Dynasty Financial Partners today announced that it plans to acquire St. Petersburg, Fla.-based TruClarity Management Solutions.
The company said it has entered into an exclusive non-binding letter of intent with the practice management firm that provides comprehensive transition and business operations support to advisors seeking independence. Founded in 2017, TruClarity has $727 million in assets under management, according to its most recent ADV.
Upon completion of the transaction, the release said TruClarity president and CEO Pamela Stross will join Dynasty as a consultant. Dynasty also intends to acquire TruClarity’s intellectual property and add select team members to the Dynasty team, the release noted.
“I am excited for the opportunity to partner with the amazing team at Dynasty Financial Partners. They have been leaders in wealth technology, platform services, capital, and business practice management offerings in the RIA space for over 12 years now. I look forward to working with them to continue to help power the independent movement, and in particular, to help inspire more female advisors to find their way to the independent side of our business,” said Stross.
Dynasty, also based in St. Petersburg, Fla., is a provider of technology-enabled wealth management solutions and business services for financial advisory firms. It services a network of 49 RIA and wealth management firms nationwide on its platform, representing more than $72 billion in client assets.
Blackstone’s net income fell during the fourth quarter, and the investing giant’s assets under management came in shy of the $1tn target it expected to reach in 2022 as fundraising weakened in some of its strategies aimed at individual investors.
The New York investment firm reported net income of $557.9m, or 75 cents a share, compared with a profit of $1.4bn, or $1.92 a share, during the same period a year earlier.
A drop in the value of Blackstone’s real estate investments contributed to the profit decline. Valuations fell by 2% and 1.5% from the previous quarter for its two main strategies.
Blackstone’s assets under management rose to $974.7bn, up from $950.9bn in the prior quarter and $880.9bn a year earlier. The firm raised $43.1bn in the quarter and $226bn for the full year.
That wasn’t enough to push Blackstone past its goal set in 2018 of reaching $1tn in assets by 2026, which it had since said it expected to reach in 2022.
Breit, Blackstone’s nontraded real-estate investment trust aimed at individual investors, posted a return of 8.4% in 2022. Yet the vehicle experienced an uptick in requests from investors to sell shares in the fourth quarter. That caused Blackstone to limit redemptions and led to a big drop in its stock. The shares have since recovered much of that ground.
READ Why Blackstone’s BREIT is a cautionary tale for private funds
Breit and Blackstone’s nontraded business-development company, Bcred, have been big drivers of its asset and fee growth in recent quarters as the portfolios of institutions such as pension funds and sovereign wealth funds become saturated with private assets.
On 3 January, Breit struck a deal with UC Investments, the entity that manages the endowment for the University of California system. Under the agreement, UC Investments said it would put $4bn into Breit and hold the shares for six years. Blackstone is contributing $1bn of its own Breit shares to the venture, effectively backstopping UC’s returns until its commitment is exhausted.
On 25 January, UC Investments said it was committing another $500m to Breit under the same terms.
“We’re north of $14bn of liquidity, and that makes us feel pretty good, not only to help meet investor requests but also for potential deployment,” Blackstone president Jonathan Gray told The Wall Street Journal.
Blackstone reported comparable cash flows were up 13% across Breit’s portfolio in 2022, and Gray said the tone of Blackstone’s conversations with financial advisers had improved in recent weeks.
The firm said the value of its corporate private equity portfolio climbed by 3.8% in the quarter. That compares with a gain of more than 7% for the S&P 500.
Blackstone’s private credit portfolio, which is nearly all floating-rate debt, appreciated by 2.4% in the quarter as interest rates rose. Blackstone’s hedge-fund investments climbed by 2.1%.
Distributable earnings, or cash that could be handed back to shareholders, came in at $1.3bn, or $1.07 a share, compared with $2.3bn, or $1.71 a share, a year earlier, as the firm sold off fewer assets.
Earlier this month, Blackstone said it finished raising a $25bn fund dedicated to secondaries, a type of transaction in which the fund buys interests in other private equity funds from existing investors.
Perpetual capital assets under management climbed by 18% to $371bn.
