HBCUs Seek Opportunities to Bolster Endowments, per PGIM Report

A study by PGIM and the United Negro College Fund suggested that historically Black institutions could pool endowments to access more investment opportunities.



Historically Black colleges and universities have far fewer resources to manage their endowments than other universities and have issues accumulating endowment assets, according to a joint study by PGIM and the nonprofit United Negro College Fund Inc. released on Monday.

For the report, “Investing in Change: A Call to Action for Strengthening Private HBCU Endowments,” UNCF and PGIM surveyed 22 private HBCU and 50 non-HBCU endowment professionals in a survey conducted in partnership with research firm CoreData.

The research found that HBCUs tend to have smaller endowments than their peers, resulting in financial constraints. According to the report, 86% of these endowments allocated most of their assets to scholarships, with little available for any other purpose, including investment.

“One of the biggest challenges we face is growing our endowment,” said one HBCU president cited in the report. “When you are an institution that depends annually on revenue from enrollment, all it takes is one blip, and all of a sudden, you’re facing a financial challenge.”

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No HBCU has an endowment greater than $1 billion, according to the report. The largest, managed by Howard University, had $865.3 million in assets as of April 2023. According to the report, the median endowment of the institutions surveyed stood at $31 million, while the institutions surveyed represented a range of $5 million to $500 million as of year-end 2022.

“With a $30 million endowment, we don’t have the luxury of dipping in one year and taking $3 million out of the endowment to supplement our operations,” said one chief financial officer quoted in the report.

The research also noted that HBCUs, on average, have very small investment staffs. These institutions averaged only one internal investment professional, while other colleges and universities have an average of six, and one external investment professional, while non-HBCUs have an average of five. Both HBCUs and non-HBCUs average one investment consultant.

Of HBCU investment professionals surveyed, fewer than half reported spending time on asset allocation, compared to 86% of their peers at non-HBCUs. With limited resources and staff, some investment professionals at HBCUs report leaning on their schools’ boards to assist with investment decisions, while some note that board members often provide expertise in risk and asset management.

“HBCUs have, for centuries, pursued their missions without the endowment resources afforded to their counterparts. They have done tremendous work with a hand tied behind their back,” said Ed Smith-Lewis, vice president for strategic partnerships and institutional programs at the UNCF, in a statement. “Using this study as a foundation, UNCF is leading the charge to forge a new era in which HBCUs are able to cultivate the endowments required to accelerate their work and impact.”

Potential Solutions Include Endowment Pooling

As part of the report, PGIM and UNCF proposed solutions involving asset management industry cooperation with HBCUs to better support and provide service to their endowments.

The report stated that providing investment “education and access to innovative investments and diversification solutions” to HBCU endowments could enhance investment outcomes.

The report also suggested endowment pooling, in which the endowments of several institutions pool assets to gain access to investment opportunities only available to investors with greater assets. According to the report, 19% of HBCUs already pool assets, and an additional 44% reporting they would be likely to consider asset pooling.

The UNCF announced in mid-January a $1 billion capital campaign that includes a goal of $370 million earmarked for the endowments of its 37 member institutions. An initial $100 million grant from Lilly Endowment Inc. will be deployed to initiate a pooled endowment fund.

“We plan to establish endowments for our member HBCUs that will be pooled and managed at UNCF. They will become permanent assets of the institutions,” said Michael Lomax, the president and CEO of the UNCF, in a statement announcing the grant. “Rising tides do lift all boats, and UNCF is committed to making this a reality, because 100% of this grant will be used to enhance the endowments at our 37 members colleges and universities.”

Additional solutions included in the report were additional risk management support to help HBCUs “navigate macroeconomic challenges, including interest rate and inflation risks;” collaborating with experienced partners to increase risk tolerance; and “implementing sophisticated liquidity management tools.”

“Our hope is that this research initiates critical conversations about how to level the playing field for HBCU endowments and how asset managers can engage with these vital institutions to help them meet their long-term goals,” said Sancia Dalley, a managing director and head of PGIM’s DEI portfolio and HBCU investment strategy, in a statement. “PGIM’s work with HBCUs and UNCF is one way we can help fuel an ecosystem that is already producing a strong talent pool of future professionals for our industry.”

