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Written by: Meera Pandit
The alternative investment landscape often evolves gradually. Assets may be priced infrequently and therefore are less sensitive to day-to-day market moves. Time horizons are inherently lengthy. While this makes them great portfolio diversifiers, it doesn’t make them immune to broader backdrop shifts that could influence assets over the lifespan of an investment. One massive change afoot is the new administration and the potential policy changes that it may bring. These policy changes could, in turn, impact monetary policy as well, resulting in a high-for-longer rate environment.
There are myriad policy changes that could potentially occur, and many may not come to fruition at all, but below we highlight a few policy-linked opportunities and risks from our 4Q Guide to Alternatives:
- Tax cuts boost exits and capex – The combination of a corporate tax cut, deregulation, and reduced political uncertainty could rouse a drowsy exit market in private equity, reigniting IPO and M&A activity (Page 57). Tax cuts could also support earnings and revenue of private equity target companies (Page 61). A corporate tax cut aimed at domestic production could spur more industrial activity, increasing the demand for infrastructure (Page 43).
- Public to private infrastructure – Mounting debt and deficits could limit further infrastructure investment from the government, increasing demand for private infrastructure projects (Page 42).
- Deregulation rebalances lending – Regulation has made lending costly and more stringent for traditional lenders, tilting market share toward non-bank lenders (Page 72). Deregulation could reduce some of that regulatory burden, supporting bank lending. However, less regulation for banks would also likely mean less regulation for private credit, alleviating a future pain point (Page 70).
- Tariffs transform transport – Aggressive tariff proposals could reshape global trade. However, transport assets could benefit from longer shipping routes as supply chains reorder (Page 51). However, a protracted trade war could lower global trade volumes, as we saw in 2019, which could be a long-term headwind (Page 49).
- Hedge funds navigate uptick in volatility – FX and interest rate volatility could persist if confronted with tariffs and policies perceived to be inflationary (Page 84). This could benefit macro hedge fund performance, which has historically tracked volatility (Page 83).
- Early end to easing – Many proposed policies could be pro-growth, but also inflationary. If this is the case, the Fed could end its easing cycle early, leaving the federal funds rate at a higher terminal rate. This may keep financing more expensive and challenge commercial real estate mortgages (Page 39) or private credit loans (Page 77) that were amended or extended in anticipation of a more favorable rate environment.
It is too early to speculate on exactly what government policies may change and how that may alter the Fed’s calculus, but investors ought to be mindful of potential impacts to alternative assets. Still, regardless of how the policy landscape shifts, investors will continue to seek alpha, income, and diversification, which alternatives can provide.
Policy changes could perk up M&A and IPO activity
U.S. private equity exits by type, USD billions, quarterly
Source: PitchBook, J.P. Morgan Asset Management. *Data for the year 2024 is through 3Q24. Data are based on availability as of November 30, 2024.