Maybe the stock market isn't the best way to invest all your money. There are plenty of reasons to be concerned with no corrections to speak of since 2009, shaky geopolitical concerns and the like. Corporate and municipal bonds don't seem to be the solid answer they used to be either: Retirees can't retire on low single digit returns and bond funds are scary when interest rates threaten to rise and, at the end of the day, the values might drop suddenly. What should we do?
There seems to be a groundswell of interest in private debt outside the public arena where interest rates have been painfully low for so long. At a gathering called LPGP Connect, at the beautifully renovated Carlton Hotel on Madison Avenue in New York City in July, there was a repeated theme: private debt is the place to be. For one thing, banks are either too small or too large to lend money to companies with revenues between $5 million and $25 million. This has been a big opportunity seized by a handful of smart firms who have been getting double digit returns steadily for the last seven years, lending to the small to medium size enterprises (SME's) who need capital and can afford it.
Secondly, on a micro-level, some retail investors have also benefitted and expect to continue benefitting from online opportunities like Peer to Peer (P2P) lending sites. In fact P2P lending has become so big that recently in London, the Chancellor of the Exchequer announced that P2P transactions would be allowed in Individual Savings Accounts (ISA's) in the UK starting next April. This announcement included crowdfunding as well, which is a third area of opportunity to be approached with caution but intelligent optimism.
P2P lending has been a real success story. Individuals with outrageously high credit card interest rates, or very small businesses with solid plans, can go online, state the interest rate they would like to be paying (often double digit) and their plan to repay the loan. Other daring individuals can go online, trust that the information is accurate and make the loan. This has been going on with fairly healthy results for years now. So banks and other innovative firms have been buying up bundles of these loans, using their unique skill sets and algorithms to attempt to lessen the default rates and re-offering these loans to the crowd-funders, again online.
Full disclosure: we have been investing in two such groups and expect to continue since they offer high yields, positive social impact and regular distributions to satisfy the need for liquidity which is so often lacking in the private space. One group was founded by Jorge Newbery, the author of Burn Zones, describing his extraordinary life story from punk rock record producer to world class bike racer before settling in his middle age to a very smart niche that satisfies his desire to help the underdog and make money at the same time.
There are thousands of families about to go into foreclosure on their homes at any moment; often through no fault of their own. Newbery buys their mortgage at a bulk discount from a big bank and keeps them in their home for a reduced payment (income to the investors). If they turn their lives around, they might settle their mortgage at a price that profits the investors despite being well below the original balance. On the other hand, he protects the investors by selling the mortgage to other lenders if payments are missed. This is fair and a good deal for all.
Newbery is not the only one who cares. According to the 2015 Deloitte Millennial Survey:
83 percent of Millennials surveyed believe businesses can have a positive impact on society and the environment and 47 percent believe it is the number one priority.
To wit, Goldman Sachs, according to the Responsible Investor, now considers ESG or Environmental, Social and Governance issues the minimum prerequisite for all due diligence. They recently acquired Imprint Capital, a firm focused on investing for positive impact with clients like the Kellogg Foundation, Abacus Wealth Partners and Family Offices. By the way, Millennials and Generation X are set to inherit more than $41 trillion in the next four decades from the Baby Boomer Generation so expect this trend to last.
Regarding private debt: after a survey of family offices, Michael Salat of CleantechIQ.com commented: "High-net-worth investors are increasingly interested in providing debt for projects that deliver a positive social impact, including distributed solar projects and energy efficiency retrofits in buildings. These projects are economical and don't take a great deal of technology risk.
Some more emerging areas of interest include sustainable food production, water efficiency, and energy storage."
So even if you stick it out in the stock market, there is likely to be a shift in how valuations occur. The new wave of investors care about more than the single bottom line, and the valuations of some stocks, like coal and fossil fuels, may just never climb back to where they were. If you are designing algorithms for super-computers, take this trend into consideration and don't short it because it is a trend that is essential for the good of all.