Mid-term US government debt
We favor adding duration to fixed income holdings as US Treasury yields are 4.6% to 4.7% for bonds with maturities of 5-to-10 years. 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.
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 a 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.
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 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 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.
