July 10, 2023 | 2 MIN READ

Weekly Market Update

Alternative Investing Through a Slowing Economy

What happened last week?

  • The S&P 500 fell 1.16%
  • The Dow Jones lost 1.96%
  • The Nasdaq composite retreated by 0.92%

After 14 stronger-than-expected reports in a row, June’s nonfarm payroll total of 209K jobs came in slightly below consensus. Still, the labor market remains tight, and the market believes the Fed will raise rates again by 25 basis points on July 26.

3 Things to Know

Alternatives have been resilient in 2023

Asset allocation can play a critical role in driving potentially better returns over the next economic cycle. Investors should consider rotating their portfolios toward different risk assets, geographies and strategies in the second half of 2023 and in 2024.

We believe alternative investments can be a key component of this. The sheer diversity of investment strategies available to fit individual risk appetites is especially appealing at turning points in markets.

The macroeconomic climate has affected capital raising and capital market accessibility for many alternative investment managers this year. At the same time, opportunities to take advantage of market stress, capital dislocations and asset repricings are prevalent.

Capital dislocations have created imbalances; securities have been mispriced and competing sources of capital have been sidelined by market dynamics. Limitations on bank balance sheets are also changing sources of capital for transactions and major capital expenditures.

From a global private capital fundraising perspective, $318.8 billion less was raised in 2022, although commitments of $1.2 trillion was still the fifth-highest amount raised in any year.

The fundraising trendline saw a further 42% decline year over year in Q1 2023. Early fundraising data for Q2 indicates that capital raised will be flat relative to Q1.

There was also emphasis on secondary, private debt and buyout offerings, while venture capital (VC) and real estate fundraising lagged. The continued fundraising slowdown is in part driven by investor asset allocation.

As public markets declined and exits for alternatives became harder, their exposure to alternatives as a percentage of their portfolios went up. Investors attempting to pursue a steady commitment pace have pulled back on the number of managers and strategies they support, rather than ceasing commitments altogether.

Buyout financing and hedge funds

While the ability of companies to access the capital markets has seen periodic relief in 2023 relative to the latter half of 2022, 63% of the new bond volume has been for refinancings, rather than acquisitions.

Given the rapid rise in yields and the uncertain outlook for corporate profits, credit markets have largely remained closed to companies with weaker balance sheets. This lack of liquidity in public markets for new issues, those that did come to market saw 1.0x to 2.0x lower debt multiples than in 2020 and 2021.

Borrowers who can’t access public markets are looking to private credit managers and Business Development Companies.

Lenders are able to get better terms from these borrowers in 2023, who must sacrifice on structure and price to stimulate interest, providing loan investors better protection and higher yields on performing credit.

Hedge funds saw an uptick in net capital flows of $9.1 billion in the first quarter of 2023 as macroeconomic and financial risks and volatility increased significantly on the back of regional bank failures and other dislocations.

Citi Global Wealth Investments
Charlie Reinhard - Head of North America Investment Strategy
Lorainne Schmitt - North America Investment Strategy

See our weekly CIO Strategy Bulletin for more details