Axxes Capital Appoints Shane Cunningham to Lead U.S. Offshore and LATAM Distribution

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Photo courtesyShane Cunningham, Axxes Capital Managing Director and Head of U.S. Offshore & LATAM Distribution

Axxes Capital announced it has appointed former Franklin Templeton executive Shane Cunningham as Managing Director and Head of U.S. Offshore & LATAM Distribution.

In his new role, Cunningham will lead the firms’ offshore initiatives across all sales and marketing-related activities for the U.S. Offshore and Latin American intermediary markets and manage all third-party distributors for the region. 

Cunningham brings a wealth of experience to Axxes Capital, following a distinguished career at Franklin Templeton spanning more than 20 years and crossing three decades.

His tenure at Franklin Templeton culminated in his role as a Senior Vice President and Offshore National Sales Manager, where he successfully led the offshore sales team covering the NRC market, Canada, and the Caribbean Islands. He also served as President and CEO of Templeton Franklin Investment Services (TFIS) broker-dealer. 

Axxes Capital’s Founder, Chairman, and CEO, Joseph DaGrosa, Jr., welcomed Cunningham’s  appointment: “The addition of Shane rounds out our highly experienced sales and distribution  leadership team, allowing us to execute on our global growth strategy.”

Parker Roy, Global Head of Distribution at Axxes Capital, added “With Shane’s 20 plus years of experience in US Offshore and LATAM, we look forward to leveraging his insights to deliver attractive private  market solutions specific to this marketplace.” 

The 10 most common mistakes made when investing in an ETF

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The team at FlexFunds, a fund manager specialising in the creation and launch of customised investment vehicles (ETPs), discusses in the following article the advantages of ETFs for an investor, as well as the most common mistakes that are often made and how they can be avoided:

What are ETFs, and how do they work?

One of the possibilities for investing in the stock market when you have little experience and fundamental knowledge is to do so through passive management funds, since they are usually characterized by their greater diversification and lower risk, in addition to having lower commissions.

An ETF is a publicly traded investment vehicle comprising a basket of assets such as stocks, bonds, and commodities. Its operation is simple, and the most common replicate indices, such as the S&P 500 and NASDAQ-100, metals such as gold, or sets of shares, are grouped by sectors such as biotechnology, information technology, or geographic markets.

Advantages of ETFs: liquidity, transparency, and lower volatility

In addition to lower volatility, their main advantages include being listed on the stock exchange, which enables them to be traded like shares, improving their liquidity. Additionally, their commissions are low, as the vast majority of them are passive management products, and their great transparency, as the assets that make up the ETF portfolio and their net asset value are published daily. If, in addition, as numerous studies have shown, the managers of actively managed investment funds are not usually able to outperform the indexes they replicate, their high fees are unjustified, which improves the attractiveness of ETFs for investors.

Although ETFs are an excellent investment vehicle, their high demand among beginners and experienced investors has encouraged the design of different types, from traditional to synthetic, inverse to leveraged, and different variations that can be created in a portfolio. But sometimes, the product is not known, and mistakes and misinterpretations can be made, leading to unpleasant surprises. For this reason, FlexFunds has a specialized team that can guide you through the process of structuring investment vehicles similar to ETFs, allowing you to expand access to international investors for any investment strategy you design.

The 10 most common mistakes when investing in ETFs

Among the most common mistakes, made by those who invest in ETFs, are those that are due to the lack of attention to certain key factors such as:

  1. ETF Investment Strategy

Not analyzing the investment strategy of the ETF or its composition is one of the most common mistakes since it is essential to understand what underlying the ETF follows to see if it adapts to the investor’s objectives. On the other hand, knowing what you are investing in and understanding it is decisive. It must be analyzed to what extent the return of the ETF is close to that of the index that it replicates and how consistent the monitoring is.

  1. Buyer Investment Plan

Not having a long-term investment plan, which allows the roadmap and the objectives to be pursued, as well as the risks to be assumed to be designed, can lead to making decisions based on emotions, impulsive, and not very rational. Having a roadmap and setting goals for the future, along with a contingency plan, can be a good idea to avoid disappointment.

