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

With elevated downside growth risks, high equity valuations, and benign capital markets activity, we’re remaining neutral on how we’re allocating risk within our alternatives portfolio in the second quarter of 2025. In general, we’re more defensive, favoring private debt and hedged strategies versus private equity. Here are key takeaways from each asset class. Read the complete Q2 report.

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

Deal flow remains challenged with recent activity well below the 2021 peak. The leveraged buyout (LBO) environment is muted because large valuation gaps have kept many private equity deals on hold. Alternative lenders are poised for a robust year of loan origination due to a surplus of real estate debt dry powder and a continued pullback by banks. We remain constructive on the backdrop for direct lending because of macroeconomic and anticipated deployment tailwinds. Real estate credit remains our preferred way of accessing real estate markets, with the anticipation of a coming bottoming of valuations.

Private equity (PE): Underweight due to moderating valuations 

Private equity faces headwinds in today’s environment. High interest rates will likely be balanced by lower public market valuations post-selloff. While uncertainty looms from tariffs, we believe a favorable regulatory environment for domestically oriented sectors within PE (such as those in the middle market) may provide some counterbalance.

Real assets: Neutral as valuations approach trough and start to appear attractive in real estate

While cap rates remain muted relative to interest rate levels, we view real estate valuations as relatively attractive compared to public and private equity markets. After recent policy and sentiment volatility, the expected Federal Reserve cuts should be supportive of lending costs and cap rates in our view.

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

After stock markets entered a technical correction, hedge funds with lower betas to market risk may be a valuable alternative within a portfolio. Spreads within event-driven strategies remain high due to the limited capital markets activity from mergers and acquisitions as private equity remains sidelined.