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Sanctions Experts Tell Congress Chinese Investment Restrictions Should Be More Specific

Sectoral-based sanctions, such as those enforced by the U.S. Department of Commerce, can be vague and harder for the industry to understand than specific blocks on individuals and companies.



Restrictions on investments in and exports to China should be increased, according to testimony during a U.S. House Committee on Financial Services subcommittee hearing Tuesday.

The Subcommittee on National Security, Illicit Finance, and International Financial Institutions heard from witnesses who advocated for greater restrictions and argued that restriction should focus more on specific entities, rather than on entire economic sectors.

Thomas Feddo, the founder of the Rubicon Advisors and a former assistant secretary of the treasury for investment security, said sectoral restrictions—those that focus on a particular technology or industry—are “slow and resource intensive,” whereas a focus on blocking specific entities from the U.S. financial system is “immediate and very efficient.”

Feddo explained that an entity-based approach is easier for the private sector to understand and comply with. Representative Andy Barr, R-Kentucky, concurred and argued that sectoral restrictions create an “ambiguous yellow light” for industry, instead of a clearer, binary choice that can be achieved with an entity-based approach.

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Barr is the sponsor of the Chinese Military and Surveillance Company Sanctions Act, which would empower the president to “impose property-blocking sanctions” on individuals or companies in the military or surveillance industries “if the sanctions will address threats related to those sectors.” The bill was passed by the House Committee on Financial Services in September.

Emily Kilcrease, a senior fellow and director of the energy, economic and security program for the Center for a New American Security, argued that while it is important to restrict China’s access to “frontier” artificial intelligence and other technologies with potential military applications, “we can’t just say AI, we need to be specific with what we’re talking about,” because a lack of specificity will make sanctions policy difficult to enforce and comply with.

The American Securities Association, which has been strongly supportive of export controls related to China, wrote a letter to the subcommittee applauding its efforts: “The ASA appreciates the ongoing work of executive agencies and Congress—including members of this Committee—to further restrict the flow of U.S. capital to the [Chinese Communist Party.]”

The letter highlighted the recent decision of the Federal Retirement Thrift Investment Board to work to ensure the indexes on which its passive investment offerings are based exclude companies in China and Hong Kong.

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Market Rally Raises US Public Pension Funded Levels to 2023’s Highest Point

The stock market rebound in November and December spurred a $349 billion increase in the 100 largest U.S. public plans’ funding, per Milliman.



As markets rallied during November and December, so did the funded status of the 100 largest U.S. public pension funds, which ended 2023 at their highest point of the year at 78.2%.

According to consulting firm Milliman, the market rebound helped spur a combined $349 billion increase in funding. The aggregate funded level of the plans, as tracked by Milliman’s Public Pension Funding Index, rose to that 78.2% figure from 75.9% at the end of November and 72.4% at the end of October.

“The late-year rally pushed nine more plans above 90% funding so that 21 plans stood above this key benchmark as of December 31—a big jump from the 12 we saw as of October 31, 2023,” Becky Sielman, co-author of Milliman’s PPFI, said in a release. “On the other end of the spectrum, 11 plans moved above 60% funding, leaving only 15 of the 100 plans below this level, compared with 26 at the end of October, a good sign for the overall health of public pensions.”

The plans earned estimated investment returns of 5.2% and 3.3% in November and December, respectively, with returns for individual plans ranging from 2.5% to 7.7% in November and 1.7% to 5.0% in December. The total asset value of the plans increased to $4.857 trillion as of the end of December from $4.704 trillion at the end of November and $4.480 trillion at the end of October.

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The market value of the plans increased by approximately $233 billion during November, offset by $9 billion in net negative cash flow, and by approximately $162 billion during December, again offset by $9 billion in net negative cash flow.

The total pension liability grew to an estimated $6.213 trillion as of the end of 2023, up from $6.199 trillion at the end of November and $6.185 trillion at the end of October.

Milliman also projected how aggregate funded status will fare in 2024 under three scenarios. A baseline scenario assumes each plan’s future investment returns will equal its current reported interest rate assumption, with a median rate of 7.0% used for the projections. While “optimistic” and “pessimistic” scenarios assume each plan’s investment returns will be either 7% higher or lower than its interest rate assumption.

