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Where growth investors are putting their money
The buzzwords at this discussion with Ibrahim Ajami of Mubadala Capital, Lauren Kolodny of Acrew Capital and Bouchra Darwazah of Asymmetric were "fundamentals" and "opportunity."
The last year has been a bumpy ride, says Ajami, noting that "the entire growth sector is frozen." As a result, valuations are being reset, and investors are trying to "stay grounded and retain humility. No VC can say that we didn't get ahead of our skis" in recent years. The combination of cheap capital, the digital acceleration prompted by the pandemic and the hype of new vehicles like SPACs created an illusion that anyone with some capital could be a success, he added. It's been a wake-up call in recent months.
"The cost of capital is significantly higher, the risk factor is higher for investors. But if you focus on the fundamentals, they'll make it through the cycle." But Ajami noted that many companies will not make it and that "it will take some time to clear up."
Right now, his firm is focusing on how to take advantage of this new landscape as well as developing technology like AI — which will be impactful in sectors like energy and health care, such as personalized health tech.
The last six months have been an "emotional time" for so many companies in Kolodny's portfolio, which have been making progress but sitting on their valuations and prepping for another round of financing. That's turned her into a coach and even a therapist for them, she laughed. "It's been a moment of deep reflection."
But she thinks it's a moment of excellent opportunity, with the efficiency gains of the digital transformation just starting to have a real impact. Her firm is focused mainly on seed and is excited about the democratization of access to financial products. She believes that in the next few years, we'll see the next big fintech platform" that parallels what happened a decade ago with the advent of mobile banking. As for AI, she sees it having a major impact in fraud detection and financial coaching for consumers.
How to play offense amid economic upheaval
During this time of economic turmoil and volatility, "people will be sitting on zombie assets for some time," intoned Michael Arougheti, the cofounder and CEO of Ares Management, a global alternative investment manager operating in credit, private equity and real estate markets.
The reference to such assets, which take significantly longer to liquidate, was a somber reminder of the challenges facing many companies today. In addition, the cost-of-capital situation is bleak, "if you believe the supply of capital is not enough to meet the demand of capital, then the cost of capital will be quite high," added Arougheti.
Yet, he was joined by Ryan Mollett, global head of distressed and corporation special solutions at Angelo Gordon, and Ivelina Green, the founder of Pearstone Alternative, in pointing out the importance of taking advantage of opportunities right now -- from private credit to real estate.
In the wake of the Silicon Valley Bank collapse and other bank failures, they noted that more large-scale private players are coming in to provide credit to startups. Right now, much of those opportunities benefit the big players. “There will need to be a lot of dollars to solve the credit issue in the next couple of years,” said Mollett.
"Capital moves to scale, companies will flow to scale," said Arougheti, who predicts a lot of consolidation in the banking sector. He noted that the US, with 4,600 banking institutions compared to 50 in Germany, is "overbanked" and "consolidation is probably necessary.”
When it comes to commercial real estate, Green talked up the advantages of Europe, where office vacancy rates are significantly lower than in the US. "We're always known to be a little lazy, but we're back in the office!"
All in on AI
The general public may fear a future that resembles the "Terminator" movies and economists may worry about millions of people being replaced by robots.
But the quants are AI on AI (all in on artificial intelligence)."It's go time!" shouted Gareth Shepherd of Voya Investment Management, who sees the way that machine learning and AI will transform asset management as a paradigm shift comparable to the advent of search engines over 20 years ago. "It's changing every part of the value chain of active investing right now," Shepherd said during his panel, noting that AI will reduce the friction between "useful insights in the data in the entirety of human knowledge that's been codified and the folks that could use that info."
He also noted that if AI can boost productivity growth even just a bit, it could increase GDP by an extra $10 trillion over the next 10 years.
The potential job losses didn't concern Julia Bonafede of Rosetta Analytics, who says that the rise of machine learning will bring much more efficiency to the marketplace and "bring more opportunity to everyone." She argues that firms will still need skill sets of humans. “It doesn't turn into SkyNet hopefully," referring to the artificial superintelligence system that rules the world in "Terminator."
Her firm is using AI in the form of neural networks, that work in curves and are inherently non-linear, to trace pricing data and for natural language processing. Some doubt was expressed by Tobias Moskowitz of AQR, who says that in the highly competitive world of finance, insights and details are always changing, which might not be that helped by machine learning.
Thus, it might have a hard time keeping up with these adaptations and sudden changes. Such a limitation also brings up another issue: the potential for the noise detected by AI to overwhelm the signals, useful info for traders.
"We need techniques that can handle the problem, but we also need structure, whether it's economic theory or something else to filter out the noise. And we'll have that same challenge 10 years from now," said Moskowitz.
Don't count out commercial real estate
It's not just location, location, location. When it comes to real estate, it's also about quality, quality, quality.
That was the consensus of Related Company's Jeff Blau, Blackstone's Nadeem Meghji, and The Vistria Group's Margaret Anadu at a panel discussion on the new real estate playbook.
Though the slump in commercial real estate dominates the headlines, the trio expressed optimism in the sector, especially with high-quality new buildings, both residential and commercial, that have plenty of light and air and sustainability features. When she talks to clients who want such buildings, "there weren't that many options," says Anadu, noting that "we don't think enough about quality." One area that has been very active is multifamily housing, she says.
Blau echoed that sentiment, saying that "we're seeing older buildings that people don't want to go back to," predicting plenty of troubled assets in that sector. But he's optimistic and thinks the remote work trend won't last, noting that 90 to 100% of the CEOs he talks to would prefer to have employees back in the office. "They may not tell their employees that because it will piss them off, but it's true." His company's focus has been on new office buildings and residential in places like Austin, Texas and Palm Beach. "Companies are realizing they can use the office to attract people back to work -- as a talent retention tool -- and the incremental cost of rent is not that important."
For Blackstone, the larger trends are reflected in their numbers. Back in 2007, 60% of their real estate portfolio was in US office -- now less than 2% of their $600 billion in real estate is in that space. And 80% of it is in these five areas -- warehouses, rental housing in areas like the Sunbelt, laboratory office, hotels, and data centers. He notes that Blackstone just put a few billion dollars into data centers in just the last few months. "We're doubling down on the same places we've been investing."