Short-term US and Canadian government debt
We favor a barbell approach of shorter-duration maturities of less than two years (yielding 5.0%-5.5%) and mid-duration maturities (10-year US Treasuries) that yield 4.6%. Adding duration increases the chances of meaningful bond price appreciation should 10-year Treasury yields decline by 100bps+ either due to subsiding inflation or if recessionary conditions emerge.
Private Credit (offering potential returns from low double-digits to mid-to-high teens).
Senior direct lending strategies are offering asset-level gross yields of 12%-13% with lower leverage levels and better covenants.
The opportunity set is especially interesting for middle-market borrowers as regional banks are likely to pull back on lending and private credit can increasingly capture share.
The demand for flexible junior capital – provision of flexible payment structures (mix of cash and PIK interest) – is also increasing and offers asset-level mid-teens IRRs. Additionally, these capital solutions can demand stronger protections in terms of financial and maintenance covenants.
Asset-backed credit solutions are seeing increased demand as companies seeking liquidity are pledging high-quality sources of collateral such as receivables, inventory, and certain fixed assets.
Private Equity
Secondary volume has been picking up throughout the year both for LP-led transactions and for GP-led deals.
While discounts have narrowed recently, they remain higher than normal, and buyers increasingly have options to cherry pick certain desired funds from multi-fund portfolios available for sale.
Given low exit activity and nearing maturity walls for several PE fund vintages from 2007-2011, we expect GP-led continuation vehicles to increase with transactions involving several high-quality assets.
Growth equity is becoming increasingly attractive as a subset of private equity.
Valuations are more reasonable relative to frothy conditions in 2021 / H1 2022.
Additionally, companies are achieving better mix of revenue growth and profitability in terms of key metrics. In prior years, companies were far too focused on revenue growth at any cost.
