global players coming to market in 1H 2023.
of capital and inflation. Additionally, tech companies have We view secondaries to offer several potential benefits for
fallen to more palatable valuations, and as evidence, we investors and may represent a particularly attractive entry
have seen more take-private deals recently. point relative to primary private equity funds because of
their unique risk and return characteristics.
Secondaries
According to latest industry reports, global secondary Fig 10: Secondary market portfolio pricing as a
volume reached $108 billion, the second largest in history. % of NAV
Limited Partners (LP)-led transactions, which is selling single
LP positions in private funds, accounted for the majority
of transactions, as LPs looked to rebalance their private
portfolio that has swelled over recent years. Pensions and
sovereign wealth funds accounted for the majority of LP
sellers, with many of these sellers looking for liquidity to
rebalance portfolios in an environment where distributions
have slowed. General Partners (GP)-led transactions, or
“continuation funds” continue to see volume as high-
quality, value buyout assets continue to be in demand as
investors “flight to quality”. As private investments are
being held longer, the traditional ten-year fund life may
not be enough time to unlock the full value of these Source: Jefferies, UBS. As of 31 Dec 2022.
investments. A GP-led secondary creates a way to return
capital to existing LPs while allowing new investors to come
in. The GP works with a new investor to create a new fund
Private credit – market update
and buy the asset or assets from the old fund. These new
investors will often-times inject new capital alongside the Performance
GP, enabling the fund to maximize the value of the assets According to Cliffwater data, global private debt continues
by extending the holding period. to outperform the leveraged loan market, returning 4.2%
for the one-year period through 3Q22 versus Morningstar
Despite the robust activity in 2022, the widening gap LTSA US Leveraged Loan Index returning (–3.3%) through
between private and public market valuations led to a the same time period. On a 10-year period through 3Q22,
spread between buyer and seller pricing expectations. This private debt returned 7.4% compared to leveraged loan
bid-ask spread kept some LPs waiting on the sidelines return of 1.6%. However, investors should note the low
waiting for a potential rebound in pricing. By end of 2H interest rate environment during that period (Fig 11).
2022, with further public market deterioration, pensions
and other LPs who were over allocated to privates were Fig 11: Annual return of direct lending vs. US
more willing to take discounts in order to rebalance. Pricing high yield corporate bonds
fell further to 81% of NAV, down from 86% of NAV at
1H 2022. Year over year, the average discount to paid on
NAV increased to ~20% in 2022 versus ~8% discount in
2021 with the largest discounts, but very few transactions,
in venture capital.

We believe 2023 secondary volume will increase due to

1. LPs will continue to need liquidity in a year with slow
distributions and continued capital calls. Those LPs who
sat on the sidelines waiting for better pricing in 2022 Source: Cliffwater Direct Lending Index, Morningstar Direct, UBS. As of
30 Sept 2022.
may see better marks through year-end.

