February 2025
I don’t even know where to start this month. Those of you who know me know I had a difficult time keeping my mouth shut while we were planning our latest fund.
Like I said in my recent LinkedIn post, I got tired of screaming from the sidelines about Private Equity and decided to do something about it.
As soon as I saw the PitchBook analyst note last year–which now lives here on the Morningstar Indexes site–I knew they were onto something.
It’s one of the reasons we had that talk with Andrew Akers, CFA (PitchBook) and William J. Kelly, CAIA (Educational Alpha), back in November. And then again last month with PitchBook for their audience. And then Bill and Andrew had an opportunity to talk about buyout replication on Bill’s Educational Alpha podcast. Thanks again, Bill.?
I can’t say enough about how great it’s been working with everyone on this and having a front-row seat while the amazing teams at 晨星 and PitchBook built their new Morningstar PitchBook Buyout Replication Index.
With that, I’d like to introduce the Third Wire / Morningstar PitchBook US Buyout Replication Index Fund (USBRIF). I’m really excited to talk to you about it. I might never shut up.
Best,
Dan
P.S. The index is the exclusive property of Morningstar, Inc., which does not sponsor, endorse, or promote this fund. The Fund is a 506(c), which allows for general solicitation. Any offer to invest is made exclusively through the Fund’s private placement memorandum or other authorized offering documents and is available only to verified accredited investors. Verification of accredited investor status is required prior to any investment.?The full disclosures are at the end of the newsletter.
Alternative Talking Points
We review the latest monthly reports and industry analyses across the private markets, boiling them down into a few easily digestible points to share with your clients. Contact us if you'd like more depth.??
Hedge Funds: Strong start to 2025 as managers navigate volatile political landscape and technology sector volatility.
? The HFRI Fund Weighted Composite Index gained +1.4% in January, with nearly 80% of hedge funds producing positive performance.
? Equity Hedge strategies led the way, advancing +2.1% as managers adapted to both policy changes following Trump's inauguration and volatility in the technology sector driven by intense AI competition.
? Activist strategies showed particular strength, with the HFRI ED: Activist Index jumping +2.4%, as policy changes increased expectations for M&A activity in 2025.
? Performance dispersion remains significant with the top decile gaining +7.9% while the bottom decile fell by -4.1%, highlighting the critical importance of manager selection in this environment.
? Discretionary global macro funds faced a complex environment roiled by U.S. policy shifts and geopolitical tensions. These programs tend to focus 3-6-12 months out, and January’s whippy announcements pushed and pulled markets quickly.
? Chinese AI startup DeepSeek's emergence created unexpected volatility in technology holdings, challenging many managers' positioning and exposing concentration risks in AI-focused portfolios.
? Cryptocurrency exposures extended their 2024 surge into the new year, with the HFR Cryptocurrency Index adding +0.36% on a favorable outlook from the incoming Trump administration.
Sources: HFR, Kettera Strategies
Private Equity: Sector in transition as rate cuts fuel deals and firms adapt to new realities.
? Deal activity shows improvement with a 23% year-over-year increase in global M&A value during Q4 2024, though January 2025 saw a modest 6.5% sequential decline to $35.28 billion.?
? Mid-market opportunities ($250M-$1B EV) dominate strategic focus, with technology and healthcare accounting for 43% of total PE deal flow, while energy & infrastructure investments have grown sixfold year-over-year.?
? Portfolio management challenges persist with 27% of PE-owned companies now held beyond four years, leading to increased use of continuation funds and secondary transactions to provide liquidity.?
? The Federal Reserve's cumulative 100 basis point rate cut in late 2024 has created a more favorable debt environment, with leveraged loan multiples climbing to 5.1x EBITDA in the U.S. market.?
? Regulatory headwinds loom with February's proposed SEC rules requiring greater disclosure of fee structures, third-party valuation validation, and limits on side letter provisions for retail-focused funds.?
Sources: S&P Global Intelligence, Ropes & Gray, McKinsey, KraneShares, EvaluServe,?
Private Credit: Growing concerns about market saturation, deteriorating loan terms, and hidden risks despite fundraising success.
? Five mega-funds now control 40% of the $209 billion raised in 2024, potentially compromising underwriting standards due to deployment pressure, according to some analysts.
? Shift to specialty finance (up from 10% to 18% of allocations) suggests oversaturation in traditional lending, with questionable expertise in these complex niches.?
? Competition with public markets is compressing spreads and eroding the illiquidity premium that historically justified private credit returns.?
? Rise in payment-in-kind (PIK) provisions (up from 14% to 22%) indicates borrower cash flow challenges are being accommodated rather than addressed.?
? Concentration in trendy sectors like data centers (up 34% year-over-year) echoes past credit bubbles where lenders overexposed themselves to "can't-miss" opportunities.?
Sources: WithIntelligence, AIMA, Moody’s, Wellington, Interactive Brokers, Morgan Stanley???
Commercial Real Estate: U.S. market showing selective recovery amid significant refinancing challenges and quality divide.
?? U.S. lending outlook improving with projected $583 billion in new CRE lending for 2025—a 16% increase from 2024—though primarily targeting multifamily, industrial, and grocery-anchored retail assets.
?? Quality bifurcation intensifies with U.S. Class A office vacancies stabilizing at 12.4% versus 27.9% for Class B/C spaces, as tenants prioritize buildings with advanced amenities.?
