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Guide to Alternatives
MARKET INSIGHTS
1Q 2019
2
Private markets24. Private market dynamics25. U.S. private equity deal flow and multiples26. U.S. public vs. private equity27. Global private equity fundraising and sentiment28. Private equity distributions and the secondary market29. Credit returns across recent economic cycles: 2004 - 201830. Credit market participants and issuance31. U.S. direct lending: pricing and characteristics32. Distressed credit: Non-performing loans
Hedge funds33. Hedge fund strategy returns34. Hedge fund correlations35. Interest rates and volatility36. Hedge funds and volatility37. Hedge fund returns and cash rates38. Hedge funds and the U.S. equity market
Alts in aggregate3. Alternatives fundraising4. Public and private market correlations5. Alternatives and manager selection6. Yield alternatives7. Alternatives and ESG
Global real estate8. Global real estate fundraising9. U.S. real estate dynamics10. U.S. real estate: Residential and retail11. U.S. real estate: Office12. REIT sector returns13. U.S. REITs and real estate14. Global real estate pricing15. Sources of European property returns16. APAC real estate: Japan residential and Australia office
Global infrastructure and transport17. Global infrastructure fundraising and dry powder18. Sources of global infrastructure returns19. U.S. regulated utilities20. U.S. utilities: ROE, inflation and rates21. Global renewable energy22. Global trade23. Global banks’ shipping finance
Page reference 3
Prepared by:David Lebovitz, Global Market Strategist, Market Insights, J.P. Morgan Asset Management Anita Sonawane, Associate, Alternatives Solutions Group, J.P. Morgan Asset Management
3
Global private capital fundraisingBillions USD
Alternatives fundraising
Source: Preqin, HFRI, J.P. Morgan Asset Management.
Fundraising categories are provided by Preqin, and represent their estimate of annual capital raised in closed-end funds. Hedge fund fundraising numbers are represented by net flows and come from HFRI.
Data are as of December 31, 2018.
Alt
s in
agg
rega
te
226 244326
418 402487
566
42644
66
77
72 103
102
129
110
78
88
109
122139
130
132
118
26
30
49
4650
66
75
85
7134
64
7644
-70
10
-34
3460
73
71 86
83
91
93
-$100
$100
$300
$500
$700
$900
$1,100
'11 '12 '13 '14 '15 '16 '17 '18
Private equity Private credit Real estate Infrastructure Hedge funds Natural resources
$479$521
$697
$806 $824$798
$1,003
$798
4
Public and private market correlations
Alt
s in
agg
rega
te
Fin
an
cia
l
assets
Pri
vate
mark
ets
Glo
ba
l
real
esta
te
Oth
er
real
assets
Public and private market correlations10-years, quarterly returns
Source: MSCI, Bloomberg Barclays, NCREIF, Cliffwater, Burgiss, HFRI, J.P. Morgan Asset Management. RE – real estate. Global equities: MSCI AC World Index. Global bonds: Bloomberg Barclays Global Aggregate Index. U.S. core real estate: NCREIF Property Index – Open End Diversified Core Equity component. Europe core real estate: IPD Global Property Fund Index – Continental Europe. Asia Pacific (APAC) core real estate: IPD Global Property Fund Index – Asia-Pacific. Global infrastructure (infra.): MSCI Global Quarterly Infrastructure Asset Index (equal-weighted blend). U.S. direct lending: Cliffwater Direct Lending Index. U.S. private equity: Cambridge Associates U.S. Private Equity Index. U.S. venture capital: Cambridge Associates U.S. Venture Capital Index. Hedge fund indices include equity long/short, relative value, and global macro and are all from HFRI. All correlation coefficients are calculated based on quarterly total return data for the period 9/30/08 –9/30/18. Returns are denominated in USD.
Data are as of December 31, 2018.
Hed
ge
fun
ds
Global
bonds
Global
equities
U.S.
core RE
Europe
core RE
APAC
core RE
Global
infra.
U.S.
direct
lending
U.S.
venture
capital
U.S.
private
equity
Equity
long/short
Relative
value
Global
macro
Global bonds 1.0
Global equities 0.3 1.0
U.S. core RE -0.1 0.1 1.0
Europe core RE 0.0 0.3 0.6 1.0
APAC core RE 0.1 0.4 0.8 0.8 1.0
Global
infrastructure-0.1 0.0 0.5 0.4 0.5 1.0
U.S. direct lending -0.1 0.7 0.4 0.4 0.4 0.3 1.0
U.S. venture capital -0.2 0.5 0.6 0.5 0.5 0.4 0.6 1.0
U.S. private equity 0.0 0.8 0.4 0.6 0.6 0.3 0.9 0.7 1.0
Equity long/short 0.2 1.0 0.0 0.4 0.3 0.0 0.7 0.5 0.8 1.0
Relative value 0.1 0.8 0.0 0.3 0.2 0.0 0.8 0.4 0.8 0.9 1.0
Global macro 0.4 0.4 -0.1 0.3 0.1 -0.1 0.0 0.0 0.1 0.4 0.2 1.0
5
Alternatives and manager selection
Private and public manager dispersionBased on returns from 2013 – 2018
Alt
s in
agg
rega
te
Sources: Lipper, NCREIF, Cambridge Associates, HFRI, J.P. Morgan Asset Management.
Global equities (large cap) and global bonds dispersion are based on the world large stock and world bond categories, respectively. Manager dispersion is based on: 2013 – 2018 annual returns for global equities, global bonds, U.S. core real estate and hedge funds. U.S. non-core real estate, U.S. private equity and U.S. venture capital are represented by the 5-year horizon internal rate of return (IRR).
Data are as of December 31, 2018.
