“Not investing in private markets means ignoring a very large part of the investable universe”

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Photo courtesyPhil Waller, en un momento de la entrevista.

Phil Waller has been working at JP Morgan AM for ten years, most of that time in private markets. He is currently the investment specialist leading the firm’s European team for alternative investment solutions, with a clear mission: to guide and support JP Morgan AM clients in building alternative allocations tailored to their needs, and to provide access to alternative strategies to increasingly diverse types of investors.

“The democratization of alternatives is a major goal for the industry and a major goal for us for the coming years,” he states emphatically. JP Morgan AM currently manages $213 billion in alternative assets.

At a forum recently organized by the firm in London, Funds Society had the opportunity to speak with Waller about his approach to alternatives, an asset class that, in the expert’s opinion, is too often used as a “catch-all” to define all those assets that are not fixed income or equities, but which actually encompasses a broad investment universe.

At JP Morgan AM, they have decided to focus on five major sub-asset groups: private equity, private credit, real assets (real estate, infrastructure, transport), hedge funds, and liquid alternatives. “These are major categories, and each behaves very differently, offering distinct qualities,” Waller points out, recommending those new to the world of alternatives “think about the set of opportunities they offer.”

Is there a real growing interest in alternative assets? How has the universe of alternatives evolved over the last year?

One of the major developments in the last 12-18 months is, obviously, that the interest rate environment has changed significantly. The major impact of this is that investors now have more options when it comes to earning income. Thus, a more detailed conversation can be had about one of the benefits of alternatives. When it comes to income-oriented alternatives, the approach for investors now is that not all income is equal; they can value the various options more broadly across different asset classes.

At the same time, as interest rates are now higher, some asset classes have benefited, like private credit. What used to be an 8-9% return is now 12 to 13%.

Is there room for new types of investors in alternatives, including retail investors?

Yes, absolutely. Institutional investors have been allocating to alternatives for decades. That has not diminished after the financial crisis. In fact, many institutions are now allocating 20% of their assets within alternatives, some even closer to 50%, because they have longer-term horizons.

On the other hand, individual investors, particularly in Europe, have allocations to alternatives that are in the low single digits, excluding their properties. They are really not taking advantage of the long-term nature of this asset class. We think there is a great opportunity for asset managers like ours to create greater access and education and, ultimately, for individual investors to continue allocating part of their portfolios to alternatives. However, individual investors still need to consider alternatives as an illiquid and long-term allocation, and need their investment horizon to match that.

What kind of conversations do you have with your clients so they can understand the different types of alternatives and their characteristics and qualities?

When it comes to alternatives, some types of clients are very sophisticated, but others have great needs for financial education. Ultimately, we seek to talk to clients about what alternatives bring as opposed to what alternatives are. Are you looking for a stable level of income? Are you looking for inflation mitigation?

The other conversation revolves around the greater offering in private markets. Now, if I do not invest in private markets, I am ignoring a very large part of the investable universe. Companies used to stay private for an average of about four years, now they can remain for more than 12 years and often coincide with the fastest growth phase of their lifecycle. Therefore, gaining access to these companies at that time is a significant added value.

The way we communicate with investors is ensuring that they are goal-oriented, making sure it is done for the right reason, ensuring they understand the benefits, but also the risks of each asset class, given some of the complexities and the illiquidity that comes with these asset classes.

Do you think the model 60/40 portfolio should evolve to also include a structural allocation to alternative assets?

The alternative solutions team at J.P. Morgan AM has been assisting clients, but also building these diversified portfolios. Our view is that it should be a significant allocation for long-term investors. Now, whether it is 20% or 30% will depend very specifically on the investor’s requirements: investment horizon, risk profile, return expectations… What is really important is what is in that 20%. Getting the right mix between income and capital appreciation is really key within the allocation to alternatives in a portfolio. A more granular approach is needed to build it.

Where are you finding investment opportunities currently?

We have divided it into three major categories. The first covers markets that have experienced some dislocation, particularly those more sensitive to interest rates – such as in real estate – or that have experienced notable flows. One of the major trends we saw in 2022, and that has continued into this year, has been that some institutional investors were overweight in alternatives, especially in private equity and private credit and this has created a bit more supply in the secondary market; as they rotate their positions they have created the capacity to invest at a discount. And that has been attractive both for private equity and for private credit.

The second major category is disruption. A big area where this is happening is in private equity, with the emergence of new industries. We have also seen disruption in real estate, due to the boom in teleworking.

Finally, we are seeing that some of the more institutional investors are focusing a lot on the aspects of diversification of alternatives. Core allocations, such as infrastructure or transport, have been a major focus of interest, along with hedge funds.

