“An expert is one who knows more and more about less and less until he knows absolutely everything about nothing.” – Nicholas Butler
Since Alts are such a broad swath of the investment universe, and there are constantly new developments, it is useful to do these editions to stay updated on a variety of areas. Call it a mashup, hodgepodge, potpourri, or whatever you’d like, but today we’ll generally focus specifically on multiple areas and ideas to learn at least a little about something (yes, that was supposed to sound ridiculous on purpose, yet it’s very possible it’s not the worst sentence I’ve written). With that, let’s look at some of the latest (probably not the greatest) happenings in Alts. Here we go!
Do you have to let it linger?
For years, the traditional private equity (PE) model was fairly straightforward: buy companies (or properties, in the case of PE real estate), improve operations, exit investments, and return capital to investors. That return of capital (ROC) naturally happens mainly in the latter years of a fund’s life, and, ideally, it occurs concurrently with (or even prior to) the raising of the manager’s subsequent fund.
I say “ideally” as it relates to both investors (LPs) and the PE sponsors (aka GPs or fund managers). For LPs, that returned capital is a good source of liquidity for investing in the next fund. And for the sponsors, it sure sounds easier to raise a fund using money you’ve just handed back to investors (especially if the strategy was a success and those are happy investors) than to convince those same investors to give you an even larger part of their portfolio allocation or find new investors altogether.
For real estate, in particular, it’s not that the model has necessarily changed, but – over the past couple of years – the environment has become more complicated. Per Cliffwater, “global [private real estate] fundraising fell from nearly $200 billion in 2021 and 2022 to $110 billion in 2024, while the average time required to reach a final close stretched to roughly two years.” As they go on to say (which we see firsthand with some GPs we know well), this is more than a sentiment issue. In short, the system is gummed up: GPs are still trying to deliver good results in their mature (aka “seasoned”) funds to work toward original return objectives and earn their carried interest (profit participation). But those results are taking longer to accomplish because the interest-rate and real estate environments have really tested original underwriting projections over the past several years. More concretely (😊), if you set out to develop a project in the early 2020s, when rates were still historically low and input costs were far cheaper (e.g., materials, labor, land…or pretty much everything!), you may have found that the world has unfolded in ways that deviate from original assumptions – to put it mildly; thus, trying to drive acceptable outcomes has required adaptation and longer hold times.
Tweens
What can be done to help alleviate the above? I’m glad you asked. Here are some ideas:
Evergreen Funds: Evergreen fund structures have become more widely available for Alts strategies, and I believe this is partially contributing to the diminished fundraising of traditional drawdown funds (as well as part of the solution). With these perpetual funds, there is no need to sell a given property or business to return capital to LPs, as those proceeds are recycled into a new project, solving a big issue for both GPs and LPs. Plus, investments are typically made all at once (rather than a series of capital calls), making investing and reporting significantly easier and less costly.
Seasoned Primaries: these are part of the adaptation to the current environment. Allowing investors to continue adding money to drawdown funds that are already 30-50% invested helps solve for additional fundraising needs by a) giving them more time to raise the money, and b) increasing the appeal to new LPs, since they already get a sense of what’s in the fund and how it’s progressing, as opposed to somewhat blindly committing capital ahead of time.
Secondaries (LP-led): if you thought the above “seasoned primaries” description sounds an awful lot like secondaries, you’d be right. The subtle difference is that seasoned-primary LPs are still contributing money to the original fund, while a secondary is someone selling you the fund in which they’re already invested. However, conceptually the two are similar. In either case, the fund is at least partially deployed/invested, and the new investors have greater certainty about composition and performance expectations. I’d expect the discounts/entry points to be more advantageous in secondaries.
GP-led Secondaries: Instead of letting a couple of projects linger and linger (…and linger – they really can go on for a LONG time), causing a fund to remain open, require ongoing tax filings/audits, drag down returns (IRRs), and frustrate investors with unnecessary K-1s, reporting requirements, fees, and lack of closure (am I laying it on thick enough?), the GP can lead an effort to buy up those remaining interest and repackage them in a continuation fund.
Co-Investments: these are often a sweetener to an LP investment, since they typically have no or very low fees, but they allow LPs to place additional capital in specific underlying investments directly alongside the fund itself. The usual rationale is that it helps control investment sizing (e.g., the fund can only absorb $20 million of a $50 million project). In this “stretched” environment, however, co-investments can also be part of the solution to the lack of fundraising.
Fundamental digital indexing?
This could have easily not hit your radar screen (and I wouldn’t blame you), but there have been crypto indexes around for a handful of years. And that makes perfect sense, as people want to have a way to broadly track what’s happening in crypto markets and benchmark returns, just like we do with stocks and other asset classes. For a very brief lay of the land, here are a few indexes, along with some of their main criteria for inclusion of underlying assets:
- Nasdaq CME CryptoTM Index: Actively traded on at least two exchanges (with a time qualifier); supported by at least one core custodian; other volume and market requirements; free-floating pricing.
- CoinDesk 20 Index: designed to capture “top digital assets…with liquidity, diversification benefits, and implementation in mind.” Requirements include being “among the largest 250 digital assets by market capitalization, excluding stablecoins”; not pegged; not a gas token or memecoin; able to “support a CoinDesk Benchmark Rate” (liquidity/exchange eligibility). Bored yet?
- S&P Cryptocurrency Top 10 Index: “a market cap weighted index that seeks to track the performance of the top 10 cryptocurrencies by market capitalization from the S&P Cryptocurrency Broad Digital Asset Index.” This one actually sounds pretty straightforward!
What you may notice is that these indexes are generally all about size and liquidity. What else is there in crypto, you may ask? That’s really the whole reason for the update, as we are now at a point where crypto can be viewed through a fundamental analysis lens.
This new crypto-index approach is a joint effort from S&P Dow Jones, Pantera, and Artemis. In their words, “rather than rewarding market hype or size (e.g., market capitalization) alone, it captures tokens backed by economically productive protocols.” Similar to how the “S&P 500 requires four consecutive quarters of GAAP earnings…The S&P Pantera Digital Asset Index requires “consecutive quarters of positive protocol revenue (subject to a minimum threshold), verified by onchain data from Artemis, and confirmation that revenue accrues to tokenholders (via buybacks, staking yields net of inflation, distributions, or tokenholder-controlled treasuries).”
The TLDR of the above is that, yes, some crypto now makes consistent profits, and the index is designed to capture those technologies. Who knows, maybe someday we’ll have a crypto protocol with a dividend growth mandate!?
This topic has naturally evolved into a 2-parter, so we’ll continue with this look around the Alts world soon.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
