As the saying goes, when it rains, it pours. And as though a global pandemic and a never-before-seen supply chain debacle weren’t enough, the war between Ukraine and Russia has created a full myriad of problems relating to the cost of living. With the cost of everything from gasoline to ground beef skyrocketing, investors are finding that their stock portfolios are plummeting. Because of this, investors are turning to private equity and hedge funds, with the hope that these will be stronger investments in the future.
A Downward Spiral
The market has been abysmal over the past few quarters, but there are a few small glimmers of hope. Although the entire market has certainly taken a turn for the worse, private equity investments did manage to remain somewhat resilient during the first quarter. “The Lincoln Private Market Index rose 1.7% during the quarter, at a time when many of the gains recorded in public company valuations in the second half of 2021 were erased following Russia’s invasion of Ukraine.”
People are taking notice. Forbes Magazine found that surveys of investors reported that they expect the trend to continue, with 72% of institutional and private wealth investors setting their sights on investing in private equity within the next 12 months, while 54% say they will place their money in hedge funds.
Hedge funds seem like an especially good choice right now, returning 10.2% for 2021 and they recorded their first net inflow in over five years at $25 billion. Although all asset classes saw a decline, hedge funds seem to be weathering the storm the best and offering the most security.
These two classes also “provide timely risk management benefits and niche opportunities in the current market environment,” according to Forbes.
The real trouble came with tech investors, who experienced a $2T decline in value from the five biggest tech firms. Although the tech world has been gaining ground hand over fist, they have fallen the hardest in this downturned market.
The Road to Inflation
Hindsight, as they say, is 20/20, and it is easy to see how the country has gotten to this place. When Covid-19 roared into the country, closing businesses, causing many people to lose their jobs, and generally wreaking havoc, the government created a stimulus package to help its citizens. They also lowered interest rates to keep the country going.
But along with the ramifications of the raging pandemic, the supply chain started to break down when entire factories were shuttered or transportation experts could not work to get the goods across the country.
All that considered, positive strides were being made until the war with Ukraine was started by Russia. Because both Russia and Ukraine play such a pivotal role in the global agriculture supply, food prices and availability have been adversely affected across the globe.
“We are in a time for which there’s a lot of money in the economy, which means that there is high demand, but the supply is just not there,” Dr. Kenneth Tah said. Tah is an assistant professor of finance at Mercer University.
The Federal Reserve has increased interest rates to combat the problem, but when investors see the interest rates increase, they see this as a glaring symbol that things are going wrong.
“All of the rates are going to go up. Mortgage rates will go up. Credit card rates will go up. Car loans will go up. Even repayment of student loans will go up. So that is bad news,” Tah said.
The interest rates are continuing to increase. On June 15, the Fed raised interest rates by three-quarters of a percentage point — the biggest increase since 1994, and so the bad news will continue.
Investors Thinking Small
Despite the bleak outlook for the economy, investors feel that private market assets around the world are holding their own. Global private market assets reached $10T in September 2021, nearly five times as much as in 2007, according to Preqin, a financial data provider. Although public markets are definitely bigger in terms of assets than private equity firms, these public markets have grown more slowly.
There are many positives to dealing with smaller companies. The Washington Post states, “For startups, staying private as they grow allows them to avoid regular disclosure requirements, investor calls, and the threat of unwelcome activist shareholders breathing down their necks. For borrowers, working with private lenders can mean faster approval on better terms.”
No one knows exactly how far the pendulum will swing, but for now, investors are thinking small in order to make some big gains. With interest rates on the rise along with burgeoning prices, investors are hoping that playing little ball will offer them a big yield.
I like to spend my time giving back with organizations that focus on mentoring aspiring entrepreneurs. I have supported after school programs that focus on entrepreneurial and global initiatives in local primary schools. I recently extended my mentoring to include students at Case Western Reserve University.