Author: cvernon

Fiduciary Duties in Selecting Designated Investment Alternatives

On March 30, 2026, the Department of Labor (DOL) issued its proposed regulation: Fiduciary Duties in Selecting Designated Investment Alternatives. This comes after the executive order released by the Trump Administration last August which asked the DOL to clarify its position on alternative assets as well as provide guidance to plan sponsors on fiduciary processes for incorporating alternative investments into DC plans. Marquette’s first DC Perspectives paper on this topic can be found here.

The key takeaways from this newly proposed regulation for fiduciaries selecting designated investment alternatives (DIAs) in participant-directed defined contribution plans include:

  • Process matters most: Fiduciary decisions will continue to be evaluated based on a prudent and well‑documented process, focused solely on participants’ best interests.
  • Asset‑neutral framework: The DOL does not require or prohibit any particular asset class, including alternative investments.
  • Clear evaluation factors: To qualify for safe harbor protection, fiduciaries should evaluate DIAs across six areas — performance, fees, liquidity, valuation, benchmarking, and complexity.
  • No immediate changes required: The proposal does not require plans to add new investment options or alter current menus; changes occur only if a fiduciary chooses to act.

Regulation Abdication?

The Basel capital framework was created to ensure that banks maintain sufficient capital to absorb losses and reduce the risk of systemic financial instability, thereby strengthening the resilience of the global banking system. Basel I established minimum capital requirements for banks based primarily on credit risk to strengthen the stability of the international banking system, while Basel II refined the framework by introducing more risk-sensitive capital requirements and supervisory oversight to better align bank capital with the actual risks banks take. In response to the Global Financial Crisis, during which Basel II ultimately proved insufficient, Basel III significantly increased capital, liquidity, and stress‑testing requirements. While these reforms improved financial stability, they also raised the cost of holding corporate loans on bank balance sheets, contributing to a sustained decline in corporate lending as a share of total bank credit after 2008. This dynamic can be observed in the chart above. As bank balance sheet capacity for corporate lending became more constrained, non-bank lenders increasingly stepped in to provide direct financing to companies, helping to fuel the growth of the private credit asset class. A proposed Basel III “Endgame” overhaul in 2023 would have further increased capital requirements, but this overhaul was ultimately shelved amid industry pushback and concerns that new rules would have been onerous.

Last month, U.S. regulators unveiled a proposed update to bank capital rules, marking a notable recalibration of the post‑crisis regulatory framework. The proposal would ease several elements of the existing framework, including aspects of Basel III implementation, the Global Systemically Important Bank (G‑SIB) surcharge, leverage requirements, and stress‑testing assumptions. Policymakers acknowledged that earlier rounds of post‑crisis regulation, while successful in strengthening the financial system, may have unintentionally constrained banks in terms of their ability to intermediate credit (particularly to businesses) and encouraged lending activity to migrate outside the regulated banking network. New proposals seek to preserve a robust capital framework while helping banks better support corporate lending on their balance sheets and compete more effectively with non-bank lenders.

Easing capital constraints could allow banks to re‑enter certain segments of the corporate lending market, particularly lower‑risk or relationship‑driven spaces, which may help stabilize or modestly increase the share of bank balance sheets allocated to corporate loans. However, private lenders retain structural advantages, including speed of execution, flexibility in deal structuring, and a greater willingness to finance bespoke or higher‑risk situations (areas banks are unlikely to fully re‑enter even with modest capital relief). As a result, competition may increase at the margin for more standardized corporate credit, potentially tightening spreads and slowing incremental share gains for private credit. Overall, the proposed changes may reduce the pace of disintermediation, but they do not undo the long‑term structural shift away from bank‑dominated corporate lending highlighted in this week’s chart.

1Q 2026 Market Insights Webinar

This video is a recording of a live webinar held April 16 by Marquette’s research team analyzing the first quarter across the economy and various asset classes as well as themes we’ll be monitoring in the coming months.

Our quarterly Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real assets, and private markets, with commentary by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Partner, Director of Research
James Torgerson, Senior Research Analyst
Fred Huang, Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Dennis Yu, Research Analyst
Hayley McCollum, Senior Research Analyst

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.

