How Are We Thinking About Expected Returns?

The note below is taken from the Q&A portion of our Outlook for 2024.

Given our team’s focus on asset allocation – including the approximate $26 billion of capital we manage on the firm’s balance sheet – we have spent a lot of time pressure-testing our assumptions around expected returns across asset classes. See below for our key takeaways, but the bottom line is that we are in a year of ‘transition’ within our Regime Change thesis. Specifically, the public markets are still adjusting to an environment of higher-for-longer rates, and parts of the next twelve months will feel like a typical downturn (including a potential fixed-income rally). At the same time, however, private asset valuations have now compressed quite a bit in recent quarters, earnings likely bottomed in 2023, and the potential to create value through operational improvement is significant, in our view. As such, we firmly believe that investors who pull back on deployment today will miss out on some very compelling vintages. Against this backdrop, we think now is still a time to ‘Keep It Simple’, with more of a bias towards quality and less need to stretch on risk, while still deploying thematically.

EXHIBIT 3: We Have Often Seen Very Strong PE Vintages in High-Rate Environments

Private Markets Investing: Back to the Future?