Panel
Global Capital Markets: New Risks, New Opportunities
Milken InstituteMichael Milken, Marisa Drew, Luke Ellis, Thomas Finke, Nobel Gulati, Jonathan Nelson
- Regulatory changes and capital constraints are expected to push banks out of specific direct lending areas, creating near-term opportunities for disruptors to serve the middle market and SMEs, though unchecked sector growth risks a potential bubble if regulators classify the space as systemically important.
- Double-digit returns in the direct lending sector for SMEs are deemed unsustainable as the arbitrage between high yields and corporate borrowing capacity is predicted to vanish, while true, uncorrelated, risk-adjusted alpha remains scarce globally compared to plentiful beta and risk premia.
- The financial services industry faces an accelerating technological revolution where beta clearing prices are forecast to drop to approximately one basis point quickly, whereas alpha clearing prices are expected to stabilize at 30% to 35% of generated alpha.
- Technology is projected to reinvent nearly all financial services, lending, and insurance through data-driven models, supported by a prediction that Internet of Things units will reach 50 billion by 2020.
- Corporate growth strategies involve adding 700 person-years of R&D intellectual property within the next 12 months and increasing the workforce such that two-thirds of employees are R&D personnel.
- Real estate and job markets will shift due to the rise of online consumption and service sector growth outpacing manufacturing, necessitating changes to industrial nodes, transportation, and port infrastructure to support last-mile delivery models.
- Asset management strategies will increasingly prioritize strategic asset allocation, which is expected to contribute 90-95% of returns, while automation and transparency are anticipated to improve manager selection processes.
- Firms are expected to overcome regulatory challenges by reinventing operations to increase efficiency and capital utilization, with some teams reporting returns north of 50% after regulatory shifts.
- Future capabilities will be built through integration with affiliates and a shift toward direct deal origination to reallocate syndication fees to investors, while direct lending returns and fees will be priced according to the value delivered between beta and alpha.
- Organizational structures must evolve to foster teamwork and self-actualization to retain talent, with a move away from "star style" investing toward team-driven approaches and the formation of new teams as single teams hit capital management limits.
- Entrepreneurship is predicted to remain critical in both emerging and developed markets, where even slight improvements in success odds are expected to globally enhance quality of life.
- Firm-specific outlooks include a commitment to sustainable earnings growth as a mutual company free from activist shareholders, the expectation that fixed income will be a primary growth area without specific numerical targets, and the belief that the pace of change in finance has barely begun.