1) How do alternatives behave in rising-rate or credit-tightening cycles?
- Private credit (often floating-rate): Income can rise as base rates reset, but interest coverage weakens and defaults/recoveries drive dispersion; underwriting and sector mix matter more.
- Real assets (core real estate/infrastructure): May offer inflation linkage but face higher cap rates and financing costs; lease duration and contract pass-throughs are key.
- Private equity/venture: Higher discount rates compress valuations; exit markets slow; operational value-creation vs. multiple expansion becomes critical.
- Takeaway: Expect lagged effects (private marks follow public moves with a delay), wider dispersion, and a premium on quality, covenants, and liquidity planning.
2) What’s the historical correlation between private credit and equities?
Reported correlations are typically lower than public high yield, but they vary by index, period, and smoothing effects (infrequent marks understate true volatility).
- Practical view: Over full cycles, direct-lending indices often show low-to-moderate correlation to equities, which rises during stress.
- How to evaluate: Use the same-frequency, unsmoothed series (e.g., monthly) and test sub-periods; compare to high-yield and leveraged loans as proxies.
3) Why does behavioral finance matter in illiquid investing?
- Commitment discipline: Illiquids require committing capital ahead of opportunity; pacing mistakes (chasing hot vintages) hurt long-term returns.
- Denominator effect: Falling public markets inflate illiquid allocations as a % of the portfolio, prompting forced sales or halted commitments—plan for this before stress.
- Loss aversion & performance chasing: Investors may redeem at cycle lows or pile into recent winners; pre-set rebalancing bands and IC playbooks help.
- Framing & expectations: Clear communication about cash-flow timing, valuation lags, gates, and realistic return ranges reduces anxiety—and bad decisions—when volatility hits.