PRIVATE EQUITY OUTLOOK
In Part Two: The outlook for private equity with financial thought leader Tony James, Executive Vice Chairman, Blackstone.
WEALTHTRACK Episode #1522; Originally Broadcast on November 16, 2018
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HAMILTON “TONY” JAMES
- Co-Author, Rescuing Retirement,
- Executive Vice Chairman, Blackstone
Investors are always looking for higher returns. After a 35 year bull market in bonds and a decade long one in stocks the consensus is that their returns are going to be muted for the foreseeable future. The markets’ behavior this year has only strengthened that view. As a result, investors are literally looking to alternatives to boost returns.
Alternative investments are just that, alternatives to the traditional choices of stocks, bonds and cash. They tend to be non-correlated, in other words they behave differently than stocks and bonds thus providing true diversification in a portfolio. Among the oldest and most well-known are publicly traded commodities such as gold and other commodities, and real estate in the form of real estate investment trusts (REITs).
Then there is an entirely separate universe of privately owned alternative investments. They don’t trade publicly. They are not transparent to the general public. They are illiquid, thus meant to be held for long periods of time. They are mostly available only to large institutional investors such as pension funds, endowments and sovereign wealth funds, and to wealthy investors, qualified high-net-worth individuals with assets of $1 million or more, excluding primary residences, and annual six figure incomes.
Among the most popular private alternative asset classes are commercial, income-producing real estate, hedge funds, private equity and venture capital. Over the last two decades these non-publicly traded alternatives have become extremely popular among large investors because they have generally significantly outperformed stocks and bonds, with less risk and have provided that desirable non-correlated diversification. For long term investors in particular their illiquidity is a benefit not a problem.
A case in point is private equity. Since 1990 private equity funds, which buy large stakes in private companies, have averaged 15.2% annualized returns, far superior to the S&P 500’s 11.3% returns or the Russell 2000’s 11.1% performance. All three have outperformed hedge funds’ 10.5% returns over the 18-year period, although hedge funds have generally provided the protection they are supposed to in down markets. The lagging performance also didn’t prevent hedge fund assets from hitting a record $3.2 trillion in 2017.
Not surprisingly private equity’s outperformance has attracted more money and participants. There were an estimated 100 private equity firms in the year 2000 managing about $600 billion in assets. Today there are roughly 4,000 such shops managing more than $3 trillion, a new record amount. The explosion of entrants and money pouring into the funds, plus the terrific track record of the asset class over the last two decades has led independent research firm, Strategas and some other market analysts to wonder if the outperformance can possibly continue especially in a rising interest rate environment.
Here’s what Strategas told clients in a recent report: “To the extent to which private equity, as an asset class, relies on leverage, it seems unrealistic to expect future returns to come anywhere close to those achieved when it was benefitting from unprecedented inflows at a time when interest rates moved ever-lower. Considering the fact that a PE firm has nearly 40x the number of competitors than it did 18-years ago, the expectation of better-than-public equity returns with less “risk” seems even less-likely.”
This week’s guest has a different view on the outlook for private equity. He is Tony James, Executive Vice Chairman of Blackstone where from 2002 to early in 2018 he was the President and Chief Operating Officer. Blackstone, with $440 billion under management is a major global player in alternative investments, including private equity and real estate funds, hedge funds and diverse credit funds. James is also a leading voice on retirement reform and is co-author of Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans, which we discussed with him in depth on last week’s WEALTHTRACK.
This week we focus on the doubts being raised about the future performance of private equity and other alternative investments.
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Thank you for watching. Have a wonderful Thanksgiving. We have so much to be grateful for in this country. Make the week ahead a profitable and a productive one!
Best regards,
Consuelo
CONSIDER ADDING SOME ALTERNATIVE INVESTMENTS TO YOUR PORTFOLIO
- INVESTMENT ENVIRONMENT IS CHANGING
- AFTER 35 YEAR DECLINE, INTEREST RATES ARE RISING
- FINANCIAL ASSETS ARE BEING REPRICED
- MARKET VOLATILITY PICKING UP
- ALTERNATIVE INVESTMENTS CAN OFFSET STOCK AND BOND MARKET GYRATIONS
BASIC ALTERNATIVES:
- GOLD ETF- iShares Gold Trust, popular choice with low fees
- REAL ESTATE INVESTMENT TRUST MANAGED BY AN EXPERIENCED TEAM- Cohen & Steers Realty Shares- large, established REIT fund, benchmark beating, high rating.
FOR QUALIFIED HIGH NET WORTH INDIVIDUALS:
- PRIVATE EQUITY FUNDS, GLOBAL REAL ESTATE FUNDS PROVIDE COUNTERPOINT TO STOCKS & BONDS
- LOOK FOR FIRMS WITH LONG, SUCCESSFUL TRACK RECORD
No ONE INVESTMENT this week.
No stock mentions in this episode.
This transcript is available here. More information regarding WEALTHTRACK transcripts can be found here
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No WEB EXTRA this week.
