Short-term US and Canadian government debt
We favor locking in yield through shorter-duration maturities of two years or less (yielding 4.0%-5.0%). If US 10-year Treasury yields return to the 4.5% level (from 4.1% currently), we would also add mid-duration maturities (10-year US Treasuries). 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 11%-12% with lower leverage levels and better covenants.
The opportunity set is especially interesting for middle-market borrowers as regional banks are pulling back on lending and private credit can increasingly capture share. However, spreads are tightening on larger deals as investment banks have re-entered the market for large leveraged loans.
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 (PE)
Secondary volume has been picking up throughout the year both for LP-led transactions and for GP-led deals.
Given low exit activity and nearing maturity walls for several PE fund vintages from 2007-2011, we expect LP-led secondary volume to increase. We also 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.