Blackstone in October struck a deal to buy a majority stake in the climate technologies business of Emerson Electric in a deal that valued the unit at $14bn.
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
This article was published by The Wall Street Journal, a fellow Dow Jones Group brand
By Joe Hoppe
Braveheart Investment Group PLC shares fell Tuesday after it said that portfolio company Phasefocus Holdings Ltd.’s 2022 sales were lower than forecast.
Shares at 0816 GMT were down 1.75 pence, or 18% at 7.75 pence.
The London-listed investment company–which holds 44.69% of Phasefocus–said that since its interim results in October, Phasefocus has increased its stock holding of critical components to provide customers with shorter lead times. However, due to the loss of Cytena as lead distributor, sales in 2022 missed forecasts.
Phasefocus is now marketing and selling in the E.U. and U.S. directly and has already developed a promising pipeline of sales, Braveheart said. The company said it remains optimistic about Phasefocus’s future prospects and intends to participate in a proposed further funding round of 300,000 pounds ($365,550).
Braveheart also said that wholly-owned portfolio company Paraytec Ltd.’s clinical study to develop rapid tests continues to recruit participants, running alongside the Sheffield Teaching Hospitals National Health Service Foundation Trust existing drive-through coronavirus test service. However, the program has recently experienced further delays due to a shortage of available NHS staff to collect additional swab specimens for analysis, and initial test results are now expected in February.
“The commercial justification for the second phase, a longitudinal study, will then be determined after consideration of the prevailing coronavirus test market,” Braveheart said.
Write to Joe Hoppe at joseph.hoppe@wsj.com
Medicare income-related monthly adjustment amounts (IRMAAs), devised as a means test on recipients for Medicare services, are set to change next year.
“Others call this a means test, but I don’t,” said Diane Omdahl, president and founder of the consultancy Sixty-Five Incorporated in Mequon, Wis., and author of the forthcoming Medicare for You: A Smart Person’s Guide. “This is not a determination of whether an individual is eligible for Medicare. It’s more like a progressive tax, but I don’t call it that either.
IRMAA is a simply a way to make higher-income beneficiaries pay a greater portion of Medicare costs.”
How are IRMAAs calculated? And even though they dipped slightly from 2022, what can a client do to mitigate their effects?
“The higher the income, the higher the Medicare costs,” added Onofrio Cirianni, consultant in the EisnerAmper Wealth Management and Corporate Benefits team. “A snapshot of your income is taken for the last two years, which will determine what your Medicare part B premium will be. IRMAA is your AGI plus municipal bond interest less any untaxed Social Security … with some other income items that may apply.
“The overwhelming majority of our clients are not aware about IRMAA,” Cirianni said, adding that among his firm’s regular annual meetings with clients is one on Medicare planning, addressing IRMAA.
“Some of those getting into Medicare at age 65 or upon retirement have heard about it, but many more haven’t,” Omdahl said. “Those over 65 who fall into it because of required minimum distributions and so on are usually surprised. In most cases, there is nothing they can do because they haven’t experienced one of the eight recognized life-changing events.”
Life events where IRMAA calculation can be appealed and changed, Cirianni said, include the death of a spouse, marriage, divorce or annulment, involuntary loss of income-producing property due to a disaster, disease, fraud or loss of a pension, among others.
“If income drops because of a life-changing event, take timely action,” Omdahl added.
“Nearly no one will win an appeal,” said Lawrence Pon, CPA/PFS, CFP in Redwood City, Calif. “You just let [clients] know that this will occur for one year and then [their IRMAA] will decrease in the subsequent year.”
House symbol sitting over a bar graph. Selective focus. Horizontal composition with copy space. … [+]
The Machine That Builds a Future
The first accounting of all the land in England was first published in 1086, the ominously named Doomsday Book, it documented the holding of the King and how it was distributed among the aristocracy. Almost one thousand years later the wealth of these families is still visible.
In more recent times, the average house price in the US in 1963 was $19,300 ($187,982 adjusted) and by Q3 of 2022 this has climbed to $542,900, now increasing Year on Year by 17%. This makes it one of the best secure returns available, with any downturns correcting quickly.
