Alternative opportunities quarterly update

Executive summary

Portfolio risk: We remain neutral on how we’re allocating risk within our alternatives portfolio into the new year. We are encouraged by the stabilization of equity and credit markets, the revival of M&A activity, and a normalization of base rates. We favor defensive alternatives, favoring private debt, real assets, and hedged strategies.

Private credit: We are still overweight direct lending as all-in yields remain attractive for senior positioning, especially in the core middle market. Significant private equity dry powder and a backlog of exits point to a continuation of recently improved deal activity. We are overweight real estate credit given high levels of current income and a recovering real estate equity market.

Private equity: We remain underweight private equity (PE), but beneath the surface, we are beginning to normalize our views on leveraged buyouts versus growth strategies. The reopening of capital markets and aging of dry powder lead to a rapid deployment of PE capital in the second half of 2025.

Real assets: We’re slightly increasing our exposure to real estate as our conviction for the outlook that valuations have bottomed is beginning to firm. Capital market activity in the U.S. real estate equity market improved meaningfully in 2025, though price growth has been mild and tenant demand continues to adjust to public policy shifts.

Hedge funds: We believe hedge funds with lower betas to market risk may be a valuable alternative within a portfolio. Our view is still attractive towards hedge funds, however it is moderating as the capital markets reopen and outlook for equity markets improves.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations), and investors may not get back the full amount invested.

Alternative strategies may include investments in private equity, private credit, private real estate and infrastructure, which may involve additional risks such as lack of liquidity and concentrated ownership. These types of investments may result in greater fluctuation in the value of a portfolio. Private Market investments are exposed to risk, which is the risk that a counterpart is unable to deal with counterparty obligations. Changes in interest rates, rental yields and general economic conditions may result in fluctuations in the value of any underlying strategies. These types of strategies may carry a significant risk of capital loss and other market risks.