  1. Monitor the portfolio and its evolution

Not monitoring the portfolio regularly and thinking everything will be fine is a bad decision. A certain majority of listed ETFs have a high probability of underperforming and disappearing. Portfolio monitoring is key to avoiding upsets and making the necessary adjustments.

  1. Associated expenses and commissions

Buying and selling too frequently can lead to higher-than-expected expenses, eroding profitability. Readjusting an investor’s ETF portfolio means facing sales commissions, purchase commissions for the new ETF, and taxing capital gains. The associated expenses erode the returns obtained and the gap compared to those expected.

  1. Liquidity

Not analyzing the liquidity of the ETF can generate losses or problems when it comes to recovering the money in the sale. Suppose the values that make up the index that replicates the ETF are not negotiable or are not very liquid. In that case, the ETF can be listed at a premium, in the purchase, or at a discount in the sale; the range of purchase and sale prices will be wider. It may be listed at a premium when the price is higher than the net asset value or at a discount in sales operations when the price is below said value. In these cases, buying or selling orders should be limited instead of at market prices.

  1. Structure and internal functioning

ETFs have a structure and operation that is important to know before investing because it can impact your level of risk, commissions, and losses. Assessing it in depth allows you to understand how it follows the index you want to replicate and what assets can form it, which affects risk and cost. It can be a full replica ETF (investing in the same assets as the index) or synthetic, supported by futures and derivatives issued by a third party, increasing risk exposure for both the underlying and the third party.

  1. Profitability

Assuming that the past performance of the ETF is going to be transferred to the future tends to occur in less seasoned investors since, many times, they are attracted by the announced historical performance without taking into account the period of time where it has been reached and if it has been done continuously or punctually. The consistency of this aspect in the long term should be one of the criteria to consider since if the announced return is similar to the average of the last five years, the probability of being faced with a good choice will increase. However, this does not guarantee that any change in the environment won’t affect negatively.

  1. Changes in volatility

Many times, an ETF is bought without considering the factors that drive its greater volatility, which may be derived from the volatility of the underlying or the lack of liquidity of the ETF itself. In both cases, the consequence is a widening of the price range, which can be detrimental. Another similar situation is their operation when the price variation is greater, such as during the first and last minutes of the opening and closing of the market where they are listed, respectively. Thus, avoiding trading in these time intervals helps to deal with less volatility and, therefore, less risk.

  1. The ETF Market

Care must be taken with the geographic exposure of the ETF since it can focus on a specific market that may not adapt to the investor’s interests or not mitigate the risk due to overexposure to a certain market. The net asset value of an ETF is calculated at the close of the local market, which can cause problems if you wish to operate when the associated underlying market has different hours than the market on which the ETF is listed. The latter is listed at a value other than the net asset value, therefore, increasing the premium or discount, due to the existing divergence between the prices. Therefore, it is advisable to diversify geographically and by asset class.

  1. Taxation

As with investing in other financial products, you must always take into account their taxation and the tax obligations that it entails since failure to comply with some of them can bring significant sanctions that dilute the final profitability of the ETF. In some countries, unlike index funds, transfers from one ETF to another are not exempt from tax. On the other hand, if the broker has the depository abroad, likely, it will not notify the treasury of the country where the holder resides, neither the yields nor the capital gains generated and, therefore, it is the investor himself who must make the corresponding informative declarations, being able to carry a sanction if it does not do so.

Although many other risks are associated with ETF trading, those detailed above are often the most common. Therefore, great attention should be paid to all of them, especially by those investors who could be blinded by the benefits of this product and make inappropriate decisions for their profile.

For more information on the setup and issuance of investment vehicles similar to ETFs, please get in touch with our specialists at info@flexfunds.com.

