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Actionable Investment Opportunities

In the current investment landscape, we spotlight the appeal of short-term US and Canadian government debt, advocating for maturities of two years or less with yields between 4.0%-5.0%, and suggesting an eye on 10-year US Treasuries should yields rise, offering potential for price appreciation. The private credit sector emerges as a promising area, particularly through senior direct lending with yields of 11%-12% and the growing demand for flexible junior capital, amidst a backdrop where regional banks' retreat has opened avenues for private credit in the middle-market. Furthermore, the private equity sector is gaining traction, especially in growth equity, driven by more attractive valuations and a healthier balance between revenue growth and profitability, making it a ripe field for investors seeking diversified opportunities in both fixed income and equity spaces.
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.     

Continue Reading Topics from This Quarter's Review

Macroeconomic Conditions

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Shorter-term View

As we venture into 2024, equity markets face a complex landscape marked by pivotal issues including inflation’s downward trend, economic growth prospects, and corporate earnings resilience amidst geopolitical uncertainties and

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Equity Markets

In 2023, global equity markets experienced significant growth, with the MSCI ACWI Index rising by 22.4%, largely propelled by growth stocks, particularly in the US where technology giants dominated, leading

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Fixed Income Markets

In the fixed income markets, both safe and riskier categories witnessed significant appreciation during Q4 2023 and into 2024, buoyed by a sharp decline in interest rates. Government bonds and

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Alternatives & Private Investments

In 2023, the alternatives and private investments sector exhibited a diverse performance landscape. The HFRX Hedge Fund Index recorded modest gains, buoyed by strong results in convertible arbitrage and equity-hedge

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Special Topic: Asset-Based Lending

Asset-based lending (ABL) is a crucial segment of the lending market, involving senior loans secured by tangible or financial assets, such as equipment, inventory, and accounts receivables, across various industries.

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