Rethinking Investment Strategy: Increasing Allocations to Alternative Investments

Investors are increasingly shifting their investment strategies to include a higher allocation to alternative investments, particularly private debt, in response to changing market dynamics. According to KKR’s Global Macro & Asset Allocation analysis, the traditional 60/40 equities/bonds portfolio is being reevaluated due to structural changes in the market and a shift towards a high inflation, low to moderate growth environment.

Dino Zuccollo, head of investor solutions at Westbrooke Alternative Asset Management, highlights the growing interest in private debt among South African wealth management businesses. A recent survey of over 100 wealth management firms revealed that 70% are currently allocating to private debt, with diversification and lack of correlation to local markets being key factors driving this trend.

With over 60% of wealth managers planning to increase client allocations to private debt in the future, the asset class is gaining momentum. Zuccollo notes that well-managed private debt funds offer consistent returns above prevailing cash rates, making them an attractive option for investors looking to diversify their portfolios.

Private debt, once considered a sub-category of private equity, has now emerged as a $1.6 trillion asset class, comprising around 12% of the overall alternatives market. The market has tripled in size since 2014 and is expected to double again by 2028, indicating strong growth potential in the coming years.

Direct lending, a popular private debt strategy where lenders negotiate loans directly with borrowers, is particularly appealing to investors due to its benefits such as capital preservation, higher returns, low volatility, and diversification. As investors seek to navigate the evolving market landscape, private debt is proving to be a valuable addition to their investment portfolios.