By Stephen L. Nesbitt – Chief Executive Officer, Chief Investment Officer of Cliffwater.
Asset class returns through December 31, 2023, are now available and show the benefits of private alternatives to long-term investors. An equal weight of private alternative asset classes produced a return 4% per year higher than an equal weight of traditional public asset classes (excluding cash) covering a period just short of 20 years.1 Over the most recent 10-year period, private alternative asset classes produced a return 5% higher than public asset class returns.
Exhibit 1 displays return and risk for seven traditional public asset classes and four private asset classes considered “alternative” by most investors.2 The September 2004 start date was selected because it is the earliest date returns for all four private asset classes are available. The red and blue plotted lines represent the best fit risk-adjusted return line for the public and private asset classes, respectively.
Exhibit 2 displays a similar portrayal but covering just the last 10 years. A few outspoken investment professionals3 have pushed the “convergence narrative” that benefits from private assets, if they existed in the past, are now arbitraged away, leaving just higher investment costs with little or no excess return.
Exhibit 2 shows just the opposite, that returns from private assets have exceeded those for public asset classes even during a recent period of relatively strong public markets.
Exhibits 1 and 2 look strikingly similar, contradicting the convergence narrative. In fact, the excess return from private alternatives was higher over the last 10 years compared to the approximately 20-year period.
Predicting the future is humbling at best. But if studying the past is at all useful, and we think it is, then allocations to private alternatives should be a meaningful part of an overall portfolio mix for long-term
investors
Footnotes:
1 Returns for the Cliffwater Direct Lending Index (aka CDLI) begin September 31, 2004.
2 Returns for private equity and global infrastructure are from Cambridge Associates which maintains the largest and longest databases. Equity real estate returns come from NCREIF, the largest and longest database for institutional real estate.
3 See, for example, Richard M. Ennis, Have Alternative Investments Helped or Hurt? Journal of Investing, Jan 2024
All posts are the opinion of the contributing author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CAIA Association or the author’s employer.
About the Author:
Steve Nesbitt is the Chief Executive Officer and Chief Investment Officer of Cliffwater, and is primarily responsible for the day-to-day management of Cliffwater Corporate Lending Fund (CCLFX) and the Cliffwater Enhanced Lending Fund (CELFX), an SEC registered credit interval fund focused on the US corporate middle market.
Steve is recognized for a broad range of investment research. His papers have appeared in the Financial Analysts Journal, The Journal of Portfolio Management, The Journal of Applied Corporate Finance, and The Journal of Alternative Investments. His private debt research led to the creation of the Cliffwater BDC Index, measuring historical BDC performance, and the Cliffwater Direct Lending Index, measuring historical performance for direct middle market loans. Steve authored the book, Private Debt: Opportunities in Corporate Direct Lending, Wiley Finance (2019) which provides the analytical and empirical underpinnings of the private debt market.