The Market Feels Like it is Waiting for an Inevitable Recession

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U.S. equities were mixed during the month of May. While mega-cap tech stocks benefited from a wave of optimism fueled by advancements in artificial intelligence (AI), the current Federal debt crisis loomed large, dominating the headlines and affecting market sentiment. The first quarter earnings season concluded and while the “better than feared” label can describe the past few earnings seasons quite well, the general increase to 2023 guidance is an encouraging sign for companies overall. After tense negotiations between the White House and Republican House Speaker Kevin McCarthy, the House of Representatives passed legislation to suspend the debt ceiling and set federal spending limits in an effort to avoid a potential economic catastrophe. The bill was sent to the Senate, which finally passed it on June 1st, so the nation’s new debt limit has been extended through January 1, 2025.

On May 3, the Federal Reserve announced another 25bps rate hike at the end of its two-day policy meeting, bringing the targeted federal funds rate to 5.00-5.25%. During his press conference, Fed Chair Jerome Powell noted that inflation has moderated somewhat since the middle of last year and that the process of getting inflation back down to 2% has a long way to go.

Mega-cap tech stocks have been the prime beneficiaries of the recent positive momentum regarding artificial intelligence, with NVIDIA (NVDA), Microsoft (MSFT) and Amazon (AMZN) as the top three contributors to the Russell 1000’s performance for the month of May.

May was a challenging month for merger arbitrage investing as First Horizon (FHN) and Toronto-Dominion Bank (TD) walked away from their deal, and the U.S. FTC sued to block Amgen’s (AMGN) $27 billion acquisition of Horizon Therapeutics (HZNP). Spreads on other deals widened in sympathy, however, we view this as an opportunity to add to positions at wider spreads despite the setbacks. The market has appropriately begun pricing in more concerns around regulatory scrutiny and risk, which has resulted in wider spreads that have negatively impacted performance. New deal activity is creating opportunities for investors to deploy capital in deals where we believe arbitrageurs can be appropriately compensated, and believe that over time will continue to generate absolute returns.

The convertible market was essentially flat in May, as fears of a recession and the US debt ceiling impasse weighed on the market while mixed economic data and company guidance gave some optimistic investors hope. Equity market breadth is quite low with only a few names driving performance. On balance the market feels like it is waiting for an inevitable recession. We recognize the importance that these macro factors have on a convertible portfolio, but believe the market currently offers an opportunity for favourable risk adjusted performance relative to underlying equities in this environment.

The unique opportunity in convertibles currently comes from fixed income equivalent issues that are trading at attractive yields to maturity in excess of our long term expected return. These are often convertibles within a few years of maturity that we expect to accrete to par over that time. While this is not the profile we have focused on historically, we find it to be attractive for the fund in this environment. These convertibles should have limited downside from here and we expect them to outperform equities in a flat, down, or volatile market.

 

 

 

Fixed-income in the Spotlight?

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In this new global context: rising interest rates and inflationary pressures triggered mainly by the expansionary monetary policies applied by central banks during the pandemic, together with a new geopolitical reality, investors’ and portfolio managers’ appetite for fixed income has been reawakened. Relegated in recent years due to low-interest rates, this asset class is now a tool for protecting purchasing power in the face of inflation.

The recent bankruptcy of Silicon Valley Bank (SVB) in March reverberated across markets, raising concerns about the impact on the financial sector in general and global monetary policy, reinforcing investment in fixed-income instruments as an exciting option for investors.

The US financial multinational Morgan Stanley is betting on bonds. It ranks them as the potential big winners of 2023. “This will be particularly true for high-quality bonds, which have historically performed well after the Federal Reserve (Fed) stops raising interest rates, even when a recession follows,” explained Andrew Sheets, chief strategist at Morgan Stanley Research.

For the first time since 2007, nearly 90% of the bond market yields above 4%. As BlackRock explains, the rate hike has brought the highest returns the US bond market has seen in over a decade.

The return offered by some fixed-income instruments in certain Latin American countries provides a unique opportunity to attract local or international investors through securitization tools and the creation of offshore investment vehicles or ETPs (Exchange-Traded Products), which allow increasing their distribution exponentially.