Under the baseline scenario, Milliman projects the aggregate funded ratio of the 100 plans would end 2024 at 79.5%, while under the optimistic and pessimistic scenarios, it projects the funded level to end the year at 84.8% or 74.2%, respectively.

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Blackstone Hires Thomas Nides for New Vice Chairman Role

The former Morgan Stanley vice chairman, deputy secretary of state and ambassador to Israel will lead the firm’s client relations.



Private equity giant Blackstone Inc. has named former Morgan Stanley vice chairman Thomas Nides to the newly created role of vice chairman of strategy and client relations.

The firm announced Monday that Nides will support various strategic company initiatives and special projects, including focusing on senior client relationships worldwide.

Nides, the U.S. ambassador to Israel from 2021 to 2023, was also a deputy secretary of state from 2011 to 2013 under President Barack Obama, after which Nides joined Morgan Stanley as managing director and vice chairman.

“Tom has operated at the highest levels of both the public and private sectors and brings a wealth of relationships across the financial, government and geographic spectrum,” Blackstone Chairman and CEO Stephen Schwarzman said in a statement. “We are still in the early innings of our global expansion and believe he will be a tremendous asset to our people and clients.”

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Prior to being named deputy secretary of state, Nides was Morgan Stanley’s chief operating officer. Before that, he was chief administrative officer at Credit Suisse and senior vice president of human resources at Fannie Mae, according to his LinkedIn profile.

Nides is currently on the boards of the Partnership for Public Service, the International Rescue Committee, the Center for Strategic and International Studies, and the Urban Alliance Foundation.

“Blackstone’s world-class people, consistent outperformance, and high-integrity culture have contributed to its stature as a leading global investment platform with considerable wind at its back,” Nides said in a statement. “I’m excited to join this high-caliber team to help support the firm’s continued growth.”

The hiring comes just a few months after Nides left Wells Fargo less than one month after he joined the company.

In September 2023, Wells Fargo announced that Nides would join the company in October as vice chairman and become a member of its operating committee. The bank said he would be a close adviser to senior management on a range of issues, such as banking and management, and help expand client relationships. However, Nides left Wells Fargo before the end of October to “return his attention to events in the Middle East,” according to a company statement, following the outbreak of war in Israel in early October.

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The FX Phoenix has Risen From the Ashes

Foreign exchange—the largest, most liquid financial market globally—has been reinvigorated by two underpinning currency alpha strategies: momentum and carry, per analysis by Aspect Capital.

Ryan Horne

Razvan Remsing

Like a phoenix rising from the ashes, currency alpha has re-emerged after a decade-long slumber. Foreign exchange—the largest, most liquid financial market globally—has been reinvigorated by two underpinning currency alpha strategies: momentum and carry.

To shed light on what has contributed to a renewed uptick in opportunities, we explored three significant periods for momentum and carry strategies, as applied to FX markets:



To gain a clearer understanding of these different regimes and the behavior of G10 currency pairs, this analysis will examine key macroeconomic factors frequently used as inputs for fair-value currency models.

  • Interest Rates: Diverging interest rates between two countries can impact the relative value of their currencies;
  • Economic Indicators: GDP, inflation rates and trade balances can influence currency prices; and
  • Central Bank Policy Uncertainty: Monetary policies have a significant impact on currency prices, and unpredictable guidance can create price movements and trading opportunities.

Dispersion, Dispersion, Dispersion

Figure 1: Interest Rate Dispersion: Jan 1990 to Jun 2023

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The rate dispersion across our three distinct periods reveals notable differences. In the period before the global financial crisis and the consequent application of ultra-low interest rate policies, there was a notable divergence between major economies’ interest rates.

The 2008 GFC marked a substantial narrowing in rate divergence, as nations adopted zero or near-zero interest rates. In contrast, the post-ZIRP era has shown a renewed surge in rate differences, largely fueled by inflation dynamics.

Source: Macrobond


Figure 2: Annual GDP Distribution for G10 Currencies: Since 1990

The ZIRP era exhibited a narrow set of GDP growth rates concentrated around 2%. The GFC dealt a significant blow to economies worldwide, leaving most developed nations struggling to restore their growth prospects.

