ALTERNATIVE MARKETS OUTLOOK – MID JULY 2024

​Inflation and interest rates were key issues as central banks flooded the world economy with capital to combat the adverse effects of Covid-19. Inflation began to rise rapidly, reaching levels not seen for a long time. In the US, inflation rose to 9% by the summer of 2022. As inflation rose, the Federal Reserve began to raise interest rates aggressively in early 2022. When inflation peaked in the summer of 2022, it started to fall, reaching manageable levels of 3%-4% in the spring of 2023. So far, inflation has not really fallen below these levels. Interest rates were raised to 5.25%-5.5% by the summer of 2023. At the time, investors were expecting significant rate cuts in 2024, as inflation had fallen significantly and central bank measures typically have a significant time lag before they take effect. Investors were also more optimistic about rate cuts as a recession seemed inevitable. To combat a potential crisis, interest rate cuts could have mitigated the expected recession. Despite many common indicators, a recession has not (yet) materialised, even with geopolitical tensions around the globe. In addition, inflation has proved to be very sticky, which has prevented the Federal Reserve from lowering interest rates so far. Looking ahead to H2 2024, inflation is likely to remain at similar levels, with a slight tendency towards the 2% mark. Inflation could spike again if geopolitical tensions and the current wars escalate significantly. Currently, interest rates are expected to be lowered two times by 25bps by the end of 2024, which would bring the target rate to 4.75%-5%. Further cuts are unlikely and would only occur if inflation were to fall very soon and remain at these levels or fall further. No cuts or even hikes cannot be ruled out either, especially if inflation were to pick up again. Figure 1 shows the development of inflation and interest rates in the US since January 2022.

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RESEARCH PERSPECTIVE VOL. 231 July 2024 Alternative Markets Update Inflation and interest rates were key issues as central banks flooded the world economy with capital to combat the adverse effects of Covid-19. Inflation began to rise rapidly, reaching levels not seen for a long time. In the US, inflation rose to 9% by the summer of 2022. As inflation rose, the Federal Reserve began to raise interest rates aggressively in early 2022. When inflation peaked in the summer of 2022, it started to fall, reaching manageable levels of 3%-4% in the spring of 2023. So far, inflation has not really fallen below these levels. Interest rates were raised to 5.25%-5.5% by the summer of 2023. At the time, investors were expecting significant rate cuts in 2024, as inflation had fallen significantly and central bank measures typically have a significant time lag before they take effect. Investors were also more optimistic about rate cuts as a recession seemed inevitable. To combat a potential crisis, interest rate cuts could have mitigated the expected recession. Despite many common indicators, a recession has not (yet) materialised, even with geopolitical tensions around the globe. In addition, inflation has proved to be very sticky, which has prevented the Federal Reserve from lowering interest rates so far. Looking ahead to H2 2024, inflation is likely to remain at similar levels, with a slight tendency towards the 2% mark. Inflation could spike again if geopolitical tensions and the current wars escalate significantly. Currently, interest rates are expected to be lowered two times by 25bps by the end of 2024, which would bring the target rate to 4.75%-5%. Further cuts are unlikely and would only occur if inflation were to fall very soon and remain at these levels or fall further. No cuts or even hikes cannot be ruled out either, especially if inflation were to pick up again. Figure 1 shows the development of inflation and interest rates in the US since January 2022. Figure 1: US Inflation Rate and US Interest Rate from January 2022 to July 2024 and Expected Values in December 2024, Sources: US Bureau of Labor Statistics, Federal Reserve and TradingEconomics, July 2024 Like the US, Europe also experienced a sharp rise in inflation after Covid-19, exacerbated by the war in Ukraine. Because of its proximity, the war affected the European economy more than the US. Inflation rose similarly to the US, but eventually rose to over 11% by October 2022. The ECB also raised interest rates significantly to keep inflation in check, but slightly less aggressively than the Federal Reserve. By September 2023, the ECB had raised rates to 4.5%. Inflation in Europe remained higher for longer than in the US, probably due to a slower central bank response and a greater impact from the war in Eastern Europe. Inflation came down to manageable levels in the winter of 2023 and is steadily on track to fall below the 2% mark. In contrast to the US, inflation has been less sticky and is currently lower than in the US. This prompted the ECB to cut interest rates to 4.25% in May 2024. By the end of the year, two or three 25bps cuts are likely, resulting in rates of around 3.5% and 3.75%. Inflation should continue its steady decline and end the year close to 2%. However, the risk of a spike in inflation and interest rates cannot be ruled out due to the turbulent geopolitical landscape. In such a case, the impact on Europe is likely to be greater than on the US. Figure 2 shows the development