This brings us to the question: Why have more people not taken advantage of this wealth building tool?
The oldest market in the world is slow, inefficient, and run by institutions.
Through the history of real estate ownership there has been institutional motives to control access to it. The process known as “Red-lining”, where financial support for home ownership was restricted in certain neighbourhoods, is responsible for a significant portion of the wealth inequality in the United States today.
Outside of these issues, the barriers to entry into real estate have been historically high, and are becoming higher as demand outstrips supply. The upfront capital, creditworthiness, and risk continues to place real-estate investment, particularly as part of a portfolio, outside the reach of many people.
In practical terms, the linking of investments to an immovable object presents challenges of liquidity and exacerbates risk. The average real-estate transaction takes 30 days to complete and involves multiple layers of fees and professional services that can degrade the value of the transaction.
While this transpires, the physical property is subject to environmental risk like damage and degradation, and shifts in the local economy and property market, something which caused huge economic damage to individuals in industrialising areas of the United States.
Alternatives for investors have traditionally included Real Estate Investment Trusts (REITs) that spread their investments across multiple properties and markets to take advantage of the overall upward trend and mitigate local fluctuations. Many can be traded as stocks and have a level of liquidity to them above the liquidity of the real-estate asset itself.
These can work well for some forms of investors who are willing to sacrifice control of their capital and lose some of its liquidity in exchange for security and convenience. These can also come with upfront investments that customers might not have available or feel comfortable locking into a commitment.
Fractional Real Estate Investment
As we have seen with investment retail-trading in recent years, progress in technology has begun to disrupt and change this market. EstateX is an organisation developing investment and payment tools that will use blockchain technology to produce their own real-estate backed digital assets.
Blockchain is a system of distributing a collective ledger that tracks ownership through a decentralised system of transactions. This can be used to track the movement of things like ownership rights of artworks, digital currency, and the digital trading of securities. These can be bought and sold through exchanges that operate 24/7.
Fractional investment allows investors to own portions of multiple properties through a single digital asset that can be stored, traded, and liquidated in speeds closer to minutes than the weeks that would be required for traditional investment assets. The liquidation channels and choice of portfolio options being left to the investor, rather than a fund manager, allows for migration of the significant risk associated with single property investing.
EstateX has developed their EstateX Pay platform that will give investors a physical Mastercard
MA
V
New Waves
WAVES
WAVES
Major investment institutions, similar to most forms of banking, have usually catered to retail investors as a secondary market due to their relatively small capital offerings. As a result, the utilities available have been geared towards the convenience of these larger customers. In contrast, fledgling retail investors that are more interested in high liquidity assets and direct access to their returns have been underserved.
Platforms like EstateX aim to support smaller investors by allowing entry for as low as $100 and paying dividends on a daily basis from the first day of investment. Regular and easily accessible dividends also allow for investors working towards building a passive income lifestyle.
Through the high returns possible in the real estate sector allowing for a hedge against and above inflation, new platforms like EstateX could have the potential to create opportunities for previously marginalised communities by giving them access to wealth building tools they have been historically restricted from.
If someone promises you the “deal of a lifetime,” it’s probably not a good investment.
That’s what finance guru Matthew Onofrio, who sold a program claiming to have cracked the code on commercial real estate, promised inexperienced investors looking to strike it rich. But prosecutors say it was all a fraud aimed at lining Onofrio’s pockets.
The 31-year-old native of Eau Claire, Wis., appeared on investing podcasts and at conferences with a compelling tale. He said he had walked away from a promising career as a nurse anesthetist when he discovered a real estate strategy known as triple net investing, through which he had amassed a portfolio worth over $150 million in just three years.
But between 2020 and August of this year, federal prosecutors in Minnesota say, Onofrio had ripped off numerous banks to the tune of $35 million by roping investors into a complex web of quick-flip real estate sales, fraudulent mortgage applications and doctored appraisals.
In a statement, Onofrio’s attorney, Marsh Halberg, said none of his client’s investors had been hurt financially by their investments.
