Headlines 📰

• PE Boom is leaving midsize players behind. With less capital to go around, there has been a flight to quality, leaving the mid-sized players in a lurch. This is the new normal.

• GIC ‘urges caution’ over private credit. Spreads are compressing, the the industry has never been through a down-cycle.

• 5 Signs to Track a Market Bubble. Meme stocks are back. So is high P/S, and so are loss-making favorites.

• Wells Fargo Centerbridge JV hits $4.8B in originations. For the big banks, when it comes to private credit, if you can’t beat ‘em, join ‘em.

• Housing market posts worst Spring selling season in 13 years. Homeowners have no interest in selling in a depressed market.

• Trump’s trade negotiations with the EU deliver early wins. EU talked tough, but as a net-exporter, it needs access to US markets more than the US needs EU goods.

• Family Office deal-making cools, as investors wait for clarity. Direct investing continues to be all the rage, but Family Offices have dialed back deployments, while the dust settles.

Private Market Review is a free newsletter for the smartest GPs, LPs and Allocators to keep tabs on the growing universe of alts, and the rotation to private capital markets.

Data Centers Cluster Where the Action Lies

Data Centers tend to be very close together, and relatively close to urban areas (relative to other big industrial real estate)

Why it matters:

• Everyone knows that AI is driving demand for data centers that is outpacing supply;

• Supply has been bottlenecked by power-issues, first and foremost, including access to the grid, and a shortage of both parts and the skilled-labor to complete the work;

• Now it appears that location—data centers with proximity to commercial cores—will increasingly command a premium (while some of the more ‘remote’ data centers plays, may disappoint investors)

Data Centers have been the most important driver of large-scale capital investment for the past few years. Part of the thesis has involved more remote locations where land and labor costs, as well as access to energy, were less-constrained. However, as an increasing share of the “AI work” moves from training to inference, latency—and therefore location—becomes more important. See also An AI Data Center Sits Empty on the Prairie.

PE Deploys at 3x the Rate it Returns

The ratio of investments to exits for PE continues to climb to a series high, now at roughly 3x

Why it matters:

• PE continues to put money to work, while exits remain relatively few and far between;

• it’s not surprising, given the amount of money that was raised in 2022 was creating a ‘dry powder’ overhang that would inevitably have to be deployed;

• the flood of distributions that has been ‘just around the corner’ is yet to materialize, causing the investment to distribution ratio to continue its upward creep

There’s a long, multi-step cycle to the PE cashflow cycle: distributions lead capital raises which lead deployments, which should lead distributions. It’s the last leg of the series that has broken down, putting GPs in the position of having massive war chests of fresh capital, without that much to show for it. One way to think about this is that PE is simply resetting, with fewer players (controlling a larger share of the dry powder), kicking off a fresh deployment cycle. In terms of investments made in the previous cycle? Well there may not be too much hope for those (or the managers who made them).

Do Hedge Funds Hedge?

L/S Hedge Fund performance is almost perfectly correlated to global equities

Why it matters:

• Rather than hedge against market-returns, hedge funds have been extremely high beta (even if the variance between the top-performers and the median is still quite high);

• a good chunk of that can be explained by the outsized attention (and performance) of the very best names in the indexes, which are also the names that hedge funds like to own;

• however, allocators will continue to question HF fee structures, if returns are basically rough proxies for ETFs (with much lower fees)

High correlation with public equities will certainly fuel the ‘hedge funds? what are they good for?’ fire. While there’s some truth to that—who needs to pay 2/20 for a portfolio of Google, Apple, and Nvidia?—the flipside is that HFs are (arguably) a victim of their own success. Passive flows need someone to do the actual price-discovery before they can (cheaply) mirror those returns. It’s a ‘fast follower’ strategy, and the problem for hedge funds, is that they can’t charge ETFs for the ride-along.

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Investment Idea 💡

Is Oracle the next $1T AI Stock? If Capex is a leading indicator, then maybe.

Strategy, Trends & Analysis 📈

• Asset-based Finance: Private Credit Hidden in Plain Sight. KKR talking its book, but the demand for capital intensive investment into hard assets is real, which means the moat around origination channels is real, and as these assets become more legible to securitized offerings, it will feed the flywheel.

• PIMCO: Investing in Real Estate Amid Uncertainty. Fade PIMCO.

• CMBS Shopping Mall Exposure Still Flashing Warning Lights. Not out of the weeds yet in the CMBS market. Rates are resetting higher, while rents are not.

• Elad Gil on AI ‘Market Clarity.’ A framework for the current state of AI investing, from one of the GOATs. ‘Wrappers’ may look bad at first, but capture enough users (especially in hard to penetrate service industries, like Law), and eventually the models can catch-up to deliver on the promise.

• The wisdom of buying absurdly expensive stock (or not). The immediate aftermath of all-time-highs are usually more all-time-highs. Over longer time horizons, however, the outlook changes.

Charts, Data & Decks📊

• Pitchbook’s latest benchmarking, deployment, and performance data for VC.

• How America Saves by Vanguard.

• Bringing the housing market into greater focus (Moody’s)

• UBS Global Wealth Report