At FlexFunds, we can confirm that the creation of ETPs with this strategy has increased during the last year. Focusing mainly on Latin American investors, these instruments seek to offer:

1. Stability: Fixed-income investments are usually considered stable and low-risk compared to existing portfolio options. The fixed income is an instrument that offers a fixed interest rate paid periodically, which provides a constant and recurring source of income.

2. Income predictability: Since fixed-income investments offer interest at a predefined rate, it is feasible to project the amount and timing of the investor’s income. This is especially useful for those seeking steady sources of income to plan their budget.

3. Inflation protection: this is a key benefit of fixed-income bonds. Typically, these bonds come with an interest rate higher than the inflation rate, which means that the investor is protected against the erosion of the purchasing power of their money.

4. Diversification: This asset class can be a valuable tool for diversifying an investment portfolio and reducing downside risk. Since the return on a fixed income is not related directly to the performance of stock markets, it can be an effective way to have a balanced and diversified portfolio.

In the current environment, to take advantage of the opportunity that fixed income is bringing to the table, and after evaluating various alternatives in the market, many asset managers have found FlexFunds‘ FlexPortfolio an efficient solution for the management and distribution of fixed income strategies because it allows them:

1. Flexibility: FlexPortfolio is an instrument tailored to the manager’s needs. The manager can choose and trade the assets they wish to invest and adjust their allocation according to the proposed strategy’s conditions.

2. Accessibility: Managers can expand their access to investors globally. The FlexPortfolio can be purchased from existing brokerage accounts simply as it has an ISIN number, with settlement through Euroclear/Clearstream.

3. Lower costs: The cost of setting up a FlexPortfolio can be half that of other alternatives in the market. Managers benefit from economies of scale and structural and back-office cost savings.

4. Transparency: FlexPortfolios offer complete transparency to the investor compared to other investment vehicles, as the underlying assets and their returns are always visible.

5. Versatility: One of the main advantages of the FlexPortfolio is that it allows a tailor-made combination of assets to be designed and executed in a single investment. A FlexPortfolio can include various assets: stocks, bonds, commodities, and currencies.

6. Liquidity: FlexPortfolios offer high liquidity because investors can subscribe and redeem their holdings in the portfolio more quickly, compared to buying and selling the underlying assets individually. The liquidity of this investment vehicle is directly proportional to the liquidity of its underlying assets.

In conclusion, in the current economic environment, fixed income can provide stability and security to investors due to its ability to offer fixed and relatively predictable income. However, as with any investment, it is essential to evaluate it carefully and have the right advice to weigh its pros and cons before making an investment decision. When establishing an investment vehicle that allows you to design and distribute a fixed-income strategy, FlexFunds‘ FlexPortfolio may be an alternative.

Pablo Gegalian serves as Regional Director of Southern Cone for FlexFunds .

As Value Oriented Stock Pickers, We Believe Now Is Our Time To Shine

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U.S. stocks were mostly higher to finish March despite a banking crisis that caused the second & third-largest bank failures in U.S. history. The market’s mood and outlook shifted as investors’ expectations about the Fed’s policy path drove a significant rotation into growth names, with big tech, semis and software among the notable beneficiaries.

The month started with thoughts of a higher terminal rate in response to stronger-than-expected economic data, supported by comments from Fed Chair Jerome Powell’s congressional testimony about accelerating the pace of rate hikes if necessary. However, investors quickly focused their attention on bank deposit stress and losses on held-to-maturity (HTM) assets, as an accelerating bank run brought about the rapid regulatory shutdown of Silicon Valley Bank (SVB) and Signature Bank (SBNY). Both banks had an unusually high ratio of uninsured deposits that spooked customers into seeking insurance.

On March 22, the Federal Reserve announced another 25bps rate hike at the end of its two-day policy meeting, bringing the targeted federal funds rate to 4.75-5.00%. During his press conference, Fed Chair Jerome Powell noted that the central bank may be nearing the end of its rate-hiking cycle but he qualified that the inflation fight is not over. Most investors still expect at least one more rate hike this year. The next FOMC meeting is May 2-3.

