The Paper Trail: Fresh Snow

A white Christmas seemed all but certain this year. More snow had accumulated in the Chicagoland area by December 7th than ALL of last winter combined. But alas, a warm front came by and melted it all away before Kris Kringle boarded his sleigh. Maybe next year...

I love this time of year so much. I hope you're enjoying the holiday season and making memories with the ones you love. Merry Christmas from the Huber family - see you in 2026!

Now, please enjoy the final installment of The Paper Trail for 2025. December's edition features:

• Historical PE performance relative to public stocks
• Opportunities in residential credit
• Headlines vs. reality in private debt
• It's complicated: the relationship between banks and non-bank lenders
• GP financing solutions
• An examination of "buy the dip" strategies
• Risk management 2.0
• 2026: the year of small-cap stocks?
• Stock market valuations and bubble concerns
• Risk-reward tradeoffs in public market asset classes
• The financing gap in professional sports
• Market concentration, passive investing, and the future of capitalism
• Signs of life in commercial real estate 

How persistent is the private equity return premium?

"Overall, private equity produced positive five-year annual returns ranging between 0% and 20% and returns that exceeded public stock more than 90% of the time. However, private equity investors individually experienced different outcomes depending upon their fund choices. The good news is that 50% of investors experience private equity returns that are tightly bound (+/- 2.5%) to outcomes for the whole, limiting a good deal of uncertainty for investors when they select private equity allocators/funds."

Private Equity Performance Through the Last Quarter-Century (Cliffwater)

Where do the best opportunities reside within residential credit?

"Two phenomena – home price appreciation (HPA) and locked-in low rates – are driving the re-emergence and growth of parts of the $14.5 trillion U.S. mortgage market: closed-end second liens and home equity lines of credit (HELOCs). Due to the rapid HPA since 2019 (+56% in aggregate or approximately 10% annualized versus a historic annual average of 5%), there is an unprecedented $36 trillion in total U.S. home equity."

Rapids of Private Credit: Opportunities in the Eddies of ABF (Davidson Kempner)

Are the recent headline concerns about private credit's growth overblown?

"Over the past 10 years, dry powder in both private credit and private equity has grown at a similar compound annual growth rate – just over 9% – but private credit is doing so off a much lower base. Over the same period, private credit dry powder as a percentage of private equity dry powder has remained almost unchanged, underscoring the thesis that the market’s scale remains proportionate to its opportunity set."

Putting Private Credit Concerns in Perspective (HPS)

How complicated is the relationship between banks and private non-bank lenders?

"The post-2024 landscape is reshaping how credit is created, transferred and held. Banks are recalibrating balance sheets for efficiency while private lenders are assuming a more active role in long-term financing. We believe the result is not a zero-sum shift but an expanding opportunity set across the credit spectrum."

How Banks and Private Markets are Redefining Credit (Neuberger Berman)

How have general partner (GP) financing solutions evolved over time?

"GP Financing Solutions offer non-permanent capital, designed to support specific GP objectives such as funding commitments, acquisition financing, strategic re-investment, succession planning or corporate initiatives. From a GP’s perspective, this can be a non-dilutive form of capital, providing the ability to maintain flexible financing with a defined duration by partnering with strategic financing counterparties."

The Evolution of GP Financing Solutions: From GP Stakes to GP Structures (Dawson Partners)

Does "buy the dip" beat "buy and hold"?

"The short answer is no. One reason is that buy the dip tends to face a headwind—it’s usually positioned opposite momentum. If investors want to add value through timing market entry and exit points, history shows it’s better to align with momentum than to buy the dip, by following the trend."

Hold the Dip (AQR)

Are current risk management best practices in the investment industry fundamentally flawed?

"Therefore, the main difference between risk 1.0 and risk 2.0 is the underlying model of reality. Newtonian physics for 1.0, and complexity science for 2.0. We are in no doubt that risk 2.0 is conceptually superior, but we acknowledge that it is far, far less mathematically tractable and, for the foreseeable feature, harder to engage with. Building a new risk model, and a new risk management process will be very difficult. It will require us to think wider (to address endogeneity, among other things), and softer (to cope with emergence, among other things) and longer (see later in series)."

Fresh Snow: Risk Management for Investment Systems (Thinking Ahead Institute)

Will 2026 be the year of small-cap stocks?

"Taken together, the outlook for US and non-US DM small-cap equities is compelling. Wide and unjustified valuation discounts, prospects for stronger earnings growth and multiple expansion, supportive macro and policy tailwinds, and favorable sector dynamics all point to significant outperformance potential in the coming year."

2026 Outlook: Finding Value Amid the Hype (Cambridge Associates)

Do current valuations suggest the stock market is in a bubble?

"In this paper, we’ve documented our view that US stocks aren’t valuation constrained, despite a P/E multiple on the high side of its historic range. We define a “sentiment spread” as the long-term growth rate (higher being good for equities) minus the equity risk premium (higher being bad for equities). Applying an optimistic sentiment spread, consistent with 1985-2001, justifies considerable further equity upside, assuming current levels of earnings and interest rates. The range of sensible fair values is wide, and current prices don’t appear extreme enough to justify taking positions either way based on valuation alone."

No, Stocks Aren't in a Valuation Bubble - Not Even Close (Hudson Bay Capital)

Where are the best risk-reward tradeoffs in stock and bond markets today?

"Our agnostic investor can build a portfolio that deserves to win handily if the bubble is a bubble and should also do just fine if all is normal. I don’t mean to say that choosing to own a portfolio with little or no U.S. equities in it is easy to do given U.S. equities have beaten the rest of the world by as much as they have over the last 15 years, but keeping a normal amount of money in equities is a luxury the last two bubbles didn’t allow for. Today, building a diversified portfolio of risk assets that are priced to deliver equity-like-or-better returns is straightforward. While in this portfolio U.S. equities are most notable for their absence, there are still plenty of assets to choose from."

It's Probably A Bubble, But There Is Plenty Else To Invest In (GMO)

Why is there so much excitement around the investment opportunity in sports?

"The evolution of sports from a local pastime to a global economic ecosystem has created an institutional-grade asset class that benefits from predictable cash flows and wide competitive moats built on structural scarcity and deep cultural and social ties with its customer base. The next stage of that evolution will be shaped by financial innovation: the deployment of solutions-based capital that strengthens balance sheets, enhances the fan experience, and preserves the traditions that make sports uniquely enduring."

The Financing Gap in Sports: Unlocking a $2.5 Trillion Opportunity (Apollo)

Do market concentration and passive investing pose a risk to the future of capitalism?

"My contention is that the emergence of a high degree of market concentration has blunted the role of competition, while in parallel the emergence of passive investing as the dominant mode of investing in public markets has blunted the capital allocation role traditionally fulfilled by investors. For anyone concerned about the functioning of capitalism, I suggest that the dystopian symbiosis I have outlined should be a concern."

The Dystopian Symbiosis: Passive Investing and Platform Capitalism (AllianceBernstein)

Is the commercial real estate (CRE) market showing signs of life?

"So…even though many real estate vacancy rates are still rising, the third major real estate price correction since 1978 suggests that a lot of bad news is priced in. We’re already seeing small monthly gains in commercial real estate returns and a recovery in transaction volumes. There’s a lot of inventory that’s still overpriced, but it’s time to look for opportunity."

The Deep End: 2025 Alternative Investments Review (J.P. Morgan)