2020.04.04

Private alpha vs. private equity & autarky & the three current crises

The narrow subset of the world occupying a lot of my mindshare has ground to a halt. The private equity fundraising market has chosen to wait out the current storm (or at least the beginning). LPs and GPs alike have hit pause, making capital deployment more difficult. One lesson I’ve heard about the Global Financial Crisis is how investors waited out that storm for too long and missed the beginnings of the recovery. However, LPs and institutional allocators are largely market-takers. Some global pensions and sovereign funds have direct investment capabilities and can more ably create opportunities. The vast majority need to invest in products created by GPs, and in private equity right now, there are fewer and fewer products to buy.

But, not all of the private market universe has paused. GPs who focus on distressed credit opportunities are active. They’re able to invest when uncertainty is high, providing capital solutions to businesses that fall outside the traditional private equity toolbox. And when done well, they can generate the levels of returns that LPs seek from the asset class. The question LPs need to answer for themselves is whether they’re willing to stray from traditional private equity, and pursue private alpha: outperformance across all of the private markets.

Reframing the search for private equity’s returns to that of private alpha acknowledges that different strategies outperform in different environments. It allows for the optionality to shift to the most interesting opportunities the private markets (not just private equity) are providing. And, in being willing to look outside a narrow subset of the world, one will hopefully be able to remain active and invest in the beginnings of the recovery on the other side of this storm.

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Some recent posts I found interesting:

• DIY masks are just the beginning. Autarky is back. Balaji Srinivasan’s thread resonates, as it points to the opportunity to build a more robust, self-sufficient economy on the other side of this crisis. The US may only be weeks in, and it’s far too early to know what behavioral changes will remain permanent—but, this experience has me wondering how to make myself more resilient to future unexpected shocks.

• The Three Crises. Brad Feld may call his post a rant, but it’s not. The confluence of two distinct crises (health and financial) has brought the country’s background hum of anxiety to the foreground, and that hum likely won’t fade away as the year progresses. Brad ends his post balancing realism with cautious optimism—we’re still very early into this crisis, and everyone will be affected in some way if they haven’t been already. And maybe, one side effect of this shared experience will be more empathy.

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Sheltering in-place in a studio apartment has been interesting, and it’s probably why I’ve been thinking a lot about what my next trip will be, whenever that will be. The rain here in Austin this weekend has put Barcelona on my mind, but I’m open to suggestions.