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Apologies in advance for the length of my intro letter this month. Proof that when I say, “Don’t get me started,” I know what I’m talking about. 🙂
Let’s pretend you operate a drive-through coffee stand at a rest stop en route to a ski resort. What do you imagine would happen if, when a customer orders a latte, you hand them an Americano with a half-cup of foam instead?
You clearly advertised a latte—traditionally made with espresso and steamed whole milk, resulting in a creamy, rich beverage beloved worldwide. But for some reason, your version of “latte” is actually just half a cup of drip coffee topped with 2% milk foam.
Who knows, perhaps some folks might prefer this watered-down concoction, finding it suits their tastes, or worse, resigning themselves to it being “better than nothing” because it’s convenient to drive through on their way to the mountain. I suspect it’s most likely that latte lovers will be disappointed and confused after driving away and taking their first sip—quickly followed by anger as they realize there’s no hope of turning around and fixing their order if they still want to lay first tracks.
Sure, there are some holes in this forced metaphor. But, what I’m trying to get at this month is the essence of client expectations and the vital role we should all play in educating and aligning those expectations when it comes to helping your clients understand and successfully navigate the alternative investment industry.
Much like the unsuspecting skiers, hopeful for a warm latte and firsties, your clients are being continually advertised ‘democratized alts’ along with certain expectations about alternative investments—the historically institutional narrative about downside protection and enhanced performance and the “illiquidity premium” for example.
Clients are being taught to have ‘institutional-quality’ expectations without also being taught that institutions have a different type of access—and that there are tradeoffs when making various alternative assets more accessible, whether by lowering minimums, improving liquidity, or structuring funds to make them available to the non-accredited masses.
If your clients want access to the benefits of alternatives but what they receive is a concoction that only superficially meets the definition of alternative—with no hope of traveling back in time and starting their investments over—the result should be more than just disappointment and anger. I believe this is a fundamental breach of trust.
Seems like every day someone new is hawking an “easier” mousetrap for investing your clients’ wealth in alternatives [See our ‘Worth Your Time’ section below]. We feel it’s our primary responsibility to ensure we help you understand the pros, cons, and trade-offs of that “easier” access. Whether we’re talking about online platforms, brand-named fund managers, or the recent ramp-up in talk about evergreen offerings, it’s our mission to help you make sure “easier” doesn’t also mean compromising on quality or expected outcomes for your clients.
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: Hedge funds carry momentum into 2024 with fixed income-based strategies leading performance.
➕ HFRI Fund Weighted Composite Index (FWC) gained 0.28% in January, with HFRI RV: FI-Corporate Index up 1.14%, and the HFRI RV: FI-Convertible Arbitrage Index gained an estimated 1.06%.
➕ Hedge funds are bullish on USD after early year economic optimism based on strong economic data, leading to a near 3% rise so far.
➕ Hedge fund managers predict increased inflows into PE, renewables, and hedge funds in 2024, with more new funds and accounts expected.
➕ Equity hedge funds had a strong 2023 with 21.91% returns, reversing the previous year’s trend while commodities dipped by 4.17% overall.
Private Equity: Muted fundraising for Buyout and VC expected in 2024 contrasting with strong expectations for secondaries.
➕ PE funds face growing risks of “clawbacks” of carried interest by investors as falling number of exits and lower valuations pose potential problems.
➕ As institutional investors continued slowing investment in PE, many PE firms are ramping up sales and marketing activity targeting financial advisors and their clients.
➕ Real assets like energy and infrastructure funds see a continued push from investors, particularly in clean energy and broadband, driven by legislative incentives.
➕ Should be no surprise that PE firms are increasing focus on strategic and operational improvements within their portfolio companies (aka Value Creation), as well as at their own firms, with expectations of broadening their use of AI.
Private Credit: Record dry powder and expected opportunities for distressed and special situations funds.
➕ Reduced bank lending and increasing investor allocations from individual investors underscore the growing importance of competent risk management/due diligence.
➕ Private credit continues to be a primary source of funding for PE Buyout deal financing.
➕ S&P Global Ratings forecasts private credit growth in 2024, with interest rate uncertainties potentially dampening the pace more than expected.
➕ Indications that some direct lenders are easing financial covenants to increase deal flow and approval.
Commercial Real Estate: Commercial Real Estate under intense pressure in 2024, expected opportunities in 2024 for disciplined investors.
➕ Increasing cost of capital with decreasing availability.
➕ CBRE believes that the U.S. might avoid a recession in 2024. However, economic growth is expected to slow, negatively impacting CRE investment activities.
➕ Ongoing uncertainty around interest rates is a key factor impacting CRE activity early in 2024.
➕ CBRE also forecasts that cap rates are expected to expand by another 25 to 50 basis points in 2024, with a corresponding 5 percent to 15 percent decrease in property values.
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.
➕ Due Diligence 101: Not Even a G.D.’d Google Search? Third Wire Insights. Do we believe even people associated with the largest Ponzi scheme in history deserve second chances? In principle, sure. But we also believe we have the right to know about their role in it before making a decision to let them anywhere near a client’s hard-earned wealth. Background checks are a critical component of due diligence. And knowing is literally half the battle. 🙂
➕ Tony Robbins returns with alternative investing book: CityWire RIA. Maybe you thought Dan was joking in his introductory letter this month? No, literally everyone is trying to sell their version of alternative investments to you and your clients. In all fairness, we didn’t read the book. It just seemed like fortuitous timing, and kind of funny.
➕ SoFi’s alternative investments let you invest like the wealthy: Business Insider. Um, don’t they make student loans? Just kidding. Our heads aren’t in the sand, we’re just completely floored by all this recent news and yet another seemingly random firm ‘getting in’ on the current alternative investments ‘gold rush’?
➕ The case for ‘retailization’ of alts is getting stronger: BNY Mellon: InvestmentNews. Show of hands: who gets annoyed when institutions refer to you and your clients as ‘retail’? Everyone is so focused on ‘private wealth’ and selling your clients alternatives, but few actually take the time to understand you. 🙂
➕ Private Equity Pushes to Hire the 1 Percenters’ Money Managers: TheInformation. This is the first time we’ve seen this publication. In all honesty, the headline sent alarm bells ringing, as did the first sentence, “Private equity firms are on the hunt for a red-hot skill set: wealth managers who can convince the richest 1% to invest in PE funds.” Is it just us?
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.
