Alternative opportunities: Outlook for private credit and equity, real assets, and hedge funds

Alternative Opportunities is a quarterly report from Invesco Solutions. In each new edition, we look at the outlook for private market assets. In particular, we focus on private credit, private equity, real estate, infrastructure and commodities.

Due to the combined impact of high stock valuations and the elevated cost of financing, we remain neutral on how we’re allocating risk within our alternatives portfolio. In general, we’re more bullish on defensive alternatives, favoring private debt, real assets, and hedged strategies versus private equity. Here are key takeaways from each asset class. (Read the complete Q3 Alternatives opportunities report.)

Private credit: Overweight as spreads begin to widen in public markets

As market volatility subsides, we’re watching for signs of renewed mergers and acquisitions (M&A) activity. In the meantime, patient credit investors may continue to benefit from a favorable higher-for-longer rate environment. We’re overweight real estate credit due to the high levels of current income and the recovering real estate equity market. 

Private equity (PE): Underweight due to moderating valuations

We remain underweight private equity, especially traditional buyout strategies, which generally require leverage to generate returns. The combined impact of high equity valuations with an elevated cost of financing may be a significant headwind.

Real assets: Slight overweight as valuations approach trough 

We’re slightly increasing our exposure to real estate because our conviction that valuations have bottomed is beginning to form. While we’re optimistic amid easing financial conditions, we remain vigilant because of tight cap rates and a murky outlook from policymakers.  

Hedge funds: Overweight due to levels of arbitrage spreads and central bank easing cycle

Hedge funds with lower betas to market risk may be a valuable alternative within a portfolio, in our view. Spreads within event-driven strategies remain high despite limited capital markets activity from M&As because private equity has remained sidelined.