Let's dive straight into the top stories from this past week...
As the Era of Easy Credit Ends, Zombie Firms Face Trouble
As a result of the Covid-19 pandemic, central banks began an unprecedented pace of monetary easing, creating an era of easy lending and low interest rates. Now that the Federal Reserve has changed their monetary policy to a more hawkish one, low interest lending has become harder to obtain. This has put the pressure on some corporate giants that are heavily leveraged. These firms are frequently referred to as "Zombie Firms", due to their reliance on low interest debt and lack of organic sustainability. Some household names include AMC Entertainment Holdings Inc., American Airlines Group Inc. and Carnival Corp. With interest rates on the rise, the result could be an onslaught of bankruptcies in the near future.
“When interest rates are at or close to zero, it’s very easy to get credit, and under those circumstances, the difference between a good company and a bad company is narrow...It’s only when the tide runs out that you figure out who is swimming naked.”
Komal Sri-Kumar, Former Chief Global Strategist of TCW Group
Investors Run to Private Equity to Wait Out Volatility
According to the Wall Street Journal, high-net-worth investors are piling into private equity in an effort to escape the uncertainty and volatility of the public equity and fixed-income markets. While asset managers say they have seen an uptick in private equity inflows, individuals remain a small source of capital compared to pension and endowment inflows. This follows a similar trend witnessed at the beginning of this year, when 62% of PE and VC firms said they planned on raising capital again.
Volt Capital, a San Francisco-based venture firm, has raised a $50M fund, targeting early-stage crypto investments. The firm joins a large group of capital allocators who are seeking to enter the space after a significant valuation pullback this year, with assets like Bitcoin dropping nearly 38%. Volt's prior fund, totaling $10M, targeted pre-seed and seed opportunities in the crypto space that included companies like Magic Labs Inc., a user-authentication platform, and CoinShift, a treasury management service. Below, New York Times compares some of the largest cryptocurrencies on an exponential scale.
“We strongly believe now’s the time to be doubling down, amidst the market carnage...What’s different now is the global macro environment...We haven’t invested with rising rates and inflation before.”
On Tuesday, UBS Wealth Management released the annual edition of their Global Family Office Report. The firm surveyed 221 clients globally between January and February. One key finding from the report included family offices reassessing their options in an environment where high-quality fixed income has become hard to obtain. In addition, many groups have major concerns regarding inflation and an unstable geopolitical climate. Private equity remained a favored source of return, with a greater number of family offices than ever before investing in the asset class.
According to a recent Financial Advisor IQ report, the SEC has charged Cornerstone Acquisition and Management, in addition to Derren Lee Geiger, the firm's CEO, of misleading investors in two private funds that the firm advised. Specifically, investors claim the manager misstated the group's percent ownership, existence of collateral and overall risk of the funds. Cornerstone was registered from January 2006 through March 2022 and had nearly $131M in assets at its height.
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