Wealth Outlook 2024 - Slow then grow

74 Wealth Outlook 2024 | Opportunistic Investing with and in unregulated financial companies equity firms that manage private credit funds. After all, buying stock in the managers allows an investor to benefit from three income streams underpinned by assets under management growth: underlying investment returns (as the manager has a general partner interest in each fund it manages), management fees and performance fees (i.e., “carried interest”). A diversified portfolio of alternative investment businesses is another reason to consider these shares. Many of these companies have other divisions that could benefit from cheaper financing when rates eventually head lower. — Private capital providers are able to charge a premium in this environment and pass that on to their investors in the form of higher yields . Finally, there’s also another avenue to participating in the disintermediation of the banking sector: the ownership of general partnership interests, or “GP stakes,” in alternative managers. A General Partner (GP) stakes fund acquires a series of minority interests in private equity/private credit managers. When there is an investment in the fund, therefore, receiving a fractional ownership in each of the managers as well as a sliver of the general partnership stake the manager owns in each of its underlying deals. This provides exposure to all three revenue streams, but also to a broader range of managers (including non-publicly listed ones) than one would get from owning only publicly traded companies. Owning a GP stakes fund provides direct exposure to the underlying deals as one would get from investing in a private credit fund, but with the added benefit of sharing in management fees and carried interest revenues. There is also the potential benefit of better tax treatment befitting a fractional GP status. So, instead of being taxed as income, all the revenue exposure is currently taxed at the (much lower) capital gains rate, thanks to the special considerations in the tax code regarding a general partner’s carried interest. Generally speaking, one’s tax liability should be discussed with a tax and/or legal advisor prior to seeking this opportunity. Regulatory risk for non-banks is not completely off the table The growth in the US private credit system could attract the scrutiny of regulators. But we don’t think that is imminent. Our reasons are twofold. First, the asset/liability mix for non-financials is materially different. For banks, public depositors are “at risk” given that short-term deposits are used to fund longer-term lending. For alternative firms, capital is raised from institutions and wealthier individuals in segregated vehicles that limit broad contagion in the event of failure. Second, regulators have repeatedly shown that while they recognize the potential for risk to build up in the so-called shadow banking sector, their primary priority remains systemic risk. The recent slump in commercial real estate is the latest example of this. As some real estate private equity funds