“Try again. Fail again. Fail better.” -Samuel Beckett.
On a pretty regular basis, our four-year-old daughter, Violet, will utter the phrase, “no, I amn’t.” For instance, when I can tell she’s getting sleepy (“Hey Vi – I think you’re getting tired.”), she’ll reply, “No, I amn’t.” I have yet to inform her that “amn’t” isn’t a word because 1) who cares? She’s only four, and it’s cute; 2) explaining the proper use of contractions to her will not be a good use of either of our time, and 3) I wonder if there’s actually anything wrong with what she’s saying.
We commonly combine “is” and “not” to form “isn’t.” So why don’t we blend “am” and “not” to create “amn’t”? In either case, you’re still left with two syllables, and the contraction is a little easier to say than the two individual words, so I really can’t think of an argument against it. Enter Quora, and here’s our answer: “Amn’t” technically is a word (Microsoft Word will tell you otherwise), but it just never really caught on, losing the war of words to “aren’t” and “ain’t.” Why? Quora contributor, Joe Roberts, offers the explanation, “Please believe me when I tell you that human languages are not logical, and asking why is not a good use of your time.”
In other news, I recently got a new laptop for work, and I had high hopes for it. It’s far more powerful than the over-three-year-old laptop I just decommissioned, but – so far – the user experience is somehow worse than it was with my old computer, as a couple of applications (Outlook and Salesforce – not to name names) are particularly slow and stripping much-needed efficiency from my day. And I’ll spare you the finer details of this past Monday, where a) an upcoming event (already thoroughly planned) was suddenly canceled for reasons outside of our control, b) a bus driver drove past me at the bus stop, c) the credit card machine broke at the shoeshine store, requiring me to backtrack a couple of blocks to an ATM so I could pay them (I know, I should carry more cash), and d) my “order ahead” salad was stolen from Sweet Green before I got there, so I didn’t have time to eat before a meeting – and that was only the first half of the day.
This lead-in is not only to bore you with my mundane first-world problems. We all have a LOT to be grateful for. The above examples illustrate several ways that life constantly misaligns with our expectations and that plans seldom turn out the way they were initially intended. On a more positive note, that same phenomenon of unpredictability can often work in our favor. Many successful entrepreneurial success stories are failures that accidentally took a different path (e.g., William Wrigley using chewing gum as a free gift with soap he thought would make him rich), and these unexpected outcomes in life are often wonderful.
The Saga Continues
I’ve previously written about a private equity strategy that – as one client put it last week – has given us “heartburn” over the past few years. Recently, however, there have been a few positive developments within the fund, including sales of some underlying businesses and improvement in valuations, implying that the fund’s total return may ultimately be half-decent. The original mid-teens annual returns are certainly off the table, but we’d be grateful for half of that amount given the challenges we’ve encountered with the investment. That is not to say that mid-single-digit returns are a good reward for the experience that investors have had to endure.
Aside from the operational issues (lawsuits, bad actors, audit delays, turnover of CFOs and auditors, etc.), the waste management sleeve of the fund has suffered severely due to the unanticipated collapse of the New York City waste management market (specifically recycled materials) – a market that had show resilience for decades. The good news? Waste management was less than 5% of the fund, and that specific issue could easily be shrugged off as long as the other sleeves performed as expected, so diversification is alive and well.
However, the waste management strategy was also available as a standalone fund, and that will likely return somewhere in the neighborhood of 20 cents on the dollar – a complete failure. Within that fund, perhaps greater geographical diversification could have helped mitigate losses, but it was intentionally concentrated in New York because of the fragmentation and (previously anticipated) opportunities within that market. In that case, concentration was a greater risk, and investors needed to consider this when sizing their investment.
Alternative Expectations
For the client with the more diversified fund, he’s (understandably) not thrilled with the investment experience despite the recent turn for the better. However, some not-apparent factors are playing into the thought process. First, he’s involved in some large institutions that have had overwhelmingly positive experiences with their private equity and credit investments, but that’s also at a level of access that a typical high-net-worth investor cannot expect, including both direct investments and co-investments with their fund managers. Second, and more importantly, we committed to putting some alternatives in place to help diversify the client’s portfolio held outside of us, which was a pretty straightforward mix of equity and bond funds. In that context, the investment was sized very appropriately (probably 2% or so), and I still believe alternatives should play a significant role in such a portfolio, even if this situation has not been ideal. Third, also related to the “limited engagement” of this particular relationship, the client also has not benefitted from investments held by other clients that have gone better than expected.
For the one client who opted for the standalone waste management strategy instead of the diversified fund, we (thankfully) committed half of the amount we otherwise would have suggested for the more diversified approach. We sized it as a small fraction of their total wealth, but that simple risk-management measure has now saved hundreds of thousands of dollars of additional losses. In addition, we’ve reduced the fund’s value as we’ve received updates, so this terrible outcome for that particular investment has been contextualized within an overall portfolio that has had years of good returns from other sources. I think that client’s reaction couldn’t have been healthier and can be summed up as a) those losses are already baked into the total return of our portfolio return, which has been good, and b) there are important lessons to be learned here:
- Diversification is still vitally important! Be careful how you size an investment, no matter how foolproof the strategy is expected to be.
- Expect the unexpected. There is no reason to think that a longstanding and seemingly predictable market could evaporate overnight, but it CAN happen, and you need to plan accordingly.
This post is a helpful reminder that I need to consistently prioritize setting my and client expectations as an essential component of successful investing, especially for Alts. Like most investments and life itself, Alts will rarely play out as originally intended. They may be better, and they may be worse. Still, the management of each strategy involves continuous adaptation to unforeseen circumstances, which is something we must expect and accept when investing. Diversifying across a mix of strategies (even ones that may be inherently diversified) and sizing investments appropriately can help smooth out the total portfolio impact and our experience. And all of that can better align outcomes with our (hopefully realistic) expectations. There WILL be unpredictable investment journeys, but what we must avoid at all costs are potentially catastrophic outcomes related to concentration risk, thus allowing us to fight another day, try again, fail again, and fail better.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
