July 2023 Newsletter

This month, there have been some major news items ranging from another Fed rate hike, crowdfunding failures, and the continued challenge in commercial real estate yet with some areas of good news. Let’s dive in and use these to highlight the importance of investment manager selection.

Federal Reserve Raising Rates

The Federal Reserve raised interest rates to a target range of 5.25% - 5.50%, the highest level in over 20 years. This hike was anticipated, and many economic indicators suggest that there won't be any more raises this year. However, the Federal Reserve made it clear that they will be monitoring economic data and future raises will be decided on a “meeting by meeting” basis. We will keep a close eye on the data as the next meeting is in September.

Despite the rate hike, unemployment remains low at 3.6%, and housing prices in many areas have reached record highs. The equity markets also continued to benefit from the slow entry into recession, with many equities surpassing earning expectations. Equities across large cap, mid cap and small cap all had positive returns for the month, with returns generated by a wider breadth of names than previous months this year.

The US Government’s long-term debt was downgraded from AAA to AA+. This was due to several factors, such as the debt ceiling battle, tax cuts and government spending increases. Is this a cause for concern? Not at the moment. On a global scale, the US Treasury is still a secure and safe investment. Many Wall Street research shops reported that this move is unlikely to affect the Treasury or our economy, given that the US economy is strong and competitive on the global stage.

Crowdfunding Sites: How to Avoid Pitfalls and Maximize Returns

We have recently received more news about fintech/crowdfunding, which has indirectly cast a shadow on real estate investing. Crowdfunding sites are like a dating app, connecting investors with investment providers. As an investor, you should understand what motivates the various sources of alternative investments, and these sites make money by focusing on size and volume.

It is essential to do your own due diligence and keep track of the investment over time. Some deals or managers are reviewed, but not all crowdfunding platforms indicate that they have conducted thorough due diligence or have an ongoing due diligence process. If you are investing in a single deal, make sure to diversify your portfolio.

At KCG, we have created procedures and processes to protect investors' capital. This allowed us to be accepted to major custodial platforms in our first year of operations, even though we only had a few million dollars under management. This is not easy to do unless you have a system in place to safeguard investors' capital from improper operational and business operations. From the beginning, we have always believed in aligning the interests of all participants in our investment process, from the borrower to the investor.

Manager Selection Over Investment Sector 

Remember that there may be some bad investment managers, but most of them are working hard to protect investors' money. When selecting a manager, consider their experience with both the investment and their operational skills. Manager selection is not only about avoiding frauds it also about determining trust and obtaining the expected return for the risk you are taking.. The chart below shows that the returns vary greatly depending on the manager you choose. The data clearly indicates that manager selection is just as important, if not more important at times, than deciding which sector to invest in.

Hunt for Unicorn Managers

Staying on the topic of manager selection, I wanted to take this opportunity to share my knowledge and experience in the area of start-ups and venture. I am a part of a group called RAISE and I wanted to share their latest article, RAISE Global Summit 2023: The Hunt for Unicorn Managers.

Here are some key takeaways from their data, which applies across the spectrum of alternative investing:

1. Finding an excellent investment is essential, but as passive investors, you must also identify the right managers. This is because they not only have a better chance of finding the right investment, but they also have the experience to manage the fund. Poor operations and managerial oversight can lead to failure (something that you will continue to hear me repeat).

2. Interestingly, in venture, the initial fund of a manager tends to outperform the second fund. This could be due to a lack of opportunity in their investment arena or an intentional style drift of the manager. As investors, you must be careful if a manager has found an inefficient trade and they are drifting away from it, as this could be a sign to redeem.

3. RAISE's research shows that all the outperforming managers are “small”. This is not surprising, as investors have known for many decades that excess returns come from inefficient and fragmented investments. Small, differentiated funds are available today to both large institutional investors and smaller investors. However, investors must understand the capacity of the fund, as too much money can dilute the return.

For the next RAISE Global Summit, they are changing the parameters of how they are selecting funds. This is a good practice, as it allows investors to regularly assess their investment non-negotiables and how they view alternative investment managers in a dynamic world.

Real Estate Deal Flow

Boxwood Means recently shared data that the micro/small balance CRE space is looking strong. Even with many tailwinds working for us, this has been a challenging environment. Broad real estate deal flow has fallen:

Capital has been difficult to raise even though there has been opportunity:

We are delighted with the performance of Kirkland Income Fund and the growth KCG has experienced. Our decision to focus on micro-balance CRE bridge debt has been validated in diverse market conditions.

 Thank you for your continued support!