On June 2, 2022, Dinesh Goel, managing director at LCR Capital, hosted a panel discussion on “Investing Globally in Times of Uncertainty & Increased Inflation”. Joining him were Thomas Garvey, president and SEC-registered investment advisor for LCR Wealth, and Kenneth Wisdom, managing director at Portfolio Advisors LLC. They had the opportunity to speak with a full room of high-net-worth investors, family office leaders, and investment fund managers, which generated a sophisticated and highly insightful conversation.
This event was organized to provide global insights into how to build a robust portfolio, especially in a time of inflation and interest hikes. The significant institutional experience of Tom Garvey and Ken Wisdom was showcased to provide different perspectives on investing.
What is the current climate?
The current inflammatory environment is unlikely to change anytime soon. Wages have increased and are not expected to reverse, and energy is trading at a high. Inflation may moderate to around 5% to 6% after a few rounds of rate hikes. After this moderation, however, monetary policies may not suffice, and further measures will need to be taken.
Unfortunately, for governments to achieve their goal of 2% to 3% inflation, both Ken and Tom feel there will need to be demand destruction. Demand destruction is a permanent downward shift on the demand curve which generally is the result of a recession. Partnering with an experienced advisor in a volatile market is key to navigating what comes next.
“There are seasoned investors in the market today who have weathered recessions before, and they know how to navigate their way and spot investment opportunities that will generate great outcomes.” —Ken Wisdom
Where to invest?
Choosing where to invest is crucial at a time like this.
The panel said they expect markets such as energy, real estate, and healthcare will do well under inflationary circumstances over the next 12 to 24 months. Tech can also be a great opportunity, but only for specific companies. Tech growth is really centered on enhanced efficiency or reduced cost. Several tech startups and growth tech companies have been struggling recently, bringing the dotcom crash of 2000 to mind for many investors. This reaction is only natural when the top quartile VC funds generated low-single-digit returns for a decade following this crash. That said, the tech market has gone through tremendous growth and change in the past two decades since the crash.
“During the dotcom crash period, the average HNWI investor had less than a 5% allocation to VC/PE/alternative investments, but now it’s more in the range of a 15% to 20% allocation. The private market space was not as big, deep, or global as it is now. Structurally, the ability to raise private capital has changed a lot. I have personally seen an increase in the number of conversations regarding VC/PE/alts allocations. There is a lot of money already in the private markets, which needs to be allocated somewhere. It will not find its way to bonds or other conservative/mainstream assets, and therefore private market assets will continue to see inflows.” —Tom Garvey
There is a great deal of opportunity in real estate tied to life sciences and industrial research. Three areas worth looking at are mid-market buyout, VC, and real estate. Secondary markets are a very interesting access point, especially in a volatile market.
“The advantage of going through the secondary markets is that one can buy seasoned assets at a discount, with greater visibility into the portfolio, no blind pool risk, and underwrite and reprice those assets, all while having a shorter duration exposure and near-term liquidity.”—Ken Wisdom
The secondary market’s greatest appeal is the insight into performance the buyer has when buying an existing private equity partnership interest. It provides the opportunity to buy a value-add or opportunistic investment in its fifth or sixth year of operation, when it is almost stabilized and starts looking more like a core-plus portfolio.
LCR Capital greatly appreciated the opportunity to host this panel discussion. Bringing together experienced investors and institutional investment managers always provides great insights. Doing this seminar in Dubai, with team members from New York and Mumbai, added a valuable global perspective which benefited both the panelists and participants alike.
Keys Highlights from the Session
- The inflation we are witnessing now is not transitory, which the Fed expected it to be.
- The Fed will be focused on controlling inflation, and this makes interest rate hikes imminent.
- For investment advisors, difficult times offer an opportunity to showcase their skills. Outperformance, even in the form of controlled drawdowns, will help them stand out.
- For governments to achieve their goal of 2%-3% inflation, we will need a reduction in demand.
- A lot of money in the private markets will not find its way to bonds or other conservative/mainstream assets, and therefore private market assets will continue to see inflows.
- Investing in secondary markets provides many advantages including visibility into the portfolio, no blind pool risk, and underwrite and reprice those assets, all while having a shorter duration exposure and near-term liquidity.