-10%
-5%
0%
5%
10%
15%
20%
25%
Globalequities
Globalbonds
Equitylong bias
Relativevalue
Globalmacro
U.S. corereal estate
U.S. non-corereal estate
U.S.private equity
U.S.venture capital
10.8%
7.7%
0.8%
2.5%
2.0%
7.3%
2.4%
6.6%
-2.1%
4.1%
Top quartile
Bottom quartile
10.7%
12.5%
0.9%
17.9%
21.5%
0.7%
-4.0%
20.0%
6
Yield alternatives
Source: BAML, Barclays, Bloomberg, Clarkson, Cliffwater, Drewry Maritime Consultants, Federal Reserve, FTSE, MSCI, NCREIF, FactSet, J.P. Morgan Asset Management. Yields are as of 12/31/18, except Global Transport, Global Infrastructure, EMEA, APAC and U.S. Real Estate (9/30/18). Global Transport: Levered yields for transport assets calculated as the difference between charter rates (rental income), operating expenses, debt amortization and interest expenses, as a percentage of equity value. Yields for each of the sub-vessel types above are calculated and respective weightings are applied to arrive at the current levered yields for Global Transportation; Preferreds: BAML Hybrid Preferred Securities; U.S. High Yield: Bloomberg US Aggregate Corporate High Yield; Global Infrastructure: MSCI Global Infrastructure Asset Index-Low risk; U.S. Real Estate: NCREIF-ODCE Index; Global REITs: FTSE NAREIT Global REITs; International Equity: MSCI AC World ex-U.S.; U.S. 10-year: 10-year U.S. Treasury yield; U.S. Equity: MSCI USA, Europe core real estate: IPD Global Property Fund Index – Continental Europe. Asia Pacific (APAC) core real estate: IPD Global Property Fund Index – Asia-Pacific. Euro Govt. 7-10-year: Bloomberg Barclays Euro Aggregate Government – Treasury (7-10Y).Data are as of December 31, 2018.
Alt
s in
agg
rega
te
Fixed income
Equities
Alternatives
10.2%
9.3%
8.0%
6.2%5.8%
4.9% 4.8% 4.7%4.3%
3.5%
2.7%2.2%
0.9%
0%
2%
4%
6%
8%
10%
12%
Asset class yieldsPercent
7
Source: Preqin Fund Manager Survey June 2018, J.P. Morgan Asset Management.
Fund survey covered managers across the globe. Environmental, social and governance (ESG). Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
Data are as of December 31, 2018.
Alternatives and ESG
Fund managers with ESG policy Percent of managers who think ESG will become more important in the next 5 years
Alt
s in
agg
rega
te
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Whole portfolio Alternative assets
Yes: 49%
No, but expect to
within next 12
months: 18%
No, but expect to
within next 5
years: 13%
No, no plans to:
20%
Yes: 40%
No, but expect to
within next 12
months: 24%
No, but expect to
within next 5
years: 16%
No, no plans to:
21%
77%
37%
77%
83%
83%
75%
73%
85%
65%
76%
81%
83%
73%
87%
30% 50% 70% 90%
Naturalresources
Hedge funds
Private debt
Private equity
Infrastructure
Real estate
All alternatives
Investors Fund managers
8
$109
$122
$139
$130 $132
$118
$0
$20
$40
$60
$80
$100
$120
$140
$160
'13 '14 '15 '16 '17 '18
Source: Preqin, J.P. Morgan Asset Management.
Fundraising and acquisition activity is that of closed-end real estate funds.
Data are as of December 31, 2018.
Global real estate fundraising
Global real estate fundraisingAggregate capital raised, billions USD
Rea
l est
ate
Office48%
Office50%
Office48%
Residential22%
Residential27%
Residential21%
Retail18%
Retail14% Retail
27%
Industrial12%
Industrial9%
Industrial5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014 -Q3 2018
Q3 2017 Q3 2018
Real estate acquisitionsPercent, by asset type
9
4%
6%
8%
10%
12%
14%
16%
'88 '91 '94 '97 '00 '03 '06 '09 '12 '15 '18
U.S. real estate dynamics
Source: NCREIF, Federal Reserve, BLS, J.P. Morgan Asset Management.
The cap rate, which is computed as the net operating income over sales price, is the rate of return on a real estate investment property.
Data are as of December 31, 2018.
U.S. vacancy ratesPercent
U.S. real estate cap rate spreadsTransactions based, spread to 10y UST, 4-quarter rolling average
U.S. real estate construction costsPPI construction materials, year-over-year % change
Rea
l est
ate
0%
1%
2%
3%
4%
5%
'98 '01 '04 '07 '10 '13 '16 '19
Average: 2.8%
Dec. 2018:
1.9%
Dec. 2018:
6.0%
-10%
-5%
0%
5%
10%
15%
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Dec. 2018:
6.3%
10
-1.0%
0.0%
1.0%
2.0%
3.0%
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Source: Census Bureau, CoStar, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
U.S. real estate: Residential and retail
Retail leasing activityShare of square footage leased by retailer type
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2017 - Present
General retail
and apparel:
39% General retail
and apparel:
32%
Health and
fitness: 16% Health and
fitness: 24%
Discounter: 7%Discounter: 9%
Food &
Beverage: 10%
Other: 24%Other: 28%
Homeownership rate by age of householderChange since 2015
Household formationYear-over-year % change
Sep. 2018: 1.9%
1.8%
1.1%
-0.3%
0.2%
-0.3%-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
< 35 35 - 44 45 - 54 55 - 64 65 +
Rea
l est
ate
Food &
Beverage: 11%
11
Source: CoStar, CBRE, J.P. Morgan Asset Management
Data are as of December 31, 2018.
U.S. real estate: Office
Rea
l est
ate
Coworking spaceMillions of square feet
Total occupied office square feet per workerSquare feet
230
240
250
260
270
280
290
'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Dec 2018:
239 sq. ft.
4.95.5
6.47.1
9.0
10.9
12.9
15.5
18.8
26.7
32.0
0
5
10
15
20
25
30
35
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
12
REIT sector returns
Sources: FTSE NAREIT, FactSet, J.P. Morgan Asset Management.
All indices are from FTSE NAREIT. Mfg. Homes represents manufactured homes.
Data are as of December 31, 2018.
Rea
l est
ate
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Ann. Vol.
