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I’ve been sitting here thinking about what to cover in this month’s introductory letter. I’m having the semblance of an idea for a longer thought piece: goals-based asset allocations vs. liquidity (or lack thereof).
How can illiquid investments, over time, complicate the long-term road map you put in place for your clients? Do these assets—often “marked to imagination” instead of market prices—make it harder for you to manage risk and seize potential growth opportunities?
And what are you thinking about the so-called “liquidity premium”? Does it really exist anymore, or are your clients being asked to give up flexibility in exchange for some specter of the past? (Halloween pun, fully intended).
I’m curious—how are you thinking about this? We’re definitely in the camp that alternatives and diversification are still important to long-term success, but do illiquids add value, or are they more trouble than they’re worth when trying to balance risk and reward?
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: Strong industry-wide gains in September, led by Event-Driven strategies amid falling interest rates and building M&A momentum.
➕ The HFRI Fund Weighted Composite Index (FWC) gained +1.2% in September, with the HFRI Asset Weighted Composite Index adding +1.4%.
➕ Event-driven strategies led performance, with the HFRI Event-Driven (Total) Index advancing +1.8%, the second-highest monthly return in 2024.
➕ Macro strategies rebounded, with the HFRI Macro (Total) Index up +1.3%, led by Discretionary Thematic (+3.0%) and Multi-Strategy (+2.1%) exposures.
➕ Equity Hedge funds also performed well, with the HFRI Equity Hedge (Total) Index up +1.2%, bringing its YTD return to +10.2%.
➕ Performance dispersion expanded, with the top decile of HFRI FWC constituents gaining +8.9% and the bottom decile falling -4.1%.
Sources: HFR
Private Equity: Mixed signals as deal activity recovers amid persistent challenges.
➕ PE deal activity has shown significant improvement year-to-date compared to 2023, with the industry on track for one of its strongest years in terms of deal value.
➕ Despite the rebound, deal activity remains below the peak levels seen in recent years, indicating an ongoing recovery process.
➕ Platform LBO and growth equity deals have seen notable increases, with growth equity continuing to outpace other strategies.
➕ Take-private activity experienced a slowdown in Q3 compared to Q2, potentially influenced by election uncertainty and market volatility.
➕ Banks are showing a gradual return to LBO lending, with syndicated LBO loan values increasing substantially compared to the previous year.
➕ The industry continues to face challenges in balancing new deals with exits, impacting the ability to realize returns and recycle capital.
Sources: Pitchbook, Ropes & Gray
Private Credit: Market dynamics shift amid rising rates and increased competition
➕ Credit dispersion is on the rise, with the Q3 Golub Capital Middle Market Report noting a growing performance gap between companies, even in outperforming sectors like technology.
➕ In response to the high-interest-rate environment, debt-heavy companies are increasingly turning to payment-in-kind (PIK) options for financial flexibility. Moody’s estimates 7.4% of private credit fund income was in PIK form in Q2 2024.
➕ Significant deal activity continues, with notable transactions including Gopher Resource’s $450 million first-lien credit facility and PlayPower’s $495 million refinancing.
➕ The private credit market is facing increased competition from the reviving broadly syndicated loan market, potentially impacting deal flow and terms.
➕ While growth continues, careful risk monitoring remains crucial, particularly as the market evolves and faces potential economic headwinds.
Commercial Real Estate: Stabilization amidst uncertainty.
➕ The office sector remains one of the weakest areas, with vacancy rates still elevated and companies continuing to shift towards hybrid or remote work, leading to slower recovery in demand.
➕ Industrial and logistics real estate continues to be a bright spot, driven by e-commerce growth and supply chain restructuring. Low vacancy rates and infrastructure investments are supporting this segment.
➕ Essential service-related retail spaces, such as grocery-anchored centers, are performing well, while luxury retail is struggling under high borrowing costs and shifting consumer habits.
➕ Investors and developers are increasingly prioritizing sustainable building practices to align with ESG (Environmental, Social, and Governance) goals, particularly in states with strong regulatory frameworks.
➕ Investors are becoming more selective, targeting sectors with stable, long-term returns, like industrial properties and multifamily housing, while remaining cautious about office spaces and luxury retail.
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 might be useful or interesting for your clients, not filler.
➕ Pidgin English: Educational Alpha. William J. Kelly and the folks at the CAIA Association have been singing our song for a while. When it comes to the educational focus on alternative investments and resistance to the “democratization of alternatives at any cost” model gripping our industry, they’re right there at the forefront. Thanks!
➕ Firms jostle to sell alternative assets to wealthy investors: Financial Times. And we quote, “So far, the investors in private markets have overwhelmingly been pension funds, endowments and other institutional investors. While many have racked up big gains, they are starting to limit or even trim their exposure to alternatives.” And, “The financial firms are all trying to hitch their wagons to a fast-growing area of the market that can generate hefty fees.” We’re all pretty good at math, right?
➕ Harvard’s endowment among Ivy League’s worst-performing funds after years of overpaying managers: report New York Post. Sure, it’s the New York Post, but we can’t help ourselves. Just stuff to mull over when someone tries to sell you on the ‘Endowment Model’ for your clients 🙂
Disclosure:
This newsletter is for informational purposes only and does not constitute investment advice. All investments, including those in equity, debt, and alternative assets, carry certain risks, notably potential liquidity and transparency issues associated with many private investments. These risks should be considered in the context of an individual investor’s objectives and risk tolerance.
The views expressed are those of Third Wire as of the date of publication and are subject to change. The information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.
Past performance is not indicative of future results. Investors are advised to consult with qualified financial, legal, or tax advisors before making any investment decisions. Third Wire does not accept liability for any loss or damage arising from the use of this newsletter.
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