Macroeconomic

Alternatives: As the dust settles

In brief:

• Last year saw broad repricings across many alternative assets that are still in various stages across different market segments.
• Light transaction volumes made it more challenging to get a firm gauge on asset valuations; however, the dust appears to be settling.
• Some of the most pressing investor concerns for 2024 will likely be diversification, inflation hedging and alpha --areas where alternatives historically have added support.
• U.S. inflation has notably declined and could soon reach the Fed's 2% goal, though may be closer to 2.5% longer term, providing opportunities for inflation-hedging assets.
• Strong public equity markets delivered double-digit returns in 2023, but a higher-for-longer rate environment could refocus attention on stock-picking and private equity alpha producers.

Multi-alternatives strategies

Strengthening portfolio resiliency with expanded diversification

In brief:

• The current investment cycle continues to point to the potential benefits of including alternative assets in a well-diversified portfolio.
• Investments in private equity, private core infrastructure and private real estate can collectively help bring “AID” to a traditional asset portfolio in the form of alpha, inflation risk mitigation and dislocation opportunities.
• A diversified multi-alternatives allocation can provide flexibility in pursuing investment goals by potentially increasing returns, reducing volatility and better diversify overall portfolio exposures, irrespective of the risk appetite of the investor.
• Historical segment rotation in core alternatives and generally much wider manager return dispersions in non-core alternatives offer considerable potential to enhance performance through active management.  
  
• At this point in the cycle, credit-like alternative assets, equity-like alternative assets with pricing power and secondary investments appear particularly attractive.

Private equity

Diligent manager and asset selection will be crucial to success in the current market cycle

In brief:

• The long-term outlook for private equity remains broadly attractive, offering potential opportunities to enhance portfolio return and reduce volatility.
• Last year’s slowdown in deal activity reduced upward pressure on valuations.
• In the current landscape, secondaries and co-investments appear to offer emerging investment opportunities.
• On the buyout side, we continue to favor the small mid-market given generally lower entry multiples, greater value creation potential and broader exit avenues.
• Return dispersions are likely to expand even more in the current cycle, making diligent manager selection even more critical to capture top-quartile returns.

Real estate

Pricing resets offer considerable upside potential

In brief:

• Commercial real estate investments have historically offered higher income than bonds with inflation-correlated appreciation.¹
• The rapid runup in interest rates and resulting deal activity slowdown have meaningfully reset property valuations from early 2022 peaks, offering opportunities to invest in select, high-quality assets at significant discounts.
• Broad repricings have occurred across sectors, creating meaningful value in properties that remain fundamentally solid.
• Opportunities are also being driven by major shifts in how people consume, live and work due to changes in demographic, technological and social trends that continue to reshape how people use real estate.
• We see potential in single-family rentals, last-mile logistics and development optionality as the market begins to recover and evolve through the current cycle.

¹ Private Real Estate: NCREIF Fund Index—Open-End Diversified Core Equity.

Core private infrastructure

Attractive opportunities for long-term private investors

In brief:

• Core infrastructure should continue to benefit from strong structural tailwinds around the need to modernize, replace and decarbonize existing assets.
• While the asset class, like many, has seen a compression in risk premia, valuations have remained largely resilient, supported by the essential nature of these services, stable cashflows, as well as explicit and implicit inflation pass-through attributes.
• The recent more challenging fundraising environment as interest rates have risen has created opportunities for well-capitalized private investors.
• We expect opportunities in 2024 to be driven by the magnitude of investment required for the energy transition, closed-end funds looking for exit opportunities and corporates looking for additional capital outside of the public markets.
• Active management remains key in the segment given the wide dispersion of asset and strategy returns and continued uncertainty around the current macroeconomic environment.