06
Private markets
Valuation marks for private debt are typically done on a
monthly basis compared to the quarterly basis typically seen
in private equity.
Fundraising
While direct lending funds have seen strong fundraising in
dollar terms, the number of funds closed has declined. This
suggest that investors remain positively inclined towards the
asset class, but are being more selective in allocating to
specific funds. Investors appear to be concentrating larger
allocations in fewer, more established managers. Total direct
lending fundraising in 2022 could end up higher than 2021.
Within private debt, distressed debt, special situations, and
mezzanine funds have gained momentum in fundraising
as investors seek opportunities with higher returns, though
with added diversification of risk.
Fig. 12: Private credit fundraising
Source: Preqin, UBS, as of 30 Sept 2022.
Cash flow
Year-to-date through Q3 2022, limited partners continue to
be net cash flow negative. Given the strong fundraising over
the last five years, it is not surprising to see capital getting
called and put to work. Primary issuances by traditional
lenders have fallen and remain muted given high interest
rates and the volatility of the market. Managers have been
turning more towards private debt to finance their deals
which will continue to drive volume and yields.
Fig 13: Global private debt cash flows
In billions
Source: Burgiss, UBS. As of 31 Sept 2022.
Even as financing rates have increased for private
companies, private debt continues to see deals getting done
through year-end 2022 while syndicated loan (public debt)
deal count dropped off sharply (Fig 14). In December, there
were two significant private credit deals announced (Thoma
Bravo’s USD 8 billion take private of Coupa, and Advent’s
USD 6.4 billion take private of Maxar Technologies) that
would have traditionally been done in the syndicated loan
market, that can be taken as an indication that private debt
has good momentum going into 2023.
Fig 14: Count of LBOs financed
Source: Pitchbook, LCD, UBS. As of 31 Dec 2022.
Private credit – outlook
We continue to see private debt as attractive for investors
as a diversifier from traditional fixed income. It is critical to
understand the illiquid nature of the asset class and conduct
due diligence on the manager and the type of private debt
they invest in. We continue to favor private credit managers
who can manage rising interest rates, have strong discipline
in underwriting investments, have a senior cap table focus,
have a quality and diverse portfolio, have an experienced
team to maximize recoveries, and have flexibility to lean into
distress or special situations if they arise. With additional
interest rate hikes expected, rising yields would broadly
benefit direct lending strategies given their floating rate
nature. However, continued higher hikes in interest rates will
add pressure to companies’ ability to service their borrowing
costs.
We continue to see private debt as a source of funding
as banks continue to pull back from leveraged lending.
While defaults and distress levels have remained low so
far in 2023, it is worth monitoring given rising debt costs
and prevalence of covenant-lite loans. Proskauer Private
Credit Default Index, a quarterly report that tracks defaults
among loans, revealed a default rate of 2.06%, an increase
from the previous quarter’s rate of 1.56%, and the second
straight quarter for which the rate increased. This is still
lower than historical average default rate of 2.7% but is
worth watching. Given that such direct lending is negotiated
directly with the company, managers of private debt have
other levers they can use to extend the runway for payment
such as payment-in-kind (PIK), debt-for-equity swaps, equity
07
Private markets
injection from sponsors, or other negotiations with the
company to avoid default.
Fig 15: Public and private debt recovery rates
Source: S&P, UBS. As of 31 Dec 2020.
Investors should note that default rates are half of the credit
loss story, it is also worth noting the recovery rates. As
most direct lending deals are first lien senior secured debt,
we can look at public data to try to gauge the recovery
rates (Fig 15.). Historically, the average recovery rate for
first-lien loans is 71%. Average recovery rate for senior
secured loans was 55% and outperform all subordinated
debt. However, private credit investments may also provide
stronger covenants for investors which can help mitigate
losses.
Private real estate – market update
2022 was a year of significant dispersion between
private commercial real estate (CRE) and publicly traded
REITs. Despite rapidly rising interest rates, tighter lending
standards, widening lending spreads and significantly higher
implied capitalization (cap) rates in the public REIT market as
compared to the private market (Fig 16) private real estate,
as measured by the NCREIF NFI-ODCE Index generated total
returns of 7.47% while public REITs, as measured by the
FTSE NAREIT All Equity REITs Index generated total returns