If you have any questions, please send our team an email.

 

A Portfolio Needs Structure: An Overview of the Securitized Credit Asset Class

Fixed income is the largest global financial market and often one of the largest allocations within institutional investors’ portfolios. A typical fixed income allocation implements an investment grade anchor with a few “satellite” mandates — most commonly high yield bonds, leveraged loans, and emerging market debt — that carry more credit risk but provide higher levels of yield. Fixed income portfolios are often over-exposed to corporate borrowers through both anchor and satellite allocations. Additionally, these satellite allocations usually increase corporate credit risk while reducing equity diversification that fixed income is supposed to provide. Securitized credit provides higher yields and more compelling diversification benefits.

Securitized credit is a large asset class that has been largely ignored by institutional investors due to under-representation in fixed income indices, perceived complexities, and a stigma from its role in the Great Financial Crisis. While factors responsible for under-allocation to securitized credit have merits, these have caused investors to overlook the benefits of the asset class. Securitized credit provides a spread and yield premium relative to similarly rated corporate credit, diversified risk exposure to various credit and market cycles, and lower correlation to both traditional fixed income and equities. Overall, securitized credit’s attributes can help to further optimize portfolio structures.

Pulling the Right Value Creation Levers

In the period between 2009 and 2022, private equity managers thrived amid an environment of low interest rates and rising asset prices, which led to financial engineering serving as a primary driver of portfolio value. In recent years, however, higher interest rates, elevated valuations, and tighter exit conditions have reduced the effectiveness of this value creation method. As a result, financial engineering has shifted from a core value driver to a supporting tool, prompting firms to increasingly focus on operational improvements within portfolio companies. Indeed, top-line growth and margin expansion are the key areas of value creation today, with revenue growth accounting for roughly 54% of value creation for deals that saw exits between 2017 and 2024. This dynamic can be attributed to the role of revenue growth as a sustainable and longer-term source of value creation, as it supports revenue base expansion, enables EBITDA growth, and facilitates more favorable valuation outcomes.

To drive both growth and profitability, private equity firms deploy a range of operational initiatives, including cost transformation, pricing optimization, technology integration, and supply chain improvements. While studies show that operations and pricing are the most effective levers in value creation playbooks, it is important to remember that execution is just as important as planning. To that point, a recent study found that more than half of executives cited poor implementation as a primary and controllable cause of underperformance of their businesses. Ultimately, as operational improvements become more crucial to value creation, private equity firms that can execute with discipline, particularly across revenue growth and margin expansion, will differentiate themselves when it comes to delivering returns and building more resilient and scalable businesses.

Pain at the Pump

Global energy costs have risen sharply this month due to a convergence of geopolitical shocks, as critical infrastructure and transport routes have been severely disrupted in the wake of U.S. strikes on Iran. Specifically, oil prices have climbed above $100 per barrel for the first time since 2022, while European gas futures have nearly doubled from late February levels. These developments have led to pain at the pump for many in the U.S., where the cost of a gallon of regular, unleaded gasoline has risen to more than $3.96 as of this writing. This figure represents a roughly 33% increase from the national average just one month ago.

It is hard to understate the importance of the Persian Gulf region to commodities markets, with the Strait of Hormuz alone typically handling around a quarter of seaborne oil and a significant share of liquefied natural gas (LNG) shipments. The effective closure of this waterway has choked off a vital artery for the global energy trade, and damage to the LNG export capacity of Qatar has further tightened markets. With shipping traffic in the region reduced or halted due to security risks, traders are now pricing in the possibility of prolonged energy shortages. The current situation is particularly acute because ongoing disruptions affect not just production but also the transportation of commodities that have already been produced, amplifying the supply squeeze. Additionally, oil producers in the Gulf have scaled back output as storage capacity reaches its limits, both on land and aboard tankers offshore. According to the International Energy Agency, production has been reduced by at least 10 million barrels per day, which represents more than half of the volume that typically passes through the Strait of Hormuz.

