The Finatical
Week of October 25th, 2022 - Private Equity, Economic Slowdown, Early Payday Deposits
Topic Breakdown - Private Equity
Stocks… Bonds… Cryptocurrencies… Many people understand or have at least heard of, these investment opportunities. But what about an alternate way to invest that most people don't understand? This is private equity.
Introduction
Private equity refers to multiple investment funds that invest in companies. Private equity firms raise money to invest in private businesses, then they grow these businesses so that they can restructure them, grow them, and eventually sell the company for a profit. Essentially, private equity firms purchase businesses and restructure them in order to resell them for a profit. The private equity funds that the companies create and manage provide the funding for the acquisitions, typically with the use of debt.
Investing in Private Equity
If you are looking to invest in private equity, unfortunately, the typical investor does not have easy access to private equity investing. The majority of private equity companies normally seek out investors with a minimum $25 million commitment. Although several companies have lowered their minimums to $250,000, the majority of consumers still cannot afford this. Due to this, investing in shares of an ETF (exchange-traded-funds) that tracks an index of publicly traded businesses that invest in private equity is a much more accessible choice for average investors. There are no minimum investment requirements because you are purchasing individual shares through the stock exchange.
Risks
In the end, investments in private equity include a high level of risk and could result in a partial or complete loss of funds. Significant dangers also exist with private equity. For one thing, investments in private equity are typically not that diversified. Investing everything into one sector can be risky in any type of investment. There are also valuation risks. Private equity investment valuation involves a great deal of judgment. When appraisals are not performed by an unbiased person, flaws/more risks may be present. Alternative investments are by their very nature complicated, speculative investment vehicles that should only be undertaken by qualified investors with the knowledge and expertise necessary to fully comprehend the risks.
Financial Trends
Federal Reserve’s Economic Slow Down
This past Thursday, the economy has given signals of a recession looming and that the Federal Reserve could be making a policy mistake by continuing to try to slow things down in the economy. Towards the end of September, the US’s Leading Economic Indicators (LEI) fell and persisted in a downward trend in the nation’s economy compared to previous months, suggesting a recession is likely to occur before the end of 2022. The main weakness that was shown in this index as “widespread” was high inflation, fueling the decrease in the number of jobs coupled with the credit conditions constantly pressuring the economy. In the future, the index is planning to use 10 metrics that include manufacturing hours worked, jobless claims, building permits, stock market indexes, and credit spreads for collecting data across all the different sectors of the economy.
The good news for the U.S. economy is that the LEI is not considered a major data point when tracking the economy’s chances of a recession despite representing a good overview of the economy, but the fact that the data points going in the index is already being known, so there isn’t any additional information being spread. There are still concerns about how the Fed officials are controlling the interest rates irresponsibly and are causing the economy to forcefully slow down. For example, chief U.S. economist at SMBC Capital and former senior economic advisor to President Trump, Joseph LaVorgna said, “We went from a Fed that was way too easy to being irresponsibly tight”.
JPMorgan Chase’s Early Payday Deposits
JPMorgan Chase has recently declared that they will be giving their customers early access to new direct deposits, which is a feature popularized by their fintech rivals, as a means to attract users to a no-overdraft checking account. This feature will consist of accelerating payments including payroll, tax refunds, pensions, and government benefits by two days for its customers of their Secure Banking product. The benefit of this for labor workers and employees throughout the nation is that they will be paid their salaries two days in advance, which in most cases means that people will get paid on Wednesdays instead of Fridays. These couple of days are often the difference for low-income families paying a bill on time and not be charged an additional late fee.
JPMorgan, which is the largest U.S. bank in terms of assets, decided to take over this step in the industry because the banking industry is continuing to gain pressure from Federal regulators and lawmakers on overdraft and other fees along with the high-interest rates that they are imposing. The bank serves more than 66 million U.S. households and has the ability to quickly adapt and learn from its fintech rivals in creating these upcoming high-demand features. Additionally, JPMorgan’s value proposition will include both digital services and a broad physical network of about 4,700 branches and 16,000 ATMs, which none of their fintech rivals offer or other banks in the U.S.
Financial Guidance
“The secret of getting ahead is getting started. The secret to getting started is breaking your complex overwhelming tasks into small manageable tasks and then starting on the first one.” ― Mark Twain
Even outside the world of finance and economics, there are many things that seem to be too overwhelming and undoable. However, one step that helps is to break down the overall task into smaller steps and start on the first one.
Term of the Week
ETFs: Exchange-traded funds, or ETFs, are funds that trade on various exchanges such as entire market indexes like the S&P 500 and the Dow Jones. They allow for cheap diversification of portfolios for many investors, differing from significantly more expensive options such as private equity funds.