The Paper Trail: Defying Gravity

We're well past the point of still being socially acceptable to say Happy New Year, but since it's my first post of 2025 I'll do it anyway - HAPPY NEW YEAR! 

I noticed a meaningful uptick in new subscribers to the blog since the start of the year (thank you and please continue to spread the word!) so for the benefit of the newbies, some quick housekeeping notes on what to expect from The Paper Trail each month:

• I'll curate and share 10-15 pieces of high quality investment research from a variety of third parties (asset managers, investment consultants, banks, academics, etc.)
• Topics will span the investment spectrum, from traditional to alternative and everywhere in between.
• Each paper will be introduced with the primary question the author(s) aims to explore and/or answer.
• I’ll also include a memorable quote and visual from each one, and a link to the full piece for those interested in diving deeper.
• Lastly, they are bucketed into two categories, sorted by estimated reading time – “bps” for the shorter ones (<10 min. reading time) and “pieces” for the longer ones (>10 min. reading time.)

With that out of the way, please enjoy the January edition of The Paper Trail. This month's research roundup features:

• Public vs. private infrastructure
• Venture capital secondaries
• Commercial real estate's investable universe
• Private credit's next act
• GP stakes' role in a portfolio
• Specialty finance investing
• The convergence of public and private debt
• Earnings growth expectations for U.S. stocks
• Global macro performance across monetary regimes
• Startup founder ownership trends
• Contrarian ideas for equity investors

How do public and private infrastructure compare with one another?

"There are distinct advantages and challenges associated with both public and private infrastructure investments. Private infrastructure offers more “pure play” characteristics, such as downturn and inflation protection, and its performance is primarily driven by operational performance rather than market trends. This results in lower observed volatility and greater diversification benefits. Additionally, private infrastructure allows for better alignment of interests between owners and management, fostering a long-term focus on enhancing underlying assets. However, it generally requires significant resources and capital to invest, and the fund structures for private infrastructure typically charge higher fees and offer limited liquidity."

Bridging the Gap: Comparing Public and Private Infrastructure (Meketa)

How large is the addressable market for venture capital secondaries?

"With a continued lack of exits coming from IPOs and M&A, there is a growing backlog of company shareholders and LPs in venture funds who need liquidity. We believe this will lead to the highest ever venture secondary TAM, in excess of $120B globally, in 2025."

2023 – 2025E: How Big Is The Secondary Market for Venture Capital? (Industry Ventures)

What is the investable universe for U.S. commercial real estate?

"Just how big is the U.S. commercial real estate market? Although a seemingly straightforward question, estimating the size of the market is challenging for several reasons: lack of data and transparency (especially for smaller, less-liquid and historically tracked property sectors), the widely diverse nature of the range of investible property types, and inconsistent industry definitions/classifications."

The U.S. Commercial Real Estate Investable Universe (Clarion Partners)

What will the next chapter for private credit look like?

"We believe navigating these sectors demands deep expertise and a nuanced understanding of the underlying assets and their unique risk profiles. Additionally, this type of lending often comes with a high capital charge for banks, making it particularly suited for private market players, in our view. Furthermore, as borrowers increasingly accept and turn to private markets for their financing needs, we believe these sectors will continue to grow and attract talent away from traditional banks."

Navigating Private Credit’s Next Act (Neuberger Berman)

Why has it gotten more expensive to own the S&P 500 via futures as opposed to buying an ETF or the underlying stocks?

"In short, we believe the elevated financing spread observed since early 2024 reflects abnormally large demand for financing capacity exceeding constrained supply. In market jargon, there has been a shortage of balance sheet."

Imbalance Sheet: Supply, Demand, and S&P 500® Financing (D E Shaw)

Which asset allocation "bucket" does GP Stakes belong in?

"Many regard GP stakes as private equity-like exposure, not only because portfolio investments are typically made in private equity managers, but also because of the typical GP stake funds’ target returns and the potential capital appreciation of the underlying firms. Other investors have looked at the stable and growing cash flow profile of a portfolio of GP stakes and bucketed the investment in their credit or yield-oriented allocations, while yet others consider the early cash flows from the realization of in-the-ground, visible assets, as most akin to a secondaries strategy. The truth, in our view, is that a GP stakes investment is really a combination of attributes from all of these potentially comparable investments; we believe the GP stakes asset class can generate attractive alpha and act as an attractive hedge or non-correlated diversifier in an investor’s portfolio through market cycles."

The Anatomy of a GP Stakes Fund: An Investment for All Seasons (Blue Owl)

What is specialty finance and why is it growing in popularity among private credit allocators?

"Specialty finance investing offers the potential for compelling risk-adjusted returns. Attractive characteristics of these investments are 1) the cash flowing nature of the underlying assets and 2) the downside protection often created through structuring. There is potential in the current market for higher investment returns from both higher base rates and wider spreads to compensate for the complexity of the assets or their structures."

Specialty Finance Investing: A Versatile Tool for Private Credit Investors (Cambridge Associates)

Is investment-grade private credit an oxymoron?

"Although funding is widely available for IG-rated companies in the public markets, the homogenous nature of the public IG market leaves a diverse set of borrowers with few options to customize their debt financings to meet their specific capital needs. This has created the opportunity to provide more flexible solutions, with many IG-rated issuers increasingly looking to private credit as a more versatile financing source."

2025 Credit Outlook: Defying Gravity (Apollo)

Are earnings growth expectations for U.S. stocks too high?

"For allocators, there is a balance to be struck: the structural advantages of the U.S. and the growth potential of new technologies should be reflected in capital market assumptions; the market’s tendencies toward over-extrapolation and over-exuberance (looming large at the start of 2025) should not."

2025 Capital Market Assumptions for Major Asset Classes (AQR)

How have global macro strategies performed across different monetary policy regimes?

"These strategies are particularly effective during heightened central bank intervention and economic uncertainty, with trading drivers that include monetary policy, inflation dynamics, and global economic divergence, among others. Conversely, in periods of low volatility and stable markets — often associated with policy normalization — macro opportunities are more muted as trends and inefficiencies become less pronounced."

Easing, Tightening, and Everything in Between: The Role of Macro Strategies across Monetary Policy Regimes (Graham Capital Management)

How does founder ownership change throughout a startup's lifecycle?

"After a priced seed round, the median founding team still owns 56.2% of their company’s issued equity, based on rounds raised on Carta between 2020 and\ 2024. At Series A, that median figure drops to 36.1%, a difference of more than 20 percentage points. The gap between Series A and Series B is another 13 percentage points, followed by successively smaller declines at Series C and Series D."

Founder Ownership Report 2025 (Carta)

Which recent equity market underperformers are the most attractive on a go-forward basis?

"An indefinite continuation of a winner-take-all bias across industries would almost certainly be a problem for value on a market capitalization weighted basis, but the economy has been through multiple cycles of consolidation and its reverse over history, and value has weathered them all, fundamentally speaking. Even the recent extremely strong outperformance of the mega cap growth names didn’t actually drive the fundamental returns for value negative. Any hint of mean reversion in mega cap performance looks likely to give value the opportunity to see strong rebalancing gains of the type we would expect with such a wide discount for value."

Bargain, Value Trap or Something In Between (GMO)