Displaying items by tag: private equity

Pacific Investment Management Co. (PIMCO) has been quite pessimistic on private credit and sees major downside if rates don’t fall as expected. This is contrary to many in the industry embracing private credit like Blackstone and Apollo Global. 

In contrast, PIMCO is looking to take advantage of the crisis that it’s forecasting. It also has larger implications for the economy and markets given that private credit has taken the bulk of risky lending which used to come from investment banks. 

PIMCO’s thesis rests on the US economy slowing in 2024 and a hard landing in Europe and the UK. If the economy remains resilient, then rates are unlikely to fall as much as expected. This would put stress on private markets where there is less transparency and price discovery. The firm believes that many borrowers are quite risky and quite exposed to a decline in revenues. They believe that about a quarter of private credit portfolios could face difficulties if rates don’t fall or are less than expected. 

PIMCO spies an opportunity if private lenders face pressure from its creditors based on portfolio values dropping. This would allow PIMCO to squeeze out other lenders by buying into debt at a discount. It would also continue a trend of the firm moving away from its roots of fixed income investing and increasingly into alternative assets. This segment has grown from $32 billion in 2016 to $170 billion in the first half of 2023. 

Finsum: PIMCO is bearish on private credit due to concerns about balance sheet risk with risky borrowers, bearishness on the economy in 2024, and the market pre-emptively pricing in a dovish Fed.

The combination of tighter money and falling valuations have led private equity sales of portfolio companies to their lowest levels since 2009. Now with some signs of thawing in markets, private equity firms are looking to exit positions and return money to investors.

It’s led to a negative cycle for the industry. The lack of exits has adversely impacted investors’ willingness to pledge money for new funds which has hampered the industry’s ability to make deals. 

According to Per Franzen, the head of private capital for Europe and North America at EQT AB, “Private equity players have to face reality at some point. They need to invest remaining capital and go back to the market to raise new funds, which means a need to drive exits and improve distributions.” Reportedly, some big deals are on the horizon such as Hellman & Friedman looking to sell its energy data platform, Enervus, KKR exiting car park operator, Q-Park, and Carlyle finding a buyer for luxury watch parts manufacturer, Acrotec Group

Another consideration is upcoming elections which could complicate efforts to exit positions. This increases the urgency to make moves in the first half of the year. There are also expectations that private equity could be looking to take advantage of any dislocations or discounts as the industry has $1.4 trillion in cash on the sidelines. 

Finsum: Private equity firms are looking to exit positions in the coming months in order to return cash to investors. 

According to a new research report from Cerulli Associates, financial advisors are retiring at a pace, faster than they can be replaced. The firm estimates that 109,000 financial advisors in the US will retire over the next decade. This is about 38% of all advisors in the US, representing about 42% of total assets. Overall, the industry needs to do a better job of investing in training programs and giving younger advisors more opportunities in client-facing and asset-gathering roles.

The report highlighted another trend as older, established advisors will continue to move into RIAs given more control and the ability to sell their practice. Currently, advisors over the age of 55, manage 56.7% of total assets, despite accounting for 42% of advisors. 

RIAs and independent broker-dealers saw headcount growth of 856 and 685, respectively, in the first 9 months of 2023. In contrast, wirehouses lost 612 advisors. This has been the case since 2008, and Cerulli forecasts that the share of advisors at wirehouses will go from 15.1% to 13.4% over the next 5 years.  

In contrast, RIAs are where growth is happening as most broker-dealers now offer some sort of RIA platform to entice recruits. There has also been consolidation, driven by private equity, with a total of 321 deals in 2023. 

Finsum: Cerulli issued a new report which revealed that nearly 40% of advisors will be retiring over the next decade. 

According to Echelon Insights, 2024 will be another strong year for M&A activity with larger RIAs picking up smaller firms. This follows a strong year for the industry in 2023 despite headwinds such as higher borrowing costs which impacted buyers’ ability to impact financing. Yet, the robustness of M&A in less than ideal conditions reveals strong fundamentals.

In 2023, there were more than 320 deals for RIAs. It was the second-highest year on record other than 2022 which saw 342 deals. Over the last 5 years, the number of deals in the space have grown at a 12.1% annual compounded rate. Average assets per transaction was up 4%, while private equity was the most aggressive acquirer. In total, the sector was involved in 71% of deals and added cumulative assets of $466 billion.

Last year, the largest transactions in terms of asset size were Captrust and Cetera Financial Group. Cetera acquired Avanax for $1.2 billion to bolster its succession planning offerings and tax and wealth management capabilities. Captrust acquired Trutina Financial for $1.1 billion and had a total of 8 deals, adding $14 billion in assets. 

Finsum: Research firm Echelon Insights is forecasting another strong year for RIA M&A activity in 2024. 2023 had the second-most number of deals, despite several macro headwinds. 

The SEC has approved the first set of bitcoin ETFs this week following a long review process. Multiple ETFs began trading on Thursday to prevent any firm from having a first-mover advantage. So far, the iShares Bitcoin Trust is the leader in terms of inflows followed by the Bitwise bitcoin ETF and the Fidelity Advantage Bitcoin ETF.

This may adversely affect demand for gold as investors will have another option to diversify portfolios. According to Joy Yang, the Global Head of Index Product Management at MarketVector Indexes, these new ETFs will likely result in gold remaining range bound around current prices due to less interest from investors. She believes it could be similar to 2021 when gold underperformed during the bull market in cryptocurrencies.

Still, she doesn’t see gold falling below $2,000 in 2024 and is bullish on it in the longer-term due to geopolitical risks and economic and financial uncertainty. And she acknowledges that gold has more upside if the Fed is forced to cut more aggressively than currently anticipated. 

Overall, gold and bitcoin have many similarities despite one being less than 2 decades old, while the other has been around since the dawn of humanity. And both are ‘stores of value’ relative to currencies and offer protection against inflation. 

Finsum: Approval of multiple bitcoin ETFs is expected in the coming weeks. This is likely to have a negative impact on gold demand as investors will have another option to diversify their portfolios.