Re giona l
Ma llsApa rtme nts Se lf S tora ge Industria l Mfgd. Home s Mfgd. Home s Se lf S tora ge Industria l Mfgd. Home s Mfgd. Home s Mfgd. Home s
Re giona l
Ma lls
6 3 .0 % 4 7 .0 % 3 5 .2 % 3 1.3 % 10 .5 % 4 6 .2 % 4 0 .6 % 3 0 .7 % 2 4 .9 % 11.4 % 2 2 .2 % 2 9 .8 %
Mfgd. Home sRe giona l
Ma lls
Re giona l
Ma lls
Re giona l
Ma llsSe lf S tora ge Apa rtme nts Mfgd. Home s Mfgd. Home s Industria l He a lth Ca re Se lf S tora ge Industria l
4 0 .9 % 3 4 .6 % 2 2 .0 % 2 8 .2 % 9 .5 % 3 9 .6 % 2 5 .6 % 14 .2 % 2 0 .6 % 7 .6 % 16 .3 % 2 7 .9 %
Offic eShopping
Ce nte rsMfgd. Home s
Shopping
Ce nte rsIndustria l He a lth Ca re Apa rtme nts Offic e All Equity Apa rtme nts
Re giona l
Ma lls
Shopping
Ce nte rs
3 5 .5 % 3 0 .8 % 2 0 .4 % 2 5 .0 % 7 .4 % 3 3 .3 % 16 .5 % 13 .2 % 8 .7 % 3 .7 % 15 .0 % 2 4 .8 %
Apa rtme nts Se lf S tora ge Apa rtme nts He a lth Ca re Offic eRe giona l
Ma lls
Shopping
Ce nte rsAll Equity Offic e Se lf S tora ge Apa rtme nts Offic e
3 0 .4 % 2 9 .3 % 15 .1% 2 0 .4 % 5 .6 % 3 2 .6 % 4 .7 % 8 .6 % 5 .2 % 2 .9 % 14 .8 % 2 4 .3 %
All Equity All Equity He a lth Ca re Se lf S tora geShopping
Ce nte rsSe lf S tora ge
Re giona l
Ma llsHe a lth Ca re Se lf S tora ge Industria l Industria l All Equity
2 8 .0 % 2 7 .9 % 13 .6 % 19 .9 % 5 .0 % 3 1.4 % 4 .2 % 6 .4 % 3 .7 % - 2 .5 % 13 .0 % 2 1.1%
He a lth Ca re Mfgd. Home s All Equity All Equity All EquityShopping
Ce nte rsAll Equity
Shopping
Ce nte rsApa rtme nts All Equity All Equity Apa rtme nts
2 4 .6 % 2 7 .0 % 8 .3 % 19 .7 % 2 .9 % 3 0 .0 % 2 .8 % 3 .7 % 3 .7 % - 4 .0 % 12 .5 % 2 0 .9 %
Industria l He a lth Ca reShopping
Ce nte rsOffic e
Re giona l
Ma llsAll Equity Industria l Apa rtme nts He a lth Ca re
Re giona l
Ma llsHe a lth Ca re He a lth Ca re
12 .2 % 19 .2 % - 0 .7 % 14 .2 % - 1.0 % 2 8 .0 % 2 .6 % 2 .9 % 0 .9 % - 7 .0 % 10 .4 % 2 0 .8 %
Se lf S tora ge Industria l Offic e Mfgd. Home s Apa rtme nts Offic e Offic eRe giona l
Ma lls
Re giona l
Ma llsOffic e Offic e Se lf S tora ge
8 .4 % 18 .9 % - 0 .8 % 7 .1% - 6 .2 % 2 5 .9 % 0 .3 % - 5 .2 % - 2 .7 % - 14 .5 % 9 .4 % 2 0 .7 %
Shopping
Ce nte rsOffic e Industria l Apa rtme nts He a lth Ca re Industria l He a lth Ca re Se lf S tora ge
Shopping
Ce nte rs
Shopping
Ce nte rs
Shopping
Ce nte rsMfgd. Home s
- 1.7 % 18 .4 % - 5 .2 % 6 .9 % - 7 .1% 2 1.0 % - 7 .2 % - 8 .1% - 11.4 % - 14 .5 % 6 .0 % 15 .1%
2009-2018
13
U.S. REITs and real estate
Source: NAREIT, NCREIF, Standard & Poor’s, FactSet, J.P. Morgan Asset Management.
Real estate investment trusts (REITs). Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not necessarily a reliable indicator for current and future performance.
Data are as of December 31, 2018.
U.S. REITs, real estate, and equities12-quarter rolling correlations, total return
Rea
l est
ate
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
'80 '82 '83 '85 '86 '88 '89 '91 '92 '94 '95 '97 '98 '00 '01 '03 '04 '06 '07 '09 '10 '12 '13 '15 '16 '18
Direct real estate/S&P 500 correlation
REIT/S&P 500 correlation
Housing bubble/
Euro debt crisis1980 “Double dip
recession”
1987 Crash/
S&L CrisisRecession
1414
Sources: Bloomberg, NCREIF, CBRE, Jones Lang LaSalle, J.P. Morgan Asset Management. Bottom chart: Based on Grade A office yields, which are all broker-estimated with the exception of New York’s office yield (derived from NCREIF). Grade A refers to the highest quality commercial real estate properties.
Data are as of December 31, 2018.
Global real estate pricing
Europe real estate property yield spreadsProperty yields vs. government bonds vs. BBB-rated bonds
APAC real estate property yield spreadsProperty yields vs. government bonds vs. BBB-rated bonds
Global cities yieldsGrade A office yields, percent
Rea
l est
ate
0%
1%
2%
3%
4%
Bri
sb
ane
Osa
ka
To
kyo
Au
ckla
nd
Me
lbou
rne
Se
ou
l
Sydn
ey
Ta
ipe
i
Sh
an
gh
ai
Be
ijing
Sin
ga
pore
Hon
g K
on
g
Lon
do
n
New
Yo
rk
Current yield spread over 10-year bond (4Q18) 15-year average yield spread
Government bond Corporate BBB All-property yieldGovernment bond Corporate BBB All-property yield
0%
2%
4%
6%
8%
10%
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '180%
1%
2%
3%
4%
5%
6%
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
15
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Sources: MSCI, J.P. Morgan Asset Management.
All returns are based on the respective MSCI IPD Global Property Index, and show one-year returns from income and capital appreciation.
Past performance is not indicative of future results. Alternative investments carry more risk than traditional investments and are recommended only for long-term investment. Some alternative investments may be highly leveraged and rely on speculative investments that can magnify the potential for loss or gain. Diversification does not guarantee investment returns or eliminate the risk of loss.
Data are as of December 31, 2018.