“The defense is aware of very few, if any, transactions where the investors have suffered actual losses at his time. We believe most of the transactions with Mr. Onofrio still maintain a positive cash flow and /or an increase in the value of the property that was purchased,” Halberg wrote in an email.
A civil suit filed this year involving a radiologist from Puerto Rico named Matthew Hermann, who wanted to get involved in real estate investing with his wife, laid out how Onofrio operated.
The suit said the pair met at a networking conference in Colorado in 2020 and hit it off while discussing real estate opportunities. Hermann said he was hoping to build up a real estate portfolio that would provide him with enough income that he could stop working.
Hermann said in court papers that Onofrio offered to bring him into “the deal of a lifetime,” involving a commercial property for sale for $6.3 million in Minneapolis. All Hermann had to do was come up with $1.5 million for the down payment.
“Onofrio told Hermann that he won’t get to his goal of leaving his job by buying duplexes. Onofrio told him that ‘this will light gas on the fire of where you need to go’. He told Hermann that this is all about mindset’,” the court documents read.
When Hermann said he didn’t have that kind of money available, Onofrio offered to lend it to him so he could secure a bank loan for the purchase and Hermann agreed, the court filings said. What Onofrio didn’t say was that he had already reached a deal with the owners to buy the building for $4.75 million, not $6.3 million, and that the difference was going into his pocket, the suit claimed.
Hermann was then stuck paying nearly $6,000 a month in loan payments to Onofrio in addition to his bank loan.
“Onofrio pushed Hermann—a novice with real estate—into this purchase with grand promises of the deal of lifetime. The reality, though, was that Onofrio was the one assured to make money on the deal, not Hermann,” the papers read.
Hermann later tried to sell the property and said he found a buyer willing to pay $6.3 million for it, but the deal fell through due to litigation surrounding Onofrio’s loan.
Hermann’s attorney didn’t respond to a message seeking comment.
Federal prosecutors described a similar pattern, with Onofrio allegedly placing his own money into investors’ accounts to make their finances look better to lenders, and also fabricating appraisal documents to inflate the value of properties.
In one deal in 2021, a Minneapolis commercial property was sold three times in just five months, passing through more than one business entity Onofrio controlled. By the end of the string of transactions, the price had jumped by nearly $4 million, business publication Finance & Commerce reported.
Onofrio is charged with three counts of bank fraud and prosecutors say they are seeking the forfeiture of $35 million seized during the course of the investigation.
Wonderful, wonderful news.
At least if you’re a creative money manager with a good line in blarney.
Nine out of 10 financial advisers say they plan to pour clients’ money into “alternative” investments over the next couple of years, including such lucrative high-fee vehicles as private equity, private credit, hedge funds, venture capital and the like.
Whether this will be such good news for the clients is another matter. But they, famously, are rarely the ones with yachts.
“As they face uncertain markets, nearly nine in 10 financial advisers (88%) surveyed plan to increase their allocation to alternatives over the next two years,” reports a new survey published by CAIS, which calls itself “the leading alternative investment marketplace for independent financial advisers,” and Mercer, an asset-management company. It adds that, “Of those, more than half (53%) estimate that their allocation to alternatives will make up more than 15% of their overall client portfolios. Meanwhile, more than 20% said they would allocate more than a quarter of their portfolio to alternatives.”
A mere 8% said that they do not plan to increase these allocations at all during the next couple of years.
Granted, this may not be a fully representative sample of the entire money management industry. CAIS and Mercer polled 200 financial advisers who had turned up to their Alternative Investment Summit last month at the Beverly Hilton Hotel in LA. Those attending were, naturally, more predisposed toward “alternatives.”
But there’s no reason to think this finding is directionally wrong. Institutional investors have been lured by the siren song of alternatives for several years. And the latest poll coincides with a moment of extreme revulsion—some might say, “capitulation”—toward the traditional assets of stocks and bonds because this year they have absolutely sucked.
So far this year, the S&P 500
SPX,
stock index has lost 15% and the S&P U.S. Aggregate 13%. The bond market has had one of the worst, and possibly the absolute worst, performance on record. No wonder the latest BofA Securities survey of institutional investment managers worldwide show they are shunning both stocks and bonds, while holding more than usual levels of cash, alternatives and commodities.
