As market indexes become increasingly concentrated, investors are looking for more diversification, but one senior investor has urged caution in moving into alternative assets. With more money flowing into private markets, which are under increased scrutiny from the Bank of England, Niall O’Sullivan, Mercer’s chief investment officer for global solutions, told CNBC that such changes require more rigorous investor analysis, particularly in untested areas such as private credit. Stock indexes are increasingly concentrated, dominated by a handful of tech giants, and concerns about an AI bubble are prompting investors to seek portfolio diversification tools such as hedge funds, private equity and private credit. “When you look around the world and talk to investors around the world, they’re asking themselves how to build diversification into their portfolios,” O’Sullivan said Thursday on CNBC’s “Squawk Box Europe.” He said the “true diversifiers” such as hedge funds are “the ones that people are watching live right now.” But he warned: “If you’re going to do it, make sure you hit your goals.” Earlier this year, research from index provider PivotalPath suggested that many hedge fund strategies have historically high correlations with the S&P 500 stock market. O’Sullivan added: “You want to make sure what you buy is stress-tested, especially if the market is trending up for an extended period of time.” “The only way you can really see what’s going to happen is to look at scenario analysis or look at a long history and see what that manager has done. If you’re going to add a diversification element to your portfolio, you need to make sure that the manager you’re adding has achieved that diversification in the past and will do so in the future.” PwC’s analysis highlights a growing appetite for alternative investments, particularly private markets. According to the latest 2025 Global Asset & Wealth Management Report, private market revenues are expected to reach $432.2 billion, growing at a compound annual growth rate of 8.2%, and are expected to contribute more than half of the total wealth management industry revenues by 2030. “Private credit is very interesting,” Georgina Taylor, Invesco’s head of EMEA client investment solutions, said at the Invesco Investment Outlook webinar on Thursday. Taylor added that the “huge” concentration risk in the stock market is now causing investors to look elsewhere. Taylor said private credit offers investors a premium over cash rates, while the variable rate nature of the asset class provides diversification of fixed income risk, with cash returns currently trending lower. Tighter Monitoring As private markets attract the attention of central banks and legislators, investors’ appetite for further diversification of their portfolios increases. The Bank of England on Thursday announced the launch of a new system-wide exploration scenario focused on private markets, amid continuing concerns over hidden risks, particularly in private credit. The BoE said the stress test would examine data gaps and potential risks in the sector, which plays an increasingly important role in financing UK businesses. The move follows the House of Lords Financial Services Regulation Committee launching a separate inquiry into private market growth, which is expected to report its findings next year. Blackstone, Apollo, KKR and Ares are among the major private market managers that have reportedly agreed to participate in the BOE’s stress tests. The Bank of England said the test remains whether the private market in its current form can withstand a deep recession. “Private equity and private credit are becoming increasingly valuable in helping British businesses innovate, invest and grow,” said Sarah Breeden, BoE’s Deputy Governor for Financial Stability. “To continue to deliver these benefits, we need a strong understanding of how risk can flow through the financial system under stress,” O’Sullivan told CNBC, warning that private credit is “not in crisis” yet. “If you’re going to choose a private credit management company because you think you’re going to make a good profit, you need to hire someone who has been through a crisis,” he said. “You need to know that you have a good lawyer on staff to negotiate what you need to negotiate when the time comes.”
