For investors, nothing may be quite as alluring—and risky—as alternative assets. Whether art, antiques, private equity, private debt, real estate investment trusts (REITs), venture capital, hedge funds, managed futures, derivatives contracts or other potentially valuable securities that aren’t publicly traded, they have an elitist panache.
That’s because, until fairly recently, alts were the exclusive province of institutional players and select accredited, high-net-worth individuals. No longer.
You can, in part, thank Christopher Zook for that.
The Chance To Make A Killing
Zook, the 54-year-old chairman and chief investment officer of Houston-based CAZ Investments, is more than a cheerleader for this asset class. He’s an investor himself who has helped bring these largely unregulated and unlisted assets to a broader, more democratic pool of savvy investors.
Some of the sex appeal of alts, he knows, lies in their being uncorrelated with traditional markets. But also, for those who can stomach their uncertainties and lack of liquidity, they offer the chance to make a killing.
“That’s our value proposition,” said Zook in a recent conversation. “We want to close the huge disconnect between the traditional investment world and alternative investments. It’s possible to integrate those two sets of portfolios and generate better results.”
Investors Pulling Back
To be sure, the promise of outsize returns brought many pension funds and risk-tolerant individual investors to private-equity and private-credit funds over the past few decades. But lately, with bond rates up and a rally in public equity markets, many of the biggest alts investors have been pulling back.
Consequently, some private-equity fund issuers have reportedly taken extreme measures to try to stanch capital outflows and attract new customers. Private equity still represents more than $4 trillion in assets, but many managers have undertaken risky loans to secure special dividends for their investors. Others have sold off shares of companies they own just to show profits and calm nervous investors, who’ve grown increasingly worried about rising interest rates and a possible recession.
Private credit hasn’t fared much better. Last spring, Moody’s Investors Service warned of a “serious challenge” facing the $1.4 trillion private-credit market, largely due to loans that were underwritten when interest rates were near zero and are now under severe strain from higher borrowing costs.
Zook Unfazed
None of this, however, seems to faze Zook. “Overdramatized,” he said. “It’s simply the economic cycle.”
He acknowledged that it’s gotten harder to raise money for private-equity funds. But that’s not “fundamental or systemic,” he insisted.
After nearly three decades in the business, Zook has certainly lived through several economic cycles. While a student at Texas Tech, earning a bachelor’s degree in financial management, he traded commodity futures to help pay his tuition.
At 21, he listened to Tony Robbins’ “Unleash the Power Within,” which gave him a new life goal: He would open his own asset-management practice.
A decade later, in August 2001, at age 32, Zook launched CAZ Investments.
Today, it has some $6 billion under management, more than 3,100 investor-clients in all 50 states and 19 countries, and more than 80 separate fund vehicles.
The CAZ Process
The firm specializes in leveraging a broad spectrum of asset classes. Its universe of potential investments includes a whopping 1,500 securities every year.
A squad of analysts narrows the list down to those that seem to offer the most promise, he said. It’s a mysterious process, one that Zook called part science and part art.
To arrive at a portfolio, he and his team start with a “thematic overview,” he explained, that’s likely to be in play for at least two years and possibly 10 years or longer. Any investments that don’t fit the theme are set aside. Those that do are then further whittled down to a select few that promise “the biggest edge and best risk-reward characteristics,” he said.
For instance, several years ago Zook and team identified the growth of private asset management as an important multi-decade trend. More and more capital was flowing out of public markets into private ones, and demand for private-market assets was on the rise.
But rather than simply investing in private assets themselves, Zook and crew bought into other firms that were successfully gathering up those private assets. That way, CAZ Investments could own a piece of the market and simultaneously gain the skills and knowhow of those who were managing the assets.
At the same time, CAZ looks for prospects in the secondary market, where trades take place between investors and traders, not directly from the companies that issue the assets.
Zook calls this multifaceted method “curating unique opportunities.”
Two Types Of Clients
To be sure, alts aren’t right for all investors. They move in a somewhat shadowy, less-protected realm. Funds can be locked up for years at a time.
Broadly speaking, the two types of clients that CAZ serves are either co-mingled, private investment funds or separately managed accounts, which are owned by single investors or investment entities—typically high-net-worth individuals and related pension and profit-sharing plans, charitable organizations, or others who can pony up at least a quarter of a million dollars. Either way, they are sophisticated folks.
For separately managed accounts, the firm receives a percentage of the profits earned by the investor. There is no management fee per se.
“We are the largest investor in everything we do,” said Zook, adding that he and his firm have some $600 million of their own capital invested in the securities they recommend. “If we do well, our clients do well. And if they don’t, we won’t either,” he said. “That’s a promise.”
A Train Wreck Coming
It would be a mistake to think that Zook is always bullish. Toward the end of the third quarter, when many economists were talking about a “soft landing,” Zook continued insisting that a recession is definitely on its way.
“The data is overwhelming,” he said, citing a dramatic rise in credit card and auto-loan delinquency rates as well as corporate bankruptcies, among other factors. “The stress on the U.S. consumer is becoming acute.”
He also dubbed the outlook for commercial real estate a “train wreck coming.” Building loans are coming due, he said, and lending has become tight. Rising interest rates will likely lead to more defaults as companies that borrowed excessively when rates were low will struggle to pay off their debts. “Little lending availability and maturing loans are a bad combination," he said.
Nevertheless, Zook isn’t overly troubled. What keeps him “in the right headspace,” as he put it, are his family, his faith, cardio exercises, and weightlifting. Plus he has a book coming out next February, coauthored with Tony Robbins, called "The Holy Grail of Investing: The World's Greatest Investors Reveal Their Ultimate Strategies for Financial Freedom."
Perhaps there’s something more behind his lack of concern. To Zook, even a recession has pockets of potential. “Candidly, there are going to be some amazing opportunities for us,” he said, “unlike anything we’ve seen since the global financial crisis.”