There are multiple problems with most alternatives. There is the fallacy of composition: If private-equity managers and hedge-fund managers plan to outperform by “beating the market,” there is only so much money they can take in. Otherwise you end up in the situation where everyone is expecting to beat the market.
Then there is the Heraclitus problem, meaning that the future will not be the same as the past. Private-equity managers benefited enormously from the long-term collapse in interest rates from 1982 until, well, last year. They were able to buy companies with cheap debt and then flip them. What happens if rates continue to go back up? We shall see.
Then there are the liquidity and transparency problems. You know what your publicly traded stocks are doing, because you can see the prices in real time. Not so private funds, many of whom furthermore make their money on untraded assets. How do you properly “value” an untraded asset, like a small company in the middle of an uncertain, multiyear turnaround? You can’t, really.
But above all there is the “agency” problem. The people running these ventures generally make out very well, but that doesn’t always translate into big bucks for the investors, because of the fees.
It is mathematically implausible for hedge funds to beat the market over time. And business school professor Ludovic Phalippou at Oxford University calculates that overall private equity returns have been no better than the stock market since at least 2006.
Important note: That is especially astonishing because during that period, from 2006 to 2020, the interest rate on BBB-rated corporate bonds halved. So the private equity crowd, who make their money by purchasing undervalued companies with debt, should have been making out like bandits.
Some people argue that things like real-estate investment trusts (REITs), infrastructure investments and master limited partnerships (MLPs) count as “alternatives.” But they have suffered this year along with stocks and bonds.
The one standout so far in 2022 has been commodities. The S&P GSCI Commodity Index is up 30% so far this year.
A fascinating research paper by the number crunchers at AQR, a hedge fund firm in Greenwich, Conn., suggests that if anyone feels they need to add something else to their portfolio of stocks and bonds, they might not need look any further than commodities. The paper, using commodities data going back to the 1870s, finds that commodity futures have added value to a traditional portfolio over time, zigging when everything else zagged (like this year) while generating a positive overall return.
“We find that, over the entire sample, the optimal mean-variance portfolio allocates 17% to commodities, 29% to stocks and 54% to government bonds,” write the authors, Ari Levine and Yao Hua Ooi of AQR and professor Matthew Richardson of NYU’s Stern School of Business. “Moreover, a 54%/36%/10% portfolio of stocks, bonds and commodities consistently outperforms a 60%/40% allocation of just stocks and bonds.”
Doug Ramsey’s “All Asset No Authority” portfolio at Leuthold, arguably the ultimate all weather portfolio, includes the commodity index and gold as two of its seven components.
Those who want to own commodities can do so without dealing with high-fee investment managers. There are a variety of ETFs that invest in commodity futures, including the iShares S&P GSCI Commodity-Indexed Trust
GSG,
among many others. (Thanks to the tricky nature of commodity futures, many perform slightly differently from each other. You need to check the data before buying.) Their fees aren’t low—GSG charges 0.75%, which is expensive compared with stock and bond ETFs, but a bargain compared with any private-equity fund or hedge fund.)
Naturally the best time to buy commodities was last year—or actually during the COVID-19 crash in 2020, but that’s another story—and not now, once they have already risen a long way. If we are heading into a recession the next move may be down. And when commodities go down, they can really, really go down. (The S&P GSCI Index fell two-thirds during the global financial crisis.)
It is dismally predictable that the global money managers who say they are shunning stocks and bonds are heavily into commodities.
But commodities can at least genuinely claim to be a third asset class, alongside stocks and bonds. And timing aside, there are worse ideas than, in general, including some alongside the others. It helped this year and it may help again in the future.
But hedge funds? Private equity? We shall see.
Investor concerns about Blackstone’s big retail real estate fund have weighed on its stock in recent months and comments by management last week didn’t appear to help.
Although Blackstone reported an earnings beat on 20 October, its shares dropped 4.2% after the report before rebounding on 21 October to finish up 1.7% at $85.43. The stock is off more than 40% from its November 2021 peak of about $150.
