Eye On The Market – “The Deep End: 2025 Alternative Investments Review”

Host: Michael Cembalest
Date: December 2, 2025

Episode Overview

In this biennial review, Michael Cembalest dives deeply into the state of alternative investments as of late 2025. He analyzes key sectors—including private equity, venture capital, hedge funds, private credit, and real estate—presenting both historical perspective and forward-looking insights. Throughout, Cembalest critically evaluates returns, risk, industry challenges, and shifting market dynamics. He also touches on democratization of alternatives, performance measurement debates, and legal/regulatory concerns impacting institutional and (potentially) retail investors.

Key Discussion Points and Insights

1. Hyperscaler Debt Explosion

• Timestamps: 01:20–03:15
  • Cembalest opens with a look at the Q4 borrowing surge by big tech “hyperscalers” (Meta, Amazon, Google, Oracle):

    “There was an absolute explosion of about $150 billion of borrowing from Meta, Amazon, Google and Oracle … on top of what was really kind of 50 billion on a year to date basis. That’s a lot of borrowing.” (02:13)

  • Despite huge debt issuance, net debt-to-EBITDA ratios remain low for many, except Oracle and IBM.
  • Credit markets are starting to price higher risk for some large tech firms.

2. Swim at the Deep End: State of Alternative Assets

• Timestamps: 03:20–07:30
  • Alternative assets have doubled as a share of global equity market cap (from ~6% to 12% over the last decade).
  • Banks (esp. Morgan Stanley, Goldman, Wells) play a major financing role for private equity/private credit.
  • On the surface, top quartile buyout and venture funds continue outperforming; the median tracks public markets; diversified hedge funds and private credit still deliver attractive risk-adjusted returns.
  • However, Cembalest warns, “a lot of managers are swimming at the deep end of the pool”:

    "Their portfolios are full of unmonetized companies dating back to the middle of the prior decade." (05:15)

  • Particularly striking: Nearly 2/3 of assets in median 2016 vintage venture funds remain unmonetized.
  • This is the slowest monetization/distribution pace on record, with higher unsold company holdings.

3. Capital Markets Recovery: A Glimmer of Hope

• Timestamps: 07:35–09:40
  • Despite sluggish distributions, capital markets are rebounding. IPO and M&A activity are increasing, potentially easing “full pools” of unsold investments.

4. Performance Measurement: Absolute and Relative Returns

• Timestamps: 09:45–14:25
  • Long-term buyout returns: Pre-2019, median buyout managers posted multiples of ~2x with IRRs of 15–20%.
  • Recent vintage years show lower returns—debated as “J-curve” (timing) vs. “performance issue.”
  • Venture capital: After ~10 years of lackluster returns post-dotcom, returns improved post-2008, but slipped again post-2019 (Metaverse/SPAC excess hurt).

    “The poor performance of 2020, 21, 22 vintages is not just a J curve issue. They've got some bad investments in there.” (12:55)

  • Relative to public markets:
    • Private equity buyouts mostly outperformed S&P 500 from the 1990s–2020.
    • Post-2020, relative outperformance declining—but S&P now includes Big Tech/Mag 7, unlike PE portfolios.
    • In venture, only top quartile managers outperform; the median just matches or lags public equities.

    “The huge gap between the average and median venture manager is kind of a clue that there's a select small group...the rest aren't.” (13:50)

5. Hedge Funds: Risk-Adjusted Analysis

• Timestamps: 14:30–19:00
  • Cembalest advocates measuring hedge fund composites (20-fund diversified groups) vs. volatility-matched stock/bond portfolios—most outperform their relevant risk-adjusted benchmarks.

    “Returns go down a little bit, but the volatility collapses… Vast majority of hedge fund composites outperformed their volatility adjusted benchmarks.” (16:40–17:50)

  • Major concern: Hedge fund crowding in momentum stocks (hyperscalers), increasing beta/concentration risk.

    “A hedge fund crowding index is at the highest level it’s been at for the last 20 years…” (18:30)

6. Private Credit: Booming, but with Caution

• Timestamps: 19:10–28:35
  • Private credit is absorbing market share from high yield bonds/leveraged loans, not adding additive risk.
  • Backward-looking performance:
    • Private credit has outperformed leveraged loans by ~300bps/year during expansion.
    • Stress signals (defaults, non-performing exposures, ratio of upgrades/downgrades) remain low.

    “There are limited signs of stress in the private credit world... Non performing exposures...are still below 1%.” (22:25)

  • Underwriting standards:
    • Historically, private credit had stricter covenants and terms than syndicated loans.
    • Recent years: Underwriting is loosening (increased “cov-lite” loans, higher leverage in BDCs, toothless covenants).