U.K. property returnsAnnual returns from income and capital appreciation
Germany property returnsAnnual returns from income and capital appreciation
France property returnsAnnual returns from income and capital appreciation
-10%
-5%
0%
5%
10%
15%
20%
25%
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Income
Capital appreciation
Income
Capital appreciation
Income
Capital appreciation
-10%
-5%
0%
5%
10%
15%
20%
25%
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Sources of European property returns
Rea
l est
ate
16
Sources: Association of Real Estate Securitization, Japan Property Index, Jones Lang LaSalle, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
APAC real estate: Japan residential and Australia office
Rea
l est
ate
Japan multi-familyOccupancy, percent
Australia prime officeNet effective rent, index level; occupancy, percent
85%
90%
95%
100%
60
80
100
120
140
160
180
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Sydney NER Melbourne NER
Sydney Occupancy Melbourne Occupancy
Net effective rent index Occupancy
90%
92%
94%
96%
98%
100%
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17
Tokyo 23 Wards Osaka Nagoya Fukuoka
2008
financial crisis
Tohoku
earthquake
17
$49$46
$50
$66
$75
$85
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
'13 '14 '15 '16 '17 '18
Source: Preqin, J.P. Morgan Asset Management.
*Dry powder refers to the amount of cash reserves or liquid assets available for use.
Data are as of December 31, 2018.
Global infrastructure fundraising and dry powder
Global infrastructure fundraisingAggregate capital raised, billions USD
Infr
astr
uct
ure
Global infrastructure dry powder*Billions USD
$66$70
$85
$73
$105$101 $104
$145
$158
$172
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18
18
Sources of global infrastructure returns
Source: MSCI, J.P. Morgan Asset Management. Infrastructure returns represented by the “low risk” category of the MSCI Global Quarterly Infrastructure Asset Index. Data show rolling one-year returns from income and capital appreciation. The chart shows the full index history, beginning in the first quarter of 2009.
Past performance is not indicative of future results. Alternative investments carry more risk than traditional investments and are recommended only for long-term investment. Some alternative investments may be highly leveraged and rely on speculative investments that can magnify the potential for loss or gain. Diversification does not guarantee investment returns or eliminate the risk of loss.
Data are as of December 31, 2018.
Infr
astr
uct
ure
Global core infrastructure returnsRolling 4-quarter returns from income and capital appreciation
-5%
0%
5%
10%
15%
20%
25%
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Income
Capital appreciation
19
U.S. regulated utilities
Source: Bloomberg, SNL.com, Moody’s, America’s Electric Utilities, J.P. Morgan Asset Management.
RoE is return on equity, which is the amount of net income returned as a percentage of shareholders’ equity. Grey bars denote recessions.
Data are as of December 31, 2018.
Infr
astr
uct
ure
U.S. utilities' average allowed return on equity and interest rates
Recession
1 5 9 13
17
21
25
29
33
37
41
45
49
53
57
61
65
69
73
77
81
85
89
93
97
101
105
109
113
117
121
125
129
133
137
141
145
149
153
157
161
165
169
173
177
181
185
189
193
20
20.5
21
21.5
22
22.5
23
23.5
24
24.5
25
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
'70 '75 '80 '85 '90 '95 '00 '05 '10 '15
Electric allowed RoE Natural gas allowed RoE Utility bond yield 10-year Treasury yield
20
6
8
10
12
14
16
18
20
2 7 12 17
Source: Moody’s, SNL.com, BLS, JPMAM Global Alternatives Research, J.P. Morgan Asset Management.
RoE is return on equity, which is the amount of net income returned as a percentage of shareholders’ equity. Average cost of debt is represented by the trailing 6-month average of Moody’s utilities yields.
Data are as of December 31, 2018.
U.S. utilities: RoE, inflation and rates
U.S. utilities’ return on equity and average cost of debt1980-2018
U.S. utilities’ return on equity and inflation ROE (2-year lagged), CPI % change vs. prior year, 1980-2018
Infr
astr
uct
ure
3
5
7
9
11
13
15
17
0 2 4 6 8 10 12 14
Inflation (%)
Re
turn
on
eq
uit
y (
%)
R2 = 0.52
Re
turn
on
eq
uit
y (
%)
Cost of debt (%)
R2 = 0.96
21
Source: International Renewable Energy Agency, Lazard, J.P. Morgan Asset Management.
*LCOE is levelized cost of energy, the net present value of the unit-cost of electricity over the lifetime of a generating asset. It is often taken as a proxy for the average price that the generating asset must receive in a market to break even over its lifetime.
Data are as of December 31, 2018.
Global renewable energy
Global renewable generation capacityGigawatts
Cost of wind, solar, natural gas and coalMean LCOE*, dollar per megawatt hour
Infr
astr
uct
ure
0
200
400
600
800
1,000
1,200
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
Wind
Solar
Bioenergy
Geothermal
$0
$50
$100
$150
$200
$250
$300
$350
$400
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Wind
Solar
Natural gas
Coal
22
Source: Eurostat, Clarksons, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
Global trade
Extra EU trade quantity by mode of transport Percent of total
Tran
spo
rt
World seaborne trade by productEstimated trillion ton miles
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002 2017
Sea: 73%
Air: 1%
Road: 14%
Rail: 5%
Other
modes: 7%
Sea: 80%
Air: 2%
Road: 13%
Rail: 3%
Other modes: 2%
0
10
20
30
40
50
60
70
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Dry bulk
Oil and oil products
Container
Gas
23
Global banks’ shipping finance
Source: Dealogic, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
0
50
100
150
200
250
300
350
400
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Deal value (Billions USD) No. of deals
Shipping loans volume
Tran
spo
rt
24
$326
$418 $402
$487
$566
$426
$77
$72 $103
$102
$129
$110
$0
$100
$200
$300
$400
$500
$600
$700
$800
'13 '14 '15 '16 '17 '18
Private market dynamics
Source: Preqin, Pitchbook, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
Pri
vate
mar
kets
Time to close private equity and credit fundsMonths to close
Global private credit & equity fundraisingQuarterly, billions USD
Global private capital dry powderTrillions USD
Private debt
Private equity
Private debt
Private equity
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
10
12
14
16
18
20
22
24
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Private credit
Private equity
25
Source: Preqin, Pitchbook, S&P LCD, J.P. Morgan Asset Management.
For U.S. private equity deal flow by sector, B2B is Business to Business, B2C is Business to Consumer, IT is Information Technology. Most recent share of deals is shown in parentheses.