Beyond the immediate supply loss, markets are also responding to the risk of sustained or worsening disruption. Damage to key facilities (e.g., large-scale LNG processing plants) could take years to fully repair, raising the prospect of a prolonged imbalance between supply and demand. Meanwhile, continued military escalation increases the likelihood that additional infrastructure could be targeted. This uncertainty has led to a risk premium being embedded in prices, as buyers compete to secure alternative supplies and hedge against future shortages. In effect, the combination of physical damage, logistical bottlenecks, and geopolitical risk has created significant upward pressure on energy prices, with potential ripple effects across inflation, industrial activity, and global economic growth.

Closing Time

This week’s chart illustrates a clear structural shift in the fundraising dynamics of North American closed-end real estate funds over the past two decades. While funds in the early 2000s were typically able to reach final close within roughly 5–8 months, fundraising cycles have lengthened significantly in recent years. Indeed, the average time from first close to final close extended to approximately 25 months in 2025, reflecting a far more competitive and selective capital raising environment.

Several factors have contributed to this trend. First, institutional investors now maintain more mature private real estate portfolios and increasingly prioritize re-ups with existing managers, limiting capacity for new relationships. As a result, raising capital has become a more resource-intensive and prolonged process for fund sponsors. Additionally, real estate capital flows appear increasingly concentrated within two segments of the market: large, diversified platforms with multiple product offerings and specialized managers with clearly differentiated strategies. This dynamic raises the barrier to entry for emerging managers while reinforcing the advantage of established franchises with strong investor relationships and scalable platforms. In this environment, thorough manager due diligence is increasingly critical for real estate fund investors, who must move beyond brand recognition and carefully evaluate a manager’s sourcing capabilities, portfolio construction discipline, and ability to deploy capital effectively across market cycles. As fundraising timelines extend and capital becomes more concentrated among select platforms, investors who conduct rigorous underwriting will be better positioned to allocate to managers capable of consistently executing in a more competitive and capital-constrained real estate landscape.

Buy High, Sell Low?

Warren Buffett once implored investors to “be greedy when others are fearful,” and this sage advice is certainly applicable to the high yield bond market. Bond investors (who have not been living under a rock) are likely aware that high yield spread valuations are extremely tight at present. Specifically, the OAS for the Bloomberg U.S. High Yield Corporate Index reached 250 basis points on January 22 of this year, which represents its lowest level in nearly two decades. Further, outside of brief periods of widening, high yield spreads have remained well below long-term averages for multiple years. These dynamics exist for several reasons (e.g., solid corporate balance sheets, a resilient U.S. economy, and the overall higher quality of the market) and there is no denying that there is currently minimal value to be found in high yield spreads. All this begs the question: When will spreads eventually widen and by how much?

Put simply, it is impossible to answer these questions without the ability to predict the future (if you can predict the future and happen to be reading this, please call me). Indeed, timing spreads is usually a fool’s errand, but this does not stop investors from trying. When conditions are tight, many postpone capital deployment until spreads are wider and have better value, which is actually a reasonable strategy if it can be executed properly. However, a major flaw exists in this approach: Human behavior. Significant widening of high yield spreads often coincides with major economic shocks and lower asset values across portfolios. Fearful and not wanting to “catch a falling knife,” most investors will again postpone allocation decisions until economic risks subside. Since spreads widen and peak quickly, these fears can, ironically, cause investors to miss the better value they were waiting for in the first place.

This week’s chart highlights seven of the most significant spread widening periods in the history of the Bloomberg U.S. High Yield Corporate Index, as well as the cumulative 2-year performance for the index immediately following those peaks in spreads. These periods all coincided with significant economic shocks that led to elevated fear among investors, which likely delayed investment decisions but also presented strong buying opportunities. Specifically, the average cumulative return for the index in the two years immediately following these shocks was more than 43%. It is important to note that this outsized performance would have been difficult to achieve, as, barring incredible luck, buying at the peak of spreads is highly unlikely. The more relevant takeaway here is as follows: The longer it takes to allocate, the more value that is missed (on average). To put this idea in numerical terms, an investor who waited six months to invest after the peak spread levels in the instances outlined above saw an average two-year performance reduction of nearly 20% relative to one who bought at peak levels.

