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Happy March! This month, we’ll start by playing a game called “Choose Your Investment Analogy.”
- “If you’re sitting at a poker table and can’t spot the sucker, you’re it.”
- “The last one in during a gold rush usually ends up holding the shovel, not the gold.”
- What’s the one about musical chairs? Who gets a seat when the music stops, and isn’t there a punchbowl involved? 🙂
What’s my point? I’ve been thinking a lot about something I’ve been seeing more and more in recent weeks—stories related to large Private Equity shops and their desire to make PE more available to your clients. It’s no secret that this most recent push is coming on the heels of slowing fundraising from their institutional clients, and the dawning realization that private wealth currently makes up more than half of the world’s total investible wealth (more than institutions).
And, before you think I’m hating on PE, let me state that I believe your clients should have access to private market assets—the full range of alternative investments.
However, with regards to PE, [Insert the investment analogy you selected here].
Even though we’re not big fans of the word ‘democratization’—mostly because it’s a useless buzzword—the narrative is compelling: these firms paint a pretty picture of a financial world where the velvet ropes are finally pulled back, and we all get bottle service and a chance to party with the institutional elite.
My thing is this, though: if institutional investors are leaving the PE party (recalibrating their expectations for future performance and reducing exposure), where does that leave you and your clients? Do you guys want to stick around until the music gets shut off? Do you even want a chair at this particular party? And where’s that institutional investor taking the punchbowl?
Are our clients being asked to essentially provide liquidity to institutions looking to exit their less favorable investments and vintages? Is a registered PE fund that’s attractive because of low minimums and investor-friendly liquidity still attractive after you discover that around 85% of the fund’s assets are in highly liquid assets—meaning, not in private equity—to comply with liquidity risk management rules? Are you concerned that even though a fund is marketed as having daily, monthly, or quarterly liquidity, the gates can and often do slam shut at the precise moment you need to withdraw, i.e., basically selling liquidity as a feature that doesn’t actually exist?
Clearly, I have a lot of questions this month, and I’d love to hear from you about yours. I’ll probably explore this a little further in a blog post later this month.
Best,
Dan
Alternative Talking Points
We review the latest monthly reports and industry analyses across the private markets, boiling them down into a few easily digestible points to share with your clients. Contact us if you’d like more depth.
Hedge Funds: Broad-based gains in February, with technology, AI, and cryptocurrency exposures leading the way. Strongest four-month return since March 2021.
➕ The HFRI Fund Weighted Composite Index and HFRI 500 FWC Index rose by an estimated 2.5% and 2.6%, respectively, while specialized cryptocurrency funds saw a substantial 31.2% gain.
➕ Equity Hedge funds, particularly in technology and healthcare, led strategy performance, with the HFRI Equity Hedge (Total) Index jumping 3.2% for the month.
➕ Uncorrelated macro strategies also performed well, with the HFRI Macro Index up 3.0%, benefiting from commodities, currency, and energy exposures.
➕ Event-driven funds had mixed results, but activist, special situations, and distressed funds posted gains.
Private Equity: No drastic changes in PE from last month. Slowdown in deals, exits, and fundraising with a few bright spots like AI expansion and Continuation funds.
➕ U.S. VC investors who invested in China-based startups are facing challenges exiting their investments due to regulatory tightening and geopolitical tensions—the recent ‘TikTok’ bill and an overall reduction in US IPOs of Chinese companies.
➕According to PEI, private equity firms have been increasingly interested in opportunities in the Japanese market in 2024.
➕ There has been a slight uptick in private equity investing so far in 2024, with sources citing a focus on distressed businesses where firms can focus on growth strategies, cost reductions, and even ESG initiatives to increase valuations.
Private Credit: Proceed with caution. Private Credit’s role in stalling a potential US recession underscores its importance amid economic uncertainties.
➕ Borrowers are actively reducing loan spreads, with repricing activity surging to $34 billion in the last 30 days, indicating a strong start to 2024 following a record January.
➕ New-issue spreads are at multi-year lows, notably for higher-risk borrowers, signaling a prime environment for optimizing loan terms across various credit ratings.