Data are as of December 31, 2018.
U.S. private equity deal flow and multiples
Purchase price multiples: LBOsEquity and debt over trailing EBITDA
Pri
vate
mar
kets
U.S. private equity deal flow by sectorPercent
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Materials, resources and energy (10.8%)
IT (17.7%)
Healthcare (16.2%)
Financial services (10.4%)
B2C (18.9%)
B2B (25.9%)
7.3x
8.4x 8.4x
9.7x
9.1x
7.7x
8.5x
8.8x8.7x
8.8x
9.7x
10.3x
10.0x
10.6x 10.6x
5x
6x
7x
8x
9x
10x
11x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
2626
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
'91 '94 '97 '00 '03 '06 '09 '12 '15 '18
U.S. public vs. private equity
Sources: Cambridge Associates, World Federation of Exchanges, Standard & Poor’s, J.P. Morgan Asset Management.
*Number of listed U.S. companies is represented by the sum of number of companies listed on the NYSE and the NASDAQ.
The Cambridge Associates Modified Public Market Equivalent (mPME) methodology determines how much the private equity funds’ cash flows would have earned had they been invested in the S&P 500 instead.
Data are as of December 31, 2018.
Number of listed U.S. companies*
2018:
5,343
U.S. public vs. private equity returnsBy vintage year
U.S. private equity
S&P 500 mPME
Pri
vate
mar
kets
0%
5%
10%
15%
20%
25%
30%
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15
27
$0
$100
$200
$300
$400
$500
$600
$700
100
200
300
400
500
600
700
800
900
1,000
1,100
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
Venture
Buyout
Other PE
MSCI ACWI (LHS)
Global private equity fundraising and sentiment
Source: MSCI, FactSet, Preqin, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
Pri
vate
mar
kets
Global private equity fundraising and global equities
MSCI ACWI Global private equity fundraising (Billions USD)
28
Sources: Preqin, Greenhill, London Business School, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
Private equity distributions and the secondary market
Global capital calls and distributionsBillions USD
Secondary market pricingPercent of net asset value
Capital distributed
Capital called
Net distribution
70%
88%
94%
108% 109%
73%
59%
89%
86%
84%
91%
96%
94%94%
99%
50%
60%
70%
80%
90%
100%
110%
120%
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
Pri
vate
mar
kets
-$600
-$400
-$200
$0
$200
$400
$600
'00 '02 '04 '06 '08 '10 '12 '14 '16
2929
ExpansionManufacturing ISM > 50 and rising
Credit returns across recent economic cycles: 2004 - 2018
Late cycle coolingManufacturing ISM > 50 and falling
RecessionManufacturing ISM < 50 and falling
TurnaroundManufacturing ISM < 50 and rising
Pri
vate
mar
kets
Source: Institute for Supply Management, Bloomberg Barclays, Credit Suisse, Cliffwater, J.P. Morgan Asset Management.
The ISM Manufacturing Index is a nationwide survey of purchasing executives. A reading greater than 50 indicates increased economic activity and a reading less than 50 indicates decreased economic activity. 10y UST: Bloomberg Barclays U.S. Treasury Bellwethers (10y), 2y UST: Bloomberg Barclays U.S. Treasury Bellwethers (2y), U.S. IG: Bloomberg Barclays U.S. Aggregate Corporate Investment Grade, U.S. HY: Bloomberg Barclays U.S. Aggregate Corporate High Yield, U.S. leveraged loans: Credit Suisse Leveraged Loan Index, U.S. direct lending: Cliffwater Direct Lending Index. All returns from 2004 through 9/30/2018 due to first data availability of direct lending index.
Data are as of December 31, 2018.
-0.4%
0.2%
1.1%
3.0%
2.3%
3.1%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
10y UST 2y UST U.S. IG U.S. HY U.S.leveraged
loans
U.S.direct
lending
3.1%
1.4%
-0.9%
-3.8%-4.6%
-0.6%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
10y UST 2y UST U.S. IG U.S. HY U.S.leveraged
loans
U.S.direct
lending
2.3%
0.7%
1.4%1.1%
0.7%
2.4%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
10y UST 2y UST U.S. IG U.S. HY U.S.leveraged
loans
U.S.direct
lending
-1.6%
-0.1%
4.6%
9.4%8.1%
2.3%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
10y UST 2y UST U.S. IG U.S. HY U.S.leveraged
loans
U.S.direct
lending
30
Source: Ares, J.P. Morgan High Yield Research, S&P LCD, J.P. Morgan Asset Management.
Covenant-lite loans are a type of financing that is issued with fewer restrictions on the borrower with regard to collateral, level of income, and loan payment terms, and fewer protections for the lender, including financial maintenance tests that measure the debt-service capabilities of the borrower.
Data are as of December 31, 2018.
Credit market participants and issuance
U.S. leveraged loan market participantsShare of total market, percent
Pri
vate
mar
kets
71%
45%
18%12%
9%
29%
55%
82%88%
91%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1994 2000 2006 2012 2017
Covenant-lite loan issuance and credit marketsPercent of issuance, trillions USD
Global banks Non-bank companies and funds
$35
$40
$45
$50
$55
$60
$65
$70
$75
$80
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Covenant-lite U.S. leveraged loans (LHS)
Global credit markets (RHS)
31
Source: Bloomberg Barclays, Thomson Reuters, S&P LCD, J.P. Morgan Asset Management.
Large corporate lending refers to companies with more than $50 million in EBITDA and middle market refers to companies with less than $50 million in EBITDA. U.S. IG: Bloomberg Barclays U.S. Aggregate Corporate Investment Grade, U.S. HY: Bloomberg Barclays U.S. Aggregate Corporate High Yield, U.S. large corporate and middle market lending: Thomson Reuters large and middle market quarterly average first-lien institutional term loan yields.
Data are as of December 31, 2018.
U.S. direct lending: pricing and characteristics
Pri
vate
mar
kets
Public and private market spreadsSpread to 10y U.S. Treasury
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
'10 '11 '12 '13 '14 '15 '16 '17 '18
U.S. IG U.S. HY
U.S. large corporate lending U.S. middle market lending
U.S. middle market lending leverageSenior Debt/EBITDA
2.9x
3.2x
3.9x 4.0x
4.7x4.9x
4.7x 4.8x
5.4x
5.6x
0x
1x
2x
3x
4x
5x
6x
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18
32
Distressed credit: Non-performing loans
Source: International Monetary Fund, J.P. Morgan Asset Management.
