As the investment landscape shifts, family offices and institutional investors are reevaluating their strategic asset allocations. Key areas of interest include private credit, hedge funds, real estate, sustainability, and private equity. However, each allocation has unique risks and benefits in the current environment.
Private credit continues to attract investor interest, with $42.5 billion raised in Q1 2022 according to PitchBook data. Advantages of private credit include portfolio diversification and the ability to exert control over lending terms. However, deploying capital may prove challenging amidst lower M&A activity, which declined 48% in Q1 2022 per Dealogic. Vintage year also matters – loans made in 2021-2022 had looser terms versus funds raised now.
73% of family offices expect hedge funds to meet or exceed targets over the next 12 months per UBS. Macro strategies may benefit from market dislocations. However, long/short equity still faces high valuations (S&P 500 P/E ratio of 20x as of August 2022 per Yardeni Research). Hedge funds could also see outflows as institutional investors rebalance across alternatives.
Private equity offers access to private companies and potential for excess returns. But valuations remain elevated, with the average U.S. LBO purchase price multiple at 11.5x EBITDA in 2021 per Bain & Company. Rising rates also pressure returns. Firms able to invest in distressed assets can find opportunities. Vintage year matters here as well.
While uncertain, real estate holds long-term appeal for patient investors. Cap rates have risen to over 7% for some property types, presenting possible value. However, downturn risks remain – commercial real estate prices are up 19% from pre-pandemic levels per Moody’s Analytics. Partner selection and track record are critical during periods of market stress.
While still a nascent area, sustainability investments present growing opportunities as ESG considerations become more mainstream. Investments in areas like renewable energy, electric vehicles, and carbon reduction could see secular tailwinds. Global sustainable fund assets reached $2.7 trillion in 2021, up 53% from 2020, according to Morningstar. However, the space lacks consistency in reporting standards and performance track records. Manager selection is key – those with deep expertise and experience investing in sustainability are better equipped to identify quality opportunities. Investors need rigorous due diligence and a long-term focus on this emerging asset class. For example, renewable energy investments have seen solid returns, with the S&P Global Clean Energy Index up 55% over the past 5 years compared to 49% for the S&P 500.
Overall, investors have several options to enhance portfolio diversification and returns. However, prudent asset allocation requires careful evaluation of risks and timing in the current investment landscape. Flexibility will be key to capitalizing on the most attractive opportunities.