According to data aggregator Pitchbook and a recent survey by State Street, investors are still planning on increasing their allocation to private equity over the next several years. Counterintuitively, even though investors are anticipating challenges due to rising interest rates and the denominator effect, recessionary environments are often the best time to increase allocations to the asset class. Ultimately, private equity vintages that see allocations in recessionary environments have opportunities to buy higher quality companies for less. Even if their cost of capital is higher in the short term, for patient investors, the debt issued to make these purchases can be refinanced into more attractive terms as rates recede. These conditions ultimately lead toward greater profitability for these vintages. That said, this dovetails very nicely with the current debate on the efficacy of the 60/40 portfolio. Investors and media members alike have been debating the vitality of the 60/40 portfolio after a very rough 2022.
Whether or not we subscribe to the notion that 60/40 is dead, we do believe that 60/40 is overly simplistic. For sophisticated investors, there is likely a better (higher return with lower risk) way to build wealth and some of the best solutions come by adding real estate and/or private equity.
