Which investing strategy will be most challenged this decade (‘20 through ‘29)?
Curious to learn what people view as the investing strategy to face the most and/or least structural and/or cyclical pressures (impacting performance, and thus existence) in this decade. Some strategies below, please feel free to add any I missed and let’s discuss. One example would be long only mutual funds (open to debate? is this still true?). Would be great to see any specific thoughts in addition to solely which strategy/strategies come to mind. Cheers!
Private Equity
- LMM
- MM
- MF
- Growth equity
- Distressed
Hedge Funds
- Long/short
- Long only (including mutual fund firms)
- Event-driven
- Multistrat
- Activism
- Distressed
- Macro
- Quant
Dedicated Credit Platforms / Funds
- Leveraged credit (liquid bank loans, CLOs etc) - Distressed
- Special Situations
- Direct lending
Venture Capital
I would be realllll nervous as a direct lender right now (even pre-COVID). It seems like the norm these days is 5x+ leverage with no covenants and bare bones docs which is a recipe for disaster.
agreed... BDC space has been crazy lately. heard apollo has been dealing with imminent covenant pressure in theirs
Direct lending + middle market private equity go hand in hand and would be my guess on challenged investment strategies/returns. Low barriers to entry, high competition from dumb first time managers and too much capital chasing the same shitty small deal is a recipe for disaster.
Not to say broadly syndicated loans are that much better, but should be somewhat more insulated for investors in higher rated CLO paper due to financial engineering magic (wouldn't want to be CLO equity, though).
Curious to hear about MM / UMM PE. Thanks in advance
I think VC is going to be in for a rough patch. The entire business model is fail 9/10 times but make sure the 1/10 that works out makes up for all the failures, but with what appears to be a cooling IPO market and some mega flops from the most hyped startups (Uber, WeWork, soon to be AirBnb, etc), the industry could be in trouble. Definitely still going to be some funds that continue to kill it, but I think there's a lot of mediocre firms in the space that have coasted off insane valuations and some lucky exits that are going to fail. Softbank Vision fund is the prime example, but there's a lot of respectable funds out there that were dumping money into pre-IPO startups at insane valuations thinking it was guaranteed profits, only for the valuations to fall once the public markets saw what messes they were.
If you look at the last couple of economic contractions, this plays out.
You generally have a phenomenon by which you see a proliferation of VC funds over the course of an economic expansion; a junior partner does well at a reputable firm with strong deal flow, and then decides to huck it out on their own.
Their first fund goes well, because they still have some access to the pipeline of their former fund (e.g., they take deals with them).
Their second fund goes one of two directions: less well, because they relied on their old connections and did not develop a unique pipeline, or more well, because they developed a unique pipline (incredibly, incredibly rare).
These new funds make up probably 50-75% of all funds, given that only the top 25% of VC funds, roughly (don't quote me on that number) end up making decent returns at all, and the median VC fund loses money. Because they generally lose their pipeline of solid deals, they end up investing in crummy businesses, because they have to deploy capital, and they don't have access to the upper echelon of deals.
I think you're spot on with regards to what's happening with the failure of the "fast and endless capital" strategy - I could write about that pretty much until I take my last breath, but you're better off reading Stratecherry or Fred Wilson (probably). The only point I will make is that a lot of these firms - even the ones that have already gone public - still make decisions based on growth at all costs; this has been relatively institutionalized and they're having a tough time switching from being effectively an oversized growth co. to a mature corporation. It's a weird time where you are seeing investors expect companies to just flip a switch into maturity, when maturity is about more than size.
Tl;dr there aren't a lot of Mary Meekers but there are a lot of people who try... and have failed and will continue to fail (I think... but unlike my industry counterparts I don't purport to have a crystal ball)
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