When it comes to dryness there are degrees of gradation, especially when it comes to the most discriminating tastes amongst us. Whether we are talking martinis, snow, or our skin, dry doesn’t always mean dry. We slake, salve, or schuss our way through, always looking for relief or a better outcome but the solutions are usually fleeting, and we often find ourselves back at that dry square one looking for the next application of relief; and so it goes in the capital markets.
From Preqin to CAIA, and so many other places in between, the discussion of dry powder in the private markets is everywhere, but their public market cousin doesn’t seem to have that same problem. The public market dry powder is so dry that it barely even exists anymore. In fact, it has burned a veritable hole in the bottom of our yield-seeking pockets and here are some of the “well-reasoned” decisions* made (by some of us) in the last few weeks alone: Not to be outdone by their neighbor Tajikistan in the recent periods, Uzbekistan floated their first-ever Eurobond offering and successfully took in about $1B in a raise that was eight times oversubscribed…try finding those places on an unmarked map. Then, there is Greece who put the “G” in PIGS. They too were recently at the teller’s window for the first time in nine years (post bailout) and easily raised almost $3B in a deal that was also oversubscribed but by a more “bearish” five times over; these bonds were priced to yield 3.9% for 10 years, which seems like a pretty skinny premium over what Uncle Sam (or is it now Donald?) is offering back at his sovereign municipality. Finally, the emerging market ETFs are the 2019 year-to-date category killers in new asset creations. Let the good times roll indeed.
Next, there are the private markets with a corresponding obsession over the size and dryness of their buyout powder. Maybe this is not such a bad thing after all, but then again, not all dry powder is created equal. If it is of the LP varietal in a limited life cycle fund, this is “good” dry powder, until it is not so good anymore. This capital will eventually need to be invested or returned to the LPs (#FatChance) if reasonably priced opportunities do not present themselves. In the case of the former, the GP can wait and discriminate for only so long before capitulation sets in and investments need to be made. Assuming the accommodating central banks never leave the stage, this might even work out in the end.
Finally, we have the dry powder in the hands of the likes of a Howard Marks who often writes about the speed in which markets can go from flawless to hopeless, seemingly overnight. This distressed debt dry powder might be the most compelling benchwarmer waiting to get into the game, and it is sitting side-by-side with the $100B+ pile that nests under the watchful perch of the very patient octogenarian, sometimes known here as the Rhetorical Oracle. This is going to get interesting…
There is no right or wrong answer and diversification is probably your very best friend but remember that friends don’t let friends part with their dry powder without a hefty base coating of IDD.
Written by Bill Kelly courtesy of CAIA Association.