How to adapt ?

As we write these lines, the markets continue their downward trend—or even accelerate it…

For those who have honored us by reading some of the articles we’ve posted here, you already know our first rule: diversification. Whether you’re a family running a business, managing a portfolio, or both, relying too heavily on a concentrated set of assets only exposes you to greater risk—especially if those assets are subject to shocks, particularly external ones. So we hope you went to bed on April 1st with a diversified portfolio.

We laid out our expectations —as well as our doubts— in our previous post. And after a studious weekend reading the opinions of major market participants, we’re sticking with the key takeaways from that post:

• The USD is unlikely to enter a long-term bearish trend, though short-term turbulence is to be expected.

• Trump’s industrialization goals are not achievable within the next three years, and his own population will suffer in the meantime. He won’t be able to maintain tariffs at current levels. We’ll see tariffs, yes—but not anywhere near the scale announced. Some economists are even saying today (Monday) that U.S. growth could remain positive in 2025, though inflation will likely rise significantly.

• U.S. rates are dropping. It looks like panic buying (“flight to safety”)—but also recession fears. That recession might not materialize. Either way, we believe rates will have to rise again in the medium term, because tariffs won’t erase the underlying macro deficits.

Why are we writing this, and why do we have any credibility to do so?

• We somewhat recklessly promised a follow-up to our last post. We missed an opportunity to shut up - but we believe in keeping our word. Our perspective is as valid - and as uncertain - as anyone else’s.

• Our portfolio dropped by 1.6% between last Wednesday and Friday. We’re heavily exposed to private equity (approx. 50%), which—by nature—hasn’t really reacted (apart from FX effects).

• We’re not selling anything (really, we’re not!), but we want to offer perspective to families who are busy running their businesses and don’t always have time to analyze the market impact on their portfolios in depth.

• That being said, feel free to stop reading if we haven’t convinced you ;-)

So, what now?

1. Your operating business

We won’t pretend to tell you how to run your company—but as private equity investors, we’ll repeat what we said in 2007, 2012, 2020, and again today: (i) preserve your cash, (ii) reassess capex projects, (iii) identify your risks (whether or not you sell to the U.S.) and (iv) review the resilience of your supply chain, and whether it needs adjustment.

Also, call your local MP - wherever you are in Europe - to ensure that short-sighted, communications-driven political decision-making doesn’t make things worse than they already are.

2. Your diversified portfolio

Real Estate

Not much you can do in the short term. But if you hold commercial real estate, two key things to watch: (i) tenant solvency and (ii) your debt structure—make sure it can handle a tougher environment.

Private assets (PE, private debt, infrastructure, etc.)

Again, not much to do today. We still consider this an essential asset class—but the current situation undeniably adds risk.

The PE market was counting on a rebound in M&A activity to reignite distributions to investors, and unlock capital for new fundraising—which is increasingly urgent. That prospect looks shaky now.

For investors, this means existing commitments are unlikely to be funded by distributions. Make sure those commitments don’t put too much strain on your liquidity. Reevaluate your allocation plans to funds currently raising. Don’t cut your commitments entirely! The best vintages often emerge in crisis, as long as the teams are strong. Be selective.

Equities

Well, like all of us—you’re exposed. The basics still apply: (i) keep a cool head, (ii) don’t exit European assets (a little pride, for heaven’s sake!), (iii) reassess your positions to see whether it’s time to take strategic profits (or losses).

Is it time to re-enter (as of Monday, April 7)? A lot has dropped. Are we past the bottom (since EU indices have rebounded from their intraday lows)? Probably too soon to say… Don’t be afraid to miss the first 2% of a rebound in such a highly uncertain environment. When you do come back in, focus on large cap, which are liquid. Volatility will remain elevated for several months—until we see initial macro data and corporate earnings for Q1 2025.

Bonds

This asset class provided some cushion last week proving, once again, the value of diversification. Granted, U.S. bonds have suffered from the USD’s decline (we’ll come back to that). If we’re right, sovereign yields are headed up - both in Europe and the U.S. - driven by current deficits and future funding needs. So this brief respite may be short-lived. We’ve used it as an opportunity to reduce our sovereign positions and rotate toward corporate debt  but only Investment Grade. Indeed, bond spreads are widening, and high yield has been hit hard due to anticipated pressure on weaker companies. Still, we believe high-quality debt remains essential in a well-managed portfolio.

No need to sell aggressively: the weight of your bond portfolio has naturally increased anyway, given the drop in equities ;-)

USD-denominated assets

If your horizon is long term, we believe you can wait—USD should strengthen again. But that rebound may take time. If your assets are short-term, ask yourself whether the yield to maturity (e.g. coupons from short-duration U.S. bonds) offsets the FX loss. Of course, it also depends on your entry rate. Above all, don’t panic-sell out of USD if you have upcoming capital calls or obligations in that currency. Even short-term USD money-market investments still offer positive yields. Better to avoid locking in FX losses now, only to buy USD back in 6 weeks when your fund calls capital…

Bottom line: USD or otherwise, focus on the underlying asset - not the currency’s short-term volatility.

Metals and commodities

Gold is down. Nothing works like it used to. Still, every portfolio deserves some gold. As for commodities: it’s more complex. They’re falling due to recession fears, and they’re also USD-denominated. Not for the faint of heart - volatility ahead!

Crypto-assets

Bitcoin… how many aircraft carriers again? (The boomer in me is tempted to say: “I sound like a broken record.”)

Thank you for sticking with us to the end. We’d love to hear your thoughts!