Investors may have been reacting on 20 October to remarks made in a conference call by president Jonathan Gray about Blackstone Real Estate Income Trust, which is known as Breit.
Gray said it was possible Breit, Blackstone’s $70bn flagship retail product, could go into redemption — meaning the fund would be paying out more to investors who are redeeming shares than it is receiving in new investments.
Breit and Blackstone Private Credit Fund, another retail product, have become important sources of asset and fee growth for the firm. This makes the investment community sensitive to flows. Breit generated over $1bn in fees for Blackstone in the first half of 2022, making it one of the firm’s most lucrative investment offerings.
Unlike public REITs like Prologis and Equity Residential, Breit isn’t publicly traded.
Blackstone executives fielded several questions on Breit during the company’s earnings conference call on 20 October, and one analyst asked whether it could “go into redemption in the coming months.”
Gray replied: “I would say as it relates to near-term flows, yes, it’s possible that we could see negatives over some period of time.”
Breit had enjoyed huge inflows in 2021 and the early part of 2022, roughly doubling in size. The fund raised $4.2 billion of capital in the third quarter, down from $6.6 billion in the second quarter, but Blackstone didn’t provide a net flow figure based on inflows less redemptions.
READ L&G, Abrdn reassure over property funds after Columbia Threadneedle suspension
Financial News sister title Barron’s wrote critically on Breit in August, arguing that retail investors should consider public REITS as an alternative.
And while many public REITs are down over 30% this year, Breit has returned a positive 9% through the end of September. Our article also cited as negatives Breit’s high fees and higher leverage than many public peers.
In response, Blackstone pointed to Breit’s strong performance since its inception in 2017, its exposure to two of the strongest categories in real estate (apartments and warehouses) and its high levels of liquidity. Breit has returned 13% annually since its inception, four times that of REIT benchmarks.
There has been greater investor focus on the gap between Breit’s performance and those of public REITs in recent months, as the REIT sector has continued to decline while Breit’s net asset value has continued to go up. The selloff in public REITs reflects investor fears about an economic slowdown and the impact on rents, as well as higher rates.
On the call, Gray cited the strong financial performance of Breit this year as warehouse and apartment rents are up sharply. He added that the earnings strength of Breit this year has more than offset the impact of higher rates on real estate valuations.
READ Goodbye Londongrad: Property market hit by pressure on Russian oligarchs
Oppenheimer analyst Chris Kotowski said that public REITs in the apartment and logistics sectors also are showing good financial results, but their stocks are down 30%. Kotowski contrasted Breit’s performance versus public REITs and asked management during the conference call if “they all of a sudden look more attractive relative to your valuations.”
Gray responded that public markets are more volatile than private markets, which is the basis for Breit’s pricing, and that Breit has “ample liquidity,” having met all redemption requests since its inception in 2017.
In a client note on 21 October, JPMorgan analyst Ken Worthington wrote of Breit: “We do see risk to net sales in the near term of intermediaries investing in public real estate funds that have seen prices fall 30% vs. B-Reit (for example) with returns up 8.5% this year.”
Morgan Stanley analyst Michael Cyprys wrote that retail flows have slowed, as expected given the economic environment.
“But we have confidence that BX’s distribution prowess and brand should continue to attractively position the firm to penetrate a ~$70tn retail TAM.”
Blackstone’s distributable earnings were $1.06 a share in the third quarter, down 17% from the year-earlier period, but they exceeded the consensus estimate of 98 cents.
Write to Andrew Bary at andrew.bary@barrons.com
This article was published by Barron’s, a fellow Dow Jones Group brand
Matt Lindholm serves as Managing Director, Investment Strategies at CAZ Investments. He is responsible for the portfolio management of both traditional and alternative investments and facilitates the ability of outside investors to co-invest with the firm and our principals & shareholders. He also serves on the firm’s Executive and Investment Committees. Matt has over 10 years of investment management experience, including significant experience in derivatives, options, futures, commodities, swaps, and hedge funds.
