Alternative opportunities quarterly update

Executive summary

Portfolio risk: We remain neutral on how we’re allocating risk within our alternatives portfolio due to elevated downside growth risks, high equity valuations, and benign capital markets activity. In general, we’re more defensive, favoring private debt and hedged strategies versus private equity. 

Private credit: 

• While we may see some compression in direct lending spreads and original issue discounts (OID), we still believe that all-in yields will remain attractive relative to liquid credit strategies.
• Real asset and alternative credit yields continue to remain elevated relative to their long-term averages.

Private equity: Dry powder continues to sit idle as public market valuations remain high, and “take-private” transactions are at record low levels. Lower interest rates and tighter spreads will likely improve the leveraged buyout (LBO) outlook as the thawing of the exit market will be a welcome shift for PE managers and investors.

Real assets: Within commercial real estate, a trough in valuations and stabilization of cap rates at tight levels have driven confidence that the start of a new transaction cycle is close at hand. Despite elevated valuations and record levels of dry powder in infrastructure, an easing of policy may provide a runway for investors to deploy 

Hedge funds: 

• Spreads within event-driven strategies remain high despite limited capital market activity from mergers and acquisitions as private equity remains sidelined.
• Trend-following strategies have historically benefited from a tailwind during periods of high and declining rates.