While commercial real estate lending and deals have slowed as interest rates have risen in the past year, KKR executive Henry McVey has doubled down on his conviction that investing in property and other real assets is still one of the best ways to protect returns.
In writing insights and blog posts this year, McVey, the chief investment officer of KKR’s balance sheet division, has been setting parameters for building an investment portfolio. Last week, he and Racim Allouani, head of portfolio construction, investment risk management and quantitative analysis at KKR, released a report focusing heavily on the need for real assets to be part of investment portfolios.
These investments that are backed by physical assets that, once constructed, are leased or contracted out to generate dependable cash flows are often directly or indirectly indexed, or automatically adjusted, to inflation. As a result, they can offer a combination of income generation, capital appreciation potential and diversification not always available in other asset classes. For KKR, real estate is one of the largest individual components of its real asset portfolio.
For his role in highlighting the importance of the asset sector as a key part of investment portfolios, McVey is the Person of the Week.
WHO: Henry H. McVey joined KKR in 2011 and serves as head of global macro and asset allocation.
STREET CRED: McVey served in a similar role at Morgan Stanley Investment Management before joining KKR in 2011. He also heads GBR Gives Back within KKR, an organization set up to provide pro bono macro and asset allocation assistance to small-to-medium non-profits. McVey also is a member of the Pritzker Foundation Investment Committee, a board member of the University of Virginia Investment Management Co. and a member of the Council on Foreign Relations. He also serves as a member of the financial sector advisory council for the Federal Reserve Bank of Dallas.
WHAT HAPPENED? In the report from KKR, McVey laid out arguments and data supporting the recent performance of real assets and pointed out that he sees more opportunities ahead for the asset class. A particularly compelling component of that asset class is real estate credit, he said. Ongoing volatility, as well as bank funding pressures, have caused a pullback in large sources of real estate debt financing, including bank lending and the CMBS market. To be clear, part of this pullback reflects more challenging fundamentals, particularly around office property. Nonetheless, he said, KKR continues to conclude that real estate lending overall will hold up much better than it did in the Great Recession because of lower loan-to-value ratios, better underwriting, and the fact that asset values have already reset in many sectors.
WHY IT MATTERS: Despite record monetary tightening around the globe, heightened geopolitical turmoil and persistent inflation in many developed markets, including “sticky wage pressures,” McVey expressed his strengthened conviction that investors should consider diversifying beyond traditional stock and bonds. A major underpinning of that view is that stocks and bonds are becoming increasingly more correlated and that real assets can offer diversification benefits that can help many investors better protect their returns and function as a hedge against inflation.