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Happy Holidays! As we wrap up 2024, I hope you’re planning some well-deserved time with family and friends.
We’re cooking up some great things to kick off 2025, so we’re a little swamped, but we will definitely enjoy a little R&R to make sure we’re rested and ready for the new year.
In case you missed it last month, I had the amazing opportunity to chat with William J. Kelly, CAIA (CAIA Association) and Andrew Akers, CFA (PitchBook), about their views on the current state and future of private equity and about Andrew’s research on private equity buyout replication strategies (Taking the Private Out of Private Equity). Our discussion was wide-ranging, and, as usual, we didn’t sugarcoat anything.
I’m actually a little surprised we haven’t gotten any hate mail from the typical PE industry pundits. We tackled some of my favorite (and thorny) details around benchmarking, performance & risk smoothing, onerous fee structures, and what’s actually driving PE returns today. Hint: It’s generally not operational alpha.
I want to thank both Andrew and Bill for their time and insights. Looking forward to deepening the conversation in the coming weeks. Stay tuned!
If you haven’t listened yet, you can catch the full discussion here. 🙂
Wishing you and yours a wonderful holiday season!
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 performance in November driven by U.S. election results and positioning for expected policy changes.
➕ The HFRI Fund Weighted Composite Index surged +2.6% in November, with equity hedge and event-driven strategies leading gains.
➕ Equity Hedge funds advanced +3.4% in November, bringing YTD returns to +13.4%. Technology (+6.7%) and Quantitative Directional (+6.1%) led sub-strategy performance, with the latter up +21.5% YTD through November.
➕ Event-Driven strategies posted their strongest monthly gains of 2024, up +3.3%, led by Activist (+4.85%) and Multi-Strategy (+4.5%) as managers positioned for an expected increase in M&A activity.
➕ Macro strategies reversed prior month declines, gaining +1.9% as managers navigated changing interest rate expectations and positioned for anticipated policy shifts. Active Trading (+2.7%) led sub-strategy performance.
➕ Performance dispersion widened significantly, with the top decile gaining +12.3% while the bottom decile fell -4.9%, highlighting the importance of manager selection.
Sources: HFR
Private Equity: Improving market conditions, narrowing valuation gaps, and evolving strategies to address liquidity challenges.
➕ Global private equity investment activity reached $1.3 trillion in the first three quarters of 2024, up 30% from the same period in 2023, marking the third-highest deal value for that timeframe on record.
➕ U.S. PE deal activity and optimism rose in Q4 2024, driven by a 50-basis-point interest rate cut in September and the U.S. election results.
➕ Private equity exits globally reached $634 billion through Q3 2024, up from $555 billion in the same period of 2023. However, this remains well below the 2021 peak of $1.71 trillion.
➕ IPOs showed signs of recovery, with $25.6 billion in sponsor-backed IPOs through Q3 2024, compared to just $8.6 billion for all of 2023.
➕ Fundraising remains highly concentrated in large mega funds. Unrealized values in buyout portfolios reached $3.2 trillion globally as holding periods extended beyond four years.
➕ LPs are demanding distributions as holding periods stretch longer than anticipated. GPs are leveraging secondary markets and continuation funds.
Sources: A&O Shearman, HarbourVest, UBS
Private Credit: While the asset class continues to grow and attract investor interest, systemic risks, rising defaults, and structural challenges demand increased investor scrutiny.
➕ Private credit default rates remain low at 2% (Q3 2024), slightly below leveraged loans (2.2%) but above high-yield bonds (1.4%), though borrower fragility is rising due to refinancing pressures and high leverage.
➕ Deal activity surged, with private credit funding 86% of U.S. leveraged buyouts (LBOs) in 2024, up from 65% in 2021, driven by refinancings and add-on capital needs.
➕ Key sectors for deployment include technology, healthcare, and infrastructure, while distressed debt opportunities grow as weaker companies struggle with tighter liquidity.
➕ Borrowers face significant refinancing risks as a “maturity wall” of leveraged loans and high-yield bonds looms in 2025–2026.
➕ Regulators are raising concerns about systemic risks from private credit’s rapid growth, potentially leading to stricter capital requirements and disclosure rules.
Sources: Apollo, UBS, KKR, S&P Global
Commercial Real Estate: A complex mix of challenges and potential opportunities for experienced investors.
➕ Nearly $929 billion in CRE loans are set to mature by the end of 2024, with $1.8 trillion maturing by 2026.
➕ Industrial: Despite oversupply concerns, industrial rents have risen modestly (+1.6% YoY), and transaction volumes are stabilizing.
➕ Office: Vacancy rates remain high (19%), and transaction volumes are down significantly (-63% YoY). Recovery to pre-pandemic levels is expected to take years
➕ Retail: Retail is outperforming other sectors, with occupancy at a record high (93.5%) and positive total returns (+1.9% in Q3 2024)
➕ U.S. CRE transaction volumes through Q3 2024 are at their lowest levels since 2011 in terms of property count and dollar volume.
➕ High refinancing costs and negative equity are forcing some owners to sell assets at discounts.
➕ Limited access to financing is exacerbating distress in the CRE market, particularly for highly leveraged borrowers. Loan-to-value ratios have fallen from post-COVID highs of 60% to around 51%, reflecting tighter lending standards
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.
➕ Industry Perspective: A Candid Conversation About the Future of Private Equity – Evolution, Revolution, or Replication?: Third Wire Insights. At first we were going to just publish this in chunks. But after listening to the conversation a few times, we decided just to go with the full monty. While we believe in the role of private equity in capital formation, we just question how it’s being sold to your clients.
➕ Private Markets Outlooks: Andrea Carnelli Dompe’, PhD. In a relatively selfless act of kindness, Andrea is collecting all the market outlooks from industry leaders. Thanks! Now we just need someone to dump them all into a Perplexity ‘Space’ and share it out for everyone so we can just talk to the reports. 🙂
➕ 12 Investment Must Reads for This Week: WealthManagement.com. This is pretty meta right? A list within a list.
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.
