Popescu highlights the asset mixes of notable private investors like CPP Investments, which hold a roughly 60 per cent allocation to some form of alternatives. He notes that given the considerable volatility attached to stocks, bonds alone lack diverse enough drivers to function as a means of risk mitigation while still driving returns. He sees alternatives broadly as valuable diversifiers and sources of risk offset.
CPP Investments and other institutional asset managers can hold such massive allocations to alts because they don’t have the same liquidity requirements as an ordinary investor. Popescu acknowledges this and notes that Harbourfront has built alternative funds available to its clients which offer greater liquidity. Their private credit and private real estate funds have 30-day liquidity, while their private equity fund has 90-day liquidity. At the same time, by pooling assets these alt funds are better able to access assets that may have a higher investment barrier.
Popescu does not advocate for a one size fits all approach to alts allocations. He leaves that to the discretion of clients and their advisors. He says that some clients may end up with 40 or 50 per cent allocations to alternatives, but each client will have a unique mix. Popescu even argues that retiring clients, who may on the surface need greater liquidity in their investments, should look at alternatives because they come with less volatility than public assets.
Of course, recent times have taught us that alternatives are not a monolith. Harbourfront themselves divide alternative allocations between private equity, private debt, and private real estate. Of those three asset classes, the current rise in interest rates has been a headwind for private equity and private real estate. However, Popescu emphasizes that private credit presents some interesting prospects in this environment.
Most private credit lenders offer variable loans, which mean that investors are collecting more income in today’s higher rate environment. While higher rates may come with higher default rates, well chosen lenders should not overextend and should have the capacity to manage those risks. He believes that some adjustments in private asset allocations may be required given the headwinds some asset classes now face, but he also believes strongly in these asset classes. He notes that private equity is already starting to become more active as M&A deals pick up again following the dearth of activity post-2022. Real estate, too, may face headwinds from borrowing costs, but certain asset classes like multifamily housing also have massive tailwinds from extremely constrained supply.
