A 2024 Outlook On Alternatives

Michael Madden, Contributing Editor & Research Analyst, Wealth Solutions Report

Barrett Upton’s Co-CIO Shares Predictions For Alts Including Private Credit, Venture Capital, Private Equity, Secondary Markets And Real Estate

As advisors know, alternative investments are “alternative” in name only, having become the third investment category in many portfolios as portfolios containing only traditional equities and debt faced a challenging environment in recent years. Given the key role alts now play in wealth management, the 2024 outlook for alternatives is as important as that of bonds or stocks for advisors and their clients.

To give advisors a glimpse into the future for certain large categories of alts investing – private credit, venture capital, private equity, secondaries and real estate – we spoke with Andrew Krei, Co-Chief Investment Officer of Barrett Upton Capital Partners, an alts platform which launched this summer that is designed for high net worth and institutional investors.

Andrew Krei, Co-CIO, Barrett Upton Capital Partners

WSR: What opportunities do you see for private credit investing in 2024? What are the drivers?

Krei: Increased volatility across the syndicated credit markets has created several attractive opportunities for private lenders in the current environment. The slowdown in high-yield and leveraged loan issuance, along with the pullback of traditional bank lending, has left private credit well-positioned to fill the shortage of capital across the traditional middle market.

With less capital competing for deals, we expect private credit to benefit from higher benchmark rates, wider spreads and more lender-friendly structures that will better support the asset class through a cycle.

Private credit is well-positioned to fill the shortage of capital across the traditional middle market.

While not our base case, the risks of recession both in the U.S. and globally are not off the table. For more opportunistic and distressed strategies, a protracted period of slower growth and elevated credit stress would provide a rich environment to extend financing to good businesses facing near-term liquidity needs.

WSR: What is happening in venture capital and private equity, and where should advisors look to deploy cash next year?

Krei: Within venture capital and private equity, the market reset that started in 2022 should continue to create compelling opportunities for investors deploying capital over the coming quarters/years. Capital raising and investment exit activity are cyclical, and today’s environment of higher interest rates, tighter lending conditions and valuation compression has led to a dramatic slowdown in transactions. With less capital competing for deals, we think the year ahead is shaping up to be an attractive investing environment for managers with capital to deploy.

WSR: What is the status of the secondary market? Where will it and secondaries funds be moving in 2024?

Krei: Bottlenecks to investors wishing to exit have created a unique environment for venture capital and private equity secondary trades. Fewer private portfolios can liquidate their investments because the IPO market remains largely shut and M&A activity has dramatically slowed. With a dry exit market, limited partners (LPs) are increasingly utilizing secondary markets to rebalance their private equity portfolios or generate liquidity.

Secondaries are an attractive avenue to deploy capital into high-quality assets, often at discounts to recent marks.

On the general partner (GP) side of the market, GP-led transactions such as continuation funds and single-asset deals are allowing managers to keep their trophy assets while proactively generating liquidity for investors. This has made secondaries an attractive avenue to deploy capital into high-quality assets, often at discounts to recent marks.

WSR: Where will real estate alternatives go next year?

Krei: Real estate faces a perfect storm of challenges, including higher borrowing costs, tighter bank lending and a wave of refinancings over the next 24 months. These challenges will likely force a reality check on fundamentals, leading to narrowing bid/ask spreads and an uptick in deal activity. Headwinds facing specific sectors – particularly an oversupplied office market – may take years to fully resolve.

Despite challenges, real estate is diverse, with pockets of opportunity.

Despite the challenges, this asset class is diverse, with pockets of opportunity. Capable managers can still deliver strong returns to debt and equity investors in higher quality segments with secular support, such as data centers and logistics, and demographically driven asset classes, like medical offices and senior housing. Asset selection will continue to be critical due to a widening dispersion of returns.

Michael Madden, Contributing Editor and Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com.

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