Investors and fund managers are always vigilant, trying to predict when and where risks might emerge. The primary source of market risk often stems from significant black swan events – unexpected incidents or phenomena that pull markets down.
Brandon Yarckin, the COO of Universa Investments, shares insights on how his firm manages risk for clients, especially in private equity and pension investments.
“Given the current landscape of portfolios structured in a certain way, we see the financial environment as highly leveraged with a substantial amount of debt,” Yarckin tells Yahoo Finance. He notes, “We’ve witnessed the Federal Reserve swiftly increasing interest rates, which has specific lagging consequences, notably impacting private equity.”
For more expert analysis and updates on market trends, you can watch the full episode on Yahoo Finance Live here.
Editor’s note: This article was authored by Luke Carberry Mogan.
Video Transcript
BRAD SMITH: Pensions and other large institutions are increasingly turning to risky leveraged strategies as unproductive investments like private equity fail to deliver. The threat of forced liquidation looms large. Brandon Yarckin, Universa Investments’ Chief Operating Officer, is here to delve into this topic. Alright, let’s start by unpacking the current risks you’re observing and explore how investors can potentially mitigate these risks.
BRANDON YARCKIN: Thank you for having me, Brad. It’s crucial to contextualize our perspective. Universa Investments focuses on risk mitigation exclusively. Our clients seek a form of insurance-like protection where losses are minimized during quiet times or ideally avoided altogether.
During market downturns, we aim to maximize gains. While we may be viewed as perpetual pessimists constantly on the lookout for the next black swan event like the one behind me, that’s a misperception. In reality, many clients engage us to adopt bullish positions. In 2022, for instance, we projected a bullish stance when sentiments were extremely negative, anticipating a market upturn before a potential crash.
Subsequently, markets surged by over 50%, reflecting a shift in sentiment. So, while we monitor areas like private equity, the notion that we are always bearish is inaccurate. We have actually displayed a bullish outlook over the past 18 months.
SEANA SMITH: Brandon, what could trigger a substantial correction in the market, and what might that correction entail?
BRANDON YARCKIN: With the current portfolio context in mind, we note a highly leveraged financial landscape marked by extensive debt accumulation. Our client communications emphasized the surge in leveraging across corporations and governments to unprecedented levels.
The Federal Reserve’s rapid interest rate hikes have triggered specific lag effects, notably impacting private equity. Although we lack direct insight into major private equity firms like Blackstone and Apollo, we cater to individuals invested in these entities, offering risk mitigation services. Large public pension funds and sovereign wealth funds rely on our expertise to navigate systemic risks and address them effectively.
Regarding private equity, we’ve observed a growing shift towards illiquidity on institutional balance sheets relative to liquidity. Institutions such as pensions and sovereign wealth funds possess fixed liabilities necessitating periodic payouts. Despite the appeal of higher returns from illiquid assets, the need for consistent liquidation to meet obligations persists. As private equity monetizations decline, the proportion of liquid assets dwindles, posing challenges for asset management.
