The investment landscape continues to evolve, carrying trends from previous years into 2025. Experts suggest this creates an attractive environment for generating returns through alternative investments (alts).
The Economic Backdrop
The economy is experiencing a unique period where inflation and monetary policy rates are settling at levels higher than pre-COVID, accompanied by strong economic growth. Many advisors are looking to deploy significant cash reserves, but recognize that public equity market valuations are high. Overexposure to U.S. equities is a concern for some, and uncertainty around Federal Reserve policy and inflation is causing volatility in the public bond market. This reinforces the diversification and return advantages of private market assets.
Key Considerations Before Investing in Alts
Before diving into alternative investments, here are some important steps to consider:
- Explore the Full Range of Options: U.S. private markets offer exposure to a much wider range of companies than public markets. This includes sectors like private equity, private credit, private real estate, and real assets like farmland and infrastructure. Alts can be essential for portfolio construction.
- Adopt an Appropriate Investment Horizon: To fully realize the diversification and return benefits of alts, investors should plan to hold the allocation for at least five years.
- Understand Liquidity Needs: Accurately assess liquidity requirements to determine the appropriate allocation to semi-liquid or less-liquid assets.
Potential Investing Ideas in Private Markets
Here are some private market ideas to consider:
- Private Real Estate: Real estate is poised for a potential comeback in 2025. Limited new construction due to the high-rate environment, combined with a strengthening economy, could boost demand. Opportunities exist in sectors like industrial, medical office, and senior living facilities.
- Private Credit: The private credit space is rapidly growing, and selectivity is key. Attractive opportunities can be found in higher-quality areas of middle-market direct lending to private equity-backed companies, offering attractive yields and a consistent source of cash flow.
- Farmland Investments: Farmland offers portfolio diversification due to the consistent demand for food and strong income gains driven by increased productivity. Technological advancements in farming continue to drive the sector's unique return profile.
The Importance of Due Diligence
As the dispersion of private market returns may be greater than that of publicly traded assets, thorough due diligence is crucial. Partnering with someone who has multiasset experience is an essential prerequisite for building a portfolio under the new economic paradigm.
