Lead Left Interview – Stephen Nesbitt (Part 2)

This week we continue our conversation with Stephen Nesbitt, Chief Executive Officer of Cliffwater LLC. Cliffwater is one of the largest alternatives advisory firms, assisting clients globally in their allocations to hedge funds, private equity and real assets. Second of two parts – View part one

The Lead Left: What’s the outlook for fixed income in this rising rate environment?

Stephen Nesbitt: In very simple terms, as we look at the world it’s been a bull market for bonds for more than thirty years. If you look at the level of interest rates, the risk-free rate, that trend is probably over. You won’t make big bucks by being long on rates.

Second, if you look at public equities, who knows where the stock market is going? It certainly looks fairly valued at the moment. With stocks, you should be able to get inflation plus 5%. So that gets you 7%, but with a lot of volatility. Up until now, the government has been a risk mitigator. We’re not sure that’s going to be the case going into the future.

TLL: Contrast that to direct lending or private credit opportunities?

SN: Private credit spreads have gone up and down over the last 35 years, correlated with the business cycle. We’ve been in the 7th or 8th inning of a recovery phase for the past five years now. But lending embodies on one of the most important elements for returns, which is alpha.