Eurozone Property Funds Reveal Risks, U.S. Banks Increase Reserves and the IMF Predicts Weaker Growth in this Week's Edition...
Take a Lap Around the Industry
FDIC Begins Selling $114B Worth of Failed Bank Bonds, Estimates $3.3B Net Loss (WSJ)
Barclays Projects to Close 21 ETNs in June (Bloomberg)
Jaguar Land Rover Launches £15B Global Investment Devoted to EV Production (BBC)
Corporate Bonds Cut to Junk Rating, Fastest Since 2020 (Bloomberg)
Property Investment Funds' Design Flaw Creates Systemic Risk for Commercial Real Estate Markets
Property investment funds have grown significantly since the 2008 financial crisis, with eurozone real-estate funds reaching €1.04T in assets under management at the end of 2022, an increase from €200B in 2007. The vast majority of these funds are open-ended, allowing investors to cash out regularly. While the funds have helped the real estate industry become less reliant on bank loans and have allowed for increased exposure to the sector, they are poorly positioned for market downturns. Managers may have to limit withdrawals until they can sell real estate to raise cash, which can put pressure on property valuations and affect the commercial real estate loans held by banks. The ECB has expressed concern that these funds have become so big that they could have systemic implications for commercial real-estate markets. While investors are not currently withdrawing their money in droves, corrections for private funds traditionally lag. Regulators have tightened rules around how quickly investors can cash out, and further controls may be needed, such as charging for withdrawals or asking for longer redemption periods.
"A big reason for this [trend] is a push by asset managers into alternative strategies..."
Rich Hill, Cohen & Steers
Private Funding Pulse Check
Dig Ventures has recently participated in a Seed funding round worth $11.5M for Otterize, a company making secure access transparent for developers with intent-based access control (IBAC)
NB Ventures has invested in a $14M Series C funding round in Purple Style Labs, a luxury fashion house that brings India's top designers under a single platform
BlueMark, the leading provider of independent impact verification and intelligence for impact investing, has raised a $10M Series A investment from Blue Haven Initiative and Tsao Family Office
Ray & Lydia Bartoszek's Family Office, RLB Holdings, took part in a $11M Series A deal with Respondology, a company that assists in removing damaging social comments and bots across social media platforms
U.S. Banks Increase Reserves as Consumers Struggle with Loan Repayments
The four largest U.S. lenders have set aside more reserves amid worsening macroeconomic conditions as a growing number of consumers struggle with loan repayments. Such banks wrote off a combined $3.4B in bad consumer loans in Q1 2023, up 73% from the previous year. This, combined with additional reserves, brought provisions at all four institutions to levels not seen since the early days of the Covid-19 pandemic. Bank executives attribute the increase in provisions to a return to normal losses following pandemic-era government stimulus programs that artificially kept consumer defaults low, stating that they have not seen any significant cracks in their portfolios. Nevertheless, banks are taking necessary actions while keeping a close eye on their clients' sensitivity to inflation and increasing rates. Citigroup reassured investors that the increased credit losses were expected, while Goldman Sachs, Wells Fargo, and JPMorgan Chase & Co. all reported a rise in net charge-offs for their credit-card portfolios.
"We haven’t seen any cracks in that portfolio yet...The consumer is in great shape."
Alastair Borthwick, Bank of America
IMF Warns of Weakest Medium-Term Growth Since 1990 Amid Risks to Financial System
The International Monetary Fund (IMF) has issued a warning regarding the increasing risk of a slowdown in the global economy, prompted by concerns over the banking system and its response to potential rising interest rates. While fears that bank runs would ripple through the financial system have abated in recent weeks, concerns that additional bank failures and tightening lending standards could slow economic output around the world remain. The IMF has slightly reduced its growth forecast for 2023, lowering it to 2.8% from 2.9% in January. The IMF expects growth to hover around 3% for the next five years, which is its weakest medium-term growth forecast since 1990. While the IMF expressed optimism that a financial crisis could be averted, it suggested that a hard landing, which could entail economies around the world tipping into recession, was increasingly plausible.
"A hard landing — particularly for advanced economies — has become a much larger risk...The fog around the world economic outlook has thickened."
IMF
Cathie Wood's ARK ETFs Face Investor Exodus Despite Strong Performance this Year
ARK Investment Management, the group of funds led by Cathie Wood, is currently experiencing net outflows from all of its US-listed exchange-traded funds this year, except for one. This comes despite the fact that most of these funds have delivered returns that outperform the S&P 500. The lackluster response from investors towards the firm's offerings could be a sign that Wood's cult-like fan base, which she amassed after her flagship's gains of almost 150% in 2020, might be losing interest following a tumultuous 2022. This is exemplified by the ARK Innovation Fund's decline of 67% last year, which dented investors' confidence in Wood's leadership. The ARK Venture Fund, a new addition to the firm's products, has struggled to garner investor interest, with net assets of only $15M as of the end of March. However, despite these setbacks, most of ARK's products have achieved impressive returns so far this year. Some analysts suggest that investors may be waiting for another dip before "upping their bets on ARK".
"There’s certainly a camp of investors that may have lost some faith...How could you not?"
Atria Wealth Solutions has announced a definitive agreement to acquire Grove Point Financial, an independent RIA with $15B in assets (Cision)
Aristotle Capital Management, LLC has completed its purchase of Pacific Asset Management, bringing its combined team to 50 professionals and $22B in AUM (Yahoo)
OneDigital finalizes its fifth acquisition this year with the addition of CLS Consulting, adding both 401(k) advisory and retirement plan business services (WM)
Written by:
Andrew Popp | Sr. Research Associate
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