We are looking at three verticals that stand out right now. One is growth equity. We are looking at where we are in the market cycle, the rate cycle. We are probably facing a period of expansion ahead of us. It might be a rocky road, but that’s not necessarily a bad thing for growth investors with a longer timeline.

We still like credit. Looking over the horizon, we are expecting rates to come in. We still think that spreads on those types of investments are pretty lucrative and pretty attractive to us. We are in this higher for longer sort of [rate] environment. I don’t think there’s any need to have instant trepidation about the upcoming year or few years because you have to think about it in terms of the whole market cycle. Those products and that particular asset class has performed in the double digits, really in the teens for the trailing 12 months. We think that’s a pretty interesting place to be for some time to come.

And then real estate. It’s kind of broad. If I was going to focus on one area, we do like industrial. There’s something to be said for the underlying infrastructure of our economy and what is underpinning value in those specific markets and that particular class of investment.

We don’t look at individual alternatives as a singular strategy or a singular suggestion. We think of alternatives from a portfolio context, no different than when we think about building traditional portfolios and piecing together growth and values. It’s always about the portfolio and it’s always about what objective the investor is trying to solve for.

If the investor is targeting return enhancement, that naturally lends itself more toward things like private equity. If it’s more about yield generation, it’s alternative income. Price stability—real assets. Lower volatility—hedge funds. We are always starting from that framework, and within each one of those four categories, there are always attractive solutions within each.

I’ll start with private equity because we are believers that private equity is one of the better ways to enhance risk-adjusted returns over the long run. But we need to pay attention to market dynamics and know where and how to build the optimal portfolio. We happen to like small and middle-market leveraged buyouts. That’s a category that we target consistently—there are numbers to back it up. There are thousands fewer public companies today relative to the late 1990s. And there are fewer funds going after those smaller companies. You have a natural mismatch, so [we like] private equity that focuses on that space, companies with revenue less than $100 million. They are a huge opportunity and [there are many] companies to go after. That is a sweet spot for us that we like.

When considering building an alternative enhancement portfolio, we generally like to shop on the more conservative side of that. If you limit the multiples that you pay, it naturally limits the downside risk inherent in some of these investments. We’ve gained a lot of traction and advisors have really bought into this concept because it’s a way to capture an inefficient portion of the ever-growing private equity landscape more conservatively.

If I could go further within private equity, there are still other good opportunities today. Secondaries are attractive, but it depends on which manager you are working with. We are looking for managers with a proven track record of not just investing in secondaries, but opportunistically investing in secondaries. What we’ve observed over the last couple of years is that 2023 will turn out to be a positive year for bonds. But the first half of 2023 was negative for bonds. Because of that, a lot of institutions like pensions sold a lot of bonds in 2023. They naturally saw the portion of their portfolio that was in bonds lose value and they were over their amount of private equity for their allocations. So, they were in a sense forced sellers through the middle of last year and that created good opportunities in the secondaries market.

We also like, while building our portfolios, venture and the growth side. It was a rough couple of years for venture capital. We saw some meaningful price adjustments. If you were in 2021, 2022, you might have seen some markdowns. But what we’ve also seen is there are some more attractive entry points for new rounds of venture today. That is one area we’ve been where there are some opportunities, but we are certainly allocating smaller amounts to venture than we are to things like small and medium buyouts.

One of the most popular areas in alternatives has been direct lending. Private credit continues to grow considerably. The private direct credit market is almost the same size as the junk bond market at this point. What we’ve observed, just like in private equity, we saw massive adjustments, companies going from public to private. We are seeing the same thing in the debt market. We think we are still in the relatively early innings of this evolution toward more private credit. There are a lot of opportunities out there as banks have gone out of business. Historically, we’ve seen small and middle-market companies utilize direct lending. What we are now seeing is that even large cap companies are using direct lending over syndicated loans. And what that means is that investors have access to higher quality, first lien, senior debt with covenants, with a spread. It creates really attractive terms and it’s done quite well. On the downside, this area is getting relatively crowded, so you need to be careful with the managers you are using and some of the older debt out there, and you also have to be mindful that a lot of this debt is tied to SOFR, which is floating rate. So, while it benefitted the loans over the last couple of years as rates have risen, we could see the reverse if and when rates go down. But we still like the space, we think it’s a great way to diversify an alternative income allocation further.

