Why Private Funds Are Sweating

SEC Chair Gary Gensler announces significant regulatory changes... [The Daily Peel... ]() August 28, 2023 | Peel #531 In this issue of the Peel: - JPow at the annual Kansas City Fed's Jackson Hole conference conveyed that the FOMC will continue their efforts until inflation gets back to or under 2%. They are monitoring the Labor Market, and further rate hikes could be imminent. - Affirm's stock boomed after positive earnings reports, and Workday showcased strong earnings, potentially indicating future growth. - Hawaiian Electric faces legal issues after alleged failures leading to fires in Maui, and Nordstrom is experiencing historically high theft losses, affecting their earnings. - SEC Chair Gary Gensler announces significant regulatory changes for the reporting of private funds, aiming for more transparency in the $25tn private fund industry. The impact of these new requirements on the performance and costs of private funds remains uncertain. Market Snapshot Happy Monday, apes. Hope you had a fun weekend. Central bankers are back from the sticks and into the big cities once more, much like you coming off the bar’s bathroom floor and back into the office. Welcome home, apes. Equity markets managed to dance around Powell’s Jackson Hole comments for a reasonably green day to close last week. All of the U.S. majors moved higher, with the large-cap dominated Nasdaq leading the charge, driven by strong days from Tesla and others. Yields on U.S. Treasuries bounced around slightly, with the 10-year managing to hang below its highs posted earlier in the week. The 2-year note said, “Hold my beer,” on the other hand, and blasted back through 5.1% for a hot second. Let’s get into it. The Ultimate Program for Aspiring Investment Bankers [image]() Landing an investment banking offer is tough coming from any school – from non-target all the way to the Ivy League. But 6-figures right out of school isn’t supposed to be easy. 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Macro Monkey Say JPow at JHole A group of central bankers flies into Wyoming and… While that does sound like the start to an obviously hysterical joke, that is also exactly what happened to close last week. The Kansas City Fed hosted its annual and always highly-anticipated conference in Jackson Hole, Wyoming, smack dab in the middle of Grand Teton National Park and 882 miles away from Kansas City, which is in Missouri. See, everything just makes too much sense. Obviously, the conference is held there because back in 1982, under the Paul Volcker regime, the only way to actually get this guy to go was to locate the meeting in a region with…good fly fishing. Just remember that every time you think these big, important institutions actually make meticulous decisions with, y’know, some logic in them. Nevertheless, it is a beautiful area of the country, so we can’t be mad, and Wall Street sure wasn’t either. "What that translates to from a technical monetary policy perspective, however, is much less clear." 10 am ET on Friday was the big moment when Fed Chair Jerome Powell dazzled us once more with a speech filled with double negatives and outsized opacity. JPow’s message, in layman’s terms, was fairly clear: We don’t know what is going on, but we are going to react based on data and make decisions meeting by meeting. What that translates to from a technical monetary policy perspective, however, is much less clear. Some of JPow’s key bars include: - “Although inflation has moved down from its peak—a welcome development—it remains too high.” - “...intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” - “Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.” - “We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.” - “We will keep at it until the job is done.” For markets, this was pretty much what they expected. There was no major change in course alluded to nor any kind of commitment to a certain level, timeline, or outcome aside from remaining hellbent on getting inflation down to 2%. Market-implied odds of a future hike did increase throughout the week, but not by a decisive amount. If anything, it seemed like Powell’s primary goal was to reduce the risk of surprise going forward. The central bank appears well aware of the market’s expectation for rate cuts sooner than alluded to in the Fed’s latest Summary of Economic Projections, so JPow seemed to be attempting to get markets more aligned with the FOMC’s timeframe in order to not be surprised at any future lack of cuts. "... JPow seemed to be attempting to get markets more aligned with the FOMC’s timeframe in order to not be surprised at any future lack of cuts." Or maybe it’s just not that deep. Regardless, some key takeaways could be: - JPow and the rest of the FOMC will “keep at it” (a reference to Powell’s idol, [Paul Volcker]()) until inflation gets back to or under 2% with no exceptions, such as changing the inflation target or other workarounds - They remain pleased with the Labor Market as is due to a low unemployment rate but seem unconcerned with the fact that the [Labor Force Participation Rate](=) remains well below pre-pandemic levels - The Fed is becoming more comfortable using real-time, non-traditional indicators like Zillow to track shelter costs - Further hikes could very well be on their way In addition to referencing his idol, Paul Volcker, Powell made sure to reference his other idol—his 2018 self. JPow made sure to include some astrology once again in his speech and likened the Fed’s coming actions to “navigating by the stars under cloudy skies.” How could you not feel confident after hearing that?? What's Ripe Affirm (AFRM) ↑ 28.82% ↑ - Buy-now, pay-later firms have caught a lot of hate since JPow’s rate hikes began, largely from us, but also from the market as the stock remains down 90% from its highs. - But yesterday, it was all about the future. Shares In Affirm boomed after more than a-firm earnings report, indicating a nice $0.69/sh loss on $446mn against expectations for an $0.88/sh loss on $406mn in