of -24.37%.
Fig 16: Private market transactional cap rates,
REIT implied cap rates and 10-year Treasury yield
trends
Source: MSCI Real Capital Analytics, FactSet, UBS Estimates. Data from
Jan 2001 - Dec 2022.
We believe a number of factors contributed to the wide
performance dispersion including:
• Investors in the highly liquid publicly traded REIT
market can react in near real time to changes in
economic and interest rate data. In addition, public
REITs entered 2022 at elevated valuations after coming
off a banner year in 2021 when the FTSE NAREIT All
Equity REITs Index returned 43.24%. By comparison,
the private CRE market is significantly less liquid and,
as interest rates increased rapidly in response to Federal
Reserve actions, the volume of private market CRE
transaction activity declined precipitously in 2022
(Fig 17), making real time price discovery much more
challenging. Further exacerbating this is the wide bid/
ask spread between buyers and sellers.
Fig 17: Private market transactional CRE volumes
Source: MSCI Real Capital Analytics, UBS. Data from Jan 2002 - Dec
2022.
• 2021 and 2022 were particularly strong years for
multifamily and industrial acquisitions (Fig 18) with
these two sectors accounting for 62% and 61% of
private market transactions respectively. In addition,
implied cap rates for publicly traded multifamily and
industrial REITs increased significantly between 2021
and 2022 (Fig 19) while they remained relatively steady
in the private market over the same time period.
Further, multifamily and industrial have been the
preferred property types of many private CRE investors,
particularly over the past several years. As such,
the high concentration of private CRE to these two
property types that have continued to generate sold
net operating income growth despite rising interest
rates and a slowing economy combined with the wide
differential between implied and transactional cap
rates likely accounts for a significant portion of the
performance differential.
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Private markets
Fig 18: Private market transactional CRE volume
breakdown by property type
Source: MSCI Real Capital Analytics, UBS. Data from Jan 2001 - Dec
2022.
Fig 19: Multifamily & industrial transactional and
implied REIT cap rate trends
Source: MSCI Real Capital Analytics, FactSet, UBS Estimates. Data from
Jan 2021 - Dec 2022.
• Private CRE funds experienced significant asset inflows
in 2021 and the bulk of 2022.
• Private CRE fund asset valuations and total returns are
traditionally based on appraisals whereas public market
REIT prices are set by investor expectations of values.
Appraisal-based valuation has often been criticized for
being a lagging indicator of value, particularly if the
appraisal is reliant on comparable transactions as a basis
of valuation. As we discussed previously, the volume
of private market CRE transaction activity declined
precipitously in 2022 and the wide bid/ask spread
between buyers and sellers has made price discovery that
much more challenging.
Fig 20: Historical global private real estate
fundraising
Source: Preqin, UBS. As of 31 Sept 2022.
We agree that appraisal-based valuation can often result
in lagged valuations. That said, a number of the larger
private REITs utilize an asset-by-asset discounted cash flow
(DCF) valuation methodology in calculating fund net asset
values (NAV). In our opinion the DCF methodology allows
fund managers to more accurately reflect near real time
data including interest/discount rates, revenue and expense
growth rates and exit cap rates. We recognize that the
DCF methodology may not reflect what the true NAV of
a fund might be should the manager seek to sell all the
assets at once, we believe a DCF valuation that accurately
reflects current and projected market trends is a much more
reasonable approximation of true value in a non-distressed
setting.
Private real estate – outlook
Given the substantial outperformance of private CRE in
2022 some degree of mean reversion with public REITs
would not be unexpected. We base this conclusion on
several data points including:
• Q4 2022 witnessed a significant reversal in
performance between the public and private markets.
The NCREIF NFI-ODCE Index generated total returns
of -4.97% while public REITs, as measured by the
FTSE NAREIT All Equity REITs Index generated total
returns of 5.52%. In addition, the FTSE NAREIT All
Equity REITs Index generated total returns of 10.67%
in January 2023. Although NCREIF data for January
2023 is not yet available, the lagged nature of private
CRE valuation could lead to further narrowing of the
private/public performance spread.
• As the data in Figure 21 highlight, over a longer period
of time public REITs have actually generated higher
absolute returns than their private real estate market
counterparts. We would note however, that in all
time periods highlighted (5, 10, 15 and 20 years)
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Private markets

