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Investors willing to risk cash amid rising interest rates and a weakening economy can take advantage of opportunities away from the stock and bond markets, money managers said at an alternative investment conference in New York on Monday.

“We are in a period of high volatility and uncertainty. asset pricing in general reflects that and it’s hard to borrow money to buy things, but it’s also brought attractive valuations in areas like private credit,” said Jonathan Gray, president and chief operating officer. Officer of Blackstone
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, the world’s largest alternative asset manager with approximately $990 billion in assets. With interest rates rising and government stimulus tapering after a sea of ​​liquidity was provided to weather the economic fallout from the Covid-19 pandemic, conventional financial markets are unlikely to provide as much capital as companies need, executives say.

Speaking at the SHOOK Alternatives 2023 summit, Gray predicted a gradual slowdown in economic growth as inflation slowly loosens its grip.

Along with the Blackstone COO, various wealth managers remained optimistic about alternative opportunities, with some identifying specific opportunities in areas such as private credit, secondary private equity funds and infrastructure.

“The market is generally concerned about the broader economy. The S&P 500 may be up this year, but much of that is due to the outperformance of a few big names,” said Scott Kleinman, co-chairman of private equity giant Apollo Global Management.
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, which has more than $500 billion in assets under management. “There are a lot of redundancies that have to be worked out on the private equity side.”

Traditionally, success in private equity rests on loose liquidity and a trajectory of corporate earnings growth, but none of those in attendance have seen a drop in deal volume over the past year. However, the looming wave of refinancing driven by higher interest rates brings a number of exciting opportunities, particularly in terms of creative structuring and finding new ways to finance deals, Kleinman added. “There is a fundamental secular shift, but also a windfall.”

As banks pull back on traditional lending, that means more opportunities for alternative lenders who can get solid returns on their investments. “Credit is going to be a very interesting area for some time,” predicted David Levy, head of Brookfield Oaktree Wealth Solutions and managing director of Brookfield Public Securities Group. He expects money managers to gain flexibility in choosing investments.

“It’s the ability to go from public to private quickly and give customers that ability,” Levy added. He noted that there are also significant opportunities in infrastructure financing for those with the ability to deploy capital.

“We’re in the middle of a strong bear market rally, but we’re headed for the biggest liquidity drop ever,” warned Troy Gayeski, chief market strategist at FS Investments. It will be much harder to generate returns with vanilla assets, while alternatives can offer high returns with less risk, making them ideal for this environment, he added. “Having dry power is critical to taking advantage of this liquidity vacuum and moving the portfolio yield arrow.”

Meanwhile, Scott Nutall, co-CEO of $500 billion private equity giant KKR
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, was optimistic about the outlook for private markets over the next few years. “At this point in the cycle is when you may tend to make some of your best investments,” he said. “Usually when people get nervous, you lean in, and that’s what we’re doing right now.”

With banks pulling back on lending and less competition from companies tapping the equity and bond markets for funding, there are significant opportunities in private lending, infrastructure and real estate lending, Nuttall said.

“It’s really about really diversifying the equity and bond component of the portfolio and getting access to something that we can’t get in the public markets,” said Adam Epstein, an adviser at UBS Private Wealth Management. He cited private credit, secondary private equity funds, infrastructure and hedge funds, particularly those not closely linked to conventional markets, as key areas of opportunity in which his team invests.

“There’s never a bad time to do private debt or secondary private equity funds,” similarly argues David Burdon, an adviser at Morgan Stanley Private Wealth Management. Offering roughly the same returns as stocks over the past 18 months, but with much less risk, private credit is firmly in favor of wealth managers, he added. He is also a fan of investing in private infrastructure. it is not only inflation resistant but also adds diversification to existing fixed income portfolios.

“Direct lending looks very risky in this environment,” echoed Richard Zinman, an adviser at Morgan Stanley Private Wealth Management. In addition to private credit, he also emphasized turning to more secondary private equity funds and co-investment opportunities as a way to hedge against downturns. Alternative strategies are “great for investors because they help protect them from themselves; the behavioral finance aspect comes out of the equation,” he said.

Several advisers also discussed negative sentiment in commercial real estate, with fears of a slowdown, especially as economic growth slows. As stock markets fell and real estate values ​​rose last year, many people over-allocated and pulled back, slowing demand for the asset class, according to Bert Crouch, head of North America at Invesco Real Estate. While commercial real estate has taken a turn for the worse, there are opportunities now, especially with trends still positive relative to long-term averages with year-over-year gains, Crouch said.

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