Without question, the first half of 2025 has been an eventful one. The introduction of DeepSeek in January, to tense trade negotiations in the spring, to stickier inflation, to a U.S. sovereign downgrade, to a U.S. airstrike in Iran in June, have all served as stark reminders that a new world order, including a notable transition from benign globalization to one of great power competition, continues to unfold. For some time, we have been calling this shift in the investment landscape a Regime Change, one in which an investor needs to think differently about where, when, and how to allocate assets, including the changing role of both Alternatives and government bonds in a portfolio. Importantly, though, despite all this perceived turbulence, financial risk assets, especially outside the U.S., have kept climbing, as the overall macro landscape has rewarded those who stuck to our ‘Glass Half Full’ thesis for the past few years. As we look ahead at KKR, we remain positive. To be sure, we expect more market drawdowns than in the past, but our ‘Glass Still Half Full’ thinking is that attractive financial conditions, a global easing cycle, ongoing productivity gains, and lack of net issuance—coupled with some incredibly powerful investment themes—will continue to drive this cycle both further and longer than many think. That said, we do start to want to build in some additional cushion in our approach in 2H25, and as such, we are advocating more allocations that allow investors to ‘Make Their Own Luck’ through, for example, control positions with operational upside in Private Equity, senior slices of Credit amidst wide dispersions, and/or Real Assets with long-dated, inflation-linked contracts that can reprice alongside rising nominal GDP. We also want to harness volatility and uncertainty to our advantage by using any periodic dislocations to lean heavily into our major macro investment themes, including the Security of Everything, Productivity and Worker Retraining, the shift from Capital Heavy to Capital Light, and Collateral-Based Cash Flows. Our bottom line: against a still favorable backdrop for financial markets, we want to tilt our portfolios to gain more exposure to operational leverage stories and macro tailwinds that help us to better control investment outcomes than in the past.
