Private Markets

AgPa #56: The Equity Risk Premium of Small Businesses

Small Business Equity Returns: Empirical Evidence from the Business Credit Card Securitization Market (2023)
Matthias Fleckenstein, Francis A. Longstaff
The Journal of Finance 78(1), URL

In 2020, there were more than 31M small private businesses in the US. Even though the estimated value of those businesses is “just” $12T, the sheer number is astonishing when compared to about 4,000 tradable US stocks (excluding penny stocks). For stocks, we typically use measures like returns, multiples, and volatilities. But given the lack of daily prices, it is difficult to calculate those measures for small private businesses. This week’s AGNOSTIC Paper is an attempt to change that…

  • Small businesses had an equity risk premium of 10.7% and a volatility of 56%
  • Robustness: the model generates plausible results for S&P 500 stocks

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AgPa #53: Investing in Interesting Times

Investing in Interesting Times (2023)
Annti Ilmanen
The Journal of Portfolio Management Multi-Asset Special Issue 2023, URL/AQR

Almost exactly one year ago, Antti Ilmanen (Partner at AQR Capital Management) released his outstanding book Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least. The book is (in my opinion) a must-read and the timing couldn’t have been better. Many of the key themes began to materialize in 2022. Given how much markets have changed since then, Antti released a few updates for six of his major ideas in this week’s AGNOSTIC Paper.

  • The low expected return challenge
  • Investors’ response to low expected returns – private markets
  • What happened in 2022 and where we stand now
  • Long-only versus long-short strategies
  • Downside protection via trend-following

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AgPa #45: Factor Investing in Private Debt

Investing with Style in Liquid Private Debt (2022)
Thomas Mählmann, Galina Sukonnik
Financial Analysts Journal 78(3), URL

This week’s AGNOSTIC Paper is yet another out-of-sample test of the Momentum and Value factor. The authors apply the factors within the relatively new asset class of private debt. More specifically, for “[…] loans to non-investment grade issuers, commonly known as leveraged loans.” This is obviously not my main area of expertise, but I learned from the paper that there is quite some trading of such loans in private secondary markets. Implementing a factor strategy for leveraged loans is obviously more complicated than for equities, but this is exactly what makes this study so interesting.

  • Private debt improves multi-asset portfolios
  • Value and Momentum are profitable within private debt

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