5. A Continued Surge In Legal Finance
The asset class of Legal Finance has rapidly grown over the past few decades.With the aftermath and lasting effects of COVID19, the legal industry, coupled with legal finance firms, are expecting a substantial increase in litigation, ranging from insurance policy rescissions to contract disputes. Though still in its infancy, and developing, as an alternative asset class, Legal Finance can help level the playing field for plaintiffs and defendants, something that we anticipate will be greatly needed over the next few years, as the world recovers from the pandemic.
6. A Push Towards Decarbonization
There’s a global push to reduce carbon emissions across various transportation networks, fueling conflict between market operators and multinational regulatory bodies. Specific to the shipping industry, this is the most significant driver of change. Part of the United Nations, the International Maritime Organization IMO is pushing to reduce shipping emissions by 50% by 2050. With new carbon reduction regulations expected to come in force by early 2023, shipowners are racing to improve the fuel efficiency of existing vessels, with new vessels powered by liquid natural gas LNG. Additional alternatives energy sources are being considered as well, but the IMO will need to provide a better framework, as well as research and development support prior to enforcing emission regulations.
7. Pockets of Concern in Retail Commercial Real Estate
The pandemic has accelerated the adoption of online shopping by roughly five years over the past six months. Though the adoption of e-commerce among younger generations, specifically in urban areas, has been a long standing trend, the adoption acceleration for older cohorts is rapidly increasing. With this, the question becomes whether or not recent adopters will go back to in-person shopping when the opportunity allows.
8. The Institutionalization of Single-Family Rentals
Institutional investors have long found successes in owning traditional multi-family home rentals. These same investors, however, have been slower to adopt a strategy for single-family rentals. This resulted in a decade-long process of institutionalizing the single-family rental market yielding only a net penetration of low single digits for institutional investors.
We expect this to change over the coming years as private owners begin to sell their rental properties to professionally- managed companies and investors who can employ operational efficiency and will have access to low cost financing. Assuming the work-from-home trend at least partially continues, meaning less than 100% of workers who previously went into the office full time no longer will, the attractiveness of single-family rentals is likely to increase.
9. Continued Stress on Corporate Balance Sheets
Leveraged loans—bank syndicated loans that rank higher than bonds in a large corporation’s capital structure—are likely to see pockets of stress as corporations continue to default on their debt obligations. Through November of 2020, the year-
to-date default rate for leveraged loans stood at 4.3%a, well above the rate of the past few years. Fitch, a rating agency, forecasts the overall default rate to reach a three-year cumulative rate of 17% by the end of 2022. If met, this would eclipse the 15% three-year high following the Global Financial Crisis.
With defaults and downgrades likely to continue in the corporate sector over the coming years, opportunities are likely to arise as structural dislocations continue to appear. In order to generate liquidity and/or comply with certain investment or structural restrictions, certain investors and packaged investment products may be forced to sell positions at less than ideal prices.
10. Large Players Coming Down Market
Many large hedge funds and private equity firms were slow to raise new opportunistic funds to take advantage of the dislocations created by the Global Financial Crisis. To avoid this from repeating, firms have been quicker to launch and raise funds for new opportunistic investment strategies at the onset of the pandemic. These large capital raises, however, have been met with fewer opportunities in the markets given the swift and decisive action on the monetary and fiscal policy fronts. The result is excess dry powder than many of these firms have opportunities for. These large firms have consequently started to deploy capital to smaller performing businesses.
This had multiple effects on the market. The first, is that borrowers are seeing financing available for lower yields given the imbalance of cash available to borrow and the competitive lending landscape. The second, is that smaller lenders are now able to partner with the larger firms to seek larger opportunities than they were previously able—the pairing being mutually beneficial—as the large firms can rely on the smaller firms’ due diligence capabilities, while the smaller firms benefit from the additional balance sheet provided by the larger firms.
Michael Weisz is founder and president of Yieldstreet, an alternative investment platform focused on generating passive income streams for investors.