?? Refinancing pressure mounting with $360 billion in U.S. CRE debt maturing in H2 2025, forcing sponsors to secure alternative financing or risk sales at 15-20% discounts.?
?? U.S. industrial construction cooling with 2025 completions projected to decline by 56%, while nearshoring initiatives benefit Sun Belt markets as companies relocate production from Asia.
?? Singaporean sovereign funds and Japanese REITs committed significant capital ($7.2 billion in January alone) to U.S. multifamily and industrial assets, with growing interest in discounted Sun Belt offices for medical conversions.?
Artificial Intelligence: Financial services rapidly adopting AI tools while navigating regulatory scrutiny and implementation challenges.
? For a lot of people, DeepSeek hit the news suddenly. They’re a Chinese competitor to OpenAI gaining attention for performing complex tasks at lower costs than GPT-4. Our friends at?Pure Math AI?also tell us that their researcher confirmed that DeepSeek is much better at translating English into Japanese and Chinese. Not Suprised.?
? Agentic AI systems are moving beyond chatbots—Coca-Cola reduced logistics costs 19% using Siemens' autonomous platforms, and Amazon's procurement bots independently closed $380M in vendor deals in 2024.?
? Mistral AI's 8x22B model now outperforms GPT-4 on 63% of benchmarks while using 40% less compute power, and Groq's LPUs deliver 3x speed/$ advantage over Nvidia H100, potentially reshaping the AI hardware landscape.?
? Generative worldbuilding tools like Google's Genie 2 create 3D simulations from text prompts—Sanofi reduced preclinical trial costs 42% using such systems, while IKEA increased conversion rates 31% with AI-designed room layouts.
? Multisensory AI interfaces are emerging beyond text/image—Apple Vision Pro 2's haptic feedback enables "virtual material" sensation, and Neuralink's Blindsight v1 assists 83% of visually impaired users in navigating virtual environments.?
Sources: Forbes, McKinsey, TechTarget, MIT Technology Review, Indigo.AI, Cloud Awards
Worth your time
Our monthly recommendation of books, articles, research, and announcements we found interesting, important, or just plain entertaining enough to share. Sometimes, we'll have a lot—other times, not so much. The objective is to share things that might be useful or interesting for your clients, not filler.?
? Third Wire Launches Novel Private Markets 506(c) Fund: WealthManagement.com. We think this one is worth replugging this month :)
? What is the Future of Alternative Investing?: Richard Ennis. We believe this should be required reading for every firm out here marketing alternative investments to the private wealth channel today using the 'Institutional Model' and past performance as their rationale. Thank you, sir.
? S3: Conversation with Andrew Akers, Lead Quantitative Research Analyst, PitchBook: Education Alpha. Yes, we are selfishly promoting this podcast about the underlying research and Index that our new fund replicates. It’s important to know how it operates and also that our fund strategy is to invest 1:1 in the underlying constituents directly. It’s not a synthetic replication strategy. Thanks again, Bill & Andrew!?
Disclosure:
This newsletter is for informational purposes only and does not constitute investment advice. All investments, including those in equity, debt, and alternative assets, carry certain risks, notably potential liquidity and transparency issues associated with many private investments. These risks should be considered in the context of an individual investor's objectives and risk tolerance.
The views expressed are those of Third Wire as of the date of publication and are subject to change. The information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.
Past performance is not indicative of future results. Investors are advised to consult with qualified financial, legal, or tax advisors before making any investment decisions. Third Wire does not accept liability for any loss or damage arising from the use of this newsletter.
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1. The Morningstar Indexes are the exclusive property of Morningstar, Inc. Morningstar, Inc., its affiliates and subsidiaries, its direct and indirect information providers, and any other third party involved in, or related to, compiling, computing, or creating any Morningstar Index (collectively, “Morningstar Parties”) do not guarantee the accuracy, completeness, and/or timeliness of the Morningstar Indexes or any data included therein and shall have no liability for any errors, omissions, or interruptions therein. None of the Morningstar Parties make any representation or warranty, express or implied, as to the results to be obtained from the use of the Morningstar Indexes or any data included therein.
The Fund seeks to replicate certain characteristics of private equity buyout strategies but may not achieve the same results. Past performance is not indicative of future results. Investments are subject to risk, including loss of principal. Investments in public equities may involve significant risks, including market volatility, economic uncertainty, and potential deviations from the Fund’s intended strategy. There is no guarantee that the Fund will achieve its investment objectives.
The Fund is a private offering and is not registered under the Investment Company Act of 1940 or the Securities Act of 1933. As such, it is not subject to the same regulatory requirements as registered investment vehicles. Fees and expenses associated with the Fund may impact overall performance. Investors should review the private placement memorandum for a detailed description of fees and costs.
This document is for informational purposes only and may be shared with the general public under Rule 506(c). Any offer to invest is made exclusively through the Fund’s private placement memorandum or other authorized offering documents and is available only to verified accredited investors. Verification of accredited investor status is required prior to any investment.?
The Index uses advanced AI methodologies, including Long Short-Term Memory (LSTM) neural networks, to guide security selection and leverage adjustments. The effectiveness of these methodologies is not guaranteed and may be impacted by unforeseen factors or market conditions.
This document may contain forward-looking statements regarding the Fund’s strategy or expected performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially.