In 2019, nearly all asset classes delivered positive returns, some more attractive than others. For a variety of reasons, there is broad consensus that we are entering a period of lower returns in the public equity and fixed income markets. The global economy remains solid, interest rates remain low, inflation is modest, corporate earnings growth is still expected to be positive and while geopolitical risks remain, the market currently seems willing to shrug them off with relative ease. However, we are in the midst of the longest bull market in history and valuations are at the upper end of a palatable range with modest multiple expansion potential. Complacency (and the disregard of a historical market perspective) is a very real risk.
In a low or negative return environment, the investment risk-return trade-off can be meaningfully enhanced by alternative or private investments that exploit inefficiencies in the marketplace. These inefficiencies often relate to such factors as regulatory changes, (il)liquidity, and general misunderstandings of complex situations. In addition, investments that generate ongoing cash flow become more desirable in a low-return environment. On the subject of liquidity, attractive premiums exist across a variety of asset classes that can benefit high net worth (accredited investors and qualified purchasers) who do not need to access investment capital in the near future. Importantly, with an uncertain and potentially volatile market environment in the years ahead, the alternatives and private investments Gries Financial Partners is sourcing generally have low to zero correlation to the equity markets, adding further diversification benefits.
As part of a broader, customized investment plan, we have been systematically adding private alternatives to our clients’ portfolios where appropriate. Many of the opportunities provide equity-like (or better) returns with fixed income risk attributes. While these opportunities are not devoid of risk, they avoid the daily moves of the market. We use an outcome oriented approach that ranges from stable income (with yields that far exceed traditional core fixed income investments) that have lower risk, to higher capital appreciation opportunities with higher, but manageable, risk that provide an attractive hedge to more typical risk assets.
We are constantly sourcing idiosyncratic risk-return opportunities in this space given the narrow window of time to invest in them. There are a range of private credit investment opportunities as a result of regulatory changes in the financial services industry. The strategies we have identified most recently pay interest quarterly for an annualized yield between high single digits to low double digits, far exceeding typical fixed income investments with a comparable level of risk. Examples of where our focus has been in the credit space include senior secured lending to middle market companies, real estate debt (including a partnership with Freddie Mac), infrastructure collateral, and renewable power contracts.
Another current offering is focused on providing credit to impact-focused companies committed to sustainability. This strategy will specifically focus on the environmental opportunity e.g. agriculture & water, waste/recycling, smart cities, renewables and energy efficiency, to name a few. Our due diligence approach leaves us confident that the approach will enable clients to ‘do well by doing good’ with an investment that generates predictable cash flows and a foundation of downside mitigation.
We look forward to further discussing the opportunity set in privates and alternatives to see what might be appropriate for your portfolio. Please contact Lauren Rich Fine, GFP Partner, at 216-861-1148 or lrf@gries.com..
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