Contrastingly, the pre-ZIRP and post-ZIRP eras have exhibited a considerably broader span of GDP growth rates and, as we look at today’s macro landscape, dispersion is prevalent once again.

Source: Macrobond

  • The U.S. has shown a strong economic recovery, aided by substantial stimulus spending and a strong labor market.
  • Japan’s economy is showing resilience with ultra-low interest rates.
  • Rising interest rates and falling house prices have hampered recoveries for Australia and New Zealand, but both are expected to benefit from higher commodity exports.
  • The EU faces another potential energy crisis, financial sector weakness and the overhang of the Ukraine war.
  • The UK is struggling with high inflation and life after Brexit and is especially vulnerable to interest rate rises.

These variances in recovery highlight that while some economies have adapted to the new normal, others are still navigating their way.


Figure 3: Central Bank Policy Uncertainty

Before ZIRP, there was significant volatility and frequent shifts in central bank policies, mainly due to global economies adopting diverse strategies to manage their idiosyncratic circumstances. The start of the GFC marked an initial jump in volatility, swiftly followed by a decline to historically low levels due to consistent forward guidance about maintaining zero-to-low interest rates.

Source: Macrobond

More recently, central banks have found it increasingly challenging to provide accurate guidance, largely due to the unpredictable nature of inflation. Consequently, the volatility associated with these financial instruments has soared, hitting highs not seen since the early 1990s.

Currency Strategies Are Back With a Vengeance

The global financial crisis led to an era of financial austerity whereby governments and central banks implemented measures aimed at reducing their debt loads and stabilizing their economies. This era was also marked by a period of range-bound and suppressed macroeconomic indicators notable for driving FX prices: inflation, interest rates, central bank policies and GDP figures. As these essential macroeconomic indicators became both more stable and more similar to each other, opportunities for directional currency trading strategies such as carry and trend were hard to come by. During ZIRP, there was a decade-long period during which carry and trend struggled in FX markets, bringing the period average performance for these strategies into negative figures, according to Deutsche Bank’s DB Currency Momentum and DB Currency Carry Indexes.

In the post-ZIRP period (through the end of 2023), currency trend and carry models within Aspect Capital have continued to demonstrate the return of opportunities. These have come from all corners of the globe, including regions such as Latin America, Eastern Europe and Asia, which joined more traditional currency behemoths such as the U.S. and Japan.

One notable trend developed in the Mexican peso, which consistently strengthened against the U.S. dollar over the last few years. Furthermore, the wide interest rate differential between the eurozone and Eastern European countries created a favorable carry environment, leading to strong opportunities in shorting the euro against the Hungarian forint and Polish zloty, as two examples.

The above examples highlight the diverse opportunity set this post-ZIRP period offers for systematic strategies, spurred by the recent divergence and dispersion of macro indicators that have once again led to a return to the robust performance we were accustomed to before ZIRP. As deglobalization, political instability and persistently wide-ranging inflation continue; and as central banks adopt different policies, the macroeconomic indicators essential to creating strong trend and carry opportunities have re-emerged, placing currency alpha once again among the core return drivers for systematic strategies.


Razvan Remsing is the global director of investment solutions at Aspect Capital. Ryan Horne is an investment solutions analyst at Aspect Capital.

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the authors do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.

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Research Aiming to Track Inflation Named 2023 Markowitz Award Winner

The award is in honor of Nobel Prize-winning economist Harry Markowitz, who died last June at age 95.



Researchers aiming to identify the economic variables that determine the future of inflation have been named recipients of the 2023 Harry M. Markowitz Award, awarded to the best paper published during the year by the Journal Of Investment Management.

The award, sponsored by JOIM and New Frontier Advisors, is intended to recognize the impact of Nobel Prize-winning economist Harry Markowitz’s work on theoretical finance and the practice of asset management. Markowitz, who passed away last June at the age of 95, is best known as the father of modern portfolio theory.

