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Alternative Assets Shine as Capital Floods Private Markets, JPMorgan Says

JPMorgan expects private equity gains will be particularly attractive over the long term — but warns that picking skilled managers is critical as investors prepare for the next downturn.

Alternative assets may be a “bright spot” for yield, as premiums offered in the expanding private markets continue to lure investors, according to a new report from JPMorgan Chase & Co.

Capital will keep flooding into alternatives such as private equity as there’s a “paucity” of returns in traditional investments, the bank’s asset management group said in its annual “Long-term Capital Market Assumptions” report. Investor interest in private markets has soared, with assets swelling to about 20 percent of the U.S. stock market, from about 5 percent in 2000, said John Bilton, J.P. Morgan Asset Management’s head of global multi-asset strategy, at a media briefing on October 31 in New York.

Investors are searching for bigger gains from private equity than they can expect to reap from public equities over the next ten to 15 years, according to the report. But they should do so knowing the average private equity manger has failed to deliver “a meaning premium” over public markets in recent years, JPMorgan warned.

“People need a new stock,” David Kelly, J.P. Morgan Asset Management’s chief global strategist, said during the briefing at the bank’s headquarters in Midtown Manhattan. “It’s so important to get the right manager.”

Investors have to weigh whether projections for increased private equity returns provide enough compensation for the illiquidity risk they’re taking — particularly in the late stages of the market cycle. Locking money up with a skilled manager is critical, as there’s a wide dispersion in industry performance, according to the report. 

JPMorgan estimates that private equity will provide the “sole meaningful” rise in long-term returns compared to its forecasts last year. The firm projects an 8.25 percent return, net of fees, over the next 10 to 15 years — a percentage point higher than its long-term estimate made in 2017.

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Despite a rocky October for public equities, the U.S. stock market remains in the longest bull market ever, with the “trough-to-peak” gains of the Standard & Poor's 500 stock index almost double the bull-market average over the past 50 years, according to the report. JPMorgan estimates that U.S equities will gain 5.25 percent over the next 10 to 15 years.

The next recession will be milder than the one triggered by the 2008 financial crisis, Kelly expects, saying such a steep downturn was an anomaly. The bank’s asset management group, which oversees $1.8 trillion of assets globally, is anticipating fewer recessions than in the past — but weaker recoveries, according to the report.

In a sign of the late economic cycle, the firm said the slight rise in gains it expects from a traditional U.S. portfolio consisting of 60 percent stocks and 40 percent bonds is due entirely to higher bond returns. JPMorgan anticipates a 5.5 percent gain from this type of portfolio over the next 10 to 15 years.

As cyclical risks rise, the outlooks for alternative investment strategies in private equity, direct lending, real estate, and infrastructure are relatively attractive, according to the report.

“There’s a potential for uplift in terms of alpha,” Bilton said at the briefing. “There’s more to be earned here.”

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