The Paper Trail: Late-Cycle Investing

A bit tardy with this month’s roundup, but for good reason. I spent the better part of this week in Vegas (baby) for our annual Cliffwater Investor Conference.

It was great spending a few days with our clients: golfing, eating, and trying our luck at the tables. And of course plenty of content, including updates from our team and an excellent roster of outside speakers, including: Jason Wenk (Altruist), Brent Sullivan (Tax Alpha Insider) and Morgan Housel (author of The Psychology of Money).

The calm before the conference

When I got home, the Halloween festivities were waiting. No real theme this year, unless you can connect the dots between a piñata, a candy corn, a firefighter, and a fire hydrant.

Trick or Treat!

Without further ado, please enjoy this month’s late-cycle (see what I did there?) edition of The Paper Trail. 

Here's what haunted me most in October:

🏗️ Financing the AI infrastructure buildout
🌲 Timberland as an uncorrelated asset class
🤠 Inflation vigilantes in developed markets
⚡ Preparing for a prolonged energy shock
🛒 Real estate's retail recovery
🏋️ The importance of scale in GP financing
🦆 Stock dispersion under the market's calm surface
🏁 Investing during late-cycle environments
💸 When negative free cash flow is a feature
🧠 AI-conscious asset allocation
🏷️ Private equity secondary pricing
🩻 The anatomy of U.S. equities
🚘 Self-driving portfolios
⚠️ Vulnerability in "risk-free" assets
⏱️ Investor timing gaps in trend-following strategies

Will data centers be the next software?

"But whereas SaaS plausibly offered credit-friendly recurring cash flows, AI-related lending has a far more speculative character."

Financing AI without a SaaS repeat (Carlyle)

Does a tree care what the market is doing?

"Unlike most financial assets, timberland benefits from an inherent multi-year biological growth component that accrues independently of market conditions, providing investors a degree of return stability alongside commodity price exposure and real estate dynamics."

Timberland (Meketa)

Are bond vigilantes getting credit for what inflation is doing?

"The connection is negligible, which indicates that inflation, rather than current or expected growth, is more closely associated with the unusually steep yield curves we see throughout the world today. So, while the bond vigilantes may indeed be trying to impose fiscal discipline, inflation seems to be what’s really shaping yield curves."

The Developed Market Inflation Vigilante (Syzygy)

How should investors prepare for a prolonged energy shock?

"Investors should trim overlapping exposures and add distinct return drivers while retaining growth holdings whose valuations support long-term returns."

VantagePoint: The Iran War Fuels the Case for Portfolio Resilience (Cambridge Associates)

Did retail get left for dead too early?

"This is not a generic recovery call. We see it as an income and scarcity call, in which returns could be driven by income growth, leasing, repositioning, and operational execution rather than cap-rate compression alone."

The Retail Recovery: Smarter Shoppers, Stronger Centers (Hines)

Would you rather lend to the best GP or the most durable one?

"Taken together, the data does not suggest that the largest managers always generate the highest returns. It suggests something more relevant to GP Financing Solutions: scaled managers have historically produced a narrower band of outcomes and demonstrated greater franchise staying power."

GP Financing Solutions: Scale Matters (Dawson Partners)

Is the calm surface of the stock market masking carnage underneath?

"Index calm does not equal low risk. Low correlations are suppressing index volatility while stock and manager dispersion remains elevated. That increases manager selection risk but also stock-selection and tax-management opportunity."

Canvas Market Insights: Calm on the Surface, Steady as She Goes? (Franklin Templeton)

How many recessions have we prepared for that never showed up?

"That’s because the economic cycle is different than it used to be, which poses stiff challenges to investors. We have been in a late stage of the economic cycle for a long time, and if one got out of risky assets at each point in time when late cycle appeared to be turning toward a slowdown or even a recession, the underperformance would have been very painful."

Late-Cycle Investing (PGIM)

Is negative free cash flow ever a good thing?

"Assuming a company can finance its operations, negative FCF is not only fine, but desirable, if returns on investment exceed the cost of capital."

To Free or Not to Free (Cash Flow) (Counterpoint Global)

How should allocators think about portfolio construction during a capital investment boom?

"The sheer amount of capital being raised and deployed throughout the AI ecosystem may overwhelm traditional approaches to portfolio diversification. Direct exposure to AI-related businesses may be highest in U.S. equity allocations, but other asset classes have meaningful AI risk exposure and may tend to correlate more highly with one another. It will be increasingly important to identify suitably defensive low AI investments that counterbalance these risk concentrations. Stress-testing portfolios against specific AI scenarios (such as model commoditization, a pause in capital flows or barriers to data center capacity) can reveal the extent of the exposure."

AI-Conscious Asset Allocation: Portfolio Construction in a Capital Investment Boom (J.P. Morgan)

Is record secondary volume froth, or a market doing its job?

"Practitioners treat the gap between transaction price and NAV as a gauge of market temperature: wide discounts signal distress, narrow discounts or premiums signal a seller’s market."

Private Equity Secondary Pricing: Understanding the Current Market (Institute for Private Capital)

What structural drivers have made the U.S. equity market so dominant?

"Our analysis shows that the U.S. equity market's historical leadership has not been triggered by a one-off event but rather by a process of business model renewal, innovation, growth and a strong persistent cycle of new companies entering and maturing."

The Anatomy of U.S. Equities (MSCI)

Will investment committees of the future be comprised of AI agents?

"The most binding constraint in institutional asset management is not data availability or model sophistication, but the finite bandwidth of human decision-makers."

The Self-Driving Portfolio: Agentic Architecture for Institutional Asset Management (Andrew Ang)

Is there such a thing as a risk-free asset?

"The problem in the US is different; it is that the shortening of maturity increases vulnerability. This issue has been helped in the short term by the jump in demand for short-term debt from issuers of stablecoins and hedge funds, but that extra demand presumably will not persist indefinitely."

 

An Invidious Choice? Towards Bond Market Crisis or Yield Curve Control (AllianceBernstein)

Why do investors have such a hard time capturing the returns of trend following strategies?

"For a strategy whose long-term premium is concentrated in a small number of strong periods, the consequences are substantial. Allocating after strong performance meant, on average, arriving after substantial returns had already been earned; redeeming after prolonged drawdowns meant, within this sample, withdrawing before the subsequent recovery."

Paid for Presence: The Investor Timing Gap in Trend-Following (Quantica Capital)