How Long Can the Sweet Spot Last?

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Aegon Asset Management hosted a Day of presentations in Miami for Latin American and US Offshore investors. The day opened with a macro review and was followed by presentations on global bonds, high yield and dividend investing. In this article we addess the macro review and how should portfolios position themselves given the outlook for inflation, rates and the economy.

According to Frank Rybinski, CFA – Head of Macro Advisory, Aegon AM, inflation in the US is coming down faster than nominal wage growth, creating a gap that boosts real spending power and fuels consumption. He discussed charts showing accelerating real wage growth supporting consumption. However, this “sweet spot” is finite as nominal wages will continue falling. The Fed will need to cut rates to provide monetary support as inflation comes down and consumers become more price sensitive.

Sectors or Industries Most at Risk if the Labor Market Weakens Further

The sectors or industries that are most at risk if the US labor market weakens further would be the cyclical parts of the economy that make up over 70% of non-farm payrolls, excluding the smaller non-cyclical government and healthcare sectors that are currently leading job growth. Frank Rabinski noted that growth in the rest of the cyclical economy, which includes industries like manufacturing, retail, transportation and construction, is only around 1% annually. These cyclical sectors would be more vulnerable to slowing further or contracting if unemployment rises from current levels.

Impact of Divided Government on Fiscal Policy and the Federal Budget Deficit

A divided government following the midterm elections will result in less substantial changes to fiscal policy and reductions in the federal budget deficit. It means you won’t get massive spending bills passed or significant policy changes, as it will be difficult for either party to push their agenda alone. Rabynski also mentioned the current spending sequester will help curb the growth of spending over the next year. Overall, divided control of Congress and the White House is seen as a positive that would limit large fiscal programs and associated deficits going forward.

Credit Sectors Most/Least Attractive Given Corporate Borrowing Trends

Most attractive: Investment grade credit, as companies with stronger balance sheets still have access to debt markets. Technical support from lack of supply could also boost prices. Secured credit such as leveraged loans, as these have higher priority of repayment over unsecured bonds.

Least attractive: Lower-rated high yield bonds (CCC-rated or below), as these companies are more vulnerable to an economic slowdown or rising rates. Unsecured high yield bonds, which have lower recovery rates than secured loans in the event of default.

Rabynski also cautioned against overexposure to private credit markets given recent signs of weakness in underlying fundamentals that are less transparent than public debt markets.

Supply Chain Changes and Trade Policies Influence on Specific Industries

Manufacturing sectors in the US may see boosts as companies onshore production or diversify suppliers globally. Industries like semiconductors are already seeing large investments. Export-oriented industries could be impacted depending on how individual countries are positioned within new trade blocs forming between the US/Europe and Russia/China. Commodity producers may benefit if trade tensions increase demand for non-Chinese/Russian sources. Industries like metals and energy could see pricing support. Transportation and logistics will likely play a crucial role in adjusting to “global fractionalization” of supply chains. Shipping and warehousing demand could increase. Consumer goods that rely heavily on Chinese/other Asian imports may face headwinds or costs rises as companies reconfigure supply chains and inventory management.

How Should Investors Position Portfolios Given the Outlook for Rates, Inflation and the Economy?

Investors should maintain some exposure to equities given expectations for moderate economic growth and rate cuts supporting markets. They should also increase allocations to fixed income as yields have risen, offering more attractive alternatives than in recent years for yield and diversification. Favoring credit over sovereign bonds to pick up extra yield, but taking a cautious approach to lower-rated segments of the market, is also recommended. Consider overweighting high-yield bonds where spreads have widened significantly from a few years ago. Emphasizing diversification across asset classes now that the “fixed income buffet” has more options than the recent low yield environment is also important.

Schroders Capital partners with iCapital to widen access to semi-liquid global private equity strategy

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Schroders Capital and iCapital announce a strategic partnership that enables Schroders Capital to broaden access to the wealth management channel for its semi-liquid global private equity strategy. 

Through this collaboration, Schroders Capital will leverage iCapital’s cutting-edge technology platform and operating system to manage the investment and education experience at scale. 

By listing the Schroders Capital semi-liquid global private equity strategy on iCapital Marketplace, a one-stop-shop connecting wealth managers, financial advisors, and their clients to a wide selection of alternative investment opportunities offered by the world’s leading asset managers, Schroders Capital gains access to iCapital’s global network of wealth managers, enabling its distribution strategy to be efficiently expanded.  