➕ The potential pool for loan repricing is expanding, potentially exceeding another $100 billion, driven by tightening spreads and a rise in secondary market prices.
➕ UK Regulators are probing the potential risks from banks’ exposure to loosely regulated private credit funds, especially as these funds finance companies that typically struggle to secure traditional bank loans or bond market financing.
➕ Some private credit funds are adding leverage to their loans, aiming to maximize returns. This strategy, however, magnifies potential losses amid an environment of rising corporate distress in Europe, further complicating the landscape for private lending.
Commercial Real Estate: Persistent uncertainty = opportunities for those who know where and how to look.
➕ Despite the downturn in office, many investors view the current market conditions as a chance to invest in top-tier properties at reduced prices.
➕ Hybrid work is still negatively impacting office vacancy rates, particularly in dense urban centers.
➕ Despite mortgage rates hovering around 7%, the demand for apartment buildings remains strong, as higher mortgage rates encourage people to consider rental options.
➕ While the industrial and warehouse sectors have demonstrated resilience because of e-commerce growth and construction spending, there are signs of a slowdown.
➕ Mixed signals in the retail sector as it has seen a slowdown in demand but low vacancy rates.
Worth your time
Our monthly recommendation of books, articles, research, and announcements we found interesting, important, or just plain entertaining enough to share. Sometimes we’ll have a lot. Other times, not so much. The objective is to share things that are useful, not filler.
➕ Asset Allocation 101: The ‘Ivy League’ Model isn’t a Fit for Individuals: Third Wire Insights. One of our partners recently joked, “Is anybody keeping a list of these firms pushing the Ivy League model on individuals? You know, for a future class action.” It prompted us to write a blog post about it.
➕ Cinnamon IRRadiation: Educational Alpha. A solid piece of work by the folks at CAIA on IRR and private equity that highlights the significant difference in performance measurements and illustrates through example how identical cash flows can yield a vastly higher IRR compared to TWR, emphasizing the critical need for education by investors (and sometimes even PE firms) on the performance metrics used to promote these products.
➕ KKR sees ‘trillions’ of retail investor dollars moving to alts: InvestmentNews. Using their crystal ball, of course. 🙂 1. We still don’t like it when institutions call your clients retail investors. 2. This trend has been in place for decades, so we don’t really think it’s news to anyone. We do think it means the role of financial advisors is more important than ever, though.
➕ Alternative Investments in Community Development: A Case Study of Pension Fund Investments in Multifamily Affordable Housing: Federal Reserve Bank of New York. Affordable housing is a massive issue. Apparently some institutional investors are taking their ‘punchbowl’ here (read my intro letter if you don’t catch the reference). The report concludes that pension funds are emerging as a pivotal source of capital for multifamily affordable housing, committing substantial funds mainly towards the preservation of existing units.
➕ Q&A: Looming Regulation Could Impact the Use of Alternative Investments: WealthManagement.com. Shocker! While many people seem to think expanding access to alternative investments to individual investors is a good thing, plenty of other stakeholders don’t. We don’t think this is news beyond keeping an eye on changing regulations and a casual reminder that transparency is important and it’s critical for investors to understand the complexities and the associated risks before making any investment—alternative or not. Again, we’re in the camp that believes financial advisors will have an increasingly important role (unless AI puts us all out of work). 🙂
Disclosure:
This newsletter is for informational purposes only and does not constitute financial, investment, legal, or other professional advice. The information, opinions, and forecasts contained herein are current as of the date of this publication and are subject to change without notice. The information presented in this newsletter has been obtained from sources believed to be reliable, but its accuracy, completeness, and relevance to your personal situation cannot be guaranteed.
Investments and strategies mentioned may not be suitable for all readers and may have different implications for different people. We highly recommend that readers seek advice from qualified professionals before making any investment decisions. Past performance is not indicative of future results, and no representation or warranty is made regarding the accuracy or completeness of the information contained herein.
Third Wire Asset Management, LLC (‘Third Wire’) does not accept liability for any loss or damage arising from the use of this newsletter. By reading this newsletter, you acknowledge and agree that Third Wire is not responsible for decisions made based on the information provided herein.
