Alternative Investments

Market Allocation Shifts

• Since 2008, public pension allocations to alternative investments have doubled.
• Managers surveyed indicate current over-allocation to stocks, bonds, and cash, with plans to shift further toward alternatives.
• Traditional fixed income is currently viewed as unattractive due to low interest rates yielding only 3% to 5%.
• Equity markets have shown high volatility over the past six years, with investments made at the 2007 peak only recently reaching breakeven.

Performance Comparisons

• Josh Harris (Apollo) reports a 26% net historical return on $30 billion in private equity capital, significantly outperforming the S&P 500's 9% return over the same period.
• While listed equities have generated higher short-term returns, private equity has historically delivered superior long-term returns despite recent lagging performance.
• The traditional private equity benchmark target is approximately 20% returns.
• Hedge funds face rising correlations with the broader market, making it increasingly difficult to generate alpha.

Specific Opportunity Areas Identified

• Energy: U.S. shale technology has lowered production costs, creating investment opportunities with potential 25% to 45% returns; buying oil reserves at $60–$65/barrel while hedging futures is cited as a viable strategy.
• Distressed Debt: Opportunities exist in restructuring large buyouts from the 2006–2008 vintage (e.g., TXU, Cengage) and in European banks selling down $65 trillion in assets (approx. 3–4x GDP) due to deleveraging needs.
• European Banking Sector: Panelists note significant asset sales, including $12 billion in loans acquired by Apollo over 36 months, driven by banks exiting asset classes and the creation of "bad banks" by governments.
• Marine Transport: Rates have collapsed 80–85% from highs due to oversupply; a turnaround is anticipated by 2014–2015 driven by shale transport demand and refinery growth in emerging markets.
• Commercial Real Estate & Infrastructure: Projected to offer risk-adjusted returns, particularly in emerging markets and secondary/tertiary U.S. cities where proactive management is required for excess returns.

Macro Environment and Risks

• Vinay Choudhary describes the current market as having a "bimodal distribution" with extreme positive or negative returns (+/- 15%), contrasting with the mean-reverting returns of the 1980s and 90s.
• Wilbur Ross and Josh Harris warn of a "debt bubble," noting that 60%+ of high-yield bonds issued last year were refinancings that added no value to companies.
• The "wall of maturities" for high-yield debt is projected to peak between 2018 and 2020, with $500 billion coming due annually, creating significant refinancing risk if interest rates normalize.
• Ten-year real rates in the U.S. have fallen from ~3.5% pre-2008 to approximately 0.65%, creating massive exposure to inflationary risks and potential bond market declines when quantitative easing ends.

M&A and Corporate Behavior

• Private equity sponsor buyout activity has declined significantly compared to pre-crisis levels; only seven transactions over $5 billion closed since 2009 versus approximately 50 in the 2006–2008 cycle.
• Mega-buyouts like Heinz and Dell are viewed as one-off transactions rather than the return of a sustained trend, driven by temporary leverage availability rather than fundamental value creation.
• Corporate cash balances remain high as CEOs cite uncertainty regarding regulation, European stability, and BRICS growth, leading to a preference for dividends and buybacks over M&A.

Commodities and Natural Resources

• Commodity price declines are attributed to a lumpy supply response rather than a collapse in demand; new mining and agricultural projects are expected to cancel as prices fall, tightening future supply.
• U.S. natural gas prices are volatile ($1.90 to $14/MMBtu range) but may stabilize near $4/MMBtu; potential export license approvals could align U.S. prices with global oil-pegged prices, offering a 50% cost advantage to U.S. chemical and fertilizer industries.
• Major miners (Rio Tinto, BHP, Glencore) are divesting midstream/downstream assets to focus on upstream projects, creating carve-out opportunities for specialized managers.
• Agricultural investments in developing markets are deemed difficult due to geopolitical risks, theft, and long capital cycles, limiting participation for most alternative firms.

Retail vs. Institutional Trends

• Retail investment in alternative strategies has grown by approximately $100 billion over the past five years, primarily via liquid alternative mutual funds.
• While retail access is increasing, institutional investors still comprise over 95% of capital for major firms like Apollo.
• Panelists express concern that retail investors are heavily exposed to duration risk in corporate and government fixed income, making them vulnerable to future interest rate hikes.
• A trend toward co-investment and direct investing is observed among sovereign wealth funds and high-net-worth individuals, bypassing traditional fund structures.

Emerging Markets Outlook

• Emerging market equities are trading at valuation spreads comparable to 2008 lows relative to the U.S. market.
• Emerging Asia offers a bifurcated opportunity: strong FX performance in Southeast Asia offset by poor equity performance, though currency risks remain significant.
• Latin America faces challenges from high nominal and real interest rates, while BRICS nations face capacity constraints and rising costs without the "shock absorber" of flexible labor markets or central bank intervention available in the U.S.
• Vinay Choudhary warns that unlike the U.S., emerging markets lack mechanisms to cushion growth reductions, meaning capital owners bear the full brunt of economic downturns.

Forward-Looking Statements

• Josh Harris anticipates the next distress cycle will emerge in 6 to 18 months as the Federal Reserve and other central banks begin tightening credit and raising rates toward full employment targets.
• Wilbur Ross projects that the "real bubble" of the decade is low-quality debt, and a decline in fixed income values is inevitable once government bond buying ceases.
• Panelists agree that private equity and alternative managers are currently "sensible" in avoiding record-breaking M&A activity in an overvalued market.
• The banking sector is expected to continue transitioning toward a utility model, creating ongoing opportunities for alternative investors with specialized expertise in distressed assets and complex restructuring.