With $93.7 billion in assets under management, Schroders Capital offers a broad range of private market investment opportunities to institutional investors and private wealth investors, including a series of semi-liquid funds. The partnership with iCapital, which initially focuses on markets in Latin America, Asia and Switzerland, is testament to Schroders Capitals’ aim to support access to private markets for private wealth clients. 

Georg Wunderlin, Global Head Private Assets, Schroders Capital, said: “The partnership between Schroders Capital and iCapital is an important step in our strategic priority of ensuring we are a leading partner for wealth managers and private banks to better access private markets. The Schroders Capital semi-liquid global private equity strategy provides an even broader set of investors with the means to invest in some of the most established global private equity open-ended funds worldwide. With a multi-year track record and a strong focus on small-mid buyouts in Europe and North America and growth investments in Asia, this sets it apart from many other comparable private equity funds in the market.” 

Gonzalo Binello, Head of Latin America, Schroders, said: “During the last decade or so we have seen the Private Assets investment market growing in demand and evolving in its pipeline to new heights. Latin America has not been an exception to this global trend, and we have seen this growth evidenced in the strong demand from the region for our global private equity ‘evergreen’ Luxembourg-based strategy two years ago, especially from countries such as Chile, Costa Rica, Peru, Mexico and the US market. Schroders Capital has been building a compelling range of next generation ‘evergreen’ private assets strategies, that we have the intention to bring to Latin America in due course to continue working for our client’s benefit.”

Marco Bizzozero, Head of International at iCapital, said: “We are delighted to partner with Schroders Capital, a leading private markets manager with over 25 years of private equity investment experience, to support them in their mission to be at the forefront of unlocking new private markets investment opportunities to the wealth management channel. 

 

BofA’s AI Assitant Surpasses 2 Billion Interactions

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Bank of America’s virtual financial assistant, Erica, has surpassed 2 billion interactions since its launch in 2018. The advanced and widely available virtual assistant has become a personal concierge and mission control for Bank of America’s clients.

Erica’s capabilities have expanded over the past six years to support individual and corporate clients across the company, including within Merrill, Benefits OnLine, and the award-winning CashPro platform.

Erica is a great example of applied innovation in language processing and predictive analytics to deliver a valuable and empowering customer experience.

Erica has responded to 800 million inquiries from more than 42 million customers and provided personalized information and guidance more than 1.2 billion times.

Like Bank of America’s 213,000 teammates, fostering a personal relationship with customers is a priority for Erica.

Bank of America’s data science team has made more than 50,000 performance updates to Erica since its launch, fine-tuning, expanding, and refining natural language understanding capabilities. This ensures that answers and insights remain timely and relevant.

Regional Markets, Credit and Cash on the Move in Focus

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In Q1 2024, global equity markets rose by 8% in USD terms, continuing their strong performance from 2023.

In contrast, developed-market sovereign bonds declined just over 2% due to persistent inflation concerns, eroding much of the previous year’s gains. With continued uncertainty around the speed and timing of central banks’ interest-rate pivots, and because substantial capital has remained on the sidelines in money-market funds, a potential shift of cash into riskier assets, such as longer-duration bonds, corporate credit and equities, could be in scope over the balance of the year.

In last quarter’s edition of Markets in Focus, the report explored the changing relationship between government bonds and equities. In this quarter’s post, we focus on the relationship between corporate bonds and equities. Considering the continued bull market in stocks, MSCI examine the prevailing risks in the U.S. markets and the implications for investors choosing to move out of cash positions in 2024. This quarter also marks the start of our integrating fixed-income commentary into this quarterly analysis, to provide a comprehensive view into public markets.

Diminished diversification benefits from credit carried into Q1

Current conditions in global credit markets have been shaped by the tailwinds of high coupons, the possibility of impending rate cuts and growing confidence in a U.S. “soft-landing.” We believe vigilance is warranted, however, given the lingering effects of shocks related to the COVID-19 pandemic, the report said.

MSCI’s head of portfolio management research, Andy Sparks, discusses the relationships within the bond markets across the credit spectrum, as well as between bond and equity markets, in the four years leading up to 2024 and during the first quarter of the year.

Using the MSCI Multi-Asset Class Risk Model, its observed that correlations between corporate spreads and government bonds remain elevated, suggesting a continuation of diminished diversification benefits from debt investments. Around the world, both investment-grade and high-yield credit markets have become more closely coupled to equity markets.

Why 2024 Could Be a Hot Year for M&A

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After a slowdown in 2023, mergers and acquisitions activity is poised for a rebound this year. Morgan Stanley Research predicts a 50% increase in M&A volumes compared with 2023, as growing corporate confidence and easing concerns about inflation and recession globally are helping fill deal pipelines.