private CRE generated higher risk-adjusted returns as Fig 23: REIT sector NAV discounts
measured by the Sharpe Ratio. In our view, the higher
risk-adjusted returns combined with the low correlation
of private CRE with the broader public markets makes
private CRE an attractive asset class for those clients
who can tolerate the illiquid nature of private CRE.

Fig 21: Public REIT and private market CRE total

and risk-adjusted returns over the past 5, 10, 15
and 20 years

Source: FactSet, UBS. Data as of 17 Feb 2023.

• The latter part of 2022 saw several large, well known

Source: NCREIF, UBS.
• As of 17 February 2023, all public REIT property
classes were trading at a discount to consensus NAV
estimates, with some sectors trading at substantial
discounts (Fig 22). Although NAV discounts in the
public market can persist for some time, we believe
this points to a more favorable relative valuation of a
number of public REIT property sectors relative to their
private market counterparts.
Fig 22: Public REIT and private market CRE
implied and transactional cap rate trends
private REITs limit investor withdrawals as redemption
requests exceeded the monthly and quarterly limits
offered by these funds. It is certainly possible that
redemption requests could remain elevated for the
foreseeable future. Although we believe it is unlikely
as these funds have the ability to halt redemptions
in their entirety, it is possible that some of these
private funds could resort to asset sales to meet
redemption requests. Should this occur, it could put
downward pressure on property prices, particularly in
the multifamily and industrial sectors as these are the
largest exposures of many of these funds. This scenario
would ultimately result in further negative performance
for private REITs. Should this occur, and we wish to
emphasize we believe the risk is low, it could provide
public REITs with the opportunity to bolster their
portfolios with assets in property types with appealing
long-term fundamentals at more attractive valuations.

Source: MSCI Real Capital Analytics, FactSet, UBS Estimates. Data from
Jan 2001 - Dec 2022.

• As Figure 23 highlights, the spread between private

market transactional cap rates and public REIT implied
cap rates is below long-term averages as implied cap
rates have risen much more quickly in 2022 than their
private market counterparts. We believe this adds
additional credence to the view that public REITs are
currently more attractively valued.

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Private markets

Non-Traditional Assets

Non-traditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed
futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and
only by means of offering documents that include information about the risks, performance and expenses of alternative investment
funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund
is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same
regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount
of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment
loss; (4) are long-term, illiquid investments, there is generally no secondary market for the interests of a fund, and none is expected
to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be
required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may
be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and
expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured
depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept
them for an extended period of time before making an investment in an alternative investment fund and should consider an alternative
investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in
these strategies:

 Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with
investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-U.S. securities and illiquid
investments.
 Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers
focus on all strategies at all times, and managed futures strategies may have material directional elements.
 Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They
involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax,
real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated
with the ability to qualify for favorable treatment under the federal tax laws.
 Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice,
and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of
investment.
 Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even
for securities denominated in U.S. dollars, changes in the exchange rate between the U.S. dollar and the issuer’s “home” currency
can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other
risks (such as political, economic or regulatory changes) that may not be readily known to a U.S. investor.

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Private markets

UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Management business of UBS Switzerland
AG (regulated by FINMA in Switzerland) or its affiliates ("UBS").
The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.
Generic investment research – Risk information:
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investment, you must read the relevant offering materials for that investment. Structured investments are unsecured obligations of a particular issuer
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do not provide tax advice. Investors should consult their own tax advisor about their own tax situation before investing in any securities.
Important Information About Sustainable Investing Strategies: Sustainable investing strategies aim to consider and incorporate
environmental, social and governance (ESG) factors into investment process and portfolio construction. Strategies across geographies and styles
approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may
inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment
objective and other principal investment strategies. The returns on a portfolio consisting primarily of sustainable investments may be lower or
higher than portfolios where ESG factors, exclusions, or other sustainability issues are not considered by the portfolio manager, and the investment
opportunities available to such portfolios may differ. Companies may not necessarily meet high performance standards on all aspects of ESG

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Private markets

or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility,
sustainability, and/or impact performance.
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Version A/2023. CIO82652744
© UBS 2023.The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

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