A nonperforming loan is a sum of borrowed money upon which the debtor has not made the scheduled payments for a period of usually at least 90 days for commercial banking loans and 180 days for consumer loans. Nonpayment means there have been zero interest or principal payments made on the loan within a specified period. Any definition of a nonperforming loan will depend on the loan's terms and agreement as there is no definitive definition of a nonperforming loan. NPL data based on most recently available numbers from the IMF. Color coding based on quintiles.
Data are as of December 31, 2018.
Pri
vate
mar
kets
Low concentration
of non-performing loans
High concentration
of non-performing loans
Nonperforming loans to total gross loansPercent, 2018
Russia
10.7%
Australia
0.9%
Japan
1.1%
Indonesia
2.6%
India
10.3%
Philippines
1.8%Malaysia
1.5%Kenya
14.0%
United States
0.9%
Canada
0.4%
Mexico
2.1%
Brazil
3.2%
Argentina
2.3%South Africa
3.7%
Spain
4.1%
FRA
2.9%
Portugal
11.7%
ITA
9.9%
Greece
45.6%
GER
1.5%
FIN
1.5%SWE
1.0%NOR
2.4%
Ukraine
54.3%
U.K.
1.2%
33
Hedge fund strategy returns
Source: MSCI, Bloomberg Barclays, HFRI, J.P. Morgan Asset Management.
Global equities reflect the MSCI AC World Index and global bonds reflect the Bloomberg Barclays Global Aggregate Index. All hedge fund returns are from HFRI. Quant: Macro – Systematic Diversified, HFRI Composite: HFRI FW Composite Index. Returns may fluctuate as hedge fund reporting occurs on a lag. Please see disclosure pages for index definitions.
Data are as of December 31, 2018.
Hed
ge f
un
ds
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Ann. Vol..
Globa l
Equitie s
Globa l
Equitie s
Globa l
Bonds
Globa l
Equitie s
Globa l
Equitie sQua nt
Eq. Ma rke t
Ne utra lDistre sse d
Globa l
Equitie s
Me rge r
Arbitra ge
Globa l
Equitie s
Globa l
Equitie s
3 5 .4 % 13 .2 % 5 .6 % 16 .8 % 2 3 .4 % 10 .7 % 4 .3 % 15 .1% 2 4 .6 % 3 .3 % 10 .0 % 15 .6 %
Distre sse d Distre sse dMe rge r
Arbitra ge
Re la tive
Va lue
Equity
Long/Short
Globa l
Ma c ro
Me rge r
Arbitra ge
Globa l
Equitie s
Equity
Long/Short
Re la tive
Va lue
Re la tive
Va lue
Equity
Long/Short
2 8 .1% 12 .1% 1.5 % 10 .6 % 14 .3 % 5 .6 % 3 .3 % 8 .5 % 13 .3 % - 0 .2 % 6 .9 % 8 .6 %
Re la tive
Va lue
Re la tive
Va lue
Re la tive
Va lueDistre sse d Distre sse d
Globa l
Equitie s
Re la tive
Va lue
Re la tive
Va lue
HFRI
Composite
Eq. Ma rke t
Ne utra lDistre sse d Distre sse d
2 5 .8 % 11.4 % 0 .1% 10 .1% 14 .0 % 4 .7 % - 0 .3 % 7 .7 % 8 .6 % - 1.0 % 6 .8 % 7 .8 %
Equity
Long/Short
Equity
Long/ShortDistre sse d
Equity
Long/Short
HFRI
Composite
Re la tive
Va lue
Equity
Long/Short
Equity
Long/Short
Globa l
Bonds
Globa l
Bonds
Equity
Long/Short
HFRI
Composite
2 4 .6 % 10 .5 % - 1.8 % 7 .4 % 9 .1% 4 .0 % - 1.0 % 5 .5 % 7 .4 % - 1.2 % 5 .6 % 6 .1%
HFRI
Composite
HFRI
Composite
Eq. Ma rke t
Ne utra l
HFRI
Composite
Re la tive
Va lue
Eq. Ma rke t
Ne utra l
HFRI
Composite
HFRI
CompositeDistre sse d Distre sse d
HFRI
CompositeQua nt
2 0 .0 % 10 .2 % - 2 .1% 6 .4 % 7 .1% 3 .1% - 1.1% 5 .4 % 6 .3 % - 1.9 % 4 .9 % 5 .8 %
Me rge r
Arbitra geQua nt Qua nt
Globa l
Bonds
Eq. Ma rke t
Ne utra l
HFRI
Composite
Globa l
Ma c ro
Me rge r
Arbitra ge
Re la tive
Va lue
Globa l
Ma c ro
Me rge r
Arbitra ge
Globa l
Bonds
11.6 % 9 .8 % - 3 .5 % 4 .3 % 6 .5 % 3 .0 % - 1.3 % 3 .6 % 5 .1% - 4 .0 % 4 .1% 5 .6 %
Globa l
Bonds
Globa l
Ma c ro
Globa l
Ma c ro
Eq. Ma rke t
Ne utra l
Me rge r
Arbitra ge
Equity
Long/Short
Globa l
Equitie s
Eq. Ma rke t
Ne utra l
Eq. Ma rke t
Ne utra l
HFRI
Composite
Globa l
Bonds
Re la tive
Va lue
6 .9 % 8 .1% - 4 .2 % 3 .0 % 4 .7 % 1.8 % - 1.8 % 2 .2 % 4 .9 % - 4 .6 % 2 .5 % 4 .8 %
Globa l
Ma c ro
Globa l
Bonds
HFRI
Composite
Me rge r
Arbitra ge
Globa l
Ma c ro
Me rge r
Arbitra geQua nt
Globa l
Bonds
Me rge r
Arbitra geQua nt
Eq. Ma rke t
Ne utra l
Globa l
Ma c ro
4 .3 % 5 .5 % - 5 .3 % 2 .8 % - 0 .4 % 1.7 % - 2 .4 % 2 .1% 4 .3 % - 6 .6 % 2 .5 % 3 .7 %
Eq. Ma rke t
Ne utra l
Me rge r
Arbitra ge
Globa l
Equitie s
Globa l
Ma c roQua nt
Globa l
Bonds
Globa l
Bonds
Globa l
Ma c ro
Globa l
Ma c ro
Equity
Long/Short
Globa l
Ma c ro
Eq. Ma rke t
Ne utra l
1.4 % 4 .6 % - 6 .9 % - 0 .1% - 0 .9 % 0 .6 % - 3 .2 % 1.0 % 2 .2 % - 7 .1% 1.1% 2 .8 %
Qua ntEq. Ma rke t
Ne utra l
Equity
Long/ShortQua nt
Globa l
BondsDistre sse d Distre sse d Qua nt Qua nt
Globa l
Equitie sQua nt
Me rge r
Arbitra ge
- 1.7 % 2 .9 % - 8 .4 % - 2 .5 % - 2 .6 % - 1.4 % - 8 .1% - 1.4 % 2 .1% - 8 .9 % 0 .2 % 2 .5 %
2009-2018
34
Hedge fund correlations
Source: MSCI, Bloomberg Barclays, HFRI, J.P. Morgan Asset Management. Global equities reflect the MSCI AC World Index and global bonds reflect the Bloomberg Barclays Global Aggregate Index. All hedge fund returns are from HFRI. Quant: Macro – Systematic Diversified, HFRI Composite: HFRI FW Composite Index. Returns may fluctuate as hedge fund reporting occurs on a lag. All correlation coefficients are calculated based on quarterly total return data for the period 12/31/2003 – 12/31/2018. Note the equity market neutral index is a member of the equity long/short family. Merger arbitrage and distressed are sub-components of the event-driven family. Quant is a member of the global macro family. Please see disclosure pages for index definitions.
