Four alternative investments for today’s higher interest rate environmentFouralternativeinvestmentsfortoday’shigherinterestrateenvironment

The investment landscape remains uncertain amid stubbornly higher interest rates, an unpredictable geopolitical environment, and divergent economies around the globe. In the webinar, “Unlocking Alts in an Age of Uncertainty,” PGIM experts discussed emerging opportunities across a broad spectrum of the alts universe:

Opportunities in affordable housing

“When we look at housing fundamentals in the U.S., the demand for rental housing has outstripped supply for the last 15 years,” said Soultana Reigle, head of U.S. Equity, PGIM Real Estate. “As a result, we are structurally under-supplied, particularly at the lower end of affordability [for individuals and families making less than 80% of area median income], where we see demand to be the greatest.”

“That combination of a stable backdrop in the U.S. economy, very good rent growth, very low vacancies, and sustained demand make the case for investing in affordable housing — particularly on the creation, something that we find very compelling and a near-term opportunity.”

Opportunistic credit strategies

With the era of cheap borrowing in the rear view and defaults rising, companies are increasingly going outside traditional channels to meet their capital needs, said Ryan Kelly, head of Special Situations, PGIM Fixed Income. “Inflexible pools of capital have grown significantly across the credit market, which is reducing the ability to adjust to the changing market conditions,” he says. “Lending markets are shrinking, tied to the central banks around the world reducing their own balance sheets. As that tide goes out, there’s less of an ability for certain managers to be front-footed and deal with some of these challenges.”

To take advantage of this environment, Kelly sees three broad areas of opportunity — liability management, mezzanine strategies in public fixed income, and classic distressed debt and restructuring strategies. Helping companies address balance sheet and capital structure problems through these transactions could drive significant uncorrelated returns across the credit cycle.

Direct lending to the middle market

Over 2023, as central bank rates rose and borrowing became more expensive, the market share for nonbank direct lending continued to grow. PGIM Private Capital’s Dianna Carr-Coletta, partner, Direct Lending, said conditions are ideal for investors in direct lending, though deals are harder to come by in a competitive marketplace. Looking at non-sponsored deals (deals not backed by private equity or another third-party financial intermediary) opens up a wider market with more favorable terms to lenders.

“A lot of direct lenders are trying to increase the deal flow by moving from upmarket to middle-market. But they’re all staying in the sponsor space. And that’s not true diversification of deal flow,” Carr-Coletta says. “Ninety percent of middle-market companies are privately owned. That is where the banks have traditionally financed those companies,” Carr-Coletta said. “As we see regulatory restrictions continue to impact bank lending, there’s an opportunity for direct lenders to step into that space and take some market share.”

Staying liquid with a systematic macro strategy

Katsaris recommends a systematic macro strategy — designed to adapt to macroeconomic and geopolitical trends.

“Systematic macro strategies explicitly take the macro environment and emerging trends into account; they consider sentiment, and factors like value and carry, so that they can navigate this tactical investment horizon,” Katsaris said. “Systematic macro strategies have historically done well during recessions and high inflationary environments.”

If both economic growth and inflation surprise to the upside, Katsaris cautions that the Fed might push on the brakes too hard and cause a hard landing next year, which will “hit equities hard.” “What you need is an agile liquid strategy like systematic macro that can deliver returns by repositioning, and therefore cushioning the blow, whichever scenario might arise.”

Watch the replay of the “Unlocking Alts in an Age of Uncertainty” webinar or read the white paper.

 

The investments and returns discussed within do not represent any PGIM product. This material makes no implied or express recommendations concerning how a client’s account should be managed. This material is not intended to be used as a general guide to investing or as a source of any specific investment recommendations.