L&G favours alpha strategy as private market asset classes ‘diverge’
Legal & General Asset Management (L&G) favours an alpha investment strategy for its private markets group in 2025, as it expects to see asset classes become increasingly divergent.
Alpha investment tends to refer to outperformance against an expected level of risk, while beta measures volatility relative to the overall market.
Addressing journalists during L&G’s 2024 Year End Horizons Media Roundtable this morning, the firm’s private markets global head of investment strategy and research Rob Martin said digitalisation, demographics, decarbonisation and deglobalisation were the overarching themes with the most influence on private markets, especially given the longer holding periods compared to public markets.
“A lot of people will differentiate between providing beta, so providing exposure to a total asset class, and then more alpha driven strategies, which are more thematic and more about delivering long-term outperformance within an asset class,” he said. “We think that the prospects within asset classes are becoming increasingly divergent, so we are focusing much more on the delivery of alpha.”
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Martin also highlighted the importance of geographical diversification, saying it was the best way to mitigate risk in private credit portfolios especially given the tendency toward “home bias.” In other words, “if you look at the real estate portfolios of many asset owners, you will find that those tend to be very concentrated in the markets that they are domiciled,” he said.
Martin said yield on private credit was still in the early teens, while a low level of spreads was apparent in the public markets, which he said the private markets tend to “feed off “in terms of the spread regime.
He also cited a less than two per cent default rate in sub-investment grade private credit, saying it was “testament to some of the credit quality that you get in the private markets.”
Read more: US private credit defaults drop in Q3
However, he warned it would be unwise to become “complacent” as “there’s still a very volatile operating environment,” contributing to the ongoing higher rates environment which can increase pressure on borrowers.
This volatility of course comes from the array of geopolitical and economic uncertainty currently being felt across the globe, from President Donald Trump’s impending trade tariffs to ongoing and emerging conflicts.
“That means that we continue to focus very heavily on robust credit underwriting, even at this point in the cycle where rates actually might start to come down, we think it’s still very important, as we’re in late cycle territory,” he said, citing a focus on direct relationships with borrowers to access transactions and actively seeking complexity as a source of return.
“One area that we’ve been focusing on is the debt-for-nature swaps within private credit,” he said. “We think, for the time being, that there’s a particular additional return that’s available from taking on that complexity, provided that you understand it.”
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