Third Wire Asset Management

Our latest paper. The 'Problem' with Alternative Investments. It’s probably not what most of you think. We posted it on our website. If you'd like a pdf version to feed into your favorite AI, reach out. Although, we dumped it into Perplextity for you here: https://lnkd.in/gxwg5xaE https://lnkd.in/gt7jTWb4

🐷 Pig in a python: Why the low distributions from private equity funds pose a threat to equity & bond markets In a recent investor report, Sebastian Lyon and Charlotte Yonge of Troy Asset Management Limited present a convincing rationale as to why investors in public markets should pay attention to the trouble brewing in private markets: "The real squeeze from higher interest rates is more obscure in the world of private equity, where leverage levels are traditionally higher than in the quoted arena. Evidence is building that all is not well in this unregulated and opaque world. While this may not appear relevant to us, investment in private equity and private credit has grown so strongly since the Financial Crisis 15 years ago that it has the ability to affect wider asset markets. The limited disclosure from private markets makes it hard for investors and regulators to assess the scale of leverage in the system, but opaqueness often results in poor behaviour in financial markets. A recent report from Markov Processes International (MPI), A Private Equity Liquidity Squeeze, highlights an increasing reliance by US institutional investors on illiquid and alternative assets, especially private equity. The very successful Yale Model for endowments, as pioneered by the late David Swensen, was embraced after 2008 but has now arguably reached extremes. We suspect, in future, those with low exposures to alternatives will have better long-term returns. Typically, private equity funds require endowments to commit to future investments on demand, as opportunities arise. A normal year of distributions would be enough to fund capital calls from other PE commitments, but this is not happening. ⚠️ According to Bain & Company there are as many as 28,000 companies globally that the PE industry would like to list, at a time when the IPO market remains lacklustre. It is true that a fall in interest rates may provide some comfort to PE sponsors and their investors but, if that coincides with an economic downturn, the outcome could be mixed. The scale of the challenge for private markets has been highlighted from within the industry itself; Scott Kleinman, Co-President of private credit specialist Apollo Global Management, Inc., in a recent speech at an industry conference said: ‘I’m here to tell you everything is not going to be OK… The types of PE returns it (the industry) enjoyed for many years, you know, up to 2022, you’re not going to see that until the pig 🐽 moves through the python 🐍. And that is just the reality of where we are.’ ➡️Endowments and other fellow PE investors may need to sell their liquid assets of stocks and bonds if they are unable to unload their locked-up PE funds. Ironically then, illiquid alternatives may pose a threat to liquid financial markets."⬅️ (+++Opinions are my own. Not investment advice. Do your own research.+++) Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

There is this one thing, I don't get, please help me Zillions of open ended private market fund structures have appeared in recent months/years (a.k.a. semi liquid etc.). So, people (mostly clueless retail investors) get in at NAV. Now, in a few years time, explain to me how these investors will NOT sue the fund sponsors given that the prices on the secondary markets consistently indicated that NAVs were too high (and therefore those buying subsidized those selling). Interestingly, the case is stronger if that fund contained more Venture Capital and Real Estate funds. Or am I missing something?

Yep, been saying that to my students for a long time. Nice visualisation

A standard but serious mistake when talking about PE fees is to look at headline numbers (see my book, chapter 12 in particular). 1.7% vs 1.9% does not tell you anything. You need to check out for the potential changes in definitions to judge whether fee decreases are material. How is capital committed exactly defined (e.g., are you paying fees on fees given the definition)? How large are fund expenses? How much are portfolio company fees and how much is rebated, what is the rule if amount rebated exceed amount due, how much are organizational expenses, how is the investment period defined, how are partial exits accounted for when computing management fees after the investment period, is there a recycling provision and how does it affect the fee bill etc. etc. The answer to these questions will make a much much larger difference to your fee paid than any few basis points difference in headline number. Nonetheless, a decrease on the headline figure is a sign that fee bill is probably going down overall. But important to bear in mind that this is probably only for institutional investors because they are more reluctant than ever to invest in PE. Meanwhile the dumb money is desperate to get in, and their advisors all too happy to feed their misperceptions, and those guys are certainly paying more fees than ever to get a piece of a PE fund.

250 institutional investors with exposure to private credit plan to invest more into private credit says firm that sells private credit :) Happy Friday!!

Live Webinar: Identifying #Liquidity Issues in Funds 📈 Join MPI for a review of the cases of H2O Asset Management and GAM Investments ARBF funds to answer the following: • Were there early warning signals that these funds were in trouble? • Can quantitative analysis identify exposure to illiquid assets? • Are there other funds in the market with similar characteristics? • What frameworks can practitioners use to protect investors? As alternatives continue to flow into the retail wealth management market, MPI will present actionable analytical frameworks and techniques that can be implemented for fund due diligence, product monitoring, and investor education. #hedgefunds #privatecredit #credit Register for either session: Tuesday, October 29, 2024 9:00 AM EDT https://hubs.ly/Q02TJBVl0 Wednesday, October 30, 2024 2:00 PM EDT https://hubs.ly/Q02TJtpN0

🎃 Boo! You should know by now that I can’t help myself. This month, we’re asking whether giving up liquidity is worth it. Does the ‘liquidity premium’ still exist? Ugh. There’s a trick-or-treat pun on the tip of my brain; I just can’t get it. I managed to get one in the newsletter, though—along with the usual insights to help you reach your client’s investment goals in the best way…uneventfully. #AlternativeInvestments #PrivateMarkets #HedgeFunds #PrivateEquity #Investing

Ahh. A breath of fresh air away from all the Private Markets punditry. Thank you!

Well said “Sensible access to all forms of risk premia is a good thing but education and transparency must be democratized first, and sustainable value creation should never yield to asset gathering.”