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The term “alternative assets” refers to non-traditional investments that fall outside the familiar realm of stocks, bonds, and cash. They include asset classes like hedge funds, commodities, real estate, as well as investments in private companies.

In a recent briefing note, UBS stated that investors could consider replacing around 20-40% of their exposure to public markets with alternatives, depending on their specific circumstances.

What makes alternatives ‘alternative’? There are many answers to that question, but a key difference is that alternative asset managers typically target ‘alpha’. In common parlance, this refers to ‘beating the market’ (or ‘beta’).

When the market is set to become more volatile or in danger of low growth, exposure to alpha can not only improve returns but also lower volatility, as returns are less correlated to the market overall.

Within alternative assets is a sub-group of investments called ‘private markets’.

Private markets investing involves buying or lending to companies that are not traded on the stock market. Like other alternatives, it can help investors benefit from the advantages of “alpha”. Unlike trying to outsmart fellow stock market investors, it is a way of side-stepping the competition and seeking out opportunities in pastures new.

As we’ve covered in previous articles, investing in firms directly has numerous benefits during a period of market volatility. Holding periods are typically longer for private equity (around 5-7 years), which shields investors psychologically from the ups and downs of the stock market.

From a statistical perspective, there are many more private companies than publicly listed ones, and hence a greater chance of finding an investment with upside potential.

 Private ownership makes it easier to capitalize on value-creation opportunities, as one has access to management and likely influence on the board.

Furthermore, since many promising companies in growth sectors (e.g. AI-related infrastructure, health, and climate-related solutions) are at a relatively early stage, they are typically accessible only through private investment.

Private debt, or private credit as it is also known, has various advantages compared to public fixed income. Private lending has typically yielded higher returns than public debt over the past decade (3-6% over public high yield and broadly syndicated loans)

, as the companies who seek debt in the private markets often have specific needs or risk profiles that banks or the public markets cannot or will not serve.

It also is normally less volatile than public debt with similar risk ratings.

 As with private equity investments, private debt is less exposed to the effects of shifting investor sentiment and speculation by traders.

If private equity provides growth potential through value creation, private debt can help bolster the income streams of a portfolio, making it more liquid and overall returns more stable.

Private market investments and alternatives in general can offer valuable strategies to manage rising volatility and pressurized returns in the public markets.

The difficulty is knowing which private deals to invest in. The upside potential of a good private company is only valuable if the management team executes effectively. Similarly, lending outside the mainstream channels requires thorough due diligence to mitigate risk. Amid still-elevated interest rates materially altering the lending landscape, diversification becomes even more critical by incorporating the right mix of alternatives alongside traditional assets, investors can better manage risk and enhance portfolio resilience.

The inherent complexity of private market investments is why they have typically been restricted to high-net-worth individuals. Recently, however, firms like The Family Office are leveraging technology to democratize access to private markets, meaning that investors can access both the opportunities themselves and the expertise to maximize them.

When times are good, it’s a good time to explore alternatives.

For further discussion or guidance, feel free to contact us.

Alpha in Uncertain Times: Exploring Alternatives in 2025

Watch the full webinar above for more details.

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Introduction

What kind of opportunities

The Family Office strategies

What are the expected returns?

Private debt caters to diverse investment

Key Lessons from 20 Years of Leading The Family Office: Enhancing Innovation and Driving Digital Transformation

The global economy is expected to deliver above-trend growth in 2025. In the US, GDP is projected to exceed 2%, supported by strong consumer spending and real income growth. Inflation will remain a concern, driven by fiscal deficits and potential new tariffs.

The Federal Reserve is likely to maintain interest rates near 4%, a neutral level that neither stimulates nor restricts growth. Fiscal challenges, including a high budget deficit, will continue to pressure long-term bond yields and investor confidence.

Small- and mid-cap US equities provide good opportunities as valuations are more attractive in comparison to large caps. Corporate bonds remain a source of focus, with strong fundamentals and tight spreads. Mergers, acquisitions, and IPOs are expected to pick up, fueled by reduced regulations under the new US Administration.

The US maintains global dominance in innovation and productivity, though high valuations in mega-cap equities necessitate caution. Japan shows potential for continued outperformance with stabilized currency volatility, while Europe faces mixed prospects as political instability in France and Germany contrasts with relative stability in the UK.

Valuations in private markets remain attractive compared to public equities. Opportunities exist in secondaries, continuation funds, and real estate, especially in sectors like data centers, healthcare, and logistics. Publicly traded REITs also offer attractive entry points.

Geopolitical tensions could disrupt markets, particularly from the US-China trade dynamic and the potential for increased tariffs. Political instability in Europe and unknown global risks, such as fiscal imbalances, remain significant concerns for 2025.

Investors should diversify their portfolios across asset classes and regions. Undervalued small-cap stocks, private equity, and real estate offer strong potential. Caution is advised for US equities, and preparation for volatility from geopolitical and fiscal risks is essential.

Unlocking Future Possibilities: Navigating Success with Vista Equity Partners

Wednesday, September 6, 2023

4:00 pm (GMT+3)

Language: English

Webinar topics include:

Speakers

Viet Nguyen

Moderators

Sami Favre

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Alpha in Uncertain Times: Exploring Alternatives in 2025

Key Lessons from 20 Years of Leading The Family Office: Enhancing Innovation and Driving Digital Transformation

Outlook for 2025: Strategic Allocation in a New Era