Many of the issues that impact traditional investments also affect alternative investments, but among some of the challenges lie opportunities, write Stephen Dover and Tony Davidow for Franklin Templeton.
Private Credit
Last year provided both economic headwinds and private-credit tailwinds. Headwinds included rising rates, high inflation, a slowing economy, and tighter lending conditions. The tailwinds were expanding spreads, lower leverage levels, better covenants, and higher illiquidity premiums. These conditions were amplified with the collapse of Silicon Valley Bank and the related contagion.
Today’s conditions are similar to the post-global financial crisis market environment, in which private credit managers stepped in to fill the void left by traditional banks. The SVB collapse will give private credit managers the upper hand when negotiating favorable pricing, terms, and covenants. This will most likely lead to a larger dispersion of return between experienced managers who know how to navigate the challenging environment and those whose sole experience is investing capital during an easy money environment.
Private Equity
When it comes to private equity, valuations reset from their imposing 2021 numbers. Higher interest rates along with tighter credit conditions should put pressure on private equity valuations this year, and investors should brace for a possible down round. Additionally, private equity fundraising is down significantly from its 2021 peak.
But while private equity deals and exits have slowed, secondaries activity has increased as institutional investors look to rebalance their portfolios. This means that secondaries currently represent an attractive and growing opportunity.
Do you trust the markets to take care of your future? In today’s economic environment, having options besides public stock, bonds, and mutual funds may reduce the risk in most portfolios.
Learn more about accredited investing and alternative assets.
Commercial Real Estate
In 2024, there will likely be a sizable dispersion of returns across the universe of commercial real estate strategies and managers. Much of the success or failure will be determined by sector and geographic allocations.
In this challenging market environment, seasoned managers who have the flexibility to skillfully allocate across the real estate landscape will most likely be rewarded for their ability to be more opportunistic. As the current real estate market condition is an asset repricing not because of a decline in cash flow but due to rising interest rates, managers putting capital to work today could find themselves in a position to buy prime assets at attractive valuations.
Fred Hubler, the CEO and Chief Wealth Strategist at Creative Capital Wealth Management Group in Chester Springs, has been telling clients to prepare for a financial winter.
“Based on all the data we see and the amount of debt at the government, corporate, and personal level, we had been making moves to help our clients create a defensive portfolio and limit, where we can, downside stock market risk,” he said.
Read more about the 2024 outlook for alternative investments at Franklin Templeton.
Want to know if you’re on the right path financially? Creative Capital Wealth Management Group’s Second Opinion Service (SOS) is a no-obligation review with one of CCWMG’s Wealth Strategists.
Schedule an SOS Meeting with Fred Hubler and his team.