Russ Alan Prince: Can you tell me a little bit about how CAZ Investments looks at investing in professional sports as an asset class, and why investors should care? Can you explain why you don’t have to be a billionaire like Jerry Jones or Steve Cohen to get this exclusivity?
Matt Lindholm: We are very thematic in our approach to investing, looking for major themes that we believe will prevail in the investable markets for the next 3, 5, or even 10 years. One of our major themes over the last several years has been The Changing Consumer, and more specifically, the phenomenon known as cord-cutting.
For many years, professional sports had what was referred to as the two-legged rule, which meant only human beings could invest in professional sports franchises—no pooled funds were allowed. But in 2019, the rules changed. Since then, all major North American sports leagues—except the NFL—have allowed institutional investment capital, under very specific guidelines & restrictions. This enormous change gave us the opportunity to participate in the cord-cutting theme in a much more direct way.
In 2005, just 14 of the top 100 most viewed programs were live sports content. By 2019, that number was 92 of the top 100, and in 2021, it was 95 of the top 100. Sports content is becoming remarkably more valuable as advertisers continue to search for eyeballs, which you can see in the TV contract step-ups across all the major leagues. That translates to higher valuations for the content producers, which are the leagues, franchises, and players.
In addition to fitting in one of our favorite investment themes, sports have several attractive characteristics. Professional sports are an asset class that has generated outsized performance historically, with less volatility, but perhaps even more notable is the non-correlated nature of sports vs. other asset classes. That’s a valuable tool, and it offers the rare ability to become both a return enhancer and a risk reducer for a diversified portfolio. That’s what all investors would like to achieve, and this is a unique way to accomplish it.
Prince: Why are professional sports attractive in today’s economic environment specifically and does it matter what type of professional sport you invest in?
Lindholm: Sports are tailor-made for the current economic environment. We are experiencing one of the most challenging investment environments of the last several decades, for the vast majority of asset classes. Stocks are in a bear market and bonds are absolutely getting killed, leaving traditional investors with few places to hide. Traditional 60/40 portfolios have had their worst performance in over 50 years. We also have stubborn inflation issues, forcing central banks to downshift global economies and reduce growth. With that as the landscape, professional sports stand out as an attractive asset class based on both predictable, recurring revenues and attractive inflation protection characteristics.
Sports league revenue growth has historically remained positive through difficult economic periods, based largely on the long-term contracts in place for national & local media rights, ticketing & premium seating, and sponsorship agreements.
Many professional sports franchises own substantial high-value real estate, which has historically acted as a strong inflation hedge. Even more important in our view is pricing power. While we often see prices drop over time in certain sectors due to technological gains, one area that is not experiencing drops is prices at the stadium, ballpark, or arena. The cost to attend a sporting event is typically higher each year than it was the year prior, as most of us can attest!
There is also a great degree of scarcity and strong barriers to entry, leading to high moats for franchise owners. Only four new sports franchises have been created in the Big 4 North American sports leagues since 2000. This is very intentional at the league level, as it is in their best interest to restrict the number of teams.
Prince: Is there a difference in where you invest whether it be between soccer, baseball, or even hockey?
Lindholm: The short answer is that yes, each asset must be evaluated differently. Each league has specific strengths, but it really comes down to the local franchise, as there are excellent investment opportunities across all the major leagues.
There are several different dynamics to consider with each sport and in each major city, so we are not overly focused on the choice of sport. The key is finding the right franchise with the right management team and creating a structure that encourages alignment and good incentives among parties. There is no question that the NFL is the 800-pound gorilla in terms of revenue, but it is the only remaining sports league that has not yet approved institutional capital. We believe that may change in the near future and look forward to being involved if it does.
Prince: Traditionally, sports team ownership has had a high barrier to entry. How can normal investors get involved in this asset class?
Lindholm: Historically, it has been quite difficult, but now there are several different ways. Retail investors can access a short list of publicly traded sports entities. Qualified investors may invest in private equity vehicles that offer exposure directly to sports franchises, which we believe offer the highest return opportunity and the least volatility.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.