of inflation and interest rates in Europe since January 2022. Figure 2: EU Inflation Rate and EU Interest Rate from January 2022 to July 2024 and Expected Values in December 2024, Sources: Eurostat, European National Bank and TradingEconomics, July 2024 The UK's inflationary situation mimicked Europe's. Inflation continued to rise until October 2022, when it also exceeded 11% in the UK. After that, the UK differed markedly from Europe. Inflation remained above 10% until May 2023. In addition to global tensions, the UK is still struggling with the aftermath of leaving the EU. After May 2023, however, inflation fell steadily to 2% in May 2024, the lowest compared to Europe and the US. The Bank of England was the first major central bank to raise interest rates in December 2021. The Bank of England was similarly aggressive to the Federal Reserve. Since July 2023, the central bank has kept rates steady at 5.25%. However, with recent encouraging inflation data, the Bank of England is expected to start cutting rates soon. Current estimates are for two to three 25bp decreases by the end of 2024, which would bring the UK rate down to 4.5%. As with Europe, there is still a lot of uncertainty as to what will happen in H2 2024. However, additional uncertainty arises from the aftermath of Brexit and the new Parliament, in which the Labour Party with Sir Keir Starmer won a landslide victory over the Conservative Party with Rishi Sunak. Figure 3 shows the development of inflation and interest rates in the UK since January 2022. Figure 3: UK Inflation Rate and UK Interest Rate from January 2022 to July 2024 and Expected Values in December 2024, Sources: Office for National Statistics, Bank of England and TradingEconomics, July 2024 The stock market had a great run after the initial crash of Covid-19. Despite significant fears of recession, equity markets continued to rise, breaking record after record. US equities in particular have had a strong performance so far in 2024. Although the overall performance has been very strong, the performance of individual stocks has varied considerably. Large caps, together with technology and communications companies, have largely driven the performance of the US equity market. In particular, the Nasdaq Composite, the Nasdaq 100 and the S&P 500 all returned more than 15%. More conservative and mid-cap focused indices posted moderate returns of around 5%. Small and micro-cap indices were close to flat, while some even posted negative performance. Figure 4 shows the performance of the major US equity indices in 2024. As mentioned above, the best returns were generated by the technology and communications sectors, with returns in excess of 25%. This, combined with the boom in AI, has led to a surge in the value of the Magnificent 7, which are up almost 50% at the time of writing. Energy and financials were up just over 10%, while all other sectors were between 5% and 10%, with only REITs posting a small loss of 2.4%. In terms of expectations for the US equity market in the second half of 2024, an aggregate of various forecasts puts the target level for the S&P 500 at around 5,650, some 100 points higher than the current level. However, forecasts vary widely, from 5,100 to 6,150 for the most optimistic outlook. Overall, the target levels have been raised significantly compared to the forecasts made at the beginning of 2024, largely due to the strong performance of the S&P 500 in the first half of 2024. Figure 4 shows the potential range for the S&P 500 by the end of 2024. Interestingly, the reasons behind the forecasts have largely not changed. More bearish outlooks focus on the unfavourable environment for the stock market, with sticky inflation, high interest rates for longer than expected, and potential recession risk. More bullish outlooks focus on strong earnings, continued support for current trends that attract a lot of capital, and further support from falling interest rates in the near term. Figure 4: Performance of the Magnificent 7, DJIA, S&P500, and the Nasdaq Composite & the Value of the S&P 500 Index Since 2024, Sources: Roundhill Mag7 ETF, Standard & Poor’s, Nasdaq, Investing & a Variety of S&P 500 Forecasts, July 2024 The world of commodities has also seen turbulent times in 2024. From the initial bull run after Covid-19, gold traded around $2,000 per ounce until March 2024, when gold prices surged. During this period, gold reached an all-time high of $2,450 per ounce in May 2024. Since then, the commodity has given back some of its earlier gains, but is still trading near record levels at just over $2,300. Fundamentally, such a breakout in gold has been expected for a number of years, as excess money, recessionary fears and heightened geopolitical tensions all work in gold's favour. However, it did not happen until March 2024. Why it happened then is largely attributed to central bank activity. Asian central banks, especially China, have been buying gold for a long time, while Western central banks have been willing to sell. As their demand for gold increased, the available supply was too small to meet this increased demand, resulting in rising gold prices. Somewhat surprisingly, aggregate views on gold for the end of 2024 see the price falling to around $2,200 and more bearish views even see a fall to $2,000 as possible. On the other hand, some investors see gold rising to around $2,550. Potential downside could come from the attractiveness of high yielding bonds compared to recent