Capital market conditions are constantly shifting, but broad trends have emerged that all investors are likely to grapple with for some time. After a lengthy bull run, valuations of many asset classes look stretched. Continuing financial repression means bonds will struggle to fulfil their traditional role in generating income. At the same time, downside risks and volatility are on the rise as major central banks begin the slow process of monetary policy normalisation. In this environment, investors need to look beyond traditional portfolio allocations and cultivate alternative sources of value to achieve performance and risk management goals.

The universe of alternative investments has been evolving rapidly and offers much-needed routes to yield and deeper portfolio diversification. It also presents a staggering range of choices, from tradeable asset classes like commodities and currencies, to opportunities to participate in privately negotiated deals (such as private equity and private debt), to niche assets like wine and fine art.

In the broad universe of alternatives, some asset classes stand out for their potential to deliver value and enhance diversification. One is infrastructure. Expanding and rapidly urbanising populations mean that for most countries infrastructure is not a ‘nice to have,’ but an essential investment. The field is truly global; the United States¹ and the UK² are among the countries that have recently announced massive infrastructure plans, and the fast-growing Asia Pacific region faces an over US$20 trillion infrastructure gap through 2030.³

Many of these plans will require private investment to become a reality, pointing to a massive pipeline of opportunities. Importantly, these opportunities are often aligned to growing investor emphasis on the environmental, social and governance (ESG) aspects of portfolios. In the past investors typically participated in infrastructure projects through equity investments, but as the asset class has developed more opportunities have arisen in other parts of the capital structure.

Senior infrastructure debt boasts attractive characteristics relative to both traditional fixed income instruments and other forms of infrastructure investment. The comparative illiquidity of infrastructure assets means they offer a premium over sovereign or covered bonds – a premium that can be most efficiently harvested in the form of senior debt. At the same time infrastructure projects are generally tightly regulated with stable cash flows, meaning default rates are low to negligible, and risk profiles favourable versus commercial property or equivalently rated corporate debt.

US private debt is another area that should be looked at closely given the current domestic backdrop. With regulatory changes making banks more reluctant to lend, there is an opportunity for investors to act as lenders to corporate borrowers that may struggle to raise financing by traditional means. This lending can target various levels of the capital structure depending on the investor’s return targets and risk appetite, all of which have the potential to deliver equity-like returns while exhibiting a low correlation to traditional assets.

What’s more, the US is at an interesting point in the credit cycle, when the number of quality private debt opportunities is relatively limited, and uncertainty has left many investors hesitant to act, resulting in a significant pool of undeployed capital (or ‘dry powder’). By setting up a private debt investment program now, investors can position themselves to both seize existing opportunities under favourable terms, and capitalise on those likely to emerge in the future as credit conditions tighten.

The unique and specialised nature of asset classes like infrastructure and private debt is integral to their value. But it also means they need to be approached with a high degree of expertise and hands-on involvement. Opportunities in these asset classes are not typically publicised, and may involve complex structures and covenants. They need to be sourced and assessed by a dedicated team with extensive networks, with people on the ground who are deeply connected to the sectors in which they operate, to ensure potential deals are flagged at early stage; evaluated in the local market and regulatory context; analyzed risk mitigation and structured to meet investor goals.

Local knowledge is important. But because opportunities can emerge anywhere, global resources is equally important, and the ability to facilitate investment in projects that require a significant amount of capital, to provide access to both the best value investments and maximum diversification. Rather than going it alone in the hunt for yield, investors should find a partner capable of providing the platform needed to support their growing alternative asset ambitions.