Alvarez-Demalde: Liquidity is the key issue for alternatives, not volatility

Key Concepts:

• Private Investments/Alternatives
• Economic Downturn/Volatility
• Private Credit
• Liquidity
• 401(k) Access
• Accredited vs. Retail Investors
• Technology Sector
• Public vs. Private Markets

1. Industry Growth and Institutionalization:

• The private investment industry has grown significantly in the last 15-16 years, with a substantial increase in assets under management in alternatives.
• The industry has become more institutionalized, with various entities owning different types of assets.
• Private assets are now professionally managed with processes for value creation and reporting.
• However, the industry hasn't faced a major crisis in the last ten years, raising concerns about its resilience.

2. Impact of Economic Downturn on Alternatives:

• Private credit may benefit from an economic downturn as traditional lenders become more hesitant, and private credit terms are favorable to lenders.
• The impact depends on the specific sector; technology is relatively uncorrelated to macro volatility due to secular trends.

3. Access to Alternatives for Different Investor Types:

• Historically, access to private markets was limited to institutional investors, then expanded to high-net-worth individuals.
• There's a growing trend to provide access to 401(k) plans, which represent a significant pool of capital (8-10 trillion USD) compared to the private equity industry in the US (3-4 trillion USD).
• The key issue is liquidity, as alternatives are illiquid assets with long durations, making it challenging to provide liquidity when needed.
• Matching the liquidity horizon of investors with the assets is crucial.

4. Suitability of Alternatives for 401(k)s and Retail Investors:

• Alternative investments can be suitable for 401(k)s and retail investors, depending on their profile and the percentage of exposure.
• In the technology sector, the public markets offer limited exposure (approximately 700 companies, with 100 being software-focused).
• The "magnificent seven" companies account for a significant portion (20-30 trillion USD) of the public market value.
• Private markets in technology offer access to a much larger target market (20,000 companies).
• By not investing in private markets, investors miss out on the broader long tail of opportunities.

5. Examples of Investments:

• Past and current investments include companies like Picasso, Ambarella, and GoPro.

6. Liquidity Concerns:

• Alternatives are illiquid assets with long durations.
• Matching the liquidity horizon of investors with the assets is very important.

7. Conclusion:

The private investment industry has matured and offers potential benefits, particularly in sectors like technology. However, concerns about liquidity and the lack of a significant crisis in recent years remain. Access to alternatives is expanding to retail investors and 401(k)s, but careful consideration of investor profiles and liquidity needs is essential. The private market offers a broader range of investment opportunities compared to the public market, especially in technology.