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Capitalizing On Private Market Dislocations

Christopher Zook is the founder, chairman and chief investment officer of CAZ Investments. Zook has more than 30 years of experience investing in both traditional and alternative asset classes, is actively involved in public policy and frequently serves as a resource to state and local officials.

Russ Alan Prince: Tell me why GP stakes are such a lucrative investment.

Christopher Zook: In short, it’s better to be a GP than an LP. Private asset managers now account for more than $10 trillion in assets under management, with estimates of growing to over $18 trillion by 2027. Participating in this broader trend has been our primary objective, and we believe sitting shoulder to shoulder with the General Partner is an ideal way to get exposure. 

One of the key reasons GP stakes are so attractive is their ability to offer a steady stream of income through management fees. These fees are contractually obligated by LP fund commitments. This consistency is highly appealing to investors seeking reliable cash flow. Beyond management fees, General Partners also earn performance fees tied to the success of the funds they manage. As the fund’s assets under management and performance ascend, the potential for substantial profit-sharing income grows in tandem. Furthermore, the long-term commitments by the underlying LP’s mitigate risk associated with short-term market fluctuations, promoting consistent returns from management fees while waiting out down cycles and the more unpredictable performance fee returns. 

Another significant advantage of investing in numerous GP stakes lies in diversification. By owning a piece of the General Partner, your potential success is spread across all vintages, past, present and future. By owning GP stakes in multiple different asset managers, you become further diversified across specialty, asset class and geography. In short, GP stakes provide exposure to the private markets from an entirely different angle when contrasted with traditional investors trying to access one specific fund vintage as an LP.   

To be clear, GP stakes are somewhat rare and exclusive. These investments are grounded in relationships, as private asset managers exercise prudence when selecting minority partners. With a track record that includes ownership of minority stakes in more than 60 well-known asset managers across private equity, private credit and private real estate, CAZ has become one of the largest players in the global landscape of GP stakes.  

Prince: Looking ahead to 2024, what do you see as the biggest opportunity the industry needs to turn its attention to?

Zook: As we often say, “Hope is not a good investment strategy.” Many investors are still hoping for a reversal in Federal Reserve policy, but the signs don’t point in that direction. Our view is that the Fed will maintain higher interest rates for an extended period, which, unfortunately, implies a more significant economic downturn than what many investors anticipate.

Considering this perspective, we are concerned about the risk/reward dynamics in public markets. We advise investors to prepare for potential opportunities arising from emerging dislocations. Dislocation investment opportunities materialize when economic or market disruptions cause asset prices to significantly diverge from their intrinsic or fundamental values. In anticipation of these opportunities, we are building our war chest to take full advantage.

So, as we look to 2024, a dislocation investment strategy will be a major theme for us here at CAZ, and we are very excited about capitalizing on those opportunities.

Prince: Where are the greatest dislocation investment opportunities?

Zook: We are investing actively in the secondary market for private assets, which involves the buying and selling of existing private equity and venture capital fund interests and is particularly attractive during dislocations.

A lot of the big institutional capital in 2022 saw large losses in their public market assets, causing the size of their overall portfolios to decline. When they rebalance to get their allocation back within their policy constraints, they sometimes are forced to sell some of what has performed well in order to reposition liquidity back into stocks, bonds and other assets that are down. So, this “denominator effect” is a real issue.

The result? We’re witnessing a surge in high-quality assets entering the private markets, driven by the need for liquidity. These assets are appealing because they can allow investors to shorten the J-curve and offer clear visibility into what’s being acquired, all at an attractive discount to current net asset value. The secondaries market is ripe with opportunities. While we see material dislocations beginning to develop in several sectors, we are currently most focused on energy and real estate.

We anticipate significant pricing dislocations in the real estate sector, especially in commercial markets, as trillions of dollars come up for debt renewal and refinancing challenges loom large. Distressed commercial real estate is likely to offer substantial value as certain sectors adapt to evolving market dynamics.

In the energy domain, we believe there’s an underestimated demand for traditional fossil fuels. The world’s current energy mix heavily relies on non-renewable sources, with only a small fraction coming from renewables. About 3% of total world energy is from renewables. The notion that we can swiftly transition to renewables is unrealistic, as it requires extensive investment in infrastructure. In reality, we are on track to consume more oil and coal than ever before in 2023. China and India’s continued coal plant construction underscores this reality. 

Thus, we anticipate a significant dislocation between global energy demands, which remain largely dependent on fossil fuels, and the push for emission reduction and net-zero goals. This gap in energy transition expectations offers intriguing investment prospects.

Russ Alan Prince is the executive director of Private Wealth and a strategist for family offices and the ultra-wealthy. He has co-authored 70 books in the field, including Making Smart Decisions: How Ultra-Wealthy Families Get Superior Wealth Planning Results.


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