decades with which gold usually competes for capital, a strong US dollar and lower demand from Asian central banks, especially China. Figure 5 shows gold's performance so far in 2024 and a summary of forecasts for the gold price at the end of 2024. Figure 5: Performance of Gold in 2024 and Expected Value for the End of 2024, Sources: GoldBullion & a Variety of Gold Forecasts, July 2024 Silver, an asset that often moves in tandem with gold, has also seen significant price gains over the course of 2024. Over the past few years, silver has been trading relatively low compared to its previous highs, while gold has set a new record high and remained close to it throughout this period. In 2024 so far, gold’s rise has been significant, but is substantially lower than silver’s gains this year, which are in excess of 30%. From a fundamental perspective, silver is an interesting asset as it has the characteristics of both a precious metal and an industrial metal. Precious metals are likely to benefit from the overall ecosystem, despite high interest rates, which usually have a negative effect. As an industrial metal, silver is likely to see increased interest with gradually falling interest rates and higher economic growth, which seems more likely at the moment as recession fears have diminished compared to previous years. Therefore, falling interest rates in the near future should boost the price of silver. In addition, demand for silver is increasing due to the growth of solar panels, electronics and batteries, especially in electric vehicles, and jewellery. The increased demand for silver also contrasts with a current shortage of the metal, which is only likely to increase in the short term. While gold's forecast for 2024 is mostly lower, silver's expected price by the end of 2024 is estimated to be around $33 per ounce. However, silver price forecasts vary widely. More pessimistic estimated price silver at around $25 per ounce, which would still leave the asset higher than it started in 2024. More optimistic estimates place the price of silver at $48 per ounce, which would result in a performance of over 100% in 2024. Figure 6 shows silver's performance in 2024 and potential silver prices by the end of 2024. Figure 6: Performance of Silver in 2024 and Expected Value for the End of 2024, Sources: Sprott Physical Silver Trust & a Variety of Silver Forecasts, July 2024 In contrast to previous years, oil prices remained fairly stable. Oil began 2024 trading between $70 and $80 per barrel, and reached the $90 mark in the spring of 2024. In the following two months, oil prices fell back to their levels at the beginning of the year, before recovering. In the spring of 2024, oil experienced a slight sell-off, resulting in some losses. Increased concerns about the health of the global economy, together with a possible ceasefire in the Middle East and thus a reduction in global geopolitical pressure, had a negative impact on the price of crude oil. In particular, the poor industrial performance in Europe added to the concerns. Currently, WTI crude is trading at $82 and Brent at $85. Overall, investors expect oil prices to rise slightly by the end of 2024, as shown in Figure 7. An aggregated view of the various forecasts puts Brent crude at around $86. Fundamentally, most of the factors underlying the outlooks are consistent, but the global macro outlook varies with different views on global growth, interest rates and geopolitical uncertainties. For example, more pessimistic outlooks see oil falling to $70/bbl, while optimistic investors see oil rising to $110/bbl by the end of 2024. Fundamentally, oil demand is set to rise in 2024. The increase in oil demand is also mixed, largely due to differing expectations for global growth. A key reason is Europe, whose economic growth is estimated to be slower than expected in early 2024. From a supply perspective, oil supply will also increase, but at a slower pace than demand. While OPEC+ is expected to continue its voluntary cuts, non-OPEC countries will supply significantly more oil than OPEC+ is cutting. Combined with the lowest level of oil reserves in 2016, this is likely to lead to higher oil prices for the rest of 2024. Figure 7: Performance of WTI Crude Oil & Brent Crude Oil in 2024 and Expected Value of Brent Crude Oil at the End of 2024, Sources: Federal Reserve Economic Data, U.S. Energy Information Administration & a Variety of Brent Crude Oil Forecasts, July 2024 Finally, in the world of commodities, uranium has been in the news recently for its strong performance. In 2023, uranium doubled in value, rising to levels last seen in 2007, when uranium briefly traded at $136 per pound. So far in 2024, uranium prices have eased slightly but remain at very high levels compared to historical averages. At the time of writing, uranium is trading at around $70 per pound. The longer-term outlook for the asset is very promising, as economies around the world plan to expand the use of nuclear power. Firstly, the geopolitical tensions and wars that have followed have shown that countries need to be able to generate enough energy and not be dependent on other countries. Nuclear power is a very stable way of generating energy and contracts are long term; thus, mitigating the dependency on other countries. Another reason is the 2050 climate targets, which do not currently seem possible with renewable energy. Although nuclear power has its critics, it is the cleanest of the fossil fuels, with the only