sales. - Losses expanded for the year, but the jump in revenue clearly was the dominant piece in investors’ minds. Surprisingly, the ability of the firm’s subprime borrowers to uphold less-than-trash credit ratings has held up well, indicated by the share of overdue credit falling 30bps for the quarter. - For a stock that’s taken a 90% beating, any positive news will trigger an outsized upside. The firm’s latest report serves almost as a proof of concept of the business model in a high-rate environment, and you could argue knowing a company isn’t speeding towards bankruptcy is fairly bullish. Workday (WDAY) ↑ 5.38% ↑ - The company behind the job application portals that we know and hate all too much (unfortunately) was ripping to close last week. Earnings were solid, meaning those damn application portals (sadly) may not be going anywhere. - Damn shame. But, if you’re a shareholder, maybe the gains can balance it out as Workday more than delivered on the bottom line with an EPS of $1.73/sh vs. $1.46/sh expected. Sales beat slightly as well, clocking in at $1.787bn. - Price target bumps ensued, with Mizuho raising to $260 and Needham to $250. Both analyst teams cited a bunch of drivers, like expansion into financial management, international growth, and, of course, AI. - Easy enough. When in doubt, just slapping the “AI” label on there seems to get the job done, but we’ll see how that goes. What's Rotten Hawaiian Electric (HE) ↓ 18.62% ↓ - Yup, saw this one coming. After a volatile few weeks with traders wondering whether or not this utility name caused the horrific fires that ripped through Maui yesterday, the government of the island decided to sue. - Basically, the country of Maui sued the firm for allegedly failing to maintain power systems appropriately during a windstorm that sent the fires on a tear across the island. - To add salt to the wound, S&P Global downgraded the company’s credit rating as well, citing “inconsistent access” to the funding market. - We can front-run any further statement from Hawaiian Electric on the matter by going back to BP’s 2010 oil spill and paraphrasing their statement: “Oopsie.” Nordstrom (JWN) ↓ 7.73% ↓ - It’s hard to have a good day when the media’s primary takeaway from your earnings report was the CEO saying, “Losses from theft are at historical highs.” - Yeah, not a great start. Purchased by customers in the middle-lower income classes appear to have been hit the most, with sales from the Nordstrom Rack division doing the most to sink the ship. - Still, EPS of $0.84/sh almost doubled the $0.45/sh expected, and sales still managed to eke out a slight beat. Like the other retailers earlier this week, the risk of theft leading to store closures and potentially weakening spending at the lower end of the income spectrum are creating the most concern. Thought Banana Privates Getting More Public While every single person on Earth is unabashedly dying to hear any updates on the SEC’s progress towards approving a BTC spot price ETF, Chair Gary Gensler has spent his time finding even more ways to upset investors. This time, it comes in the form of regulatory changes to the reporting of private funds. Fun stuff today, apes! "... Gensler has declared war on hedge funds and other kinds of private funds ..." Basically, Gensler has declared war on hedge funds and other kinds of private funds that seek to keep their deep, dark trading secrets all to themselves and charge some hefty fees for it. The key changes include: - Providing info to investors on a quarterly basis describing fees, expenses, and performance - Adding annual independent audit requirements for private funds - Prohibiting preferential treatment of large investors through sweeteners related to redemptions, information, and more - Adding restrictions to expense recoupment and borrowing programs It’s a lot of nerdy, deep-in-the-weeds type of sh*t, but the changes are set to sweep over the $25tn private fund industry, so yeah, it might matter a bit. Private funds are, for lack of a better word, pissed. Previously, the SEC relied on the view that all investors in private funds, being accredited—meaning sophisticated or financially strong enough to understand and suffer potential big losses—were qualified enough to understand the risks they were taking without the SEC’s protection. Now, the SEC is forcing their protection on these investors whether the funds (and investors) like it or not. Spoiler alert: They do not. "... the SEC is forcing their protection on these investors ..." After going back and forth with industry groups for some time, the SEC’s final docket of rule changes was softened from the original, especially in relation to “side letters,” or offer letters customized to certain marquee investors to sweeten the deal and incentivize investment. Gensler just really loves to focus on the sweeping rule changes that no one was asking for rather than the other things we all want answers on, like a spot BTC ETF or changes to accreditation laws. As always, stay tuned. The big question: How will these new requirements impact the performance and costs of private funds in the long term? What sweeping changes are up next for the SEC? Banana Brain Teaser Friday — Here is a group of common three-letter words. Can you take these and turn them into half as many 6-letter words? Each three-letter word is used only once. act, age, bed, can, cat, cud, dam, did, don, dot, for, gel, get, ion, lam, nap, out, par, pen, rag - Action - Dotage - Bedlam - Candid - Catnap - Cudgel - Dampen - Pardon - Ragout - Forget Today — On a clock, the big and small hand are exactly between 1 and 2. Both hands lie on top of each other. What time is it? Shoot us your guesses at vyomesh@wallstreetoasis.com. Wise Investor Says “Sure don’t fight the Fed but … don’t believe too much that the Fed is all powerful.” — John Weinberg How would you rate today’s Peel? [All the bananas]() [Decent]( [Rotten AF](=) Happy Investing, Patrick & The Daily Peel Team Was this email forwarded to you? 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