Displaying items by tag: alternatives

Investors are selling their private equity holdings at a discount on secondary markets in order to reduce exposure to the asset class. Last year, there was $112 billion in secondary market transactions, the second-highest since 2017. According to Jefferies, 99% of private equity transactions were made at or below net asset value last year. This is an increase from 95% and 73% in 2022 and 2021, respectively. 

It’s a result of the depressed atmosphere for M&A and IPOs, which have been the typical path for private equity exits. However, these outlets have been offline for most of the past couple of years due to the Fed hiking rates to combat inflation. 

Many of the sellers have been pension funds that are required to make regular payments to beneficiaries. Prior to this cycle, private equity was lauded for its steady returns and low volatility, leading pension funds to increase allocations from 8% in 2019 to 11% last year. 

Private equity’s appeal has also dimmed, given that higher rates can be attained with fixed income and better liquidity. In contrast, private equity thrived when rates were low, as it led to robust M&A and IPO activity in addition to more generous multiples. 

One silver lining is that as the Fed nears a pivot in its policy, there has been some narrowing of discounts. According to Jefferies, the average discount from net asset value has dropped from 13% to 9%. 

Finsum: Many investors in private equity are exiting positions at a discount due to liquidity concerns. Now, some institutional investors are rethinking their decision to increase allocations.

In 2023, the global financial markets experienced an unprecedented surge known as the "everything" rally, marked by significant gains in various asset classes. Factors driving this unexpected shift included lower inflation, the resilience of the U.S. economy, and the anticipation of looser monetary policies and declining interest rates in the near future.

Looking forward, private markets are poised to offer competitive returns and diversification advantages compared to public markets, with private credit emerging as a particularly promising strategy amidst prevailing interest rate challenges. Investors are urged to carefully evaluate the risks associated with private markets and consider their potential impact on portfolio performance.

According to JPMorgan, exploring alternative strategies for 2024, such as private equity, real estate, infrastructure, and secondary markets, presents opportunities for growth and portfolio enhancement, contingent upon thorough due diligence and selective fund allocation.

Finsum: As the Fed takes its foot off the gas pedal alts might in the biggest position to rally in 2024

iCapital, headquartered in New York and a sizable user base of over 100,000 financial advisors and 560 asset managers, has rolled out its latest offering, the portfolio construction tool, on the iCapital Marketplace. 

Dubbed Architect, this tool equips advisors to delve into alternative assets such as private equity and hedge funds, alongside structured investments, to fine-tune client portfolios. Architect boasts capabilities to simulate past performances, discern macroeconomic influences on portfolio returns, and align future projections with client objectives. 

This initiative aims to bridge the gap between traditional portfolios and alternative investments, historically kept separate. Now accessible to a broader audience, including users via a collaboration with Morningstar, Architect underscores iCapital's commitment to empowering advisors with flexible tools for better client service.

Finsum: Easy access to alternatives in portfolio construction gives clients better access to uncorrelated returns.

In 2023, private credit funds managed $550 billion in assets and generated 12% in average returns for investors. Private credit has been ascendant the last couple of years and helped private equity firms find a new source of revenue. 

As public market financing become less available, direct lenders extended credit to small businesses and buyout deals, replacing syndicated loans and the high yield bond market. It resulted in private credit growing from less than $100 billion in 2013 to its current size.

This year, investment banks are once again stepping into the fray. So far, $8.3 billion of private market debt has been refinanced via syndicated loans, indicating that the high yield bond market in the US is once again a viable option for companies. In leveraged buyouts, banks are also competing as evidenced by JPMorgan’s financing of KKR’s purchase of Cotiviti, a healthcare tech company.

Spreads for syndicated loans and high yield bonds have dropped to thier lowest levles in 3 years. Rates are now between 200 and 300 basis points below what private credit lenders were offering in December. 

Private equity firms are expected to pivot into higher quality, asset-backed financing such as credit card debt and accounts receivables to replace revenue from private credit. They would also benefit from an improvement in public market sentiment and liquidity as they are sitting on a backlog of unsold investments in portfolio companies. 

Finsum: The private credit market has boomed over the last couple of years due to anemic public markets and hesitant banks. Now, banks are once again competing for business and offering more favorable terms.

For investors with unhurried time horizons, patience holds untapped potential. Unburdened by short-term needs, they can explore long-term investments and cultivate portfolio diversification beyond conventional assets. Traditionally, accessing alternative strategies like private equity or direct ownership meant navigating high minimums and limited accessibility.

Enter interval funds, a unique bridge between open-ended and closed-end structures. Unlike exchange-traded closed-end funds, interval funds offer periodic redemption windows, providing measured liquidity while pursuing less-liquid assets. This opens doors to previously exclusive (and sometimes higher risk) strategies, such as real estate investments, infrastructure assets, and private credit.

By incorporating these diverse allocations, their advisors can enhance portfolio resilience and reduce correlation to traditional assets, bolstering overall risk management. Additionally, interval funds often carry lower minimums compared to direct alternatives, democratizing access for a broader investor base.

Naturally, interval funds come with unique considerations. Redemptions occur only during predefined windows, necessitating careful planning. Shares may trade above or below net asset value, impacting entry and exit points. Also, advisors and investors should carefully consider any fund’s management fee, complexity, and performance-tracking aspects during their vetting process.

Ultimately, interval funds offer a valuable tool for advisors to unlock diversification for clients with long-term investing horizons.

Finsum: Find out how financial advisors can take advantage of their clients’ longer time horizons by using interval funds to provide greater diversification.