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Reduced public equity assumptions, historically high PE purchase price multiples and significant stores of dry powder lead to a somewhat more pronounced decline in return estimates for PE vs. other alternative strategy classes. A broader opportunity set may help enhance investors’ returns.
Projected returns are up slightly and imply yields meaningfully higher than comparable public market credits. Premiums can be expected to fall as this private market matures.
We mark up return estimates for most strategies, largely reflecting expectations of a transition from a macro-driven to a more fundamentally driven market environment, supportive of alpha generation.
Though return estimates are down slightly, the outlook for real estate remains a relative bright spot. Positive factors include disciplined supply, constrained leverage and the globalization of real estate investment flows. REIT returns are based primarily on regional core real asset return assumptions and incorporate leverage.
The return outlook for infrastructure equity is unchanged, given two opposing forces: a strong bid pushing up project pricing, and investors’ expectations of higher illiquidity premiums. Infrastructure debt returns are also unchanged, as a lack of investor experience in these markets is expected to keep illiquidity premiums high.
Most current indicators (with the exception of those for the energy sector) continue to point to an upturn in the broad commodity cycle. Our return assumptions imply a 150 basis point (bps) real return over inflation, unchanged from last year. For gold, we anticipate a 25bps premium to commodities.
Source: J.P. Morgan Asset Management; estimates as of September 30, 2017, and September 30, 2016.
* The private equity composite is AUM-weighted: 60% large cap and mega cap, 30% mid cap and 10% small cap. Capitalization size categories refer to the size of the asset pool, which has a direct correlation to the size of companies acquired, except in the case of mega cap.
** The diversified assumption now represents the projected return for multi-strategy hedge funds (vs. funds of funds, as in previous LTCMAs).
† “Conservative” represents the projected return for multi-strategy hedge funds that seek to achieve consistent returns and low overall portfolio volatility by primarily investing in lower volatility strategies such as equity market neutral and fixed income arbitrage.
†† 2018 assumptions for REITs are levered; in previous LTCMAs, these assumptions (not shown) were unlevered.