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You know what grinds my gears? What gets my goad? What really chaps my hide? You want to watch me go from zero to livid in like 3 seconds flat?
Let’s talk about fees for alternative investments.
I recently did a quick analysis of a few different name-brand funds—and the fees they charge—and we published a short blog post about what I found. It wasn’t a surprise; it was more of a reinforcement of what I all already knew.
Asset Allocation 201: Fees–The Silent Performance Killer.
TLDR: We are not fans of unnecessary fees, and we don’t think the industry is talking enough about them. Particularly when these megafunds from name-brand managers are currently raising record amounts from your clients.
Example? Please explain how anyone still justifies charging a servicing fee with a straight face. Isn’t technology supposed to have made transactions essentially frictionless?
Another? Don’t get me started on Hurdles and Catch-up provisions and whether or not they serve to align the manager’s interests with the investor or are actually just a form of deferred fleecing.
We launched Third Wire to do things different from most. Clear fees and expenses. No hidden transaction costs, placement fees, performance fees, or redemption fees—none of it. That way, more ‘net net’ ends up in investment returns for your clients.
Happy September! 🙂
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: Navigated historic volatility in August, with Equity Hedge and Relative Value Arbitrage strategies leading gains.
➕ The HFRI Fund Weighted Composite Index (FWC) advanced +0.25% in August, despite a volatile start to the month.
➕ Equity Hedge (EH) funds led performance, with the HFRI Equity Hedge (Total) Index up +0.8% in August, bringing YTD return to +9.0%.
➕ Macro strategies declined, with the HFRI Macro (Total) Index falling -1.1%, marking the fourth consecutive monthly decline.
➕ Performance dispersion contracted: top decile of HFRI FWC constituents averaged +5.5% gains, while the bottom decile averaged -6.2% losses.
➕ Approximately 60% of hedge funds produced positive performance in August.
Sources: HFR
Private Equity: Strong global fundraising in 1H 2024 with people piling into megafunds, albeit at a slower pace.
➕ Global PE fundraising reached nearly $300 billion in new capital raised in H1 2024. W/ over half of the capital raised globally in H1 came from just 12 new megafunds of over $5 billion.
➕ Buyout funds dominated, representing 86.7% of new capital raised YTD, while European PE fundraising gained momentum, representing 34.1% of global capital raised (up from 23.1% in 2023).
➕ Brand-name managers continue to attract the majority of capital, with established firms receiving step-ups at the highest rate ever recorded.
➕ Exit Challenges: Some PE-backed assets have grown “too-big-to-exit,” limiting traditional M&A and IPO options. GPs exploring alternatives like continuation funds, partial stake sales, and extended holding periods to manage oversized assets and provide LP liquidity.
➕ While the August deal count was down, deal value reached its highest level over the past twelve months. YTD deal count remains down 4%, but deal value is up 10%.
Sources: Pitchbook, Ropes & Gray, PEI
Private Credit: Increased competition and market shifts amid economic uncertainties and regulatory scrutiny.
➕ Private credit providers are aggressively moving into the broadly syndicated loan market, competing on pricing and terms to win deals.
➕ Major players like Blackstone, Apollo, Brookfield, and KKR are creating specialized credit and insurance divisions to capitalize on market trends and diversify their offerings.
➕ The share of riskier B-minus rated borrowers in the broadly syndicated loan market has fallen from peak levels, with private credit increasingly picking up this slack.
➕ Jamie Dimon of JPMorgan Chase expressed concerns about the rapidly growing $1.7 trillion private credit market, warning of potential problems from weaker firms making mistakes.
➕ Over one-third of private credit borrowers now have interest costs exceeding earnings due to rising rates, increasing default risks and highlighting the need for careful risk management.
Sources: Pitchbook, Bloomberg, Yahoo
Commercial Real Estate: Persistent uncertainty = opportunities for those who know where and how to look.
➕ U.S. is facing its worst housing affordability crisis in decades, with homeownership affordability reaching its lowest level since at least 2006. This is driven by a combination of higher interest rates and a severe supply shortage that has been building since the 2008 housing market collapse.
➕ Office vacancy rates remained at a record high of 13.8% in July, with negative absorption expected to persist through 2024 and into 2025. Class A spaces are most impacted, with vacancy rates increasing to 19.7% over the past year.
➕ Despite the downturn in office, many investors view the current market conditions as a chance to invest in top-tier properties at reduced prices. Major tech hubs like San Francisco, Houston, and Washington, DC are seeing significant increases in vacant office spaces.
➕ Multifamily properties continue to perform well, with stable rents and low vacancies, except for some concessions in the luxury apartment segment. Class B properties are seeing increased demand for the 5th consecutive quarter.
➕ Industrial sector is grappling with an oversupply of properties and declining absorption rates. Net absorption has dropped by 68% over the past year, hitting a decade-low of 83.4 million square feet.
➕ The retail sector remains resilient, succeeding alongside e-commerce and fueling demand for industrial properties. Vacancy rates have remained at a record low of 4.1% for the seventh consecutive quarter.
Sources: Orange County Register, Invesco, 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.
➕ Asset Allocation 201: Fees–The Silent Performance Killer: Third Wire Insights. Dan already told you how we feel about unnecessary fees in this month’s intro letter. Here’s another link to the blog post he talked about. Also, we’re happy to help you model the fees your clients will pay before they invest in any new funds.
➕ Former Macquarie star bets on private market reckoning: Financial Review. One man’s trash is another man’s treasure. He’s betting big that a whole bunch of over-leveraged private companies are about to hit a wall when it comes time to refinance—and he’s possibly right. Wonder who loaded those private companies up with all that debt?
➕ Avoiding Wipeout: How to Ride the Wave of Private Markets: Bain & Company. It’s all fun and games until somebody gets hurt. Lots of talk about the expected growth in AUM from your clients and creating products that appeal to them; not much about ensuring they don’t get wiped out or fleeced by unnecessary fees in the process. And yes, we’re on our soap box about fees this month.
➕ Private Financial Markets are Eating the World: LPE Project. We don’t know much about this project, but the title of their article got our attention. And it got us thinking. Private market pundits like to point out that the private markets are bigger than the public markets—and therefore, your clients should all be piling in and mining for alpha there. Food for thought. What typically happens to returns when markets get crowded—or the alternatives are no longer the alternative? 🙂 Asking for a friend.
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.
