Wealth Management
As interest rates remain higher for longer, borrowers are increasingly turning to an alternative source of funding: private credit. These arrangements benefit both sides of the transaction; lenders receive higher returns than traditional loans, and their clients get a source of financing with the flexibility to meet their unique needs.
With alternative asset managers packaging their private credit investments to accommodate smaller account sizes, this asset class is showing up more in investors' portfolios.
This product proliferation gives investors key advantages that are hard to find elsewhere. Private credit typically has a low correlation to stocks and bonds, which are often the mainstay of an investor's portfolio. It also provides an opportunity for higher returns than more traditional debt instruments.
Private credit's advantages, diversification and higher returns, come at a cost. These funds can be less liquid than traditional investments, and the return, as with most investments, is not guaranteed.
However, private credit may be an asset class to consider for investors with a time horizon that allows them to put a portion of their account in less liquid investments and who desire a chance at higher returns.
Finsum: Read how private credit offers investors the opportunity for greater diversification and higher returns than more traditional forms of debt investments.
Diamond Consultants recently completed the 2023 version of its Advisor Transition Report to identify the most important trends in financial advisor recruiting. Overall, recruiting was up 7.5% compared to 2022 which was unexpected given several headwinds. Many advisors who switched reported being more focused on the long-term to find the best place to maximize the value of their practice on a 5 to 20 year horizon.
Another interesting finding is that each channel seems to have a big winner. LPL enjoyed the most success from independent firms, while Morgan Stanley was the winner from traditional wirehouses. Boutique and regional firms like Rockefeller, RBC, or Raymond James also notched some major wins as they offer many of the resources of the large wirehouses without the bureaucracy.
One catalyst for the increase in recruiting activity has been the expected involvement of private equity bidders. Yet, this hasn’t materialized in terms of PE-backed RIAs poaching talent from legacy players. One factor is that PE offers come with some caveats that make it less appealing to advisors.
Finally, the lure of the independent channel seems to be fading despite the number of options increasing. This is likely due to traditional firms offering more generous compensation packages while the initial cohort of recruitees who wanted an independent channel have already moved firms.
Finsum: Diamond Consultants put together its 2023 report on advisor transitions. Major takeaways are that recruiting remained strong despite some major headwinds and that PE buyers haven’t been successful in luring advisors.
In 2023, private credit funds managed $550 billion in assets and generated 12% in average returns for investors. Private credit has been ascendant the last couple of years and helped private equity firms find a new source of revenue.
As public market financing become less available, direct lenders extended credit to small businesses and buyout deals, replacing syndicated loans and the high yield bond market. It resulted in private credit growing from less than $100 billion in 2013 to its current size.
This year, investment banks are once again stepping into the fray. So far, $8.3 billion of private market debt has been refinanced via syndicated loans, indicating that the high yield bond market in the US is once again a viable option for companies. In leveraged buyouts, banks are also competing as evidenced by JPMorgan’s financing of KKR’s purchase of Cotiviti, a healthcare tech company.
Spreads for syndicated loans and high yield bonds have dropped to thier lowest levles in 3 years. Rates are now between 200 and 300 basis points below what private credit lenders were offering in December.
Private equity firms are expected to pivot into higher quality, asset-backed financing such as credit card debt and accounts receivables to replace revenue from private credit. They would also benefit from an improvement in public market sentiment and liquidity as they are sitting on a backlog of unsold investments in portfolio companies.
Finsum: The private credit market has boomed over the last couple of years due to anemic public markets and hesitant banks. Now, banks are once again competing for business and offering more favorable terms.
More...
Natixis conducted a survey of 500 investment professionals, managing a combined $35 trillion in assets. The survey showed that investors are adjusting their allocations in expectations of more volatility in 2024 due to more challenging macroeconomic conditions.
A major change in the survey is increasing preference towards active strategies as 58% noted that active outperformed passive for them in 2023, and 63% believe active will outperform this year. Overall, 75% of professionals believe that being active will help in identifying alpha in the new year.
In terms of fixed income, 62% see outperformance in long-duration bonds, although only 25% have actually increased exposure due to uncertainty about the Fed. In addition to increasing duration, many are interested in increasing quality with 44% looking to increase exposure to investment-grade corporate debt and US Treasuries.
Money continues to flow to alternatives with 66% believing that there will be significant delta between private and public market returns. Within the asset class, fund selectors are most bullish on private equity and private debt at 55%.
With regards to model portfolios, 85% of firms now offer them either in-house or through third-party firms. Due to increasing demand, the number of offerings are expected to increase. Benefits include additional diligence and increased odds of client retention during periods of uncertainty. They also help form deeper relationships with more trust between advisors and clients, leading to more of a relationship focused on comprehensive, financial planning.
Finsum: Natixis conducted a survey of 500 investment professionals and found that model portfolios are increasingly popular. Another major theme is that volatility is expected to remain elevated in 2024 due to uncertainty about the economy and Fed policy.
The 2006 vintage of buyout funds remains etched in the memory of private equity investors who endured the global financial crisis (GFC), despite eventual recovery. Unlike typical fund vintages following a predictable "J curve," 2006 saw a deviation, marked by record capital investment before the financial markets' collapse.
Recent fund vintages show alarming parallels to 2006 according to a report by Bain & Co, sparking concerns among limited partners about trapped capital and delayed returns. While historical challenges offer valuable lessons, today's private equity portfolios differ, with varied exit strategies and market conditions.
Nonetheless, fund managers must proactively manage portfolios to generate distributions, prioritizing liquidity to satisfy investor expectations and secure future allocations.
Finsum: Lower interest rates could begin to free up capital for return distribution in 2024.
Buffer ETFs have surged in popularity among financial advisors aiming to placate nervous clients while maintaining their investment positions. Their widespread adoption has led to major expansion, from less than $200 million to $36.7 billion since 2018, according to Morningstar.
Operating on the defined outcome strategy, buffer ETFs use equity options to mirror benchmark performance while offering downside protection in exchange for an upside cap within specific 12-month life cycles, available monthly or quarterly.
Jeff Schwartz, president at Markov Processes International, underscores the importance of comprehending the intricacies of these vehicles, given the multitude of variables involved, and that the intricacies around the buffer and cap structure are pivotal. Advisors must carefully consider market conditions when purchasing buffer ETFs at any point during their lifecycle to prevent diluting the intended benefits.
Finsum: Timing conditions are still important when it comes to buffer ETFs despite their built in protections.