drawback being the nuclear waste. Forecasts for the asset are scarce and difficult to assess in the short term due to the long time it takes for a plant to become operational. Most forecasts see uranium trading at around $90-$100 per pound by the end of 2024, which would be a gain of 30%-40% this year. Figure 8 shows a summary of the price of physical uranium and uranium miners, and a summary of the expected price range for uranium by the end of 2024. Figure 8: Indexed Performance of Physical Uranium and Uranium Miners in 2024 and the Expected Performance of Physical Uranium at the End of 2024, Sources: Federal Reserve Economic Data, International Monetary Fund, Sprott Physical Uranium Trust Fund, Sprott Uranium Miners ETF & a Variety of Uranium Price Forecasts, July 2024 Hedge Funds The hedge fund industry has continued its positive trend since Q3 2023, with assets under management growing steadily to reach a new high of $5,149bn according to BarclayHedge. However, it should be noted that BarclayHedge typically reports significantly higher AuM than other service providers, with hedge fund AuM just over $4tn. Over the past few years, the industry has experienced mostly net outflows and the growth in assets has been driven by the performance of the managed assets. According to analysis by Nasdaq, hedge funds saw positive net inflows in May 2024 for the first time in almost two years. Thus, the recent asset growth shown in Figure 9 has been entirely performance driven and is expected to continue to grow in 2024. Previously, when markets were doing very well, hedge funds disappointed investors, as the funds mostly failed to match the performance of broad indices. However, hedge funds typically underperform public markets in bull markets and mitigate drawdowns in bear markets, which is when they excel. Given the current uncertainty in the markets, hedge fund exposure may be attractive as a way to mitigate a potential crisis on the horizon. In 2024, our benchmark returned 25%. Although impressive, much of this return was driven by cryptocurrency hedge funds, which returned 78%. Our Tactical Trading Strategy Index, which focuses on global macro funds, was also impressive with a return of 25%. Our Equity Strategy Index returned 7%, dragged down by the dominance of long-short strategies, which have lower equity market exposure than public benchmarks. Our fund of hedge funds and fixed income hedge funds also posted positive returns of 4% and 2% respectively. Figure 9 shows the performance of each of our hedge fund strategies since 2023, with cryptocurrency hedge funds delivering an impressive performance of over 350%. Figure 9: Hedge Fund AuM and Performance of Stone Mountain Capital Hedge Fund Strategy Performances from January 2023 to May 2024, Sources: Stone Mountain Capital Research & Barclay Hedge, July 2024 The outlook for the remainder of 2024 is promising for hedge funds as assets have seen recent inflows, which are expected to continue. The other driver, performance, is also expected to continue as markets have been favourable so far despite the challenging macroeconomic and geopolitical environment. In general, this is an attractive ecosystem for hedge funds as alpha-seeking strategies can deliver strong performance in a segmented market and heightened uncertainty. In addition, the potential for a crisis, leading to increased interest in downside protection, is also supportive of the industry. Strategically, equity hedge funds should continue to perform well as equity markets are expected to continue to rise. Long-short strategies are of particular interest, as the funds are able to benefit from segmented markets and reduced exposure to the equity market in the event of a crisis. On the fixed income side, things are more difficult. Typically, the strategy offers a steady income stream, which was attractive when interest rates were low. However, as interest rates will remain high for the next few years, the strategy becomes less attractive as similar returns can be achieved by buying bonds in the public market. This pushes funds into riskier assets to generate excess returns. Global macro strategies are also well positioned to benefit from geopolitical uncertainty and central bank action in the near term. Cryptocurrency hedge funds are also likely to be well positioned to benefit from the post-Halving bull run. More on the outlook for cryptocurrencies below. Private Equity & Venture Capital It is no secret that the private equity (PE) sector has had a challenging 2023 and 2024. The industry had to contend with macroeconomic headwinds, namely inflation and high interest rates, as well as worrying signs in the wider economy. The signs for the industry can be seen in many of the metrics that represent the space. The time it takes for funds to close has increased significantly. According to the 2024 data, only 10% of funds are able to close within a year of opening, which is less than half of any previous year since 2019. While this is not a favourable trend, 80% of funds are able to close after two years, which is similar to 2019 and 2020 when the industry was doing well. While 2020 was intuitively bad for the industry, its results were impressive, as the industry experiences a significant time lag for immediate market shocks to be priced into the space. In North America, which remains the main driver of private equity and accounts for almost 70% of the industry's global capital, the fundraising figures send a depressing signal. 