The award was also established to support research and innovation in practical asset management. Candidates for the annual award are chosen by the JOIM’s associate editors from the papers published in the JOIM in a calendar year. The final prize winners are chosen by Nobel Prize laureates, who are members of the JOIM’s advisory board. An honorarium of $10,000 is given to the winning paper, with two other papers receiving a special distinction award and a $5,000 honorarium.

The top award for 2023 was given to “The Determinants of Inflation,” by William Kinlaw, Mark Kritzman, Michael Metcalfe and David Turkington. The authors used a hidden Markov model to identify “regimes of shifting inflation” and used an attribution technique based on the Mahalanobis distance to identify the economic variables that determine the trajectory of inflation.

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The paper’s analysis is intended to allow policymakers to focus on the most effective tools to manage inflation and offers guidance to investors whose strategies could benefit from knowing the prevailing determinants of inflation. According to its analysis, the most important determinant of the recent spike in inflation was federal government spending.

The winners of the special distinction awards were “The Diminishing Role of Active Mutual Funds: Flows and Returns,” by James Xiong, Thomas Idzorek and Roger Ibbotson; and “Financing Fusion Energy,” by Abdullah Alhamdan, Zachery Halem, Irene Hernandez, Andrew Lo, Manish Singh and Dennis Whyte.

The authors of “The Diminishing Role of Active Mutual Funds” found in their research that U.S. active equity mutual funds have experienced net outflows since around 2006, If the current flow trend continues, the assets under management of active mutual funds will drop to 17% of the total AUM of equity funds after 15 years, according the paper.

“Financing Fusion Energy” made the case for investing in fusion energy, citing increasing global energy demand, high annual carbon dioxide output and the technological limitations of rivals wind and solar power’s. However, it also notes that financing for fusion companies through traditional means has been a challenge, citing high upfront costs, a lengthy delay in payoff and high risk of commercial failure.

The awards will be formally announced March 26 at the Spring JOIM Conference, which runs from March 24 through March 26 at the University of California, San Diego’s Rady School of Management.

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What if the Economy Has a No-Landing Outcome?

Everyone expects a soft landing, but Ned Davis sketches how that felicitous result might not happen.


Things sure look good for the U.S. economy, with a strong gain for gross domestic product, a deceleration in inflation, a rise in real (inflation-adjusted) paychecks, low unemployment and a Federal Reserve apparently sold on cutting interest rates. No surprise that the stock market has responded with glee: The S&P 500 has catapulted 22% over the past 12 months. To think that one year ago, 61% of economists in a Wall Street Journal survey expected a recession soon, aka a “hard landing.”

Conventional wisdom today anticipates a “soft landing,” with solid but temperate economic expansion, little inflation and lowered borrowing costs. But as market seer Robert Farrell, the former research chief at Merrill Lynch, once observed: “When all the experts and forecasts agree, something else is going to happen.”

What if what happens lies in between soft and hard, in the realm called “no landing”? In this outcome, inflation fails to keep dropping toward the Fed’s desire 2% annual rate and might even re-accelerate. Economic expansion is robust, but the central bank scraps its plans to loosen policy, scotching expectations for lower rates. Then the disappointed stock market likely would flag.

That is the outcome laid out by Ned Davis Research in a note: “The no-landing scenario has historically meant positive, but below average, stock returns and a hawkish Fed,” wrote Alejandra Grindal, chief economist, and London Stockton, a research analyst, at the analytics firm.

While conceding that the soft-landing result is the more likely, the pair made the case that recent data points could indicate the “meh” alternative. For one thing, the economy is at “above-trend growth,” and “higher inflation this year is more than just a remote possibility.” So GDP could run too hot to allow inflation to continue its descent, and the Fed could back off from rate cuts.

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Indeed, GDP grew at a blistering 3.3% annually in 2023’s final quarter. For 2023, the Ned Davis report pointed out, shelter costs “remained stubbornly high,” and super-core CPI “remained resilient”—that is, costs not counting energy and rents.

Such developments could lay the groundwork for dismay in the stock market, per Grindal and Stockton. They wrote that “the no-landing scenario, which we would describe as an overheated economy, is historically consistent with positive, but below-average, equity returns.”

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Private Credit Is Changing Everything, Even Bankruptcy

Restructuring professionals report an uptick in both restructuring activity and private equity sponsors considering turning indebted businesses over to their lenders.



