May 31, 2018, 2:38 PM ETConference Presentation, Panel

Common Sense From Uncommon Investors

Milken InstituteMichael Milken, Mark Attanasio, John Danhakl, Emanuel J. Friedman, George G. Hicks, Mitchell Julis

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The structural opportunity to fill balance sheet capacity gaps due to regulatory compression of money-center banks is expected to persist for 5 to 10 years, potentially longer.
Federal Reserve decisions and a new Congress bill are expected to accelerate regulatory changes favoring small and medium-sized banks by Memorial Day, creating an unlevel playing field that advantages them over large banks.
New Federal Reserve rules, including counting sub-debt as equity, are projected to facilitate significant consolidation among small banks, allowing smaller institutions to sell out to larger ones.
The direct lending business in the United States, currently valued at $16 to $18 trillion, is expected to double the size of traditional bank lending, presenting a massive balance sheet that remains downsized compared to historical norms.
Market openings similar to those seen in 2009 are expected to slowly disappear over the next four to five years as the credit cycle swings away from post-2008 conditions.
Excess bank capital, estimated at $250 billion, is expected to begin affecting the middle market dramatically within six months to two years as regulatory constraints are lifted.
As ETF ownership of debt inventory is projected to reach 90% to 99% of transaction volume, market mechanisms are expected to become aberrant, eventually forcing a reversal in capital flows that will create buying opportunities for debt.
When ETF ownership in sectors like REITs approaches 95% to 100%, active investing is expected to become highly profitable due to market saturation and inefficiencies.
Corporate debt multiples in or below investment-grade universes are expected to decline over the next seven quarters without an imminent end to the credit cycle.
The "Unit Tranche" financing concept is expected to continue simplifying deals for growth companies compared to traditional multi-tranche structures.
The average compound annual growth for the S&P 500 over the last four years, at approximately 3.4%, is expected to remain significantly lower than the 19% growth rate of private equity companies.
Private equity is expected to outperform the S&P 500 index due to a favorable spread, buying assets at 11-12 times EBITDA while public markets trade at 14 times EBITDA.
Private equity firms face intense competition from the $32 trillion in available "dry powder" capital waiting to be invested.
Management of retail investments in specific portfolios is expected to be exited based on pattern recognition of negative trends, with further exits anticipated for companies showing similar risks.
The high-yield credit market is expected to see continued lending growth offering returns of 8 percent plus, driven by responsible lending practices.
EBITDA is expected to remain the primary metric for decision-making despite criticisms that cash flow analysis subtracting capital expenditures is more accurate for certain businesses.
Banks are expected to continue moving away from underwriting into wealth management as institutions downsize their balance sheets, particularly in Europe.
A global platform with teams in the U.S., London, and Singapore is expected to continue providing diverse views to ensure better risk management and decision-making.
The "stages of grief" experienced by holders of distressed debt are expected to continue creating buying opportunities as asset holders eventually sell.
The "rule of law" is expected to remain a critical filter for investment decisions, leading to avoidance of jurisdictions lacking predictability and enforcement.
High selectivity and discipline, exemplified by making 30 investments out of 1,300 to 1,500 transactions, are expected to continue driving positive performance.
Significant inefficiencies in the banking sector caused by a large number of institutions are expected to persist, providing opportunities for expert analysis.
The regulatory environment is expected to continue generating volatility and massive changes that serve as catalysts for returns in the financial sector.
A misconception regarding the yield curve and mortgage terms is expected to continue providing a competitive advantage to small banks over large banks.
An impact investment fund is expected to pursue a dual mission of doing good while achieving financial returns.
The private equity industry is expected to maintain its status as a high calling due to its control over over 8,000 firms and responsibility for employment.
Three primary strategies for private equity returns—buying low multiples, adding value, and riding momentum—are expected to remain valid.
A disconnect between bond and equity markets is expected to persist due to different decision rules and incentives, creating anomalies for traders.
The dysfunctional cycle of market-cap weighted indices is expected to continue reinforcing buying pressure on specific stocks.