Growth stocks have substantially outperformed value stocks to start 2023. We believe this creates an opportunity for Value Investors. The market is pricing a cut in interest rates sooner than Powell’s comments imply. The current environment of rising interest rates will continue to put a premium on near term cash flows, which should benefit our portfolio of companies.

As value oriented stock pickers, we believe now is our time to shine. We continue to seek franchise businesses with barriers to entry, pricing power, recurring revenue and large free cash flow generation that are trading below Private Market Value. The environment is still ripe for value surfacing catalysts: while M&A activity was down in 2022, it is still robust compared to most historical years. Companies have many opportunities to pursue financial engineering, not limited to M&A. We believe our portfolio of holdings is well positioned to thrive in this environment and their value will be recognized by the market in due time.

Global M&A volume totalled $580 billion in the first quarter, a 23% sequential decline from the fourth quarter of 2022 and a decrease of 44% compared to the first quarter of 2022. Healthcare was the most active sector for M&A, totalling $97 billion of dealmaking, an increase of 60% compared to 2022, and it accounted for 17% of all deals. Technology and Industrials were the next most active sectors, accounting for 17% and 13%, respectively.

Private Equity activity remained robust, accounting for more than 25% of deal volume in the first quarter. Despite the global slowdown in deals, public company M&A in the U.S. remained stable sequentially.  Notable deals that closed in March include: Atlas Air Worldwide (AAWW-NASDAQ) which was acquired by Apollo Global for $5 billion, Coupa Software (COUP-NASDAQ) which was acquired by Thoma Bravo for $6 billion, Vivint Smart Home (VVNT-NYSE) which was acquired by NRG Energy for $5 billion, Altra Industrial Motion Corp. (AIMC-NASDAQ) which was acquired by Regal Rexnord for $5 billion,  and Duck Creek Technologies (DCT-NASDAQ) which was acquired by Vista Equity Partners for $2.5 billion, among others.

Despite the noted volatility this month, the convertible market finished slightly higher with strong performance following the CS acquisition. Convertible performance is more a function of underlying equity movements than interest rates, but both factors had a positive contribution over the last few weeks. Issuance has continued to trickle in and we have added some recent new issues to the portfolio. Generally, these have helped increase current yield while diversifying the portfolio with balanced convertibles.

We continue to remain optimistic for the possibilities of convertibles as an asset class this year, as they allow investors to position their portfolio cautiously while allowing them to participate when the market moves higher. There are many convertibles with a yield to maturity in excess of the long-term expected return of the convertible market despite solid and improving fundamentals. As we have noted previously, we have managed convertibles through multiple market downturns and have seen how they can be a great tool for companies to raise capital despite uncertainty while offering investors a risk-adjusted way to participate in a recovery.

 

Opinion article by Michael Gabelli,  Managing Director at Gabelli & Partners. 

Bolton Global Capital and iCapital® Partner to Enhance Access to Private Markets for LATAM and US Clients

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Photo courtesyFrom left yo right: Steve Preskenis, Bolton’s President y Marco Bizzozero, Head of International at iCapital

Bolton Global Capital, a leading independent wealth management firm, and iCapital, the global fintech platform driving access to alternative investments for the wealth management industry, today announced a partnership to provide Bolton’s extensive network of financial advisors with a range of private market offerings and resources.  

Bolton will launch a customized marketplace powered by iCapital’s technology and solutions to deliver private equity, private debt, and real estate investment offerings to advisors across Latin America as well as US advisers servicing US resident and non-resident LATAM clients.

Unicorn Strategic Partners, a leading distribution partner to asset managers and a strategic partner to iCapital in the LATAM region, will support Bolton in their distribution efforts and will educate Bolton’s network of advisors on the asset class and funds available on Bolton’s marketplace. 

“Financial advisors are increasingly looking for a broader array of investment options to meet clients’ growing appetite for private market offerings,” said Steve Preskenis, Bolton’s President. “Our partnership with iCapital provides advisors with streamlined access to a selective range of alternative investment solutions, while empowering them with the resources to make informed decisions about how this asset class can potentially benefit client portfolios.”  

