Conference Presentation, Fireside Chat, Panel
Alternative Investments
Milken InstituteAndrew Whitaker, Josh Harris, Vinay Choudhary, Julia Lawler, Andrew Serwer, Eric Schmidt, Brevin Howard, Arvind
- Public pension plans and institutional investors plan to continue shifting capital away from traditional stocks, bonds, and cash into alternatives, with liquid alternatives increasingly integrated into core strategies and retail investor allocation expected to grow by $100 billion over the next five years despite remaining a small portion of total funding.
- The alternative asset manager sector anticipates continued excess returns for specialized teams serving sovereign wealth funds, pensions, and family offices, while over 80 percent of dry powder in the 2007–2008 private equity vintages (exceeding $100 billion) is expected to eventually be deployed.
- Market participants predict five years of unstable conditions favorable to convex portfolios, driven by emerging market integration and a potential five-year trend of retail investors moving capital to alternatives.
- A significant shift in value distribution is forecasted where depressed wages and interest rates favor capital owners, though a future recession or advanced society crisis could negatively impact them due to wage stickiness and near-zero rate floors.
- Commercial real estate is expected to maintain a role in risk-adjusted returns for institutional and retail portfolios globally, with Basel III regulations driving banks to retain value in real assets and European banks to utilize "good bank, bad bank" structures offering cheap seller financing.
- The banking sector is projected to evolve into a utility through de-risking efforts, while U.S. secondary and tertiary real estate markets will offer significant returns to those assuming development or rent-up risks.
- The marine transport sector is predicted to experience a major turnaround in 2014 or 2015 driven by the shale phenomenon and increased refineries in emerging markets, while natural gas prices are expected to stabilize and trade closer to oil prices following potential export license approvals.
- U.S. companies with 50% cost advantages in chemicals, plastics, and fertilizers are expected to retain their competitive edge through liquefaction and transportation cost efficiencies as global markets adjust to new supply dynamics.
- Mining sector activity is forecasted to see Rio and BHP divest midstream and downstream assets to focus on upstream projects, while smaller Canadian-funded miners may sell down in risk-off environments to create pricing opportunities for agile investors.
- Corporate M&A activity is expected to decline as companies prioritize portfolio monetization through sales at all-time highs, with CEOs becoming cautious about large transactions due to uncertainty and fundamentals lagging growth expectations.
- High purchase prices are projected for deals exceeding $500 million, reaching 9.5 times EBITDA against only 2.5 percent growth, which creates a risk of losses if interest rates rise; consequently, large private equity shops may largely avoid the traditional market for mega buyouts.
- A distress cycle is predicted to commence within six to 18 months as the Federal Reserve and monetary authorities rein in credit to achieve the 6.5 percent employment target, causing highly leveraged companies to struggle with refinancing.
- A "wall of maturities" for high-yield bonds is expected to emerge between 2018 and 2020, coinciding with the end of the permissive credit environment, while a "time bomb" of refinancing risk involving value-depleted issues may build in the high-yield market.
- Interest rate movements are a primary concern, with a potential rise causing the 10-year Treasury to trade at 360 or 460, resulting in a significant value decline, while forward breakevens of 2.75 percent indicate market recognition of long-term inflationary risks from central bank actions.
- Emerging market equities, particularly in Latin America and Emerging Asia, face challenges from high nominal and real interest rates and currency risks, with BRICS nations lacking the U.S.-style shock absorbers needed if growth reduces.
- Risk management strategies are shifting, with high net worth individuals focusing on contained downside and deviation rather than long-term returns, while retail investors continue to increase exposure to alternative strategies.
- Infrastructure and real assets in emerging markets outside the U.S. are identified as key growth areas, complemented by continued growth in commercial real estate exposure within U.S. and global portfolios.