On Thursday, December 14, leaders in public finance, private equity, venture capital, hedge funds and investment management convened at the Kenan Center in Chapel Hill to discuss 2018 investment challenges and opportunities. The 2018 Investment Outlook forum was sponsored by the Kenan Institute of Private Enterprise.
Kenan Institute Director Greg Brown kicked off the proceedings with a macro look at the current investment climate. Brown presented statistics that show real gross domestic product growth for the U.S. declining slightly from its current three percent to between two and two and a half percent in 2018. Some factors that will affect GDP growth as the new year begins, he said, are the effects of massive rebuilding efforts after several major hurricanes across the country; the “wealth effect,” which refers to the notion that consumers tend to spend more when there is a bull market in widely-held assets like stocks and real estate; and an uptick in the growth of global investment.
Brown also discussed the fact that, while the U.S. is adding approximately 200,000 new jobs per month, this number is not sustainable long-term. In addition, productivity gains have been weak at less than one percent for the past few years.
All of this, Brown concluded, points to a real possibility of a U.S. recession by late-2018 to early 2019.
Next, Brown turned the discussion over to four panelists. First on the agenda was Edwin Poston, general partner and co-founder of TrueBridge Capital Partners, an alternative asset management firm focused on the venture capital industry. Poston noted success in venture capital markets in 2018 would continue to be tied to both the economy and to cycles of innovation, with technological advances spurring venture capital investments.
Betsy Battle, CIO and founding partner of Lone Peak Partners Management, focused on hedge funds, saying that the current investment period was the “third entry of an existential crisis” for such funds. She added that hedge fund managers “haven’t beaten their benchmarks in about nine years,” and that, as passively managed funds become more commonplace, it will be increasingly difficult for active managers to compete.
Panelist Jon King, president and CEO of UNC Management Company, noted that UNC’s current investment strategy focuses heavily on both long-term investments and a diversified portfolio. He added that the university has recently built up its low volatility “defensive investments” to balance out its more speculative investments.
Mike Elio, a partner in StepStone, a global private markets specialist, focused on the private equity landscape. Elio said that public markets are shrinking, while “private markets have been great for the past few years.” Elio noted that private market investment was at its highest rate ever in 2017, but raised the issue of sustainability, asking, “When is the music going to stop?”
A topic of immediate interest to the panelists was how the congressional tax bill currently under consideration might affect the investment landscape. Battle stated that “the 21 percent corporate tax [rate] is an absolute positive,” but noted that she’s “terrified” about the effects of other provisions of the bill, such as those dealing with the Alternative Minimum Tax and the cap on real estate deductions. Elio said the group who will likely benefit the most from tax law changes are lawyers, saying they’ll have a “field day” as companies tweak their offshore presence in reaction to potential changes in the repatriation rate for company’s foreign profits.
After the panel discussion, Edward M. O’Herron Distinguished Scholar of Finance Christian Lundblad, who also serves as Kenan Institute research director and associate dean of the PhD program at Kenan-Flagler Business School, provided an overview of financial markets in China. He covered the effects of government politics and policies on those markets, saying that China’s average GDP growth, holding at roughly 10 percent since the 1970s, has been tapering off since the financial crisis.
Lundblad discussed the major factors affecting the Chinese financial landscape. One, he said, is the fact that China’s economy is no longer coming from behind. “It’s easy to go from low income to middle income,” said Lundblad, “[It’s] harder to go from middle to high.”
The Chinese government’s penchant for infrastructure projects, many of which are awarded as political prizes, is also helping to slow the country’s economic growth. According to Lundblad, 50 percent of Chinese investment is tied up in incomplete infrastructure projects.
Lundblad said that government policies and a lack of oversight are often red flags for foreign investors considering China. In addition to labor and environmental concerns, investors also have questions about Chinese property rights, contract enforcement and judicial efficiency.
In spite of the challenges, Lundblad suggested that investors should consider a strategy for investing in China. While he questions whether the current political regime is sincere about efforts to change the economic landscape, he cited several government initiatives, such as the current anti-corruption campaign, as possible signs that political and investment changes may be coming, albeit slowly.
After the main presentations, participants had the opportunity to further discuss the forum’s topics at a reception sponsored by Hamilton Point Investment Advisors.