To be clear, Marquette is not advocating the timing of spread levels, but the information detailed above does demonstrate that even when risks seem greatest, delaying an investment due to fear of losses can result in missed opportunities. In the case of high yield spreads, it is always helpful to remember that what goes up must come down.

A Bug in the Software

Recent market dynamics in the software sector reflect a sharp shift in investor sentiment driven primarily by concerns that advances in artificial intelligence could fundamentally disrupt traditional software business models. Public software-linked equities have sold off broadly (even as many companies continue to deliver solid earnings) because investors are increasingly focused on long-term structural risks rather than near-term financial performance. Indeed, estimates for longer-term earnings growth for these businesses have started to decline despite stable or improving near-term outlooks, highlighting growing skepticism around the durability of pricing power, competitive moats, and growth trajectories in an AI-enabled environment. Since the end of October, the S&P North American Technology Software Index has fallen by roughly 30%. These concerns have now spread beyond equities into credit markets, where leveraged loan investors are rapidly reducing exposure to software-related borrowers. Many software loans that entered 2026 priced at or near par have since declined as investors reassess the sector’s credit risk profile, reflecting fears that AI-driven disruption could weaken cash flows and increase default risk for highly leveraged issuers. Specifically, the Morningstar LSTA U.S. Leveraged Loan Index has dropped by around 6% since the start of 2026.

This repricing across equity and credit markets underscores a key shift in sentiment. Software, long viewed as one of the most predictable and resilient sectors of the economy due to recurring revenue models and high margins, is now facing simultaneous multiple compression in equities and widening spreads in credit. While fundamentals remain relatively intact today, markets are increasingly discounting a wider range of potential outcomes for software-linked businesses, creating heightened volatility and a more selective environment in which investors are demanding clear evidence of AI resilience and sustainable competitive differentiation.

The Seller Becomes the Buyer

Most have traditionally viewed a successful exit for a venture-backed start-up as either an IPO or an acquisition by a larger strategic or public company. That long-standing dynamic is gradually shifting, as start-ups are now more active than ever as acquirers. Indeed, what was once a buyer landscape dominated by strategics and public corporations now increasingly includes venture-backed firms. According to PitchBook-NVCA data, VC-backed buyers accounted for more than 38% of total U.S. venture M&A activity last year, up from roughly 20% a decade ago, with 2025 marking seven consecutive years of increasing participation. Specifically, more than 387 start-ups were acquired by venture-backed companies last year, compared with 177 in 2015. Although overall exit volumes remain below 2021 peak levels, the steady rise in startup-led acquisitions reflects a structural shift toward internal consolidation within the venture ecosystem.

The drivers behind this shift are largely pragmatic, as capital remains available but far more selective. Growth equity investors are increasingly concentrated within perceived category leaders, while companies that fall slightly below that threshold face a more challenging fundraising environment. For scaling start-ups that have survived earlier rounds of capital selection, acquisitions can serve as an efficient strategic accelerant. Rather than depleting cash reserves to build adjacent features, expand geographically, or acquire customers organically, management teams can accelerate these objectives through M&A, adding revenue, product capabilities, or talent in a single transaction. At the same time, the bar for IPO readiness has risen materially in the last five years, as public investors are increasingly prioritizing profitability, operating leverage, and durable revenue growth. For venture-backed companies aiming to meet these standards, combining with a competitor or complementary platform can create scale and margin expansion more quickly than standalone execution. In some cases, consolidation represents the most rational path forward in a more disciplined capital cycle. This trend is visible at the upper end of the market as well. For instance, OpenAI completed five acquisitions across hardware design, experimentation tooling, fintech AI capabilities, and model infrastructure in 2025 alone. The fact that one of the world’s most valuable private companies is actively using M&A as a growth lever reinforces the idea that an acquisition is no longer solely a means of exit but increasingly a tool for expansion.

While it remains too early to declare a permanent transformation in venture markets, it is clear start-up-led consolidation is becoming more common and strategically meaningful. As companies remain private for longer and develop greater operational scale, their roles as acquirers may continue to expand.