“Future complications in the strings between the cans.” – Jack Johnson, The Horizon Has Been Defeated
The future is both exciting and very tricky to predict. When I was buying 50ft-long cords as a teenager to give myself a lot more freedom when talking on the phone while still tethered to our bedroom wall, I didn’t imagine that – only a handful of years later – it would be possible to talk to people across the globe with no “strings between the cans” whatsoever.
One thing is for sure: the quality of human life continues to improve. I love this historical overview from the Hoover Institute (h/t Nick Murray) that recounts what life was like in the past and makes a reasonable case that even our uber-wealthy ancestors could be better off as average citizens in the developed world of modern times. It’s incredible what has been accomplished, and worth a moment of gratitude for progress, as that can get lost in life’s day-to-day chaos.
My hope for the immediate future is that AI delivers on adding significant efficiency to menial tasks that require much of our time…but there will also be countless developments we cannot yet imagine that will continue to improve the human experience. And with that all in mind, let’s look at some areas of markets, especially Alts, to contemplate what may be on the horizon. Here we go!
Private I’s of the future
For those unfamiliar with it, the CAIA (Chartered Alternative Investment Analyst) Association is the industry standard for personal development and continuing education related to Alternative Investments (like the CFA or CFP® professional designation of Alts). Of recent significance, CAIA has launched a new publication, the Quarterly Mark, as a members-only publication.
Now, they may be biased, but the opening article of the inaugural edition concludes that private markets will continue to grow due to investors seeking several factors, such as risk/return characteristics, increased availability/access points, exposure to opportunities that don’t exist in public markets, and – not surprisingly – “pursuit of higher returns” in what is expected to be a more muted return environment (for both public and private markets) going forward. The future existence of our personal privacy may be questioned by many, but private investments (aka “Private I’s”) are here to stay.
Other notes in the first edition related to today’s topic of “the future” include the following:
- Reaffirming the notion that access to the best managers is of utmost importance in venture capital (VC) and private equity (PE), as performance persistence is “a thing” in these asset classes – something we covered back in The Ruse – Part 2, in May of 2021.
- Attempting to predict some investment themes we may see in the future (by Scott Welch of Wisdomtree), touching on areas like goals-based investing becoming the norm and “decumulation portfolios” gaining traction (i.e., where the portfolio is designed to outlive the beneficiary); I think TBG is ahead of the curve on both fronts.
- Increased “tokenization” of assets (aka fractional ownership via the blockchain); this is a concept we touched on somewhere within the 11-part Crypto Dip-Toe series, but also briefly in The Future is Off the (block)Chain. In a related update, I received a communication recently indicating that the securitized real-estate solution I wrote about closed down earlier this year. So, perhaps the solution will need to be tokenization after all.
PC and PE
If you haven’t seen it already, there’s a Financial Times article in which both Jim Zelter of Apollo and Blackstone’s Steve Schwartzman sound very bullish on private credit. [I’m not sure if I can include quotes or not here (due to FT’s terms), so I’m erring on the side of caution, but even non-subscribers should be able to access the above link.] It’s pretty apparent where the collective mind of both firms lies regarding the future of private credit. Concisely, it’s “game on!” My only concern is that they’re so aggressively positive it sounds almost too good to be true – and we know where that usually gets people.
On the private equity front, the recent/ongoing Historically High PE Dry Powder committed to primary funds means not only (the no-brainer prediction) that a lot of private investing will occur in the coming years. More interesting, however, is that this should create an outsized opportunity for secondaries as those budding primary funds run their course. As a reminder, secondaries can include buying primary funds on the secondary market at a discount or even GP-led secondaries to offload lingering positions. Similarly, more PE activity should pave the way for increased co-investment opportunities – typically involving investing alongside PE managers in one-off projects (but with no fees!). We covered these topics in more detail in Warren Haynes and Secondary Gains back in July. In other words, PE primary funds are the engine that will power the secondary and co-investment ecosystems in the coming years.
Long/short infrastructure
The long of it is that a ton of infrastructure is needed globally (roads, bridges, energy, digital, utilities, etc.), so expect that it’s coming. The short of it is that this is all I’m writing about today, but it sounds like a good topic for the near future.
Mortgages
What we know for sure: 30-year mortgage rates are the highest they have been in over two decades.
What no one knows: where rates are going from here. Still, some “experts” will offer predictions, complete with language to hedge their clairvoyance, like “over the medium term…” One “prediction” I like in the linked article is that, eventually, more buyers for long-bonds (i.e., greater demand) should help push down long-term rates, and those lower rates could unleash more potential homebuyers into the housing market (really just an “if-then” statement rather than a prediction). One can only assume that situation would imply (even) higher home prices if meaningful new supply doesn’t come into a given market. When, if, and how any of that unfolds is nothing short of guesswork.
What we can reasonably ascertain: While we don’t pretend to be able to predict the future, I think it’s reasonable to expect – as this fascinating article from the Richmond Fed contends – that, as the yield curve normalizes, mortgage spreads should compress. That spread refers to the 30-year mortgage rate minus the 10-year US Treasury rate. According to their data, those spreads widen in times of distress. It’s worth the read, but the thinking goes like this:
- Mortgages become short-duration assets in times like the present, as people will refinance as soon as they can (i.e., when rates normalize/fall again).
- Because they are effectively short-term (due to #1), borrowers are subject to paying higher rates (when the yield curve is inverted, short-term rates are higher than long-term rates).
Historically speaking, as the environment normalizes, the mortgage spread tends to narrow, bringing the mortgage rate closer to that of the 10-year bond. On average, it’s about 1.75%. As I write, I see the 10-year yield at 4.62% and the average 30-year fixed mortgage rate quoted at 7.78%, which implies a spread of about 3.16%, or almost double what borrowers are used to in “normal” markets.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