A wave of bankruptcies and restructurings is always on the horizon, depending on who you ask. Whether it materializes is another thing entirely. 2024 is showing some signs that the wave might crest.

At the start of 2023, it looked like a wave might materialize. Many firms staffed up their restructuring teams, expecting a busy season. But, sources say, bankers were willing to extend and amend financing if it looked like a given business had a path forward. According to data from a recent analysis by FTI Consulting, the distribution of filings by debtor size in 2023 is consistent with annual averages since 2017, except for 2020, which was an outlier. Approximately 55% of large filers have liabilities at filing between $50 million and $250 million (middle-market cases); about 25% have liabilities at filing between $250 million and $1 billion (large middle-market cases), while nearly 20% of filings are above $1 billion—and 2023 was unexceptional in this respect.

Those findings are consistent with what Brian Davies, a managing partner in the financial advisory services practice at investment bank Capstone Partners, saw play out. He says he did not ramp up headcount on his team, in part because the ascent of private credit changed the math for borrowers. They have more ways to secure financing, and private lenders may be willing to find solutions during times of trouble, instead of forcing businesses to seek legal protection.

Many lenders hold their assets, because capital is much more difficult to redeploy at the moment, Davies says. Another issue is that weve been in a very competitive lending environment, so its difficult for some lenders to force a restructuring if a borrower breaches the agreement, because so many deals were drafted covenant light. These two factors can limit a lender’s options.

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Moving into 2024, these trends may be starting to shift. The year started with a number of highprofile filings, including Signa Group and Diamond Sports.

Vincent Indelicato, global co-head of Proskauer Rose LLP’s business solutions, governance, restructuring and bankruptcy group, says,restructuring professionals have seen a conspicuous uptick in restructuring activity.” He adds that in some cases, private equity managers are taking a look at the balance sheets of their portfolio companies and realizing they have run out of options. “For the first time in a long time, we are seeing private equity sponsors approach their lenders and say, ‘Do you want the keys?’” he says.

Indelicato adds that there is still a desire from lenders and borrowers to find a workout without going to court, even in a changeofcontrol arrangement at the borrowing company, unless the business has troubled assets that would benefit specifically from tools available in bankruptcy proceedings. Businesses with unexpired leases or labor agreements that cannot be managed in a workout are two examples.

Challenges Ahead

Despite the desire to stay out of federal bankruptcy court, being able to do so is likely to become harder. Businesses that extended and amended their way through the past three years may be out of runway, and whats more, depending on their overall balance sheet, they may not have the equity available to get refinancing, even from flexible lenders.

I think creditors are beginning to realize that even if the Fed cuts rates this year and next, a lot of balance sheets are still broken or unserviceable, says Tuck Hardie, managing director in the financial restructuring group at investment bank Houlihan Lokey. Creditors are beginning to say, ‘OK, someone has got to de-risk me either through an equity contribution, an accretive asset sale, or deleverage by having a junior stakeholder convert to equity, because senior creditors are not being compensated for the risk they are taking. I think that attitude will continue to harden.

Hardie notes that there are loans maturing this year and next that were written when interest rates were significantly lower, and companies may find they cannot afford to refinance at a higher rate. That pressure is likely to be most acute in the middle market, where significant private credit activity is focused and where businesses have fewer financing options overall.

Capstones Davies agrees. Historically speaking, when we started a restructuring process, there often was some unencumbered assets that would provide incremental capital, thus giving additional runway to work with,” he says. What were seeing now, and what I think were going to see going forward, is that there are very few unencumbered assets left. The competition to place these credits has been so high that theyve stretched the collateral to provide more credit for the business. So getting restructuring financing in place is going to be more of a challenge.

Even if it is challenging, parties may try getting as creative as possible to avoid court. Bankruptcy proceedings are more expensive than an outofcourt restructuring and can take much longer. Hardie adds that middle market companies could lose 10% or more of their enterprise value in a bankruptcy proceeding, even if the company eventually exits and resumes regular operations. With the cost of capital already high, bankruptcy will be even harder to come back from. Sources say creditors and investors also have a preference for so-called packaged bankruptcies,” meant to be entered and exited quickly. If that’s not possible for a given company, it could be challenging to secure debtor-in-possession financing to go through the process if the exit strategy is not straightforward.