2023 was a bad year for the industry. However, in terms of fundraising, Q1 2024 was worse than any quarter in 2023 and about as successful as Q2 2020. Q2 2024 was even worse, raising only $50bn, a figure last seen in 2016. On a more positive note, European equity has become more attractive of late, and this is reflected in the European PE fundraising data. In Q1 2024, European PE raised almost as much as the US, at almost $70bn. Valuations also became an issue for the sector, as sellers were unwilling to exit at relatively low valuations, while buyers were unwilling to spend a lot of capital on acquisitions in a challenging ecosystem. Portfolio company valuations rose to exorbitant levels during the 2020/21 bull run, resulting in flat or even lower valuations for exits or follow-on rounds in the current cycle. As a result, most sellers are planning to wait to exit their position rather than sell at comparatively low valuations. However, as the pressure to return capital to investors increases, so does the pressure on PE funds to exit positions. The current level of exits is low. Since the PE 'breakout' period from Q3 2020 to Q3 2021, when exit values never fell below $150bn, exit values have never reached the $100bn mark since Q4 2021. Q1 2024 also marks the second lowest point in terms of number of deals, with only 200 since 2012. Only Q2 2020 was lower with around 180 deals. Despite these significant challenges, PE AuM continue to grow. According to Pitchbook, AuM is well over $5tn and has not declined in a single year, as shown in Figure 10. It is particularly notable that dry powder has been broadly flat since 2020, with a slight downward trend. The chart also shows the impact of rising valuations in 2021, when AuM increased by almost $1tn as dry powder fell. Since then, however, the unrealised value of portfolio companies has barely risen, highlighting the challenges of general market activity. Figure 10: Global Private Equity AuM by Dry Powder and Value of Portfolio Companies from 2005 to the End of September 2023, Source: Pitchbook & Apollo Chief Economist, July 2024 Although the space in under stress, there are several aspects that indicate a turning point. The most important factor relates to the macroeconomic headwinds, which are likely to gradually abate. Inflation has already come down to acceptable levels and interest rates will follow. Nevertheless, higher interest rates will remain a dampening factor. A more stable outlook for the global economy, with the likelihood of a significant recession diminishing by the day, is boosting investor confidence. The standstill in deal activity is also showing signs of coming to an end. Perhaps most promising is an analysis by PitchBook, which found that nearly 50% of portfolio companies held by PE funds were acquired before 2020. This puts pressure on funds to repay investors in their funds, which should lead to another wave of deal activity in the sector. In venture capital (VC), the macroeconomic headwinds, general uncertainty and geopolitical tensions hit VC even harder than PE. As for PE, the challenges in the industry were widespread. In particular, fundraising is showing worrying signs.  At the beginning of the year, fundraising was expected to reach levels similar to 2020 and 2023, which were relatively strong by historical standards. In those years, just under $100 billion was raised for US VC. By contrast, the highly successful years of 2021 and 2022 each raised close to $200 billion. According to data from PitchBook and as of May 2024, fundraising amounted to only $23 billion, as shown in Figure 11. This figure is a consequence of the challenging environment for VC as well as low deal and exit activity. While the latter does not directly affect fundraising, it is crucial for the repayment of VC fund investors, who typically invest the repaid money in new VC funds. With exits and deal activity at rock bottom levels (compared to previous years), this has had a significant impact on fundraising. As is typical in challenging ecosystems, smaller funds are feeling the pain and large funds (>$1 billion) from established managers are not having difficulty raising capital. Figure 11: Venture Capital Fundraising in Billion USD from 2014 to May 2024 and Forecasted 2024 Levels in the US, Source: PitchBook, July 2024 Blockchain / Cryptocurrencies Cryptocurrencies have been very successful so far in 2024. Both Bitcoin (BTC) and Ethereum (ETH) are up almost 50%. This is particularly notable, as the cryptocurrency market had already risen significantly in 2023. That said, cryptocurrencies are not at their peak this year, and for some tokens, not at levels last seen in the previous bull run in 2021. The return in 2024 is a combination of many factors. Firstly, with a more stable financial ecosystem than in previous years, investor confidence in riskier assets (e.g. tech stocks) has increased, which has been a major benefit for cryptocurrencies. 