Wealth Outlook 2024 - Slow then grow

72 Wealth Outlook 2024 | Opportunistic Investing with and in unregulated financial companies Considerations: • Unregulated providers of capital benefit when regulations hamper traditional low-cost providers (banks), and this is an investable trend. • One can step in as the alternative lender through private credit funds to potentially generate yield premiums over traditional securities. • Or for qualified investors, invest in the managers via listed alternatives firms or private general partner (GP) stakes funds. More regulation for banks US regulators recently proposed a comprehensive series of reforms designed to mitigate risk in the banking sector. Bank executives have expressed concern that the proposed rules – which would increase large-bank capital requirements by as much as 16% and enforce more consistent risk management standards – will have a negative impact on the banking industry. In the process, the executives say, the changes will push traditional banking services such as middle- market corporate lending to non-bank financial firms, potentially benefitting their investors. Since the global financial crisis, systemically important banks have contended with wave after wave of higher regulatory capital requirements. The latest proposed increases are still just that: proposals. Still, the banks’ response (primarily focused on limiting the impact on consumer lending and other specific business lines) suggests that an additional capital burden is all but inevitable. The beneficiaries: alternative investment managers and funds Negative trends for one sector can be a tailwind for another. That’s why we see increased regulation today as a boost for non-bank capital providers tomorrow. This is especially true for alternative investment managers, who have seen their businesses grow faster and more profitably as bank regulatory requirements have constrained their competitors. From 2000 to 2022, alternatives assets under management (AUM) grew at a 12.6% compound annual growth rate (CAGR) to $16 trillion and are expected to reach $23.3 trillion by the end of 2027 ( FIGURE 1 ). ¹ ¹ JPMorgan Chase & Co. 2Q23 earnings call, July 14, 2023. Private credit, a subset of private equity, has been a key component of that growth, growing twelve-fold between 2006 and 2022. ² ² Source: Prequin as of December 31, 2022. In all, non-bank lenders today represent 83% of the $12.8 trillion non-real estate corporate lending market in the US. ³ ³ Board of Governors of the Federal Reserve System, Financial Stability Report, May 2023.