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Wayne Yi examines opportunities created by 2024’s transitioning economy and high interest rates
Key Takeaways
- Driven by continuing high interest rates and an economy still in transition, Wayne Yi thinks some of the most interesting opportunities in 2024 will be in private credit - particularly structured credit and direct lending - or being a liquidity provider.
- As the US and other countries move deeper into near- and friend-shoring, there will be investment opportunities centered around manufacturing and business services that focus on logistics.
- Larger platform companies may find value in buying smaller add-on companies where the debt loads have grown too heavy to carry in a high-interest environment, giving the good business/bad balance sheet an opportunity to thrive.
My name is Wayne Yi. I'm the chief investment officer at Simon Quick Advisors. We're an RIA based in New Jersey, but with offices across the country.
So, what are we thinking about for 2024? This is still a market and economy in transition. We're coming off of the very high inflationary environment, but inflation is still pretty high. The Fed still wants to maintain high levels of interest rates just to keep the market a little bit tighter. But despite that, the consumer overall has been strong. Labor has been very constructive as well. In that environment, fixed income, traditional fixed income, and equities have been choppy across the board.
Now, looking at 2023, equities continued to perform well on the back of a very difficult 2022. But the question becomes, how much more room is there for public markets to run? We would take the view that, over the long term, public equities are a very attractive component of any client portfolio. However, in this environment, because of high rates, there are really interesting opportunities on the private credit side, whether that's in structured and direct lending as well as being a liquidity provider.
Private assets are long-term investments. Public investors, or those that might not have the wherewithal to stay invested for the long term, may need to find other opportunities to unlock some of that liquidity. So, secondary investing is an attractive component of private markets today that will likely be here for another couple of years. Those are elements that we think will be really attractive to create consistency in a still uncertain world, particularly given the changing dynamics from a geopolitical perspective as well as the still positive but slowing macro perspective here on our own shores.
There is a variety of opportunities today across all private assets that spans the really attractive element of AI and robotics as well as private credit. So, the opportunity is large. What I personally find really interesting is manufacturing and industrials. Why is that? With the US moving into a much more, and not just even the U.S., but countries overall moving into a much more friend-shoring or near-shoring mindset, that is driving a lot of need for being able to make, supply, and deliver products within our own country. That is different from what we had experienced through the export environment that we had kind of preceding 2020.
So, in that regard, particularly around private equity, we're spending a lot of time around manufacturing-oriented and business services that work in logistics as well as industrials, and maybe on the margin, not as active on the business services or high labor elements that had been really attractive previously.
Something that we do need to consider within private investing is that we are in a high-interest rate environment, and that impacts large companies as well as small, public or private companies that had to borrow are paying a lot more today than they were just a couple of years ago. So, we have continued to monitor and evaluate our underlying portfolio exposures for businesses, and how much debt do they have. Can they service that debt? Do they have any maturities that are coming due? This is even more acute in the real estate space, but even in middle market companies that had used capital, as well as venture companies that had raised a lot of capital by burning through or using up that capital base, what is in liquidity environment as well as a maturity expectation for debt for these underlying companies?
We have historically remained under-levered and used any kind of financing to support add-on acquisitions as opposed to levering up the core businesses. So, that is a mitigant. However, we do want to make sure that these sponsors are optimizing for cash flow and making sure that they can refinance or extend maturities as much as possible across the board.
On the flip side, some of these situations create opportunities for private equity sponsors to be buyers of businesses that may have weaker balance sheets. A larger platform company can potentially buy into one of these businesses as a tack-on that is very beneficial to the firm and the underlying company to expand its footprint. It also gives a way for a good business-bad balance sheet to really fix itself that might not otherwise be available.
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