Yellen: Risks of a Recession Are Rising | Chief Investment Officer

When Janet Yellen chaired the Federal Reserve, she was known for her careful views that sought never to antagonize anyone. No longer. Her latest outspokenness was on view at the World Business Forum, where she said the risk of a recession is mounting.

In mid-2017, right before leaving office, she raised eyebrows by saying that no economic crisis would occur “in our lifetime.” She reasoned that, unlike the situation that led to the 2008 meltdown, banks had become more cautious about lending.

But this past week she declared she’d found “good reason to worry” about the US tumbling into another recession. While she didn’t see such a downturn imminently, she stated that the risks were mounting.

“I would bet that there would not be a recession in the coming year. But I would have to say that the odds of a recession are higher than normal and at a level that frankly I am not comfortable with,” she said.

One reason Yellen cited was the US-China trade war, harming Americans with higher prices due to tariffs and an overall sense of uneasiness. Plus, the Fed’s three recent rate cuts meant that the central bank now has less ammo to fight a recession, said Yellen, who started hiking rates in late 2015, after keeping them near zero like her predecessor, Ben Bernanke.

Now, she said, her successor had “not as much scope as I would like to see for the Fed to be able to respond to that. So, there is good reason to worry.” Similarly, she lamented the large federal deficits during a period of prosperity, which also would hinder fiscal policy to combat a slump.

She also found it worrisome that US corporations had packed on a lot of debt owing to low interest rates, which threatened to hurt them once the economy chilled. “If there is a recession, there will be a lot of companies that will be in trouble because of all the debt they’ve piled on,” Yellen said.

Yellen, a Democrat, pointed to income inequality as a malign force in society. “It’s a serious economic problem and social problem because it means the gains of our economic system are not being widely shared,” she contended.

Last winter, Yellen abandoned her previous stance of not criticizing Donald Trump when she said he had had no “grasp of economic policy.” She indicated that she doubted the president knew what the Fed was supposed to do.

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Tags: Federal Reserve, Janet Yellen, rate hikes, recession

The Washington State Investment Board is continuing its large allocation to private markets as it continues to place large bets on alternative investments.

The Washington State Investment Board (WSIB) has approved up to $2.05 billion in new private market commitments, shows a news release from the pension organization.

Real estate saw the largest commitments, $1.25 billion, followed by up to $450 million for private equity, up to $100 million for tangible assets, and up to $250 million for the system’s Innovation Portfolio.

In real estate, Aevitas Property Partners received $500 million and a second venture, Partners Enterprise Capital Holdings, received another $500 million. A third firm, Calzada Capital Partners, received $250 million.

Aevitas is based in Amsterdam and invests in real estate located in Europe, Africa, and India. The venture was formed in 2012. WSIB has previously invested $250 million in Aevitas in 2012, and $500 million each in 2014, 2016, and 2017.

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Partners Enterprise Capital Holdings is based in Chicago. WSIB has committed more than $4 billion to the real estate venture beginning in 1999. The third firm, Calzada Capital Partners, is also based in Chicago. The real estate firm manages $4.075 billion for WSIB, not including the new $250 million commitment.

The Washington State Investment Board has one of the largest and most unique real estate portfolios among public pension systems in the US. Its real estate portfolio totals $20.2 billion and makes up more than 18% the total plan assets of $109 billion.

The portfolio is unique because WSIB’s real estate investments are managed by captive companies, owned and controlled by WSIB. Traditionally, pension plans invest in commingled funds with other institutional investors or in separate accounts.

The biggest private equity commitment by WSIB, the release shows, is up to $250 million allocated to Madison Dearborn Capital Partners VIII. The fund will invest in middle and upper‐middle market companies located primarily in the US.

A second private equity investment is a $200 million commitment to Insight Partners XI. The fund will invest in software, enabled services, and internet businesses, primarily in the US and Europe.

Private equity is another large investment area for WSIB. The pension system’s $23.9 billion private equity portfolio is one of the largest in the United States and makes up almost 22% of WSIB’s total portfolio.

Percentagewise, it is around three times the size of the private equity portfolio of the largest US pension plan, the California Public Employees’ Retirement System (CalPERS).

In the tangible assets arena, WSIB has committed up to $100 million to Lime Rock Resources V. The fund, managed by Houston-based Lime Rock Resources, invests in oil and gas properties in the US. The fund has a target of $750 million. WSIB’s tangible assets portfolio is $5.5 billion.

WSIB also made a relatively large investment for its small Innovation Portfolio. It invested up to $175 million in GI Partners Data Infrastructure Fund. GI Partners has been best known for its real estate and private equity funds, but the new fund plans to make investments in data centers and related infrastructure. The fund has a target size of $1.25 billion. In addition, WSIB is committing up to $75 million in a co-investment vehicle, which will be managed by GI Partners.

The new commitments exceed total previous investments in the Innovation Portfolio. The portfolio, before the two commitments, only had a size of $162 million.

Real estate and private equity have produced particularly strong returns for WSIB. For the one-year period, ending Sept. 30, the real estate asset class produced returns of 13.43%. On a three-year basis, returns were 11.44%, on a five-year basis, returns were 11.5% and on a 10-year basis, returns were 11%.

Private equity returned 10.4% for the one-year period ending Sept. 30, 15.14% for the three-year period, 12.03% for the five-year period, and 14.17% for the 10-year period.

For the fiscal year, ending June 30, WSIB had overall returns of 8.36%.

Maintaining WSIB’s private market dominance will fall to the system’s new Chief Investment Officer, Alyson Tucker, starting in January. Tucker is replacing longtime CIO Gary Bruebaker, who is retiring at the end of December. Bruebaker was credited with successfully leading efforts to keep private market allocations high despite increased competition by other institutional investors for private market’s exposure.