Investors are scrambling for portfolio alternatives. A CIO urges caution — especially with private credit
Investors are hunting for greater diversification as market indices grow more concentrated, but a senior investor urged those shifting to alternative assets to be cautious. With more money flowing into private markets, which are under heightened scrutiny from the Bank of England, Niall O’Sullivan, chief investment officer for global solutions at Mercer, told CNBC that such a shift demands more rigorous investor analysis, especially in untested areas like private credit. Equities indices are becoming increasingly concentrated, dominated by a handful of tech behemoths, and concerns over an AI bubble have prompted investors to seek out portfolio diversifiers, including hedge funds, private equity and private credit. “When I look around the world, and talk to global investors, they are asking themselves how they get diversification into their portfolio,” O’Sullivan told CNBC’s “Squawk Box Europe” on Thursday. He said that “genuine diversifiers” — such as hedge funds — are “something that people are looking at live at the moment.” But he warned: “If you’re going to do it, make sure you’re getting what you set out to get.” Earlier this year, research by index provider PivotalPath suggested that many hedge fund strategies are now showing a historically high correlation to the S & P 500 stock markets. “You need to make sure that what you’re buying has been stress-tested, particularly when… there’s been along run-up in markets for quite a while,” O’Sullivan added. “The only way you can really check what’s going to happen is by looking at scenario analysis, or looking at long history to see what those managers have done. If you are going to add diversifiers to your portfolio, you have got to make sure that the managers you are adding have achieved that diversification in the past and will do so in the future.” PwC analysis underlines the surge in appetite for alternative investment, particularly private markets. Its latest 2025 Global Asset & Wealth Management Report said private market revenues are expected to reach $432.2 billion, growing at a compounded annual growth rate of 8.2% and delivering more than half of the total asset management industry’s revenues by 2030. “Private credit is really interesting,” Georgina Taylor, head of client investment solutions, EMEA at Invesco, said during an Invesco investment outlook webinar on Thursday. Taylor added that a “huge amount” of concentration risk in equity markets is now pushing investors to look elsewhere. With cash returns now trending downward, private credit offers investors a premium over cash rates, while the asset class’ floating rate nature provides a diversifier to fixed income risk, Taylor said. Closer scrutiny Investor appetite for greater portfolio diversification comes as private markets draw closer attention from central banks and lawmakers. The Bank of England announced on Thursday the launch of a new system-wide exploratory scenario focused on private markets, amid ongoing concerns surrounding hidden risks , particularly in private credit. The stress test will look at data gaps and potential risks arising in the sector, which forms an increasingly important role in financing U.K. companies, the BoE said. The move follows the launch of a separate inquiry by the House of Lords Financial Services Regulation Committee into the growth of private markets, which is expected to report its findings next year. Blackstone , Apollo , KKR and Ares are among the major private markets managers who have reportedly agreed to take part in the BoE’s stress test. The U.K. central bank said the resilience of private markets in the current form to a severe downturn has yet to be tested. “Private equity and private credit play an increasingly valuable role in helping U.K. companies to innovate, invest and grow,” said Sarah Breeden, the BoE’s deputy governor for financial stability. “To keep delivering those benefits, we need a robust understanding of how risks might flow through the financial system in a stress.” Speaking to CNBC, O’Sullivan warned that “we haven’t seen a crisis” yet in private credit. “If you’re going to pick a private credit manager because you think there’s a good return there, you need to have somebody who’s been tested through a crisis,” he said, adding: “You need to know that when the time comes, they have good lawyers on their staff to be able to negotiate what they need to negotiate,” he observed.
Source – CNBC