Data are as of December 31, 2018.
Hed
ge f
un
ds
Hedge fund correlations15-years, quarterly returns
Global
bonds
Global
equities
HFRI
composite
Equity
long/short
Equity
market
neutral
Merger
arbitrageDistressed
Global
macroQuant
Relative
value
Global bonds 1.0
Global equities 0.2 1.0
HFRI composite 0.1 0.9 1.0
Equity long/short 0.1 0.9 1.0 1.0
Equity market neutral 0.0 0.7 0.8 0.8 1.0
Merger arbitrage 0.1 0.7 0.8 0.8 0.6 1.0
Distressed 0.0 0.9 0.9 0.9 0.7 0.7 1.0
Global macro 0.4 0.4 0.5 0.4 0.4 0.4 0.2 1.0
Quant 0.3 0.1 0.2 0.1 0.2 0.2 -0.1 0.9 1.0
Relative value 0.1 0.8 0.9 0.9 0.7 0.7 0.9 0.3 0.0 1.0
35
Interest rates and volatility
Source: CBOE, Federal Reserve, FactSet, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
Implied volatility and the federal funds rateVIX index level, 6-month moving average, Fed funds %, 2-year lead
Hed
ge f
un
ds
VIX (6-month moving avg.)Federal funds target rate
(2-year lead, %)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
10
15
20
25
30
35
40
45
50
55
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
36
Source: HFRI, CBOE, FactSet, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
Hedge funds and volatility
Hedge funds and volatilityAverage y/y hedge fund returns by VIX level, 25 years
Hed
ge f
un
ds
Macro hedge fund relative performance & volatilityVIX index level, y/y change in rel. perf. of HFRI Macro index
VIX
Macro hedge fund relative performance to HFRI
7.1%
8.3%7.9%
10.7%
2.7%
-4.9%-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
<10 10-15 15-20 20-25 25-30 >30
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
0
10
20
30
40
50
60
70
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
37
'93
'94
'95'96
'97
'98
'99
'00'01
'02
'03
'04 '05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
'18
-30%
-20%
-10%
0%
10%
20%
30%
40%
-1% 0% 1% 2% 3% 4% 5% 6%
Hedge fund returns and cash rates
Source: Bloomberg, Federal Reserve, HFRI, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
Hedge fund returns and cash rateYearly average HFRI fund weighted composite return, 3-month U.S. Treasury yield
Hed
ge f
un
ds
Ave
rag
e h
ed
ge
fu
nd
retu
rn
3-month U.S. Treasury yield
“Zero Interest
Rate Period”
38
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
Hedge funds and the U.S. equity market
Source: HFRI, Standard & Poor’s, FactSet, J.P. Morgan Asset Management.
Data are as of December 31, 2018.
Hed
ge f
un
ds
Average: 0.44
Dec. 2018:
0.48
Hedge fund beta to the S&P 500Rolling 12-month beta
3939
J.P. Morgan Asset Management – Definitions
Alpha – Is the difference between an investment’s return and it’s expected return, given its level of beta.
Accredited investor – Defined by Rule 501 of Regulation D, an individual (i.e. non-corporate) "accredited investor" is either a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase OR a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. For the complete definition of accredited investor, see the SEC website.
Capital commitment – A Limited Partner’s obligation to provide a specific amount of capital to a Closed-end Fund (defined below) for investments. The Capital Commitment is “drawn down” or “called” over time, meaning a portion of the commitment must be wired to the Closed-end Fund by a set date.
Capital called – The amount of capital wired to a fund that is “drawn down” over time as the General Partner selects investments.
Carried interest (aka incentive fee) – A fee paid to a fund manager for generating returns over a benchmark; calculated as a percentage of investment profits over a hurdle rate and charged in addition to a management fee. In Private Equity, carried interest (typically up to 20% of the profits) becomes payable once the investors have achieved repayment of their original investment in the fund, plus a defined hurdle rate.
Catch-up – This is a common term of the private equity partnership agreement. Once the general partner provides its limited partners with their preferred return, if any, it then typically enters a catch-up period in which it receives the majority or all of the profits until the agreed upon profit-split, as determined by the carried interest, is reached.
Clawback – A clawback obligation represents the general partner's promise that, over the life of the fund, the managers will not receive a greater share of the fund's distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (e.g., 20%) of the fund's cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund's limited partners an amount equal to what is determined to be "excess" distributions.
Closed-end fund – A fund that has a finite capital raising period and stated term (i.e. 5 years, 10 years, etc.). Clients will have the ability to commit to the fund during the set fundraising period, after which point the fund will be closed to new investors. Unlike an open-ended fund, there is limited flexibility on when a client may invest and there is no liquidity/redemptions. Clients who invest are obligated to remain in the fund for the duration of the term; they will be required to fulfill capital calls during the stated commitment period and will receive periodic distributions based on underlying monetization of investments.
