Sequels are never as good, and what’s occurring in Alternatives?
Blain’s Morning Porridge Dec 2 2024 – Sequels are never as good, and what’s occurring in Alternatives?
“Brothers, what we do in life… echoes in eternity.”
Sequels oft disappoint. Just how will the world change after Jan 20th 2025? Maybe not the way we expect. Meanwhile, the global Alternatives markets are becoming increasingly frothy as the big firms bid up for market expertise and scale. Does that suggest they might be missing something?
Has there ever been a decent sequel?
She-who-is-Mrs-Blain and I went to see Gladiator II on Sunday night. Oh dear. It’s a metaphor for our times – loud, busy, improbable, confused, historical bunkum, not particularly great CGI, pointless, and déjà vu all-over-again. (Denzel Washington should be under arrest for stealing the whole show.) I felt an insult to the immortal memory of Maximus Decimus Meridius, commander of the Armies of the North, General of the Felix Legions and loyal servant to the emperor, Marcus Aurelius. (Since Master and Commander, there has been an arching emptiness in historical drama..) In some ways….Gladiiator was nearly as bad as the recent Napoleon…. It was so disappointing, we’re off to see Conclave this week to clear the bad taste from our critical facilities.
From January 20th we get the next big sequel… Donald Trump Part 2!
How will it compare with the original? My own guess – which will surprise readers – is it won’t be half-as-bad as the glitterati fear – but it will accelerate global shifts, challenge and change. It promises to make the world… “interesting”.
Despite my own misgivings, where I think Trump will succeed is maintaining confidence in US stocks. He may well overturn a few modern shibboleths about how we think governments are supposed to function – that will be no bad thing. Some aggressive posturing on the World Stage may also have a more positive than expected effect. I’m unconvinced on how he will reconcile the billionaires expecting favours and tax cuts – his goal should be to restore the real incomes of US consumers; the only way MAGA is going to deliver its promise to make America feel prosperous again.
The unstoppable force of MAGA is likely to run four-square into the unmovable reality of the economy. Can they run together? Let’s assume Trump gets his deals – avoiding the need to impose inflationary tariffs, reaching new accommodations with China, Europe and its neighbours. Let’s assume he ratchets down tensions in the Middle East and forces a peace in Ukraine, leading to easier global energy conditions, and the possibility of further interest rate easing. These are possible, and could create stronger growth.
But the next four years will be dominated by the debate on debt and spending. That discussion won’t change the path of history – all empires rise, decline and fall. The trick behind longevity, it seems, is to remain fresh and resilient.
Where the world is likely set for change through the Trump era 2, is in the patterns of geopolitics. However much Trump flexes his muscles, the world knows America has a debt problem and is seeking de-escalation of costly foreign encumbrances. Many nations aren’t scared of Trump, but will see his brief 4 years as an opportunity to seize global position. As he tries to do deals with them, they could be gaming him and the USA.
That’s going to be fascinating over the next 4 years – who moves on what? Who will push, and how hard? Can the USA maintain its relative wealth, prosperity and power projection? Will its’ economy be able to support and afford the costs that come with being global hegemon?
At 340 million people, the US is a small country compared to the 4 bln plus inhabitants of the increasingly prosperous new Asian powerhouse economies. As they become wealthier, how will the nexus of global trade move? It would be a mistake just to focus on India or China, but to acknowledge the future could come from across the Global South and East.
Maybe it’s time to re-axis the globe sitting in the corner of the office?
That’s the big picture…. The small picture is equally interesting.
One of Blain’s market mantras states that: “When a bank or financial institution is building a prestige new office, or acquiring other banks at the market top – then sell.”
One of the big stories I never got round to writing about last week was Blackrock looking to buy HPS, the Alternatives Private Credit Manager, for $12 bln. It highlights the value that’s been generated in Alternative Assets since the market sprang into life following the Global Financial Crisis of 2008, and the retreat of banks from lending. It follows on from its purchases of infrastructure investor GIP, and private credit data provide Preqin in October.
These all make sense for Blackrock, supporting its irresistible rise towards becoming the investment manager of everything, raising its AUM to $12 trillion with over $500 bln of Alternatives under management – challenging the behemoths like Apollo – and giving it heft to launch new Alternative-Index ETFs, further confirming the markets maturity.
(Alternatives, a term to describe the Private Capital Markets (Private Equity, Private Credit and Real World Assets) – is my day job. Way back in 2009 I realised the future of capital markets lay in direct lending – from investor to borrower. Sadly, my efforts to build a firm focused on the direct-lending, special situations, private-credit space didn’t work out, and I sold out the nascent private credit unit we’d created over a decade ago. Way too early.
Earlier this year I launched my own Alternatives consultancy firm, Windshift Capital, to work independently with my close clients; finding co-investors in their deals, while sourcing assets for others. I’m currently raising deals in UK Commercial Property, Global Green Shipping, Sports and Media and MedTech.
The attraction to me is working on unique projects, each of which is challenging, but intrinsically interesting in its own right. I spent the first 24 years of my career pushing out multiple cookie-cutter Eurobonds for Sovereigns, SSAs and Banks. Today my schedule includes a seed-round funding, a debt-based fund, and financing the unfinanceable – CRE in the UK non-London market! Since launching Windshift I’ve never felt closer to broke, but I’m having fun.)
The Alternatives markets is maturing at frightening speed. Earlier this year I found myself squeezed out a deal – a large US investment bank had got wind of the project and inserted themselves into it, offering to slash their fees when I tried to retain my investors and remain involved. I backed out before I was slung out. Increasingly I’m told by some of the largest “investors” they have so many deals to look at, they’re only going to work with a limited number of the largest firms to source new deals – effectively squeezing out my more bespoke transactions. The 80-5 rule: 80% of business goes to the top 5% of the market, is establishing itself in Alternatives.
The potential scale of the Alternatives market is huge – but it’s not with challenge and danger. A key issue is liquidity – deals are bespoke, and therefore only trade on a “negotiated basis”. (To be fair, the vast bulk of listed corporate bond deals and investment funds post prices on stock exchanges that are entirely notional.) Should something occur that puts pressure on Alternative flows, the result could be a substantial impact – perhaps not dissimilar to the crisis triggered by gated CLOs in 2007, which metastised into the 2008 GFC. (Remember: the market has 28 doors market “Entry”, but only one saying “Exit”.)
I’m watching how the money flows – or rather isn’t – in some areas of private equity, and how these potentially impact liquidity flows in the private credit sector. I suppose my first recommendation for 2025’s market will be to keep a close eye on private capital market pressures.
Out of time, and back to the day job.
Bill Blain
Author of the Morning Porridge, founder of Wind Shift Capital