If someone says I want to diversify my income bucket, we like to spread that out across income-generating strategies, diversification strategies, as well as even some equity strategies, just as a way to diversify your source of the yield so the lower correlation across those asset classes will help protect the investors on an ongoing basis. So, we like direct lending, we think it has the potential to perform well across all periods of the economic cycle and we like that it’s higher quality across the capital structure.

If I could throw out one other area we like that has been a bit out of favor lately: core real estate. When we talk about core, we differentiate it from opportunistic or value-add. We are talking about lower leverage properties that are fully occupied or close to fully occupied, need little enhancement, they are in their mature income-generating stage. This segment of the commercial real estate industry has experienced notable drawdowns over the last 12 to 15 months as interest rates have been on the rise. There’s definitely an inverse relationship there. However, we think with the notion that we are heading toward a period of [more stable] rates, the vast majority of those markdowns are behind us and investors can get in at a very attractive entry point. The overall return is in the high single digits, most of which is coming from an income stream and most of that income stream often has tax advantages. It really is an interesting area that’s been out of favor, and some might find a little boring because it doesn’t offer yields in the teens. But we like those areas of the market that produce very stable returns that have lower leverage and they form a good core of the portfolio.

When you look at how we position alternatives at Beacon Pointe, we don’t want to look at the alternatives allocation as a return chase. We view it as a diversifier and return enhancement. We’ve always had somewhat of a strategic allocation to alternatives, whether it’s private equity, private credit, private real estate, or other real assets areas.

Then, we can make slight tilts and changes to the allocation targets depending on the current market environment. If we are looking at today, part of the market we still believe in is private credit. When we look at private credit, we think that with these elevated yields that we are able to achieve, the stability in the lower middle market, and upper middle market area, has been strong. And you are able to get a very good premium over the public markets over that period of time.

And if we are looking at what has taken place within the real estate market, obviously a lot is going on there, there is a lot that needs to shake out. But we still see pockets of opportunity there. We would see that it would still be in industrial and multifamily areas due to lack of affordability. But then also, with REITs taking a fair brunt of 2022, they are also starting to show some pockets of opportunity.

Private equity continues to ride out and produce consistent returns, so we are pleased with that. The private credit space continues to perform well, so we are very positive about that.

And we are getting into a few strategies within the infrastructure space. Obviously, infrastructure has been more of a global investment by larger institutions over the years. If you look outside the US, there is much more private investment in infrastructure. In the US, given the lack of spending in the infrastructure space and the public-private partnerships that are taking place, if you look at some of the renewable aspects (windfarm, solar, and other types of energy), it leads it to be more of an attractive space as it comes to be more opened up to the private sector. That is an area we are looking at and saying—where can we participate, get consistent returns, and maybe some income? So that’s an area we are exploring because we think the need and demand are there, and we just need to get the supply of capital into those areas of importance. That is an area where we have been as a committee digging into.

What we are really homing in on is the manager in each one of those areas—private equity, private credit, private real estate and also real assets. I think it’s incredibly important to understand the manager’s capabilities in those areas and the liquidity profile that they can provide for the investors. Knowing that they are at a critical size from an AUM perspective to manage any outflows that may take place.

Given where we are in the cycle and the last bear market really being defined by a pretty significant decline in the value of tech, I would say we’ve spent a good amount of time thinking about and moving toward investing capital in tech-oriented things.

We are natural optimists, so we believe the world will go on. We believe technology is a large part of the economy and will continue to be for a long time.

In the last two or three years, we’ve done a good amount in tech lending. And then I would say, at this moment, we are continuing to do tech lending, but we are starting to shift a little bit of our capital towards equity. Preferring later stage venture at this point—when you look at valuations across the venture capital landscape, I think it’s pretty clear that late stage venture experienced most of the pain in the last cycle. That’s not to say that the businesses are doing poorly. The businesses are growing and doing quite well, experiencing growth that anybody operating a business would love. But they are trading at valuations that are equal to where they were two or three years ago despite experiencing 50% to 100% growth and more.