2024 also saw three major developments for the space. April 2024 saw the Bitcoin Halving, which halves the reward for mined Bitcoins and has historically been a key bull and bear market indicator. The consensus view on cryptocurrency prices around the Halving can typically be divided into three cycles. There is usually a weaker bull run before the Halving, which has happened again, a stronger bull run after the Halving and a bear market in between. Although the Halving has important implications, it does not usually cause significant market movement. The other two events address the adoption of crypto with the approval of spot BTC and spot ETH ETFs by the SEC in January 2024 and May 2024, respectively. As shown in Figure 12, these had a significant impact on the price of the respective cryptocurrencies. At the time of writing, the cryptocurrency market cap is also at $2.37tn, which is relatively close to its record high of nearly $3tn in November 2021. In early 2024, the industry was also close to its record high from the previous bull cycle. Figure 12: Performance of Bitcoin and Ethereum and Cryptocurrency Market Capitalization from July 2023 to July 2024 Including Major Events of 2024, Source: CoinMarketCap, July 2024 Looking ahead to the rest of 2024, if financial markets remain stable, cryptocurrencies are likely to continue to rise, and the forecast range assumed in Figure 13 is based on this assumption. In the event of a crisis or a major correction in financial markets, particularly equities, cryptocurrencies are likely to experience a sell-off. Typically, cryptocurrencies are the first to be sold as investors try to reduce risk. It is notoriously hard to get any riskier than owning cryptocurrencies, and the markets are extremely liquid, allowing for a quick sell-off. However, in a stable market, which is widely expected for the remainder of 2024, especially if the Fed cuts rates sooner rather than later, it is not unlikely that the price of BTC will exceed $80,000 by the end of 2024. Quantitative models based on previous Halvings see BTC reaching prices between $78,000 and $110,000 by December 2024. Major events in the space could provide additional triggers to reach potentially higher levels. Currently, there is a chance that a spot Solana ETF could be approved by the SEC. This would be an incredible step for the industry, as it would signal to the cryptocurrency market that adoption is significantly higher than currently perceived. The approval of the ETH ETF was also a surprise, but ETH has been in the market almost as long as BTC and is well known. Solana could be the 'gateway' token that unlocks the potential for further adoption across a variety of tokens, leading to a significant boost to the ecosystem. Figure 13: Bitcoin Price Since January 2024 and Expected Price by the End of 2024, Source: CoinMarketCap and a Variety of Bitcoin Forecasts, July 2024 Private Debt Private credit has recently come to the fore as rising interest rates and a more difficult ecosystem to navigate have reduced the amount of capital that can be raised through traditional means, such as banks. Recession fears and tighter bank lending, has enabled private credit to step in and increase the industry’s relevance. Notably, the industry has now surpassed $1.5tn for a while and is increasing further after having reached the $1tn mark in 2020. Growth is expected to continue, reaching around $2.8tn by 2028. According to Preqin and data based on H1 2023, the private debt industry's AuM has risen above $1.7tn and there has been a notable increase in dry powder. Currently, around $1.2tn is invested in loans, with a further $500bn available in dry powder. Figure 14 shows the sharp increase in private debt industry AuM. Figure 14: Assets under Management, Invested Capital, and Dry Powder of the Private Debt Industry from 2000 to 2024, Source: Preqin & Alliance Bernstein, July 2024 Private debt is attractive to investors looking for a steady income stream. In contrast to bonds, private credit typically has a higher yield due to an illiquidity premium. In addition, the asset class has historically had a lower correlation to public markets, reducing overall portfolio volatility and losses relative to public credit. In particular, direct lending, which makes up the bulk of the private debt market, has shown attractive characteristics with higher returns and lower volatility compared to leveraged loans and high yield bonds. This is particularly true in a high interest rate environment. According to Morgan Stanley, direct loans have returned an average of 11.6% in high interest rate environments, compared with 5% for leveraged loans and 6.8% for high yield bonds. The superior risk/reward of direct lending makes it very attractive in the coming years as interest rates are likely to remain relatively high, an ecosystem in which the asset class performs very well. The recent shift from high-growth companies to high-quality growth companies also works in favour of private debt. The search for less equity dilution at relatively low valuations and tighter traditional lending makes private debt an attractive niche. Distressed debt has not had a good few years recently, but the strategy could return to prominence if the global economy enters a recession. Real Estate The past few years have not been kind to the real estate sector. It suffered greatly during the Covid pandemic and has faced further challenges since then. During Covid, the office and leisure sectors were hit hard and the ensuing trend led to major shifts within the real estate industry. Once this segmentation had taken place and the economy had returned to normal, inflation and interest rates began to rise, causing house prices to soar as the financial cost of building houses skyrocketed with much more expensive mortgages. This, combined with already low supply, led to another housing "crisis" in 2023. Since then, prices have cooled, but increased financing costs will keep house prices high for years to come. These macroeconomic