This week, I want to get a little more serious and take a look at market opportunities that have a better than average chance of performing in 2021.
We’ll do this by taking a look at trends that have begun to emerge over the last year and following them to their ultimate conclusions.
The Trends Shaping 2021
Biden, China, Covid…
There’s no denying that macro factors will impact the markets going forward.
A recent report from Henry McVey, The Head of Global Macro and Asset Allocation at KKR, agrees.
Like I said above, I tend to discount market predictors, but McVey and his group do a fantastic job of looking at the world as it really is and using a private equity mindset to find investable trends worldwide.
I look forward to reading his quarterly reports and have found them incredibly useful.
McVey believes that we will see massive growth in 2021. He expects government spending on things like broadband, education, supply chain resilience, energy transition & climate change, health care coverage, and traditional infrastructure to spur the economy along. As the vaccine is made widely available, we should see a resurgence in consumer spending as well.
The Fed will continue to fill its role as well and continue to provide favorable monetary stimulus.
Against this back-drop McVey thinks we should be looking at Asset-Based Finance in Credit, Infrastructure, Logistics, and parts of Real Estate. He says, “We are maximum bullish on assets linked to nominal GDP growth with upfront cash flow.”
The KKR team also sees a long, slow normalization of oil prices and continued expansion of renewable energy projects. This opens some real opportunities in energy infrastructure assets that we will be exploring in this letter as we get into 2021.
Ultimately, McVey and his team believe the best growth opportunities will be in areas such as Healthcare, Technology, and Consumer products.
Combining the trend and BDCs
Suppose I combine McVey’s predictions and a desire to be in opportunistic credit (a strategy of investing in companies that make loans to middle market businesses that banks usually avoid).
In doing so, I come up with a very favorable outlook for business development companies (BDCs) that lend to and invest in technology, healthcare, and other growth companies.
One example of such a company is TriplePoint Venture Growth BDC (TPVG).
TriplePoint lends to companies that are in the late stages of the venture capital process and are within a few years of IPO or an exit that fully unlocks the businesses value.
In the financing arrangements, Triple Point usually gets warrants and options so they can participate in the equity’s upside and collect interest payments.
Therefore, as an investor in TriplePoint, you can participate as well.
Right now, shares of the BDC are yielding almost 11% and trading just below net asset value (NAV).
Another such company is Hercules Capital (HTCG).
Hercules is a little more wide-ranging in their efforts as they will lend and invest in almost any stage of the venture process, from early-stage all the way up to post IPO.
Hercules likes to invest in technology in energy, renewables, and life sciences. These, of course, are the hottest areas of the market right now and should remain so for the foreseeable future.
Like TriplePoint, Hercules receives warrants and options to participate in the upside of the companies to which they lend. Most of their debt is short term with 3-4-year maturities and 97% are floating rate with interest rate floors.
85% are first-lien loans, and Hercules likes to be the only lender in a deal to maximize their security as the primary lender.
Hercules is yielding almost 9% at the current price. I prefer to use the “only buy on pullbacks” approach with Hercules as it is trading at 1.3x asset value which is getting a little close to the edge of the BDC’s historical range.
How to Play Opportunistic BDCs
Regardless of how 2021 goes, I can promist that there will be market disruptions despite a robust economic rebound.
The US-China situation could – to use a technical term – go wonky at any moment. Any sign of outright hostilities would be very disruptive to financial markets.
Also, stronger than expected economic growth could cause some increases in interest rates. And the current market fears higher rates like Dracula fears sunrise.
There is also a good chance the US dollar declines next year, which could also give the stock market a bit of a sour tummy.
Use these disruptions to enter the market and accumulate shares in great companies such as TriplePoint and Hercules Capital.
The idea is to use market weakness to build a position that can be held for decades with a constant flow of reinvested dividends and appreciation that creates lasting wealth.