Bolton’s digital marketplace will automate the subscription process to improve the efficiency and client experience of alternative investing.

“There is increasing unmet demand from wealth managers and their clients in the region for private markets as value creation is increasingly taking place outside public markets while companies are still private,” said Marco Bizzozero, Head of International at iCapital. “We are delighted to further strengthen our presence domestically and in Latin America and to support the Bolton team in our shared mission to provide institutional-quality investment offerings to the US and LATAM wealth management communities.”

In addition, iCapital will offer research, due diligence, education, and investment product training to Bolton’s advisor network of more than 50 affiliated offices.

“A lack of education has prevented many advisors from using more alternative investments,” said Wes Sturdevant, Head of Client Solutions LATAM. “This partnership is emblematic of iCapital’s key value proposition because it helps advisors and their clients understand private market investments through education to produce successful outcomes.”

Santander, named Best Private Bank in Latin America by Euromoney

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Photo courtesySantander Private Banking team at the Euromoney Private Banking Awards ceremony

Santander Private Banking has been named the Best Private Bank in Latin America by Euromoney. Santander leads in several award categories, which are some of the most prestigious accolades in banking. The financial magazine also named Santander as Latin America’s Best Bank for Family Office Services and for Wealth Transfer/Succession Planning.

Santander has also been recognised for its teams’ work in several geographies including the awards of Best International Private Bank in Mexico, Argentina, Brazil, Peru, Uruguay, Poland, and Portugal; Best Private Bank for Ultra-High-Net-Worth Individuals in Spain and Colombia; Best Private Bank for Wealth Transfer/Succession Planning in Brazil; Best Private Bank for ESG in Chile; and Best Digital Private Bank in Mexico

“The breadth and distribution of these awards across Latin America & Europe demonstrates the value of the Santander Private Banking network combined with our local market expertise”, said the company in a press release.

José Carlos González: “The flexibility of FlexFunds’ solutions is superior to that offered by an AMC”

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Photo courtesyJosé Carlos González, Founder & CEO of FlexFunds

José Carlos González, Founder & CEO of FlexFunds, explains in an interview with Funds Society how FlexPortfolio, an ETP that offers access to the performance of an underlying portfolio managed by an investment advisor, works and what its advantages are over actively managed certificates (AMCs). González, co-founder and former head of Global X, a New York-based ETF provider, also outlines the client profile of this asset class and discusses which ones he considers most attractive in the current market environment.

What is the FlexPortfolio?

The FlexPortfolio is an ETP that offers access to the performance of an underlying portfolio managed by an investment advisor or portfolio manager, where the assets are liquid or listed. To make an analogy, the FlexPortfolio is similar to an ETF in the United States or an investment fund in Europe.

How do you coordinate creating and administering individualized ETPs while keeping management costs contained?

The process of setting up an ETP is a complex one, involving several service providers with different roles, but FlexFunds makes it simple for its clients. Each firm is involved in a specific area of ETP or FlexPortfolio creation and administration, and FlexFunds coordinates all of these service providers. Some of the most prominent are BNYM as issuing and paying agent, APEX, Intertrust as a trustee, and Interactive Brokers as one of the main custodians. We work with world-class service providers.

One of FlexFunds‘ main achievements over the years has been to “industrialize” this ETP issuance process to keep costs competitive for our clients through investments in state-of-the-art technology platforms and a great team of people. This makes the process efficient: we can issue a FlexPortfolio in half the time and at less than half the cost of any alternative investment vehicle.

What are the advantages of the FlexPortfolio over actively managed certificates (AMCs)? 

The FlexPortfolio has aspects in common with actively managed certificates (AMCs). For example, both are funds that allow third-party management. One of the main differences is that AMCs are usually structured and issued by banks, mainly Swiss or European. In contrast, in the case of FlexFunds, the issuer is an Irish SPV (Special Purpose Vehicle), so the credit risk is more easily avoidable. This is especially relevant at certain times, such as the current one, with the recent episode with Credit Suisse.

