‘Herd mentality’ seen in private-market fund flows; Asia offers diversification: Lombard Odier

This year, an increase in redemption requests for evergreen private-credit funds has been observed, attributed to a "herd mentality" among wealth investors, rather than inherent weaknesses in the underlying portfolios, according to Daniel Matson, global head of private assets at Lombard Odier. Major funds have hit redemption limits as investors sought to withdraw capital from direct lending.

Matson stated that individual investors have been "piling into" the asset class over recent years, leading to a subsequent rush for exits. He emphasized the need to differentiate between fundraising activities and the underlying portfolio, noting that the observed behavior is primarily driven by fundraising. The underlying portfolios have remained relatively stable, with only minor fluctuations.

Investors should view Asia as a collection of diverse markets, each with unique opportunities and risks, rather than a single investment exposure. Illiquidity is a characteristic feature of private assets, not a weakness, as it takes time to realize their value. The need for diversification has been underscored by recent weakness in software stocks, which constitute about 20 to 30% of US direct lending.

Matson stressed that investors should not assume that high-quality companies are inherently good investments; the focus should be on purchasing good deals at reasonable prices. He highlighted the importance of distinguishing between companies and deals, particularly in the AI sector, where not all AI companies will perform well.

Matson expects higher interest rates to impact valuations, but he believes that moderate turbulence, with quality assets trading at reasonable prices, offers the best investment conditions.