Governance checks and balances are expected to remain necessary to prevent institutions from deploying capital based solely on mandates without regard to market conditions.
The complexity of the global market and unintended consequences are expected to challenge the "false comfort of simplicity" held by ETF investors.
Alternative investors are expected to utilize their staying power to buy assets when others are forced to sell during periods of market fear.
Fear enveloping assets, rather than the investments themselves, is expected to remain the primary source of toxicity in the marketplace.
The capital market window is expected to continue opening for private banks due to favorable Federal Reserve rules.
Bank consolidation is expected to continue accelerating as rules facilitate easier acquisition and branch closure.
High-yield credit is expected to continue offering meaningful returns through leveraged lending growth.
The private equity industry is expected to continue honoring retirement promises to clients by acting as coaches to ensure business success.
Pattern recognition regarding industry fit is expected to continue informing investment choices in private equity.
The market for high-yield credit is expected to grow, maintaining returns of 8 percent or higher for investors.
The unit tranche model is expected to continue simplifying the financing process for growth companies.
The private equity industry is expected to continue being viewed as the highest calling of mankind due to its economic power.
ETF outflows are expected to eventually reverse, creating opportunities to buy debt when flows become uneconomic.
High levels of ETF ownership are expected to make active investing unbelievably profitable as market mechanisms fail.
The complexity of the world will continue to be an opportunity for firms capable of analyzing interconnectedness and unintended consequences.
Staying power will allow alternative investors to purchase assets during times when others are forced to sell.
Fear in the marketplace will continue to be the main source of toxicity requiring long-term holding capacity.
Diverse views from a global team will continue to ensure better decision-making by accounting for risks across time zones.
The stages of grief will continue to create opportunities for buyers as distressed asset holders eventually sell.
The rule of law will continue to be a critical underpinning for credit-related investing strategies.
Selectivity and discipline will continue to lead to good results for the firm's investment strategy.
Tremendous inefficiencies in the banking sector will continue to provide opportunities for expert analysis.
Regulatory changes will continue to create volatility necessary for generating returns in the financial sector.
The small bank advantage will continue as long as the regulatory environment remains unlevel.
Consolidation of banks will continue to be driven by rules allowing for easier acquisition and branch closure.
The direct lending business will continue to dwarf traditional bank lending in the market.
The high-yield credit universe will continue to see growth in leveraged lending with meaningful returns.
The unit tranche financing model will continue to make deals simpler for growth companies.
The disconnect between different markets will continue to exist due to varying decision rules and incentives.
The dysfunctional cycle of market-cap weighted indices will continue to create reinforcing buying pressure.
Checks and balances in good governance will continue to prevent blind investment mandates.
ETF flows will eventually reverse, creating buying opportunities for debt investors.
High ETF ownership will eventually lead to massive profits for active investors.
Complexity will remain a source of opportunity for those who can analyze it.
Staying power will allow investors to buy when others sell.
Fear will continue to be the main toxicity in the market.
Diverse views will continue to improve decision-making capabilities.
The stages of grief of sellers will continue to create opportunities.
The rule of law will continue to be a key investment filter.
Selectivity will continue to drive results.
Inefficiencies in banking will continue to exist.
Regulatory changes will continue to drive volatility.
The small bank advantage will continue.
Consolidation will continue to accelerate.
Direct lending will continue to grow relative to traditional banks.
High-yield credit will continue to offer returns.
The unit tranche model will continue to simplify things.
Pattern recognition will continue to guide investments.
The three ways to make money will remain valid.
The impact fund will continue its dual mission.
The private equity industry will continue to be seen as a high calling.
Client promises will continue to be the core mandate.
Market disconnects will continue to create opportunities.
The index cycle will continue to be dysfunctional.
Governance will continue to require checks.
ETF flows will eventually reverse.
High ETF ownership will eventually generate profits.
Complexity will remain an opportunity.
Staying power will allow buying on distress.