Mid-term US government debt
We favor adding duration to fixed-income holdings if US Treasury yields approach 4.5% for maturities of 5-to-10 years (yields are currently at 4.2% for 10-year maturities).
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 Equity
Secondary volume remains strong 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 high-quality assets.
The quality of LP portfolios and GP continuation vehicles offered via secondaries continues to improve as buyer and seller expectations converge.
Growth equity is becoming increasingly attractive as a subset of private equity.
Valuations are more reasonable than during frothy conditions in 2021 / H1 2022.
Additionally, companies are achieving a better mix of revenue growth and profitability regarding key metrics. In prior years, companies were too focused on revenue growth at any cost.
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%, 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 have tightened meaningfully 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 financial and maintenance covenant protections.
Asset-backed credit solutions are seeing increased demand as companies seeking liquidity pledge high-quality sources of collateral, such as receivables, inventory, and certain fixed assets.
Interestingly, on the one hand, credit spreads for publicly traded corporate and high-yield debt are at tight levels. Yet, credit funds are reporting increasingly robust pipelines, indicating wide dispersion regarding borrower access to credit.
