“When we look at our investment portfolio, we don’t see a crisis in the real economy, we see active companies. But the macro conditions create an environment that predicts a crisis and it will happen. There are currently several dangerous centers that can lead to a crisis and in the end there may be a match that ignites one of them,” states David Stoneberg, deputy head of the alternative investments division, at the global investment company Neuberger Berman.
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“It’s not that there isn’t an effect of the situation already, we see cracks here and there. What do you mean by cracks? Companies can no longer raise prices at the rate of rising expenses, or their profit margins are reduced. But it stays in these areas, it does not go to areas of inability to repay debts , and the revenue line continues to be good.”
So basically “business as usual” and meanwhile consumers continue to buy?
“The Fed decided to suppress consumption by raising interest rates, either through making products and services more expensive or through unemployment. Companies will have to adapt to this. Some companies will be hurt and some companies will be able to adapt more easily to the new situation.
“It will be difficult for the clients of a software company to replace their entire system now in case the service becomes more expensive, other companies will have to make more of an effort. There will also be branches that will flourish now because of the geopolitical situation and the war between Russia and Ukraine.”
“Inflation is ‘sticky’ and is here to stay”
Neuberger Berman is a global investment management company headquartered in the USA, which manages financial assets worth approximately $460 billion in stocks, bonds, commodities and private investment funds in various fields. Its clients include institutional bodies as well as capable private clients. The company is active in 26 countries, and the Israeli representative is managed by Daria Ochnik, who for 8 years managed the institutional activities of Goldman Sachs in Israel.
Neuberger Berman’s forecast for developments in the financial markets paints an unoptimistic picture of the economy and the markets: a scenario of a soft landing in interest rate increases (inflation suppression without severe damage to the economy or the markets) is no longer relevant, the bear market we are in shows that this is no longer an option.
“Engineering a soft landing when you’re operating aggressively is something very difficult,” notes Stoneberg. According to him, the inflation, which only a year ago was estimated by the markets to be temporary, will be with us for a long time. This would be “sticky inflation”.
He explains that the Fed will do everything to fight inflation, including going into recession. According to Neuberger Berman, the interest rate in the US may reach 5%, but the more severe recession will be in Europe. The investment company also estimates that the markets will continue to be turbulent, while in the corporate bond markets, according to Stoneberg, after the storms, yield levels become interesting in relation to risk.
What is meant by “sticky inflation”?
“It will be more difficult to take it down than it seems. It will stay with us for a longer time than the forecasts, in a wide range of goods and services, and the Fed will work hard to break it. This will be a counter force to continued growth.”
Fed Chairman Jerome Powell at the press conference on Wednesday / Photo: Associated Press, Patrick Semansky
How are the macro forecasts reflected in the allocation of your investors’ assets at this time?
“We sit a lot on cash. We are very careful in the area of stocks, because there is high uncertainty in the stock market, and we recommend alternative assets to stabilize the portfolio.”
“Companies in the health and defense sector will benefit from the situation”
There has been a big buzz in the last two years around alternative investments, both in debt and equity. But if companies can’t pay debt, or aren’t doing well because of a recession, what does it matter if the debt is marketable or not?
“You can never time the market, and the great value in non-tradable investments is in the premium for the illiquidity of the investment, so these will always be long-term investments.
“In addition to that, in investments through investment funds there is a better coordination between the interest of the investor and the company in which his money was invested, than in investments through the stock exchange.
“Large investors appoint board members, they are more involved in the management of the companies, the conversation with the company is direct, unlike in the tradable market, so there is a greater chance that the investment will succeed.”
Seemingly, there is logic in these things, but only in the last year investment funds poured money into bizarre technology ventures at illogical values, which today are sharply cut.
“First of all, it’s clear that mistakes were made, every investor makes mistakes, and the thing that scares me the most personally is an investor who says he never made a mistake. Beyond that, we didn’t see the crazy pricing in the entire private investment fund industry, but mainly in the technology funds. Also there in certain sectors like In crypto, where the technology is so innovative, it is clear to investors that most ventures will fail anyway, but if one investment out of six succeeds, they will still make a 20x profit on all their investment money in the field.
“In debt funds, there is an advantage in investing during such periods, because the terms of the loan are such that an increase in interest is reflected in the yield automatically. There is also much more room in this market because traditional lenders such as the banks are less active in it, and private lenders enter at higher rates.”
Neuberger Berman believes that currently maintaining cash will enable opportunities to be exploited in the future. The investment house believes that governments will invest in health and defense, and companies in these sectors will benefit from this. In the area of debt, the increase in corporate bond yields creates, in their opinion, interesting opportunities in terms of the risk/return ratio in the bonds of low-risk companies. Also, the investment house continues to believe in commodities, even though their pricing is less attractive than at the beginning of the year.
“The financial industry was built to be flexible”
We are in a strange scenario, the interest rate is rising towards 5%, which is not a very high level historically, and it seems that everyone is just waiting for it to go down again. We have forgotten how to live in a world where there is interest on money.
