Asset Allocation Debate ‘How will you position your (private markets) portfolio in 2025?’

April 30, 2025

_{This article was originally written in Dutch; this is an English translation.}

Diversification as a weapon against uncertainty and volatility

Is it necessary to adjust your asset allocation in light of geopolitical tensions? How do you deal with uncertainty as an investor? And what are the prospects for (private) equity and (private) debt?

By Esther Waal

These questions were central to the Asset Allocation Debate organised by Financial Investigator on 11 February in Brussels, with Tim Derycke from KBC Pension Fund, Joris Laenen from Ethias, Christel Lootens, co-founder of family office United NRJ, and moderator Jan De Bondt, advisor at Vlerick Business School and director at various organisations.

The Asset Allocation Debate was part of the seminar organised by Financial Investigator for the second year in Brussels around the presentation of the Asset Allocation Awards by research firm Alpha Research. The seminar focused on the outlook for 2025 amid geopolitical uncertainties, with the main question being ‘How do you position your (private markets) portfolio in 2025?’.
 

For Jan De Bondt, this question cannot be viewed separately from the expected risks. His first question to the panel is therefore: ‘What risks do you expect?’. Christel Lootens cites Donald Trump's import tariffs as a major risk. ‘I expect them to fuel inflation and cause a lot of uncertainty and volatility.

Joris Laenen agrees with her: ‘The measures Trump wants to take will indeed have an impact on the markets. But it is not always easy to predict how Europe will react, or other regions such as China, Canada and Mexico, and how this will affect the market.’ Laenen has the impression that the market itself is somewhat searching for direction. ‘Although there is much more volatility, there is no clear direction as yet. Geopolitical risk is one of the biggest risks, but there are also climate risks, cyber risks, energy transition risks, liquidity risks, market risks and spread risks. There are many.’

Tim Derycke also believes that Trump's policies entail risks. Derycke: ‘I think that not only the import tariffs, but also his tax cuts could have serious inflationary effects. And I don't see that being priced into the market yet.’ Derycke would therefore not be surprised if interest rates were to rise next year, something that De Bondt is also taking into account.

But the moderator also questions Trump's intentions. ‘Is he using tariffs as a weapon to put pressure on China and Europe to bring the trade balance more into equilibrium? Lootens responds: “That is indeed possible. And that also creates volatility.” Derycke continues: ‘One thing is certain: we are in a pretty bad negotiating position. That is perhaps the biggest concern for European markets and European investors.’

Hedging risks

This brings De Bondt to his next question. ‘How do you hedge your investment risks or how do you limit them?’ Laenen replies: ‘As an insurer, we look at our liabilities. Which assets should we buy? How should we allocate them to obtain portfolios that cover the risks we see in the liabilities (insurance risks)? That is another way of looking at investments and means that we have time to get through a crisis. But we do try to look at certain trends and at the asset allocation per sector. And we look at the biggest risks we have in our portfolio in terms of spread risk. We try to put some hedges in place there. But always hedges that fall under hedge accounting. We try to avoid volatility as much as possible.

We actively manage the duration of our bond portfolios as well as the geographical and sectoral allocation.

For Derycke, liabilities are also a normal cost. ‘It is of course an advantage for us that our liabilities are fairly predictable and, by definition, fairly long-term, which means that we can also pursue a buy-and-hold strategy that runs through cycles,’ he explains. ‘Nevertheless, we manage our equity portfolio and our bond portfolio very actively. For example, we actively manage the geographical and sectoral allocation, as well as the duration of our bond portfolios. We don't really hedge them, because we have a large DB pension portfolio and we know exactly how much money we will need in, say, 15 years‘ time.’

Allocation to private assets

De Bondt brings the discussion to another topic. He wants to know from the panel participants how important private assets are. Lootens is the first to respond: ‘Private assets are an important part of our family office. In addition to direct investments in companies and real estate, we also have a portfolio of private equity and private debt funds, which has been built up gradually. We believe diversification is important in the expansion of our private assets.’

