The record of Operational & Investment Due Diligence within private equity, real estate, hedge funds and traditional investing has been dismal through the ages. An after the fact event, it is usually about shutting the barn after the horse has bolted. The function has done very little to insulate investor portfolios from losses. The activity has devolved to fiduciary CYA, designed to protect the wealth management firm, pension or sovereign fund, consultant or product purveyor from liability. In going through a roster of standardized questions, to which are offered standardized answers, it is about dotting the ‘i’ and crossing the ‘t’. One now sees new digital platforms that collate, collect, structure, and offer fund manager data for easy access to prospective investors.
The Capital Allocator is in the business of entering into partnerships with fund sponsors to potentially generate significant returns, mainly through long-term capital appreciation, by making, holding and disposing of privately negotiated equity and related investments.
Such investments are usually made as a passive investor in vehicles directed by a third party fund sponsor; as a result, the investor has only indirect influence over-achieving ultimate investment objectives. We believe that a methodical approach to selecting sponsors—which combines scientific rigor with seasoned subjective judgment— may contribute to creating strong results in a variety of economic environments. We present here a ‘best practices’ framework for selecting financial sponsors. We draw attention to important issues, metrics and considerations deemed worthy of exploration.
What follows does not represent an exhaustive list, of course. Each investment and operational diligence mission inevitably take one down paths that are not common to other missions. One must be prepared for this—and even seek it and relish it. For, it is forays beyond the common and readily available, that enable real insight into the people with whom one entrusts with one’s capital.
What is missing is the capital allocator’s nuanced perspective. We suggest one here.
Download PDF here:
Download white paper authored by Sameer Jain to explain the characteristics of distressed debt.
investing in distressed debt
#ActiveAllocator Research – Distressed Debt. WSJ today, May 19 page B2, reports that 59 distressed debt funds are in the process of raising $67 billion. I have long advocated that opportunistic and distressed debt may have a useful role in investor portfolios. I had authored one of the early white papers explaining the characteristics of distressed debt which whilst dated in the data is still very useful.
Watch video: The updated 2020 opportunity
I am of the view that LPs prevail on their GPs to stop throwing good money after bad in their risky early stage series A/B investments, especially within FinTech. They now need start writing down investments, close down follow-on funding and institute layoffs and firm closures. The U.S. economy is expected to languish over the next two years as policy stabilization efforts are unlikely to provide a boost to financial conditions in the short term. My recession scenarios capture the potential for more crippling damage to financial inter-mediation and slower economic growth beyond the cyclical horizon. Things are going to be rough and risky early stage FinTech firms will be worst affected.
The biggest issue is GPs will disregard this advice for they have a vested interest in keeping investments going and perpetuating management fees. I had written a proprietary game ( game theory) to arrive at Nash Equilibrium in the LP-GP relationship some years ago. Some of my findings are expressed in a dated research piece, that I think is very relevant in 2020.
key contractual considerations in private equity fund placements
Contact me for a Pdf / Conversation
ActiveAllocator converges competencies in asset and wealth management, investment banking and computer science in an example. We in minutes analyze, given what you own if Master Limited Partnerships ( MLP) may be accretive or detract from your portfolio. We explain the general idea behind investing in MLPs and provide a supportive deck which explains the anatomy of a MLP.
MLP anatomy deck PDF: email me
Allocating to MLPs video:
LP-GP negotiations : the more things change the more they have remained the same in private equity land over the last two decades. I had analyzed contract negotiation dynamics during an earlier phase of my career on Wall Street – attached .. (It also lends itself to be formulated as a gigantic Game Theory problem, I imagine )
key contractual considerations in private equity fund placements.pdf
ActiveAllocator analyzes portfolios and tells you exactly how much, if at all, you ought to allocate to the Private Debt asset class (inter alia). I had analyzed the characteristics of a variant, Distressed Debt, early on in my career. Attached is an excerpt reproduced by CAIA in their alternative investments journal from my more comprehensive white paper – hopefully active investors find it useful….
ActiveAllocator analyzes portfolios and tells you exactly how much, if at all, you ought to allocate to the Private Equity asset class (inter alia). I had analyzed its characteristics early on in my career. Attached is how I explained it then and reproduced in many books now. While the data here is now outdated, active investors tell me they still find it very useful….as I hope you do too.
Private Equity Compendium
ActiveAllocator analyzes portfolios and tells you exactly how much, if at all, you ought to allocate to the Private Debt asset class (inter alia). I had analyzed the characteristics of a variant, Mezzanine Debt, early on in my career. Attached is how I explained it then and reproduced in many books now. While the data here is now outdated, active investors tell me they still find it very useful….as I hope you do too.
Investing in Mezzanine Debt
ActiveAllocator, is pleased to share with you our latest research piece ” M&A and Activist Hedge Funds”. Given our unique vantage point we see trades, that such firms do. These secretive funds have long been subject of folklore . Preserving confidentiality , we introduce here the ‘anatomy’ of how such deals get played out. In future we also hope to show you 30-40 case studies
email me for pdf
ActiveAllocator is pleased to share with you our latest research piece ” Intra hedge fund asset allocation framework”. We explain how one may intelligently choose from +20 hedge fund sub-strategies, sift jargon, and combine in the right amounts to meet specific asset allocation objectives, through correct portfolio construction
email me for pdf
ActiveAllocator allocates to major hedge fund strategies and their sub-types including Merger Arbitrage. Given the wide dispersion in returns in M&A funds we believe that hedging the time period deal risk is integral to both profitable trade as well as helpful for diligence. We present the anatomy of the M&A trade by drawing attention to the ‘Collar’ and reconstructing it from first principles.
email me for pdf
ActiveAllocator research presents allocating assets to and within Alternative Investments in this primer – video introduction and PDF download
email me for pdf
ActiveAllocator research presents its views on tactical opportunities within Alternative Investments during economic downturns
email me for pdf
The market for #Art remains buoyant in 2019. However, we at #ActiveAllocator are unconvinced that Art can be classified as an ‘ alternative asset’ class to be rigorously included within investment portfolios.
ActiveAllocator approach to modeling Private Equity investment in Emerging Markets in portfolios – (1) use developed markets as starting point (2) scale up expected risk, return by EM public equities premium (3) add currency +- appreciation over holding period
Download our research piece ” Investor Liquidity in Hedge Funds — Empirical Analysis of Costs and Benefits ” from our website
Non-Traded REITs have been in the news recently. They typically invest in sector specific real estate programs, targeting stable, fully occupied properties subject to long-term leases to strong credit tenants. They are thus able to generate immediate, durable, rent-driven cash flows from the inception of the investment as capital is deployed without a cash drag. Much like traditional private equity core real estate investing, they aggregate property through acquisitions and build diversified portfolios by tenant, geography, industry and lease duration. They return value from these aggregated portfolios via asset sales, public listings or mergers, usually over a five- to seven-year timeframe.
My take in a past podcast interview: 1:19 The case; 6 Market size;7:30 Investor type;9:55 Illiquidity premia; 11:52 Regulation; 13 Returns; 14:45 Capital raising; 16 Growth; 18 Transparency and industry evolution
Sameer Jain discusses the advantages of non-traded REITs as compared with publicly traded REITs. During this interview he discusses the size and historic returns of the non-traded REIT industry, as well as its regulatory environment, which types of investors they are best suited to, and what investors get in return for the illiquid nature of this particular real estate investment vehicle.