Could you explain what your greater flexibility and the absence of restrictions on the rebalancing of the underlying account vs. AMCs consist of?

The flexibility of FlexFunds solutions is superior to that offered by an AMC. Let’s take as an example the FlexPortfolio with custody at Interactive Brokers. The portfolio manager has direct access to the trading account of this custodian. They control subscriptions and redemptions of the assets they deem appropriate, according to the investment strategy specified in the prospectus. The variety of products that can be securitized and operated is huge: stocks, bonds of many markets, indexes, futures, options, etc…

Regarding trading hours, our products can be traded practically 24 hours a day without being subject to European trading desk hours.

What does it mean that the FlexPortfolio is “Euroclearable”?

This is one of the fundamental features of the product, and it is also crucial. The fact that our solutions are “Euroclearable” means that financial intermediaries and broker-dealers can buy and sell the product on behalf of their clients. This is essential for investment advisors and clients who want consolidated statements of their positions.

Can I trade the portfolio 24 hours a day?

Yes, as long as the underlying market is open. The investment advisor is free to decide what to buy and what to sell.

Does the presence of leverage in the strategies increase risk?

Many of the strategies that our clients choose when launching ETPs are composed of long/short. In other words, the portfolio manager can be “long” in equities and take short positions. The purpose of many long/short strategies is to reduce volatility.

Our solutions allow our clients access to portfolio margin, providing leverage if the client desires.

For what type of client does FlexFunds recommend this type of product?

Our solutions and ETPs benefit investment advisors with a captive client base who want to repackage their own investment strategy for distribution. One of the advantages offered by the product is that it allows cost reduction through centralized account management and administration instead of separate accounts for each client.

It is also useful when the advisor wants to access private banking and broker-dealers. Our clients can do this through Euroclear and Clearstream.

Is there a particular underlying asset type (or types) that, in the current environment of volatility and uncertainty, is attractive for securitization? Why?

At FlexFunds, we have always had a lot of demand for structuring ETPs from real estate managers. Nowadays, real estate can be interesting because of its inflation hedging capacity, and by definition, it is a product with less volatility than equity markets. At FlexFunds, we are experiencing a lot of demand for repackaging real estate funds, REITs, etc…

José Carlos González’s LinkedIn profile.

Global private equity (CERPIs) beats local investments (CKDs) in returns

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Elaron

The international investments of the CERPIS in Private Equity, have improved the returns on this asset class by a ratio of three to one.  The 128 outstanding CKDs (including those that have been amortized) have a net IRR weighted by 2.7% net in Mexican pesos (MXN) as of December 31, 2022, while the IRR of CERPIs is 7.4%.  IRRs are in MXN and not US, because institutional investors who invest in CKDs and CERPIs have their portfolios evaluated in MXN. 

The CKDs are the vehicles registered in the Mexican Stock Exchange (BMV and BIVA) that allow institutional investors to invest in local private equity and the CERPIs are the ones that can invest globally. 

The weighted IRR of both is 3.8%.  There would be several considerations:

  • The CKDs (128) were born in 2009 (almost 14 years ago) and have called 75% of the capital to date.
  • The CERPIs (141) although they were born in 2016 it was from 2018 that they began to invest globally, which means that they are almost 5 years old and have called 32%.

 

With less time and capital called, CERPIs have improved profitability in this asset class. If the AFOREs had only invested in CKDs today the return would be 2.7% and if they had only invested in CERPIs it would be 7.4% net in MXN.  This data is weighted for the 128 CKDs and 141 CERPIs respectively.  When graphing the IRR of the CKDs, its evolution year after year has been gradual, while the behavior of the IRR of the CERPIs shows a steeper slope.

 

The great diversity of options available when investing in global private equity has allowed the AFOREs to select those global funds that have practically no “j curve”. The “j curve” is the investment period of private equity funds in which investments in this asset class show an initial loss (investment period) followed by a dramatic rise. On a chart, this pattern of activity would follow the shape of a “capital J”.