Laenen continues: ‘To avoid excessive investment risk, we try to diversify into private markets, which are less volatile than public markets. The allocation to private assets within the portfolio is still limited, but it will increase in the coming years.’ Laenen points to the regulations that weigh heavily on insurance companies and make it more difficult to accurately estimate the risk capital costs of private equity and private debt. He expresses the hope that the discussions currently underway in Europe on a capital markets union will ultimately result in opportunities for insurers as long-term investors to mobilise more of their own capital to support growth in private markets. ‘Matching the maturity of your investments to your liabilities is very important. Assets that fit this profile are easier to find in private markets.’

Derycke indicates that his organisation allocates around 15% to 16% to private markets, mainly in infrastructure and real estate funds. ‘But we also have a limited position in private equity, mainly because of the combination of lower volatility and higher returns.’

Private equity recession-proof?

De Bondt recalls how, before the outbreak of the coronavirus pandemic, the global economy experienced one of its longest periods of economic growth, with a boom for private equity. The coronavirus pandemic turned out to be only a brief dip for the asset class. ‘How will private assets, and private equity in particular, perform in a normal recession lasting one or two years?’

Lootens responds: ‘Our investment horizon is longer, so in the context of ten years, a two-year dip is no drama.’

For Laenen, one of the advantages of private assets is the ability to be more inventive with valuations.

‘For example, you can add some goodwill, use internal valuation models and look at different multiples.’

Tim Derycke believes that 2022 and the interest rate hikes in 2021 were already good stress tests for private markets. ‘We saw a sharp decline in the number of deals, but fairly stable valuations compared to the public markets.’ However, he points to the gap between reported valuations and transaction valuations. ‘In private debt, we are now seeing very low spreads, especially on large US deals between treasuries and LDO financing terms. That is a risk, especially if Trump's policies lead to higher interest rates and higher inflation.’

I see the collapse of Europe as a risk, because Europe is really struggling to speak with one voice.

De Bondt agrees. De Bondt: ‘A lot of private debt is linked to variable interest rates, so if the Fed stops cutting, spreads will start to rise.’ ‘And deals will be more expensive to finance,’ adds Derycke.

Interest rate risks

‘What would be the impact of rising or falling capital market interest rates over the next five to ten years? Would that affect the portfolio?’ De Bondt wants to know.

For Derycke's pension fund, that would certainly have an impact. ‘If rising interest rates cause the value of the portfolio to fall, that could naturally put pressure on the funding ratio. We have an exposure of approximately 55% to fixed-income investments.' For Lootens, the impact is less significant. “If capital market interest rates rise, the value of our real estate portfolio, for example, will fall. But we invest for the long term and by diversifying, we create a mechanism whereby if you lose something in one area, you gain something else elsewhere.”

To avoid excessive investment risk, we try to diversify into private markets, which are less volatile than public markets.

Laenen: ‘The same applies to an insurance company. As an insurer, we have to comply with the Solvency II ratio, but we also have to bear in mind how our duration is positioned in each of the different buckets in our portfolio. You can only accept a duration gap if you have a clear view of interest rates. That is how we try to manage it.’

Black swans

De Bondt moves on to the final question of the debate: ‘What big surprises can we expect in 2025?

Derycke calls that a difficult question, but does have a few suggestions: ’Perhaps interest rates in the United States will be the black swan, or overinvestment in artificial intelligence, resulting in the bubble bursting.

Laenen doesn't need to think long: ‘The big surprise could well be a risk that almost no one is looking at: liquidity risk. Liquidity in the market could dry up. We know what effect that can have on certain sectors. We've seen it in the real estate sector in recent years. So I think geopolitical issues and other economic risks could have an impact on liquidity.’

Lootens takes a different view of the possible ‘black swan’: ‘I see the collapse of Europe as a risk, because Europe is really struggling to speak with one voice. So it could be the collapse of Europe. But it could just as easily turn out positively, with Europe getting a wake-up call and seeing a European resurgence.’