Shrinking Multiples

The challenges businesses face are not limited to just their balance sheets. Investors could see contraction of the multiples within certain private equity vintages that have exposure to these companies. If private equity managers engage in the debt-for-equity swap needed for a change-of-control transaction, it can give companies more time to clean up troubled balance sheets, but it cannot fix everything. As a result, it may be harder to gauge the overall risk profile of private equity and private credit portfolios if managers are not disciplined about what they are willing to underwrite.

When I think back to the last restructuring market we had, the amount of private equity capital that was out there then, compared to what it is nowthe increase is just breathtaking, Davies says. So you have to think about how these funds are going to react to a restructuring if their focus has largely been on profit improvement.”

So-called liability management practices, such as accelerated change of control, could be one way sponsors avoid court. Proskauers Indelicato says he expects to see these practices continue. I think in the first quarter, in particular, well continue to see use of this playbook as [PE] sponsors with flexibility use these tools to extend runway and avoid a bankruptcy filing, he says. Many of the candidates for those trades will likely prove to be companies that have been the walking wounded since the pandemic and desperately need a capital solution because of liquidity challenges. To some extent, I think we may see ‘The Return of the Living Dead.’” 

Nate McOmber, managing director in the restructuring practice at G2 Capital Advisors, says he is already seeing an uptick in demand for financial and restructuring fiduciary services, as sponsors and companies look for people to lead them through insolvency. He also points to a talent gap in the industry, saying,There’s a pronounced shortage of junior and mid-senior people with the kind of wide-ranging toolkit required to be an effective fiduciary in special situations. Despite the soft landing the Fed is working toward, borrowing costs will remain high for the foreseeable future, which a lot of companies won’t be able to stomach, which will continue to drive a lot of need for restructuring services.”

New data from S&P Global show that private equity managers are also terminating a fairly significant number of deals. Global terminated M&A deals totaled $15.96 billion across 29 transactions in the fourth quarter of 2023, a low figure on a historical basis. However, 17.2% of those deals were backed by private equity and venture capital firms, either as buyer or seller, the highest quarterly proportion since 2020.

If more companies are running into financing hurdles and the broader M&A market remains challenging and slow, investors could encounter difficulty getting money back from private equity managers, which could make it difficult to redeploy capital, especially in institutional portfolios already struggling with denominator effect issues. As Bloomberg recently reported, some large investors have already said they will not re-up into new private equity funds until they get at least some cash back.

If investors look to the default rate as a relative benchmark to assess portfolio risk, they may find it less accurate than in the past. According to FTI Consulting’s analysis, “The ascent of private credit likely is having some indirect impact on the default rate, as more non-bank lenders opt for credit estimates (or less) and forgo a full credit evaluation process by the rating agencies for some of their loan exposures, thereby excluding these companies from the pool of issuers tracked by the rating agencies should they later default. Consequently, we believe that, in time, the speculative-grade debt default rate could become a less representative proxy of large corporate failure, if it isn’t happening already.

Lenders, for their part, still have some tools to ensure they get something in a recovery process. Practices like priming—when the seniority position of a lender on a secured loan is superseded by another lender— can keep groups of senior creditors at the top of the repayment list. However, it requires those creditors to be relatively sophisticated in their practices. Capstone’s Davies notes when banks were doing the majority of the lending, they had workout groups within the team already. Non-bank lenders may not have that and could lose out to teams that do.

Investors may also want to look closely at the discipline of the private credit managers with which they invest. Private credit is fresh off another banner fundraising year and is looking to put money to work in a relatively slow M&A environment. Houlihans Hardie notes that the temptation to finance companies under pressure could add risk to managers portfolios.

“There are firms that will continue to finance these businesses, sometimes even at an over-levered level, because they buy into the story that the company will eventually grow into its balance sheet over time,” Hardie says. “We’re seeing debt deals get done at leverage levels that make you scratch your head and go, ‘What were they thinking here?’ They’re financing somebody else’s problem and creating a problem for themselves.”

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