The U.S. office property outlook has grown increasingly dark in recent months as big companies make plans to formalize a roll back of more than two 1/2 years of mostly remote work.
Early results, following a post-Labor Day burst of office visits, indicate that U.S. commercial real estate landlords and investors should brace for a tough road ahead, given the embrace of flexible work arrangements, maturing property debt and higher borrowing costs.
New York City, the largest U.S. office market, saw only 9% of Manhattan office workers reporting to jobs in-person five days a week (see chart), according to a survey of major employers conducted by The Partnership for New York City, a group of the city’s key real-estate developers and business leaders.
The survey was conducted over two weeks, ending in mid-September, and found that while half of workers showed up in the office in an average week, only 37% were in three days a week, the largest category among returning workers.
Only half of Manhattan office workers reporting to the office in a typical week in September. Now Meta is joining Twitter in downsizing.
Fitch Ratings, The Partnership of New York City
Head count in offices matter for property owners and tenants alike, because it helps gauge actual office use, potential future office-space needs and rent levels.
While the office utilization has been improving, it isn’t expected to “return to pre-pandemic conditions,” according to a new Fitch Ratings report, which pegged utilization near 70% before the pandemic.
Tracking office building access swipes also has become a popular gauge of office use during the pandemic.
On that front, the Kastle Systems’ weekly 10-city index last pegged occupancy near 47%, up from a pandemic low of under 20%, but still far below full occupancy levels preferred by lenders to refinance property debt.
Office ‘apocalypse’
Meta Platform Inc.
META,
on Tuesday became the latest big technology player to announce plans to shrink its office space, while putting roughly $2.4 billion in property debt exposure in the spotlight, according to Barclays analysts.
Twitter Inc.
TWTR,
announced a similar move in July.
But office buildings have yet to flash the sort of warning signs that became a hallmark of the pandemic’s early months, as tourists and business travelers abandoned hotels and shopping malls stayed dark.
That’s partially been due to record corporate earnings, which only lately have been pegged to retreat, but also to the prevalence of long, 10-year office leases taken out by many big companies.
Those factors helped keep delinquencies on office loans low during the pandemic, even though Deutsche Bank researchers expect to potentially see lower payoff rates in the next few years as some $21.5 billion of office debt in bond deals comes due through 2024, in a higher rate environment.
“It hasn’t hit a point yet where there’s clarity on where deals are going to get done,” said Shlomo Chopp, a specialist in distressed commercial real estate restructurings and a managing partner at CPS, by phone.
Still, Chopp said property borrowers and lenders both worry about office buildings that might now be leased up, but still sit largely empty. “If you have a 20,000 square foot office floor plate in Manhattan that’s empty, you can’t put a bedroom in the middle of a trading floor,” he said.
A working paper released by the National Bureau of Economic Research in September warned of an office property “apocalypse,” with New York City office buildings expected to tumble a 39.2% in value due to remote work, or a $49.6 billion loss over the long-run.
The paper, which has yet to be peer reviewed, pegged the national toll for office buildings over time as likely near $453.6 billion.
The damage already done to households and financial markets has been sharp this year as the Federal Reserve has aggressively raised interest rates to fight inflation at a 40-year high. The Dow Jones Industrial Average
DJIA,
joined the S&P 500 index
SPX,
in a bear market in September, while the benchmark 10-year Treasury rate
TMUBMUSD10Y,
briefly topped 4% last week before pulling back to 3.6%.
Higher borrowing costs for landlords, plus potentially slower cash flow growth, led BofA Global strategists in September to suggest that commercial property values could fall by as much as 20%-30% over the next few years.
The cloudy backdrop has meant slower loan originations, particularly in the office sector, “for a lot of the obvious reasons,” said D.J. Lucey, senior portfolio manager, fixed income at SLC Management, by phone.
Lucey also said investors in commercial mortgage bonds now benefit from higher yields, roughly approaching 10% on debt with BBB- ratings, when looking at pools of different property loan types, but also that deals have more conservative underwriting standards than in the run-up to the global financial crisis.
The question is whether that will be enough if an office apocalypse comes to Wall Street.