Alternative Opportunities is a quarterly report from Invesco Solutions. In each new edition, we look at the outlook for private market assets. In particular, we focus on private credit, private equity, real estate, infrastructure and commodities.
Private credit
The backdrop supporting a more favorable transaction environment is firmly in place, including better visibility into the macro environment, softening inflationary pressures, potential rate reductions, and heightened pressure from limited partners (LPs) for private equity (PE) firms to generate realizations and invest in new platform companies.
Private equity
Leveraged buyouts (LBOs) are facing tremendous pressure to realize distributions to limited partners in a constrained exit environment due to elevated valuations and a limited appetite within public markets for initial public offerings (IPOs). We reassert our focus on growth strategies versus those that require expensive levels of debt.
Real assets
We remain confident that, depending on the region, we are either at or close to the trough of private real estate valuations. We have seen a convergence of public and private real estate pricing and capitalization rates have bounced from recent lows, leading us to upgrade core real estate to a neutral rating.1 Hence our upgrade of real assets to neutral.
Hedge funds
At present, merger arbitrage spreads are slightly above their long-term average and represent a decent total return potential. We believe allocations to merger arbitrage hedge funds will likely come from fixed income in this environment.
Commodities
Commodities hit a 15- month high during the quarter, led by the surging price of metals, including silver and copper.2 As a result, trend measures saw the largest improvement in Q2 and allowed the asset class to transition from underweight to neutral.
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Source: Bloomberg, MSCI, NCREIF, Moody’s Analytics as of 6/30/24.
Source: Bloomberg, as of 6/30/24
Real estate pricing: Short-term view needs long-term perspective
To determine what current pricing, expected fundamentals, and capital spending mean for future returns, the long view on real estate cap rates provides perspective.
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Three reasons to consider real estate credit now
Higher yield potential, reduced basis, and opportunities for alternative lenders due to proposed capital requirements for banks are positives for real estate credit.
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Information is provided as at May 31, 2024, sourced from Invesco unless otherwise stated.
Leverages buyouts (LBOs) is the acquisition of one company by another using a significant amount of borrowed money to meet the cost of acquisition. The borrowed money can be in the form of bonds or loans. The assets of the company being acquired are often used as collateral for the loans along with the assets of the acquiring company.
Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.
Alternative strategies typically are subject to increased risk and loss of principal. Consequently, investments such as exchange-traded funds which focus on alternative strategies are not suitable for all investors.
Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.
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