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April already? Insert cliché about spring cleaning here. 🙂
Last month, I bombarded you with questions. This month, I’ve been digging around for answers and have shared a bunch of solid articles and recent studies below. If you’ve been following our company page on LinkedIn and have been picking up what we’ve been dropping over the past few months, you probably have a decent grip on where my head’s at.
Equity is Equity, and Debt is Debt—Plain and Simple. Equity, whether private or public, means owning bits of companies. Debt? It’s borrowed money that needs to be paid back over time with interest. Dressing up private equity or private credit as some kind of exotic “alternative investment” to sell it under the guise of “diversification” is like claiming a sprinkle of sea salt makes a chocolate bar a health food.
Tossing some private investments into a portfolio and calling it “diversified” doesn’t cut it. At its most basic, true diversification is about mixing assets that react differently to the same event—actually reducing your risk, not just rebranding it. Private equity and credit? They’re pretty much the same tunes as their public counterparts, just played in a less liquid, less transparent club.
And about that risk—private investments may actually ratchet it up by (among other ways) being tougher to offload when you really need to hit the eject button. If the market takes a nosedive, good luck getting out without a few bruises.
“Tell us what you really think, Dan.” Well, I didn’t launch Third Wire to sugar-coat things or hawk the latest investment buzzwords just to get you to add them to your client portfolios.
As the push to ‘democratize’ (their word, not ours) alternative investments accelerates (along with the push to oddly rebrand alternative investments as private markets), we believe it’s crucial that some of us who’ve been around the block a few times—and can see the sleight of hand—keep calling it as we see it.
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: Most hedge fund strategies posted positive performance in Q1, extending gains through March.
➕ Macro strategies led gains, posting their strongest quarter in over 20 years, according to HFR. The HFRI Macro (Total) Index jumped an estimated 3.9% for the month, bringing Q1 2024 performance to 6.9%, the strongest calendar quarter since Q2 2003.
➕ Long/Short Equity posted strong performance led by energy, quantitative directional, and healthcare exposure.
➕ Event-driven strategies also had gains in March, led by special sits, distressed, and activist strategies.
Private Equity: Still adjusting to a “new normal” marked by higher capital costs and a cautious investment atmosphere.
➕ In Q1 2024, global venture capital deal value and volume decreased, with transaction values falling 2.37% year-over-year to $71.57 billion and the number of deals dropping to 3,647 from 4,438; notably, the technology, media, and telecommunications sector led with 28.4% of the total investment value, according to S&P Global Market Intelligence.
➕ The private equity industry has ~$3tn of unsold assets, more than 40 percent of which it has held for more than four years, according to the Financial Times.
Private Credit: While many funds are significantly growing AUM, cautious investors are asking ‘deeper questions’ about inherent risks, fees, and underwriting standards.
➕ A recent NBER paper suggests the rates at which private debt funds lend are sufficiently high to cover the funds’ fees and risks, but not high enough to provide extra returns over the investors’ risk-adjusted rates of return.
➕ The private credit market exceeded $2 trillion globally last year, according to a recent report by the IMF, and they cite increasing competition putting pressure on capital deployment and leading to possible weaker underwriting standards and looser covenants.
Commercial Real Estate: The difficulty in markets continues, with many expecting 2024 to be as challenging as 2023 as commercial real estate loans come due. Savvy investors are looking for distressed opportunities.
➕ $900 billion in loans backing office buildings, retail centers, hotels, warehouses, and more will come due this year.
➕ More than $17 billion of commercial mortgage-backed security (CMBS) office loans are coming due in the next 12 months, double the 2023 volume.
➕ Industrial and multi-family sectors continue to show stronger performance due to e-commerce growth and increased demand in rental market due to high mortgage 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: Getting your equity allocation “right”: Third Wire Insights. Continuing with our Asset Allocation educational theme, this latest post discusses we ponder if the push to relabel ‘Alternative Investments’ as ‘Private Markets’ (with a heavy emphasis on Private Equity and Private Credit) by some in the industry risks marginalizing other investments like hedge funds and CTAs, i.e., alternative investments that have historically played a vital role in mitigating risk and enhancing returns within diversified portfolios.
➕ Private equity’s latest trick is to buy and hold: Financial Times. Hey Rocky, watch me pull a rabbit out of my hat. See, nothing up my sleeve. Presto! Buy and hold. Sell the assets to yourself. “The private equity industry has $3tn of unsold assets — more than 40 percent of which it has held for more than four years. Investors are clamoring for promised returns and distributions. But being a forced seller into a choppy market is no fun. Hence, the growth of secondary deals and continuation funds that allow firms to sell assets to one other, and themselves.”
➕ Here’s Why the Illiquidity Premium Is a Bad Reason to Invest in PE: Institutional Investor. This article makes a compelling case for why the private equity illiquidity premium that investors are being ‘sold’ may not actually exist.
➕ Private Credit Offers No Extra Gains After Fees, New Study Finds: Bloomberg. National Bureau of Economic Research (NBER) study finds that many private credit funds typically earn enough to just cover their operating costs and the risks taken, without providing extra profits to investors beyond what would be expected given the risks they face. AKA, manager selection is critical to investment success when you’re talking about alternative investments.
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.
