Short-term US and Canadian government debt
4%+ yields to maturity for US and Canadian Treasury bonds (for short maturities of up to one year)
Public market high-yield bonds and leveraged loans.
7-year annualized expected returns of 7.0% which are favorable relative to equities. However, high-yield bond and leveraged loan spreads may widen further in a recession, which may make short-term performance more volatile.
Private credit strategies are also highly appealing (offering potential returns from low double-digits to mid-to-high teens).
Preferred and structured equity demand is increasingly sharply. Sponsors are increasingly dependent on M&A acquisitions to drive portfolio company growth and cannot add senior debt to their capitalization stacks (either syndicated or through private direct lenders). Preferred equity providers can add 1x-2x turns of leverage at mid-teens+ IRRs.
Opportunistic credit funds should benefit from a wider range of higher-returning potential investments including a) dislocated publicly-traded bonds and loans and b) opportunities to provide bespoke bi-laterally negotiated credit solutions such as rescue financing or balance sheet restructuring to corporations.
Venture debt is increasingly interesting especially post the SVB collapse. The borrower universe has expanded (larger, more-established borrowers), expected yields have increased, and terms have become tighter and stricter. The loans also have an attractive amortization component which leads to an attractive de-risking element.
New allocations to private equity are also becoming more interesting (especially across PE Secondaries)
Activity in the secondary market has picked up significantly during Q1 driven by institutions selling existing LP positions either to a) bring allocations to PE more inline with their targeted ranges or b) facing liquidity issues as distributions are delayed given current market conditions while capital calls are continuing.
Potential deal volume during Q1 2023 is 3x-4x greater this time last year.
Discounts have widened significantly for LP transactions with average deals done in the low-to-mid 80% range of stated NAV vs. low-to-mid-90%s last year. For the first time in several years, modest discounts are even available for best-in-class GP led continuation vehicle single asset deals.