headwinds have also led to crushing deal and investment volumes. Both are close to 10-year lows. The situation for the property industry as a whole is difficult. However, there is significant friction within the industry. Geographically, the Asia-Pacific region has been much less affected than Europe or the US. Some of this can be explained by a more stable financial ecosystem in terms of inflation and lower interest rates. Fundamentals and resilient occupiers have led to steady rental growth, which has kept valuations stable. Overall, Europe has been the hardest hit as the economy has been under more pressure than the US. This led to falling valuations in Q1 2024, which are expected to remain at these levels for the remainder of 2024, before valuations start to rise again. The office market is another example of the varying impact across regions. In Europe, office vacancies are around the long-term average, while in the US office vacancies have reached new highs and the market is undergoing a significant fundamental shift. The US government is currently promoting the conversion of office buildings into residential properties. Current market developments are also leading to changes in the real estate space. The trend towards decarbonisation in the real estate sector continues to grow in an effort to reduce emissions. AI, not only in the sense of data centres, is also expected to improve the efficiency of the market by providing additional insights in underwriting, valuation, development and modelling of operations and risks. There is also expected to be a major shift in the provision of care and housing for the elderly, as the ageing of the population is a steady trend that will not go away. Retail property has had its problems in recent years, but has become a stable option in the property market. Vacancy rates are currently very low and the sector is expected to perform strongly in the coming years. STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As of 2nd February 2024, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 62.4 billion. US$ 48.5 billion is mandated in hedge funds and US$ 13.9 billion in private assets and corporate finance (private equity, venture capital, private debt, real estate, fintech). Stone Mountain Capital has arranged new capital commitments of US$ 1.95 billion across more than 25 hedge fund, private asset and corporate finance mandates and has been awarded over 90 industry awards for research, structuring and placement of alternative investments. As a socially responsible group, Stone Mountain Capital is a signatory to the UN Principles for Responsible Investing (PRI). Stone Mountain Capital applies Socially Responsible Investment (SRI) filters to all off its alternative investment strategies and general partners on behalf of investors.    Our Team   Our Mandates   Our Research   Our News     Contact We are able to source any specific alternative investment search and maintain relationships with dozens of best-in-class hedge fund managers, private equity and private debt general partners (GPs) and real estate and infrastructure developers. We don’t pass any costs on to our investors, since our compensation comes from our mandated managers, GPs and developers. Please contact us, should you require further information about our solutions.   Schedule a call with the team Main UK Tel.: +44 207 268 4905 Main Switzerland Tel.: +41 44 586 45 55 Main UAE Tel.: +971 4383 5386 We have updated our privacy policy to take into account the new requirements of the GDPR. 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Stone Mountain Capital LTD is authorised and regulated with FRN: 929802 by the Financial Conduct Authority (‘FCA’) in the United Kingdom. Stone Mountain Capital LTD is the Distributor of foreign collective investment schemes distributed to qualified investors in Switzerland. Certain of those foreign collective investment schemes are represented by First Independent Fund Services LTD, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (‘FINMA') as Swiss Representative of foreign collective investment schemes pursuant to Art 13 para 2 let. h in the Federal Act on Collective Investment Schemes (CISA). Stone Mountain Capital LTD conducts securities related activities in the U.S. pursuant to a Securities and Exchange Commission ('SEC') Rule 15a-6 Agreement with Crito Capital LLC, a U.S. SEC registered broker-dealer, and member of Financial Industry Regulatory Authority (‘FINRA’), Securities Investor Protection Corporation (‘SIPC’) and Municipal Securities Rulemaking Board (‘MSRB').  Stone Mountain Capital Partners LLP is incorporated as limited liability partnership in England & Wales with company registration number: OC430515. Its registered office is: One Mayfair Place, Devonshire House, Mayfair, London W1J 8AJ, United Kingdom. Stone Mountain Capital Partners LLP is registered as Appointed Representative with FRN: 934964 of Stone Mountain Capital LTD which is authorised and regulated with FRN: 929802 by the Financial Conduct Authority (‘FCA’) in the United Kingdom.  