Commitment period – The period of time within which the fund can make investments as established in the Limited Partnership Agreement (“LPA”), meaning the governing document, for the fund.
Direct co-investment – An investment made directly in a single underlying asset of a fund. Example: The General Partner elects to invest in an operating company alongside a fund.
Dispersion – Difference between the best-performing and worst-performing strategies.
Distressed – A financial instrument in a company that is near or is currently going through bankruptcy. This usually results from a company's inability to meet its financial obligations. As a result, these financial instruments have suffered a substantial reduction in value. Distressed securities can include common and preferred shares, bank debt, trade claims (goods owed) and corporate bonds.
Distributions – The total proceeds distributed by the fund to the Limited Partners, which may include both return of capital and gain distributions.
General partner – The managing partner of a Limited Partnership. The General Partner is managed by the asset management team responsible for making fund investments (i.e., the intermediary between investors with capital and businesses seeking capital to grow)?
Gross IRR – The dollar-weighted internal rate of return, before management fees and carried interest generated by the fund.
Hedge Fund strategies:
Relative Value/Arbitrage involves the simultaneous purchase and sale of similar securities to exploit pricing differentials. Strategies in this sector offer potential to generate consistent returns while minimizing directional risk.
Opportunistic/Macro strategies involve investments in a wide variety of strategies and instruments, which often have a directional stance based on the manager’s global macroeconomic views.
Long/Short (L/S) Equity involves long and/or short positions in equity securities deemed to be under- or overvalued, respectfully. Exposures to sectors, geographies, and market capitalizations are often flexible and will change over time.
Merger Arbitrage/Event Driven strategies invest in opportunities created by significant corporate transactions and events which tend to alter a company’s financial structure or operating strategy.
Distressed Securities invests in debt and equity securities of firms in reorganization or bankruptcy.
High watermark – The highest peak in value that an investment fund has reached. This term is often used in the context of fund manager compensation. For example, a $1,000,000 investment is made in year 1 and the fund declines by 50%, leaving $500,000 in the fund. In year 2, the fund returns 100%, bring the investment value back to $1,000,000. If a fund has a high watermark, it will not take incentive fees on the return in year 2, since the investment has never grown. The fund will only take incentive fees if the investment grows above the initial level of $1,000,000.
Hurdle rate – The rate of return that the fund manager must meet before collecting incentive fee.
Internal rate of return (IRR) – The dollar-weighted internal rate of return. This return considers the daily timing of cash flows and cumulative fair stated value, as of the end of the reported period.
J-Curve effect – Occurs when funds experience negative returns for the first several years. This is a common experience, as the early years of the fund include capital drawdowns and an investment portfolio that has yet to mature. If the fund is well managed, it will eventually recover from its initial losses and the returns will form a J-curve: losses in the beginning dip down below the initial value, and later returns show profits above the initial level.
K-1 – Tax document issued for an investment in partnership interests to report your share of income, deductions and credits. (Note that Private Investments generally issue a Schedule K-1 instead of a Form 1099 for tax reporting. K-1s may at times be issued later than 1099s, requiring investors to file for an extension).
Limited partner – An investor in a Limited Partnership, which is a form of legal entity used for certain hedge funds, private equity funds and real estate funds.
Management fee – Fee paid to a fund manager for managing the fund; typically calculated as a percentage of assets under management
Mezzanine finance – Loan finance that is half-way between equity and secured debt, either unsecured or with junior access to security. A mezzanine fund is a fund focusing on mezzanine financing.
Multiple of Invested Capital (MOIC) – Calculation performed by adding the remaining (reported) value and the distributions received (cash out) and subsequently dividing that amount by the total capital contributed (cash in).
Net asset value (NAV) – This is the current fair stated value for each of the investments, as reported by the administrator of the fund.
Net IRR – The dollar-weighted internal rate of return, net of management fees and carried interest generated by the fund. This return considers the daily timing of all cash flows and the cumulative fair stated value, as of the end of the reported period.
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J.P. Morgan Asset Management – Definitions
Open-ended fund – As it relates to private alternatives (not mutual fund structure), an open-ended fund is a fund that has no stated term or maturity and allows clients to invest and redeem on an ongoing basis. The frequency of investments (aka subscriptions) and / or redemptions may vary. Redemptions from open-ended private alternative funds generally require advance notice in writing.
Pari Passu – At an equal rate or pace, without preference.
Portfolio company – A business entity that has secured at least one round of financing from one or more private equity funds. A company in which a given fund has invested.
Post-money valuation – The valuation of a company immediately after the most recent round of financing. For example, a venture capitalist may invest $3.5 million in a company valued at $2 million “pre-money” (before the investment was made). As a result, the startup will have a post money valuation of $5.5 million.
Pre-money valuation – The valuation of a company prior to a round of investment. This amount is determined by using various calculation methods, such as multiples to earnings or comparable to other private and/or public companies.
Preferred return – Also known as Hurdle Rate.
Private equity – Equity capital invested in a private company through a negotiated process.
Primary investment – An investment made in newly formed limited partnership.
Real estate investment trust (REITs) – Are stocks listed on an exchange that represent an interest in a pool of real estate properties.
Realized value – The amount of capital extracted from an investment.
Reported/remaining value – The current stated value for each of the investments in a fund, as reported by the General Partner of the fund.
Return on equity (RoE) - Amount of net income returned as a percentage of shareholders' equity.
Secondary market investment – The buying and selling of pre-existing investor commitments.
Seed money – The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.
Tax documents – See K-1
Total value – The combination of market value and realized value of an investment. Shows the total worth of an investment.
Unfunded commitment – Money that has been committed to an investment but not yet transferred to the General Partner.
Venture capital – A specialized form of private equity, characterized chiefly by high-risk investment in new or young companies following a growth path in technology and other value-added sectors.
Vintage year – The year of fund formation and first draw-down of capital.
Write-down – A reduction in the value of an investment.
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J.P. Morgan Asset Management – Risks & disclosures
The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support
investment decision-making, the program explores the implications of current economic data and changing market conditions.
For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
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Unless otherwise stated, all data are as of December 31, 2018 or most recently available.
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