“Last year’s strong market performance masked a dismal deal environment. Global M&A volume fell 35% last year, the second consecutive decline and the lowest level since 2004,” says Andrew Sheets, head of corporate credit research at Morgan Stanley. “This has created pent-up demand for deals in 2024, especially as companies become more confident about growth, giving those that spent the past two years building strategy, evaluating prospects and engaging preliminary discussions an opportunity to strike as the market turns.”

A number of cyclical and structural factors are likely to propel deal activity. Non-financial companies have amassed $5.6 trillion in unallocated capital, and private market investors hold another $2.5 trillion, which are ready to fuel an M&A comeback.

In addition, companies are looking to improve efficiencies, expand market share or add capabilities such as AI expertise and energy transition technology. At the same time, more private companies and private-equity portfolio assets are either putting themselves up for sale or looking to shed assets.

And while the projected rise in 2024 deal activity is coming off this lower base, it reflects both necessity and opportunity. For example, private equity firms are holding more than 1,200 “unicorns” — startups with valuations of $1 billion or more — that they need to monetize.

Industries Primed for Deals

Analysts have flagged six areas to watch for M&A in the coming year.

1.      Banks: The U.S. banking system has been consolidating for several decades, and it remains highly fragmented compared with many other countries. In addition, regulatory requirements and supervision are becoming stricter, increasing the need for stronger internal controls. As a result, analysts see a growing need for scale, which could drive consolidation over time.

2.      Energy: Despite last year’s slump in M&A volume, 2023 did include two of the largest energy acquisitions in more than a decade, and it could be a sign of more to come. Energy companies are looking for well-structured deals that will help them create value as the future of the industry moves toward fewer, yet higher-quality, companies.

3.      Healthcare: Lower interest rates, a desire for growth and, in the U.S., a need for consolidation are likely to drive transactions. Large European biopharma companies may be on the hunt for deals given their strong balance sheets.

4.      Hotels: Hotels have low valuations in Europe, and large transactions in the past have created significant value by reducing expenses and travel-agent costs. However, the industry remains fragmented. The five biggest hoteliers control just 25% of the market and the biggest player operates just 7% of all rooms globally. With one large merger already in discussions, a broader consolidation could follow.

5.      Real estate: Eleven deals with a value of $61 billion for publicly traded real estate investment trusts (REITs) were announced in 2023, which resulted in greater economies of scale, higher earnings and better portfolios. The market appears ready for more, especially in subsectors such as self-storage, apartment, office, retail, health care and industrial REITs.

6.      Technology: Technology may offer the best deal prospects in 2024, especially in software, which had five transactions last year. Tech still attracts significant amounts of private investment, and companies are looking to expand platforms rapidly in sectors such as communications software.

“The M&A resurgence will be a global story, with optimism for European equities and a cyclical rebound in Japan driving deal activity in those regions,” says Sheets. “In North America, companies are looking to grow by acquiring smaller players in their markets.” He notes that activity also appears poised to accelerate in Australia, India, Korea and Japan, where the drive for corporate efficiencies is particularly strong.

Even so, risk factors remain. Recession fears, though diminished, still linger and regulatory challenges remain a concern. Analysts say these risks seem manageable given growing indications that central banks will successfully tame the last mile of inflation without triggering a recessions. That could create opportunities for investors as equity prices may not fully reflect the M&A resurgence.

Amerant Bancorp Announces Sale of Texas Operations

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Boreal Capital Management Roberto Vélez Miami

Amerant Bancorp announced that its wholly owned subsidiary, Amerant Bank, entered into a definitive purchase and assumption agreement under which MidFirst Bank, based in Oklahoma City, will acquire Amerant Bank’s banking operations and six branches in the Houston, Texas metropolitan area. The transaction includes approximately $576 million of deposits and $529 million in loans.

“As part of our strategic planning process, we reviewed our current business model of operating in both Florida and Texas. While we have appreciated the opportunity to serve our customers in Houston and see the potential for growth there, we recognized that additional investment would be needed to gain the scale necessary for our Houston operations to materially contribute to future results,” said Jerry Plush, Chairman and CEO.

Plush added: “With the tremendous growth opportunities we see here in Florida, we believe it is prudent to focus on the execution on our ongoing expansion plans in South Florida and Tampa, and continue to work toward achieving our goal of being the bank of choice in the markets we serve.”

The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close in the second half of 2024.

Stephens Inc. served as financial adviser and Squire Patton Boggs (US) LLP provided legal counsel to Amerant. Raymond James & Associates, Inc. served as financial adviser and Covington & Burling LLP provided legal counsel to MidFirst Bank.

Grupo Pacífico Joins UBS in New York from Morgan Stanley

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UBS International has announced the arrival of Grupo Pacífico at its New York offices.

The group, led by Fernando Massaro, includes Daniel Gonzalez Lucar, CFA, Richard Gonzalez, Michael Presta, and Luis Reyes, all from Morgan Stanley.

“Please join me, Michael Sarlanis and the entire New York International Leadership team in welcoming Fernando Massaro, Daniel Gonzalez Lucar, CFA, Richard Gonzalez, Michael Presta and Luis Reyes to UBS,” posted Fabian Ochsner, Market Director of Wealth Management Americas’ international office in New York, on LinkedIn.

Grupo Pacífico brings extensive experience and knowledge of the estate planning needs of non-resident U.S. investors, including technology entrepreneurs, business owners, executives, and their families, primarily focused on countries in Latin America and the United States, according to the company’s press release.

Fernando Massaro has been at Morgan Stanley since 2016 and holds an MBA from New York University.

On the other hand, Daniel Gonzalez Lucar is returning to UBS after a stint at Morgan Stanley from 2021 to 2024. The senior wealth advisor previously served at the Swiss bank between 2017 and 2021 and at J.P. Morgan from 2009 to 2016, according to his LinkedIn profile.

Richard Gonzalez, with about eight years of experience, worked at firms like Wells Fargo and Morgan Stanley. Additionally, Michael Presta spent the past four years at U.S. Bank as a Hedge Fund Operations Associate, at Glazer Capital, and Morgan Stanley.

Luis Reyes, for his part, joined Morgan Stanley in 2020 where he worked as a wealth management operation analyst and then client service associate.

Insigneo Announces Inauguration of Flagship Houston Office

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Inauguration of Insigneo's Houston office | LinkedIn account of María Elena Orantes, Consul General of Mexico.

Insigneo was opened its flagship office in Houston, Texas. This occasion marks a significant milestone for Insigneo as it materializes its presence in Texas, the firm said in a press release.

The inaugural event served as both the opening of Insigneo‘s new office and the 2024 Q2 Quarterly Call. This dual-purpose gathering brought together clients, leadership team, and peers, providing an opportunity to explore the new office environment and gain valuable insights directly from Insigneo’s CIO, Ahmed Riesgo.

The event, which commenced on April 10th, has the speeches from Raul Henriquez, Chairman and CEO of Insigneo Financial Group, and Maria Elena Orantes Lopez, Consul General of Mexico. 

This expansion underscores Insigneo‘s dedication to extending its services to the Mexican clientele and broadening its geographic footprint across Texas. Following the acquisition by PNC, Insigneo has strategically expanded its presence, with additional locations in San Antonio, El Paso, Laredo, and San Diego.

“This moment marks a significant milestone in our journey as an investment firm, expanding our reach and commitment to serving our clients with excellence and dedication.” said Maria G. Hernandez, Insigneo Market Head Texas/US SW. “As we embark on this new chapter, we are grateful for the opportunity to further strengthen our presence in this vibrant city and contribute to its thriving financial landscape. With the support of our talented team and the trust of our clients, we look forward to achieving even greater success together.”

This expansion underscores Insigneo’s commitment to international wealth management, driven by state-of-the-art technology and continuous innovation, the statement concludes.

 

BlackRock and Santander Partner on $600 Million Private Infrastructure Financing

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BlackRock and Santander announced that funds and accounts managed by BlackRock will provide financing on a $600 million diversified portfolio of infrastructure credit across communications, energy, power and transportation sectors via a structured transaction.  

BlackRock’s private debt franchise provides differentiated, flexible and scalable financing solutions to a broad network of global financial institutions and corporate relationships.

Through the breadth of BlackRock’s over $50 billion of infrastructure client AUM across equity, debt, and solutions, the firm has built one of the market’s leading infrastructure debt franchises, sourcing, structuring and managing client assets with the potential for income generation. 

“Our infrastructure debt franchise aims for win-win financing transactions that solve the needs of financial institutions and corporates, while generating returns for long-term investors. We have a longstanding relationship with Santander and look forward to providing flexible capital to support the growth of its global project finance franchise and all sectors of the burgeoning infrastructure economy,” said Gary Shedlin, Vice Chairman, BlackRock.

“We are pleased to announce this transaction, which underscores our commitment to private debt mobilization. By proactively rotating our assets, we not only strengthen our financial position but also generate capital for additional profitable growth. This approach is fundamental to our strategy of sustainable growth and value creation for our stakeholders,” commented José García Cantera, Group Chief Financial Officer at Banco Santander.