Stone Mountain Capital Ventures LLP is incorporated as limited liability partnership in England & Wales with company registration number: OC439509. Its registered office is: Devonshire House, ​One Mayfair Place, Mayfair, London W1J 8AJ, United Kingdom. Stone Mountain Capital Ventures LLP is incorporated as Appointed Representative with FRN: 967914 of Stone Mountain Capital LTD which is authorized and regulated with FRN: 929802 by the Financial Conduct Authority (‘FCA’) in the United Kingdom. Stone Mountain Capital FZC is registered as Free Zone Company (FZC), a limited liability company in United Arab Emirates (UAE) at: Atrium Tower, Office AT-101, 1st Floor, One UAQ, P.O. Box: 7073, UAQ Free Trade Zone, Umm Al Quwain, United Arab Emirates with company registration number: 6813. Stone Mountain Capital FZC (DMCC Branch) is registered as branch of Stone Mountain Capital FZC and investment company at: Almas Tower, Level 54, Office 5431, P.O. Box: 112911, Jumeirah Lake Towers (JLT), Dubai Multi Commodities Centre (DMCC) Free Zone, Dubai, United Arab Emirates with company registration number DMCC-912005. All information in this perspective including research is classified as minor acceptable non-monetary benefits ('MNMB') in accordance with article 11(5)(a) of the MiFID Delegated Directive (EU) 2017/593 and FCA COBS 2.3A.19. For United Arab Emirates (excluding Dubai International Financial Centre (’DIFC’) and Abu Dhabi Global Market (’ADGM‘)) residents only. This website, any document, and the information contained herein, does not constitute, and is not intended to constitute, a public offer of securities in the United Arab Emirates (’UAE‘) and accordingly should not be construed as such. Securities are only being offered to a limited number of exempt investors in the UAE who fall under one of the following categories of Exempt Qualified Investors: (1) an investor which is able to manage its investments on its own (unless such person wishes to be classified as a retail investor), namely: (a) the federal government, local governments, and governmental entities, institutions and authorities, or companies wholly-owned by any such entities; (b) foreign governments, their respective entities, institutions and authorities or companies wholly owned by any such entities; (c) international entities and organisations; (d) entities licensed by the Securities and Commodities Authority (the ’SCA‘) or a regulatory authority that is an ordinary or associate member of the International Organisation of Securities Commissions (a “Counterpart Authority”); or (e) any legal person that meets, as at the date of its most recent financial statements, at least two of the following conditions: (i) it has a total assets or balance sheet of AED 75 million; (ii) it has a net annual turnover of AED 150 million; (iii) it has total equity or paid-up capital of AED 7 million; or (2) a natural person licensed by the SCA or a Counterpart Authority to carry out any of the functions related to financial activities or services, (each an “Exempt Qualified Investor”). The Securities have not been approved by or licensed or registered with the UAE Central Bank, the SCA, the Dubai Financial Services Authority (’DFSA‘), the Financial Services Regulatory Authority (’FSRA’) or any other relevant licensing authorities or governmental agencies in the UAE (the ‘Authorities‘). The Authorities assume no liability for any investment made as an Exempt Qualified Investor. This website, any documents and securities are for the use of Exempt Qualified Investors only and should not be given or shown to any other person (other than employees, agents or consultants in connection with a named addressee's consideration thereof). Stone Mountain Capital FZC is registered as Free Zone Company (FZC), a limited liability company in United Arab Emirates (UAE) at: Atrium Tower, Office AT-101, 1st Floor, One UAQ, P.O. Box: 7073, UAQ Free Trade Zone, Umm Al Quwain, United Arab Emirates with company registration number: 6813. Stone Mountain Capital FZC (DMCC Branch) is registered as branch of Stone Mountain Capital FZC and investment company at: Almas Tower, Level 54, Office 5431, P.O. Box: 112911, Jumeirah Lake Towers (JLT), Dubai Multi Commodities Centre (DMCC) Free Zone, Dubai, United Arab Emirates with company registration number DMCC-912005. Copyright © 2024 Stone Mountain Capital LTD. All rights reserved. Any business communication, sent by or on behalf of Stone Mountain Capital LTD or one of its affiliated firms or other entities (together "Stone Mountain"), is confidential and may be privileged or otherwise protected. This e-mail message is for information purposes only, it is not a recommendation, advice, offer or solicitation to buy or sell a product or service nor an official confirmation of any transaction. It is directed at persons who are professionals and is not intended for retail customer use. This e-mail message and any attachments are for the sole use of the intended recipient(s). Our LTD accepts no liability for the content of this email, or for the consequences of any actions taken on the basis of the information provided, unless that information is subsequently confirmed in writing. Any views or opinions presented in this email are solely those of the author and do not necessarily represent those of the limited company. Any unauthorised review, use, disclosure or distribution is prohibited. If you are not the intended recipient, please notify the sender by reply e-mail and destroy all copies of the original message and any attachments. By replying to this e-mail, you consent to Stone Mountain monitoring the content of any e-mails you send to or receive from Stone Mountain. Stone Mountain is not liable for any opinions expressed by the sender where this is a non-business e-mail. Emails are not secure and cannot be guaranteed to be error free. 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