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You know what keeps me up at night? 🙂
Actually, not much keeps me up at night. I sleep like a baby. But it did seem like a dramatic way to introduce our latest (and first) paper, The ‘Problem’ with Alternative Investments.
Our goal with these newsletters is to provide thoughtful investment commentary that is light on marketing and sales pitches and heavy on useful information. The paper has the same goal.
As we see it, the real “problem” with alternatives isn’t that they are becoming more accessible to individual investors or that technology is streamlining the investment process.
TLDR?
In our opinion, the “problem” is that in the rush to “democratize” alternatives, too many firms appear to view your clients as walking dollar signs to extract fees from rather than human beings with families and unique goals and complex financial needs. There’s a heavy focus on asset gathering instead of putting the client’s needs first.
Regular readers will know this is a drumbeat I’ve been tapping since we launched this newsletter almost exactly a year ago (thank you for reading it, btw, and for putting up with my monthly musings), but we felt it was time to put everything down in one comprehensive piece.
From questionable products being launched and targeted at your clients to fee structures that would make a medieval tax collector blush, we break down what we’re seeing in the industry and why it matters. We also offer a nice framework for helping you to evaluate those fees.
You can read the full paper on our website here, or you can view a page we setup in Perplexity so you can talk to the paper. Welcome to the future 🙂
Please reach out if you’d like a pdf version of it. Also, if you’d like a hand evaluating fund fees, I have the spreadsheet we created and I’m happy to share.
As always, I’d love to hear your thoughts.
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: Mixed performance in October as managers positioned themselves for the U.S. election amid rising rates and geopolitical tensions.
➕ The HFRI Fund Weighted Composite Index declined -0.7% in October, with approximately 45% of hedge funds producing positive performance.
➕ Fixed income-based Relative Value strategies led performance, gaining +0.6% as rates increased, with sovereign and asset-backed exposures showing particular strength.
➕ Event-Driven strategies reversed recent gains with a -0.35% decline, though Credit Arbitrage funds advanced +3.45% as managers positioned for an anticipated M&A cycle.
➕ Equity Hedge strategies fell -0.7% but remain the leading main strategy for 2024 with +9.6% YTD return. Quant Directional strategies, despite a -2.0% October decline, lead all sub-strategies at +14.3% YTD.
➕ Macro strategies faced the largest challenges, declining -2.0% as managers navigated pre-election positioning, with systematic strategies particularly impacted (-3.3%).
Sources: HFR
Private Equity: Deal activity showing signs of stabilization despite continued fundraising challenges and extended holding periods.
➕ According to PitchBook, deal value dropped for the second consecutive month in October but remains up YTD compared to 2023, with 2024 on track to see more $1bn+ deals than last year.
➕ The fundraising environment continues to be challenging—2024 is projected to have the fewest number of closed funds since 2016, though PE firms are actively deploying significant dry powder.
➕ Over 30% of buyout-backed companies have been held for 5+ years, with distribution yields remaining near GFC-level lows. Firms are increasingly using alternatives like continuation funds and dividend recaps to provide liquidity.
➕ Dealmakers remain optimistic about increased activity, particularly with expectations of continued decline in interest rates and improved clarity in the market environment post-election in the U.S.
Sources: Pitchbook, Ropes & Gray
Private Credit: Growing concerns about systemic risks, potential overvaluation, and questionable asset quality despite continued growth.
➕ While deal activity has slowed, the total addressable market for private credit continues to grow faster than capital inflows, with only about 15% of middle-market companies currently owned by private equity.
➕ Default rates expected to rise in 2024 and 2025, though still well below 2008-09 crisis levels, highlighting the importance of manager selection and workout capabilities.
➕ Competition increasing as banks and syndicated markets reemerge, putting pressure on spreads, particularly for high-quality deals – though private credit remains an attractive alternative to traditional financing.
➕ Growing institutional interest in the space, particularly from Japan, South Korea, and Middle East investors seeking diversification, though current market conditions demand careful underwriting and portfolio management.
➕ Concerns over the growing involvement of individual investors in private credit through vehicles like business development companies (BDCs) or exchange-traded funds (ETFs) adding another layer of risk.
Sources: SEC, McKinsey, Financier Worldwide Magazine
Commercial Real Estate: Mounting pressure with surge in foreclosures and significant loan maturities ahead = future opportunities for distressed investors.
➕ Major distress signals in commercial real estate, with September 2024 foreclosures up 48% year-over-year—a trend that could impact both direct CRE investments and REIT valuations in client portfolios.
➕ Nearly $1.8 trillion in CRE loans are set to mature before the end of 2026, creating significant refinancing pressure in an environment of higher rates. While lenders are extending some loans temporarily, regulatory constraints may limit this relief.
➕ Office sector remains particularly vulnerable, with analysts predicting potential price declines of up to 40%—comparable to the 2008 financial crisis – while industrial and multifamily properties show more resilience despite broader market pressures.
➕ While distress signals mount, some experienced investors see opportunities in acquiring assets at reduced prices.
Sources: PRNewswire, Norada, NAR,
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.
➕The ‘Problem’ With Alternative Investments: Third Wire Insights. Another shameless plug of our latest (and first) paper. It’s not all doom and gloom, people; we just believe someone needs to bring some balance to the force. The good news is that the problems, as we see them, are all relatively solvable. It just requires the industry to take a more educational approach with a client-first mentality instead of only looking at your clients as a meal ticket. Easy right? 🙂
➕A Reality Check on Private Markets: Part II: CFA Institute. Ludovic Phalippou , PhD continues his work on “the rise of global AUM in private market funds and how this trend may have been driven by a perception of superior returns compared to traditional investments.” He educates us on the important differences between IRR and rate of return, and “why investors must be careful not to view the metric as an equivalent measure to infer investment rates of return.” Thanks for your work!
➕The sting in the tail: Unigestion. A timely piece examining the impact of black swan events on private equity performance. The article does a great job highlighting how the traditional focus on average returns can mask significant downside risks in PE portfolios. Their analysis suggests that while PE might seem to offer better risk-adjusted returns than public markets, this advantage largely disappears when accounting for tail risks. Perfect reading for anyone questioning the ‘endowment model’ narrative being pushed on individual investors. 🙂
➕ Private Capital Markets Insights 2024: The Return of Warrants to Mezzanine Debt: Financial Markets, Institutions and Risks. A data-heavy look at private market trends that caught our eye. The paper examines how rising rates are affecting deal structures, valuations, and expected returns across private markets. Particularly interesting: their analysis of falling VC revenue multiples (7x to 4x) and, in general, the return of warrants in mezzanine deals.
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.
By subscribing to this newsletter, you agree and acknowledge that Third Wire is not liable for any decisions made based on the information provided herein.
