Current macroeconomic headwinds and public market volatility are pushing portfolio diversification – in its truest sense – right to the top of investors’ agendas.
In a prolonged low interest rate environment, where monetary support from central banks is still propping up financial systems, and global trade wars and Brexit continue to take a toll on confidence, investors are being pragmatic. Alternative investment strategies, including private equity and private debt, which have always been secondary to listed equities and bonds, are coming under the spotlight.
Front of mind is the hunt for yield and a demand for inflation-proof investments. In the private capital arena, investors are after assets that will not only give them a return after a time, but ideally deliver cash along the way as well. If assets are uncorrelated to mainstream market movements too, helping to further spread sources of risk and return within portfolios, so much the better.
What is hot in the current climate
Within alternative funds, there is a huge variety of asset types and strategies, and as with portfolio diversification in general, investors should try to have fingers in many different pies. Decisions around what to include will of course vary from investor to investor, but it is worth looking at which fund strategies have the most potential in the current climate, before entering this space or increasing allocations to alternatives. Sterling-based investments are preferable right now, but beyond that, in my view, some of the most attractive areas of opportunity currently include:
Ethical, Social and Governance-focused investments are a fast-growing area, and demand for socially and ethically conscious or ‘green' assets is unlikely to subside any time soon. Long-dated, cash-generative funds investing in green energy infrastructure is one exciting option, especially as companies (led by the likes of Apple and Facebook) are keen to demonstrate their carbon neutrality.
Private debt and other credit strategies
At this late stage in the credit cycle, private debt/credit strategies where investors occupy a senior position in the capital structure and where lending is cashflow or asset-backed, hold strong appeal. Their cash-generative nature mitigates the J-curve associated with returns from some other types of alternative assets.
Private equity/venture capital strategies with an edge
Technology continues to dominate venture capital appetites, with tech businesses that can break down geographical barriers and make markets more efficient, in high demand. Outside that competitive sphere, private equity strategies that can differentiate themselves from other private equity funds, for example by focusing on a specific niche or an overlooked market segment such as smaller management buyouts (which have outperformed larger buyouts according to the most recent British Venture Capital Association data), can be rewarding. So too, those with a value-adding strategy such as a ‘buy and build' approach.
Distressed credit/special situations
Economic uncertainty brings with it increased risk of corporate distress and market dislocation, so it's possible that opportunities will increase for specialist strategies which can acquire underperforming assets at a discount and restructure them to maximise returns.