    “The only reason that some borrowers still have a lot of headroom...is because the...ratio...was like 8, 10 or 12x. … Private credit standards are changing.” (27:30)

  • Key warning: No real recession since 2008 means “manager dispersion” hasn’t been truly tested; future downturns will reveal who underwrote well.

7. Real Estate: At or Near the Bottom?

• Timestamps: 28:45–33:00
  • Fundamentals still poor, especially in some sectors (commercial/office), but signs of market bottoming:
    • Investment returns, transaction volumes, debt origination, and distressed sales picking up.
    • “Special servicing” rates for office loans have ballooned, yet that can signal clearing activity:

      “Markets bottom way before the fundamentals stop deteriorating… I have a feeling we're in that kind of environment right now for real estate.” (31:55)

  • Office now less than 15% of institutional CRE portfolios (was 35–40% a decade ago); industrial/data center/apartment segments drawing more capital.
  • Office sector: More buildings converted/demolished than newly delivered for the first time—a key turning point.
  • Back-to-work (post-pandemic): Stable at ~70% (with ~30% still WFH), based on multi-source data.

8. Democratizing Alternatives: Regulatory and Litigation Risks

• Timestamps: 33:05–34:25
  • Highlights August 2025 executive order to study introducing alternatives into 401(k) plans.
  • Retail fundraising in alternatives rapidly rising (from $25B to $175B).
  • Raises the specter of litigation risk against alternative managers. Regulators may lag, but courts could discipline via lawsuits over opaque fees, reporting, fiduciary duties.

    “These documentation firewalls… [may] be tested” in a sharp recession. (34:15)

  • Points to both historical and recent examples (auction-rate securities, SPACs, 401(k) excessive fee suits) of legal exposure for asset managers.
  • Concludes with a call for greater scrutiny as democratization progresses.

Notable Quotes & Memorable Moments

• On “Dry Pools” of Assets:

  “For the median buyout fund, there's still around 30 to 35% of the assets left. And for the median venture fund, this is eye popping. The median venture fund has almost two thirds of its assets that's invested in still unmonetized from 2016, which is kind of amazing.” (05:45)

• On Venture Capital Gaps:

  “Limited partners need to consistently invest with top quartile venture managers to outperform the S&P 500... Fourth quartile venture managers have been a money pit like destroying value…” (13:50)

• On Hedge Fund Risk-Adjustment:

  “If all you cared about was absolute return, you'd be disappointed… [but] the volatility of the 70:30 mix was higher than almost all of the hedge fund composites.” (16:55)

• On Private Credit’s Future Test:

  “Eventually when the next recession does hit, you’re going to see a lot more manager dispersion than we’ve seen in the past.” (28:15)

• On Real Estate’s Turning Point:

  “The bottom line is that markets bottom way before the fundamentals stop deteriorating. And I have a feeling that we're in that kind of environment right now for real estate…” (31:55)

• On Democratization and Litigation:

  “If the regulators don't figure out a way to protect retail investors, the litigation process will.” (34:10)
  “These documentation firewalls that were supposed to shield the alternative asset managers are going to be tested.” (34:20)

Structure by Segment (with Timestamps)

| Time | Topic/Segment | |--------------|-------------------------------| | 00:24–03:15 | Hyperscaler debt surge, set-up | | 03:20–07:30 | Overview: Alt asset landscape, “The Deep End,” unsold assets | | 07:35–09:40 | Capital markets recovery for exits | | 09:45–14:25 | Return analysis: PE & Venture (absolute and relative) | | 14:30–19:00 | Hedge funds: diversified risk-adjusted returns | | 19:10–28:35 | Private credit: performance, covenants, warning signs | | 28:45–33:00 | Real estate: correction, bottoming, CRE portfolio shifts | | 33:05–34:25 | Democratization & risk of litigation in alternatives |

Final Thoughts

Cembalest offers a nuanced, data-driven, and sometimes skeptical perspective on alternative assets as the cycle matures. Key themes include banners of surface stability masking deeper risks (illiquidity, unsold assets, loosening standards), the importance of manager selection, and the rising intersection of alternatives with retail and regulatory worlds. Real returns may be harder to achieve and legacy assets tougher to exit, especially if the market faces its first true “real” recession in over a decade.

He concludes, in typical fashion, with a preview:

“We will see you again on January 1st...most of which is...going to look at what’s going on with hyperscalers and pathways to profitability on 1.4 trillion of hyperscale or capital spending since GPT was launched in 2022.” (34:24)

This summary omits ad, intro, and disclaimer material but covers all substantive discussion and analysis from the episode.