“The financial industry was built to be flexible, and the people who work in it need to know how to be flexible. I’ve been in my industry for 20 years, so I can say that what I see is that until now the interest rate has not increased, because there were fears that if it increased it would lead to deflation (a drop in prices as a result of a slowdown ), and these concerns now no longer exist and that’s good. But it’s really different if you started working just five years ago, and now you’re encountering a situation of rising interest rates for the first time, which characterizes about a third of the workers in the industry.
There are no longer fears of deflation, but will we be in a situation of stagflation (combination of inflation and recession)?
“No one has a crystal ball, but the Fed is very aggressive with interest rates, and when you act aggressively, you can find yourself going to places you didn’t want to go.”
What is better for the private investment fund industry? Zero interest or 5% interest?
“The private investment fund industry prefers certainty. You could see the outlook for the future well. It doesn’t matter if it’s around 0% interest or 5% interest.”
If there really is a priority in such a time for investments in private funds over the fluctuating stock market, how is it that we see a decrease in investment transactions?
“Part of this is due to a change in the risk appetite of the investment funds, as an effect of the turbulent sentiment in the stock market, and part of this is due to gaps that have arisen between the funds and entrepreneurs and companies: it is very difficult for a deal that until a year ago was priced at a certain price to close at much lower prices. “Some entrepreneurs are not ready for the new price tag So they avoid raising investments, some funds think that there is still room for a price drop, so they wait. There is no doubt that the year 2022 brought with it much fewer opportunities for the industry – in the US there is a 50% decrease in investments this year, in Europe there are places where it reaches a 90% decrease, because they are more affected by the crisis of the Russia-Ukraine war, and the energy crisis.”
How do you see the European market today?
“There are very few situations in which it is wrong to do transactions in private investment funds, and what they all have in common is that you estimate that your investments in the future will be worth less than they are now.
“This is not the situation in Europe now, despite the war. It is true, there are risks that need to be priced, and Europe cannot be looked at as one piece, but still, in the future, European companies will be worth more than today, and if the market grows more slowly, simply adjust the transaction price accordingly “.
The Stock Exchange in Frankfurt, Germany / Photo: Shutterstock
Do you have clients who are still interested in exposure to high-risk investments, or have there been a change in tastes?
“With the institutional clients, we see continued exposure to the level of risk consistently, and in most cases also with the private clients. The changes are within the segments themselves, not between them. For example, those who want exposure to capital investments, can prefer less technology and more from other sectors, but he does not change the scope The exposure to capital investments in general.
“What’s more, we see changes due to an allocation correction. For example – if we want 30% non-tradable capital investments, and the portfolio is built according to that, but in 2022 the declines in the tradable part brought the portfolio to a state where the share of non-tradable capital investments – which do not suffer from fluctuations like The tradable portfolio – rose to 40%. Sometimes a part of the non-tradable holding is sold, to bring it back to the level of 30%.
Neuberger Berman’s Israeli connection Habib Waldhorn songs
Neuberger Berman is a veteran investment firm, founded in 1939 by Roy Neuberger and Robert Berman. It is a private company that operates from New York and is managed by George Walker. Over the years Neuberger Berman expanded its business and in 2003 was acquired by the investment bank Lehman Brothers. The bank, which ran into difficulties during the 2008 crisis, sold Neuberger Berman to its management in a Management Buyout deal, and since then the company has been operating independently.
According to the company’s data, its activity is mostly carried out in the Americas (66%), and the rest in Asia-Pacific and Europe and the Middle East. In the Israeli context, it is possible to mention its current investment in the defense technology company Cognate : Last August, Neuberger Berman reported holding 5.6% of Cognite shares, and began an activist course, with the aim of trying to flood the company from Herzliya.
Neuberger Berman stated that she believes in the ability of Cognite’s management to produce a turnaround in its business if it raises additional capital, and adds management members and directors with skills that will complement the existing ones. Since then there have been no further updates from Neuberger Berman, but Cognite recently announced the sale of part of its business for $47.5 million, and additional amounts of up to $35 million, which will come in the future based on meeting targets. Cognite, managed by Elad Sharon, is traded on Nasdaq with a market capitalization of $179 million.
Neuberger Berman’s activist move at Cognite comes several years after she made a similar activist move at the technology company Verint, from which Cognite split off in 2021. At Verint, Neuberger Berman demanded the replacement of some of the board members, and even then raised the possibility of splitting Verint into two companies (one that would address the civil-business market and the second for the security market), in order to generate value.
In the end, the struggle ended with a compromise signed between the parties, and after about two years the proposed split was carried out, with Verint remaining with the civilian market activity and Cognate with the defense market activity. Verint, under the management of Dan Bodner, is traded at a value of 2.25 billion dollars.
T. G | Neuberger Berman
Occupation: A global investment management company. Among its clients – institutional bodies, wealth funds, wealthy private clients
history: Established in the USA in 1939
data: Operates in 26 countries, employs 2,500 people. Manages assets in the amount of 460 billion dollars