Obviously, you can’t just throw capital at the wall, you have to be careful about it and pick your spots. But we think getting to invest in later stage venture right now makes sense. And we are continuing with the tech lending as well.

Our primary approach within real estate currently is real estate debt. I think we’ve seen the commercial banks take a good step away from commercial real estate debt markets and see very compelling returns on real estate debt. We’ve been allocating there. Real estate cycles are slow, so it takes patience. And I think many investors, clients, and other RIAs think the cycle should occur in commercial real estate. It just requires extreme patience. We are on the debt side of things right now. We can envision a world where we move toward opportunistic equity. But I would say we are not quite there yet.

We passed on solar two or three years ago. The market had gotten extremely competitive and projects had gotten quite expensive. That has flipped to a certain extent. And now, as best we could tell, solar developers are almost desperate for capital and help in completing their projects. So we are definitely spending time in solar right now deciding whether we think that’s something to do in 2024. This would be true equity-oriented development of solar projects, providing capital to solar developers to actually construct the project.

Private debt looks attractive as traditional lenders are pulling back, leaving a void for private credit managers to fill at better than average coupons. Currently, private debt investors benefit from attractive yields and very favorable bargaining power on financing terms. Given the uptick in interest rates over the past couple of years, we believe that private credit remains a strong asset class to invest in.

In a gradually lower rate environment (like the one that’s priced into the market), returns for private debt may erode, but are likely to remain fairly robust. The void left by banks pulling away will result in favorable terms for investors and offsets some of that risk in the near term.

We are also looking at secondaries and co-investments within private equity. As shown by the trends in continuation funds, investors in private equity may be looking for more liquidity.

In this environment, with high interest rates and concerns about certain parts of the credit markets, I really like the distressed debt markets. Opportunities there, private credit, those spaces are probably the top choices for allocating funds to the alternative space.

When we sit down with a client or a prospective client, and we talk about making an allocation to alternatives, we first talk about the standard areas we should look at, which are areas that have a lower correlation to the broader market. So, long-short equity has always been very popular. There are fantastic managers across that space and it’s liquid. Some people don’t want to invest in alternatives because of the time frames you have to commit to and assets aren’t liquid. So long-short is always an allocation I recommend because returns are decent and liquidity is high.

Other spaces I like are parts of the real estate market. I’ve had success with different single-family home managers buying single-family homes as rental properties. Those have done very well. I like that space.

Then, private equity is another space that’s always popular and a good allocation. In private equity, those clients need to understand the commitment is long. You can be in that fund for over 10 years as that manager makes investments and works out those investments.

I am allocating [to private credit], and I am definitely putting new money to work in that space for clients. Again, there is a lot of dislocation in the credit markets, with a lot tied to real estate. We all see what’s happening in the big cities, and offices, so there are opportunities in the credit markets. Some companies are not well-financed and have debt coming due. There are opportunities there for these private credit managers. And it’s very low correlated to what’s going on in the stock market. For those reasons, I am making allocations there. That’s probably the top place I am putting new funds for alternatives.

The biggest thing with alternatives is to really educate clients so they understand what they are getting into. A lot of clients hear “alternatives” and they think “Oh my god, this is fantastic, I am going to make instant money. I am getting into some investment that very few people can access.” But the reality is most alternatives are a long-term investment. That’s where you really see the benefits.

Higher interest rates make private credit investments more attractive, and with banks limiting their lending, opportunities to deploy capital in private credit have increased, particularly in corporate lending, asset-based lending, and commercial real estate lending. However, with the crowding of this space investors will need to focus on competitive differentiation to succeed.

Private equity GP capital solutions, GP-led and LP-led secondaries, GP stakes, and NAV lending are attractive in the current financial environment. With higher interest rates and lower multiples, GPs may increasingly look to alternative capital solutions that secondary players provide. This can lead to a broadening set of investment options for GPs and LPs alike, offering more flexibility and potential for growth.

Infrastructure—with the growing maturity of institutional quality evergreen funds in the high-net-worth space, infrastructure investments could provide uncorrelated returns to investors. The government-backed dollars in energy transition and infrastructure projects offer a potential tailwind for this investment opportunity.