Alternative Allocations: Reversal of fortunes

On April 2, in a much-hyped press conference, the Trump administration announced a series of tariffs with most of the US’ global trading partners, ranging from 10% to more than 40%. While Trump had campaigned on raising tariffs, the magnitude shocked the markets, leading to one of the biggest back-to-back losses in equity market history, significant volatility in Treasuries, and raising fears of a global recession.

Initially, Trump and his team stated that their goal was to reset trade policies with global partners, and they would not be open to negotiating. Several trading partners, notably China and Europe, announced counter-tariffs on US goods.

Then, in a stunning announcement on April 9, Trump shifted course and announced a 90-day pause to the tariffs as the United States seeks to re-negotiate with most partners. The administration offered no such reprieve to China, but instead escalated tariff rates. Equity markets staged a significant rally on this news.

There are still a lot of unknowns—but Trump’s signaling of a willingness to negotiate has calmed the markets somewhat and seemingly given investors more time to digest the impact of tariffs.

What does this mean for the private markets?

Coming into 2025, we thought that the administration would be more business-friendly and lighter on regulations, leading to a pickup in merger and acquisition activity and initial public offerings. We thought that the Federal Reserve would continue to cut rates which would reduce the cost of capital and benefit private market activities. Looking ahead, our highest conviction areas are private equity secondaries, real estate, and commercial real estate debt.

We remain constructive on secondaries. Prior to the recent tariff-induced market volatility, institutional investors in private funds were seeking liquidity via the secondary market. The latest volatility increases the need for liquidity, and may increase deal flow for secondary managers. We anticipate an elongation of the hold periods for private assets. Our expectation is that the current market environment will present an attractive buying opportunity for institutions that may be further overallocated to private equity.

Real estate valuations are down dramatically from 2021 peaks and generally well below replacement cost. As noted in our 2025 outlook, there are a few troubled sectors (offices, malls), but far more attractive sectors (industrials, housing). While the rising risk of a recession may negatively impact many real estate sectors with temporarily slower demand, we see the long-term fundamental drivers as remaining in place and supporting the strength and durability of real estate, particularly industrial, housing and health-care- related sectors.

Our outlook for real estate debt was largely based on the need to refinance a “wall of debt,” and banks’ reluctance to lend capital in the current environment, thereby offering an attractive opportunity for private lenders. Recently, there have been growing concerns regarding the amount of capital that has been raised in direct lending, and the tightening spreads. However, commercial real estate debt can provide attractive risk-adjusted returns, and diversification from direct lending.

We had also identified two macro themes that we thought would play out in the coming years. We believe there will be a larger dispersion of returns between the winners and losers, favoring seasoned managers who have managed capital through good times and bad. Managers who are disciplined in deploying capital should do better than those who are putting capital to work without regard for the price or whether the investment will pan out.

We also noted the difference in putting capital to work today versus capital deployed prior to 2021. Managers with dry powder can be much more selective in deploying capital at attractive valuations and favorable terms. Leading up to 2021, valuations became stretched, and managers were fighting for prized assets. Today, we think managers can be more disciplined in putting capital to work.

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