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Well, it’s July. You know what that means? Of course, you don’t. This is the first July I’m writing this newsletter. It just sounded like the way a newsletter should start. 🙂
Nothing says “summer fun” quite like poking fun at ‘private markets pundits’ and reviewing hedge fund performance.
While some folks are trying to squeeze in some well-deserved R&R, the world doesn’t seem to be taking a break this summer, so neither are we. With ongoing economic uncertainties and rising geopolitical tensions, there’s plenty to keep an eye on.
All work and no play? Maybe. But for us, this is play. Call me a nerd, it’s okay.
Best,
Dan
P.S. Speaking of nerd. If you’ve been reading our newsletter and blog posts you can imagine how pleasantly surprised I was to read the latest from Cerulli this morning?
Cerulli Gives ‘Democratization’ Of Alts Investing A Reality Check.
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 experienced mixed results in June due to rising global election risks and central banks cutting interest rates amid inflation concerns.
➕ Relative Value Arbitrage Gains: The HFRI Relative Value Arbitrage Index gained +0.4%, led by fixed income-based strategies.
➕ Equity Hedge Advances: The HFRI Equity Hedge (Total) Index rose +0.3%, driven by Quantitative Directional (+3.8%) and Technology strategies (+2.6%), despite declines in Energy exposures (-1.9%).
➕ Macro Strategies Decline: The HFRI Macro (Total) Index fell -1.65%, with significant losses in Commodity (-4.1%) and Systematic Diversified strategies (-1.8%).
➕ Event-Driven Strategies: The HFRI Event-Driven (Total) Index fell -0.10%, with declines in Activist (-2.1%) and Special Situations strategies (-1.1%), partially offset by gains in Multi-Strategy (+0.6%).
➕ Geopolitical and Economic Impact: Performance was affected by a surge in election risks, political fragmentation, and ongoing interest rate and inflation uncertainty.
Sources: HFR
Private Equity: Cautious GP optimism amid improving market conditions and deal activity, but with continued challenges and a need for adaptation.
➕ Stabilization of Activity: The two-year decline in private equity deals, exits, and funds closed has slowed, with activity stabilizing in early 2024, though still below historical levels.
➕ Pressure from Limited Partners: Limited partners (LPs) continue to press for faster distributions and are focusing new commitments on a narrow swath of favored funds.
➕ Valuation Adjustments: Private equity firms did not take substantial markdowns during recent rate hikes, meaning investors will face decreased valuations “in the pipeline,” leading to fewer realizations and lower returns.
➕ Higher Financing Costs: The exit market remains sluggish, with buyout-backed exit value expected to rise by 17% from 2023, but still marking the second-worst year for exit value since 2016. This sluggishness, coupled with higher financing costs, continues to impact dealmaking.
➕ Fundraising Challenges: Fundraising remains difficult, with a 15% drop in global private capital raised expected in 2024 compared to 2023. The number of funds closed continues to decline as LPs concentrate commitments on larger, more experienced funds.
➕ Macro Environment Uncertainty: The macro environment remains a significant hurdle, with high interest rates, inflation-driven costs, and geopolitical uncertainties creating a challenging backdrop for dealmakers.
Private Credit: Increased competition and diversification amid market uncertainty and tightening spreads.
➕ Transparency and Valuation Challenges: Growing push for transparency, with recent analysis revealing significant valuation discrepancies among lenders.
➕ Increased Competition: Banks returning to the market, contesting deals and increasing competition for corporate loans, leading to tightened credit spreads.
➕ Insurer Involvement: Insurers driving demand for higher-quality assets, focusing on commercial mortgage loans, infrastructure lending, and asset-based finance.
➕ Institutional Adaptations: Major players like Blackstone, Apollo, Brookfield, and KKR creating specialized credit and insurance divisions to capitalize on market trends.
➕ Macro Environment Uncertainty: The macro environment remains a significant hurdle, with high interest rates, inflation-driven costs, and geopolitical uncertainties creating a challenging backdrop for dealmakers.
Sources: Pitchbook,
Commercial Real Estate:
Commercial Real Estate: Navigating turbulence and looking for opportunity.
➕ Distressed Asset Opportunities: The decline in office values and nearly $1 trillion in maturing debt are creating opportunities for distressed and value investors to acquire troubled assets at discounts.
➕ Tightening Credit Conditions: Tightened credit and a widening gap between maturing loans and available credit are stressing smaller lenders, potentially leading to more regional bank failures.
➕ Interest Rates: The higher interest rate environment is expected to persist, impacting borrowing costs and property valuations. Leading to increased borrowing costs for new acquisitions and refinancing and upward pressure on cap rates.
➕ Mixed performance: Multifamily and retail sectors showed resilience with strong demand and tight availability, while the office and industrial sectors faced high vacancy rates and weakening fundamentals.
➕ Recovery: The hospitality sector showed improvement, with hotel occupancy rates leveling off at around 63%. While still below pre-pandemic figures, average daily rates and revenue per available room have now exceeded pre-pandemic benchmarks.
Sources: Yahoo Finance, Morgan Stanley, Cauble Group, 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 are useful, not filler.
➕ Beating Back the Bullsh!t: Third Wire Industry Perspective. Dan’s latest take on the continuing push by the powers that be to shove private equity and private credit into you’re clients’ portfolios by selling you the narrative that your clients are more like Institutional Investors than you know. We’re not picking up what they’re putting down and neither should you.
➕ Cathie Wood: We would have held Nvidia if: Business Insider. The winner of this month’s ‘No Sh!t!’ award. “If I had known that Nvidia was going to go up like this, of course, I would have held it” Look, we get it. Sometimes things sound great in your head…
➕ A Private Equity Liquidity Squeeze By Any Other Name: Markov Processes International. Next time an investment manager tries to explain to you how your clients are a lot like institutional investors when they’re trying to sell you their latest PE Fund, send them this great report from the folks at Markov.
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.
