With rates still expected to stay “higher for longer,” risk premia in public equities and public fixed income is narrow. In our view, private markets can offer options, especially in private equity secondaries, large corporate direct lending, asset-backed finance, and other areas.
Key Takeaways
- Even if the Fed embarks on an easing cycle in September—as we now expect—we believe that average interest rates will remain relatively “higher for longer.” If so, we believe that portfolio allocations today should be designed with the expectation of sustained elevated rates in mind. But where can investors find risk premia?
- High levels of concentration and still lofty valuations (despite recent sell-offs) have combined to narrow the risk premium in public equities. Meanwhile, in public fixed income, still tight spreads have made it difficult to find attractive yields at, in our view, reasonable risk levels.
- We believe that private markets can offer an alternative to muted risk premia in public markets.
- Although higher rates pose some challenges to traditional “growth” buyout private equity (especially those not focused on purchase price and, therefore, more dependent on multiple expansion to meet potential return targets), we see attractive risk-adjusted returns in the secondaries markets.
- On private credit, we believe that an expanding and increasingly diverse addressable market can be a source of attractive risk premia, with opportunities in large corporate direct lending, asset-backed finance, and other areas.
- We believe replacing a portion of public equity and fixed-income allocations with private assets has the potential to add sources of attractive risk premia today, diversify portfolios, and enhance risk-adjusted returns over time.
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