When reviewing the yields per vintage, it is observed that in four years (2009-2010-2014 and 2019)  CKDs had yields greater than 5%, the rest being lower; while for CERPIs there are three years with yields above 8% and only one year with negative IRR corresponding to the issuance of the first CERPI (j curve effect).

When presenting the net IRR in MXN for CKDs in a sectoral manner as of December 31, 2022, the Credit (17/128 CKDs) and Infrastructure (17/128) sectors are the ones that have offered the best IRRs to date. It is important to recognize a “J curve” with less slope for the most unfavorable sectors.  These results change over time by capital calls and market valuation, among other variables.

In the case of CERPIs, the Fund of Funds/Feeder sector (130/141), which concentrates 87% of the market value, has an IRR of 7.0% that weights the market value of the Credit sector (1/141), as well as the other sectors that allow the net IRR weighted in MXN to be raised to 7.4%. 

 

If the 8% rate (preferential rate) is considered as a threshold to distinguish the most profitable funds; with IRR greater than 8% net in MXN there are 37 of 128 CKDs (29%); if those with IRRs greater than 10% are considered, there are 22 CKDs and if those with IRRs greater than 15% net are considered, there are 4 CKDs. Of a total of 64 CKD administrators (GPs) only 19 have IRR greater than 10%, so there are few administrators who present competitive IRR to date.

In the case of CERPIs, 36 of 141 CERPIs (26%) have IRR greater than 8% as of December 31; with IRR greater than 10% there are 30 and with IRR greater than 15% there are 25 CERPIs with data as of December 31.  Being an important number of CERPIs Funds of Funds that act as Feeders, if in each CERPI there are two global funds (conservative number) in total there are more than 280 funds, although many of them are the same in the different CERPIs. Diversification is proving important in CERPIs.

Where is the market going?

Historical IRR makes CERPIs look like an alternative that has helped institutional investors to diversify and improve the returns in this asset class.

The competition that has occurred between local and foreign GPs has allowed the institutional investor to compare between the options in the market, selecting those sectors and managers with proven experience and attractive results.

Of course, these comparisons may change as the investment cycle of CKDs and CERPIs concludes, however, today the numbers are skewed in favor of CERPIs.

Column by Arturo Hanono

ZEDRA Enters the US Private Wealth Market by Opening a New Office in South Dakota

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ZEDRA announces the opening of a new office in South Dakota, expanding the trust services provided to both international and domestic US clients.

ZEDRA’s new office will strengthen the firm’s presence in the Americas and promote its proven active wealth expertise in the US private wealth space. The new office, led by its Managing Director, Jon Olson, will offer a full set of trust administration services tailored to international clients, spanning from high-net-worth-individuals, families, entrepreneurs as well as their relevant advisors.

The office opening follows a number of recent acquisitions in the Americas, including US and Curaçao-based, Atlas Fund Services, now rebranded to ZEDRA Funds, which provides long-term, tailored, and reliable alternative investment fund services to US-based investment managers. ZEDRA also acquired US Global Expansion Specialist, Axelia Partners, in 2022, now rebranded to ZEDRA Global Expansion Services US, which facilitates the expansion in the US of predominantly European headquartered businesses and entrepreneurs.

Commenting on the office opening, Ivo Hemelraad, CEO at ZEDRA, said: “We have been working with private clients for decades, providing that all-important strategic oversight of a nuanced big-picture. “The expansion of ZEDRA’s trust services in the US supports our reputation as an international leader for trust services and is a natural next step in bolstering the firm’s global offering for private clients, cementing the business opportunities of our Miami office across North and Latin America.”

Jon Olson, Managing Director of ZEDRA in South Dakota, said: “We are excited about the endless possibilities that the new office represents, both for the firm and our clients.

“As ZEDRA has established itself as a strong and trusted partner in Europe and Asia in the trust services business, we look forward to repeating our successes in the Americas by offering all the advantages of South Dakota trust laws to our clients.”