The Takeaway: Delayed but not denied

Who stands to be the biggest loser if free trade starts to unwind? Who stands to gain?  

Chief Market Strategist Troy A. Gayeski, CFA dives into his latest strategy note on what trade policy may mean for equities and how investors can respond.  

Troy joins Content Strategist Harrison Beck to outline his frameworks for understanding the current tariff-inflected environment. He examines the contributing factors of the GDP, U.S. consumer and bank strength, and the concept he coined to describe this kind of market upheaval, “The Galactic Mean Reversion.” 

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Transcript

Harrison Beck (00:04): 

The US economy continues to defy the predictions of pessimists, but that doesn't mean the macro environment has escaped this year's volatility unscathed. Can the brief slowdown in Q2 consumption lead to even greater future growth? Will businesses be able to optimize for the new onshoring trend? And where does this put opportunities across private equity credit, commercial real estate, and liquid markets? I'm Harrison Beck, future standards content strategist. Luckily we've got chief market strategist, Troy Gayeski in the Future Standard Podcast studio to give us some answers. He'll walk us through the insights in his most recent perspectives note, including where he's seeing opportunities across private markets. Troy, welcome. 

Troy Gayeski (00:49): 

Good to see a Harrison. Happy tail end of the summer. 

Harrison Beck (00:52): 

Happy tail end of the summer. Well, let's start with the macro backdrop. You've titled your most recent perspectives note delayed but not denied. Why is this a useful mindset for investors in the second half of 2025 and what does it mean for the current economic landscape? 

Troy Gayeski (01:10): 

Well, to be fair, let's give credit where credit is due. You and the marketing team came up with that title as you always parse through all the statements and come up with something very creative. But the original genesis of gratification delayed but not denied, actually comes from middle market private equity, which as we've discussed before, is the definition of growth at a reasonable price. And it stemmed from the fact that coming out of last year after the election outcome in particular, there was so much enthusiasm, markets were ripping again, eclipsing the 2021 multiples and private equity assets had not only not gone up, they went down even more in terms of value. And so when you think about that from a profit standpoint or a return on investment standpoint, the multiple expansion of private assets is going to happen. It's just going to take longer than it would've otherwise because of the trauma that the economy and markets went through Liberation day. 

(02:09): 

So as you extend that delayed but not denied framework, it affects a lot of different areas of investing. We'll hit the economy first, as your question alluded to that as you go through Q2 and Q3, I think even the perma bearers and the perma pessimists calling for the US economy to collapse overnight and 60% of companies in America are going to just cease to exist, all sorts of nonsense. There were recession probabilities calling for like 80% probability and a hundred percent probability, all sorts of goofy stuff. I think even they can admit that yes, the US economy's really resilient, and by the way, we're not having a recession anytime soon. That being said, it was a traumatic moment, and what it did is it pushed back a lot of deal flow on private credit, not only in corporate credit, but also commercial real estate. It pushed back consumption in the US economy because even though the consumer is still very resilient, when you're getting inundated with these nonstop headlines of, here we go, another hyperinflation wave. 

(03:14): 

Oh my goodness, the economy's in the collapse. It's natural that you have a pullback in spending, which is from my perspective, very good because I'm always focused on forward consumption as opposed to current. And so what happened in Q2 is consumers did pull back to some extent, they boosted their savings rates even more in line with higher end historical averages, which means there's more future consumption power to come and help drive the economy over the future. Tied to that also I must add is business fixed investment. That business fixed investment was going to completely collapse by the tariffs. No business in America was ever going to invest in anything again. Well, it is true that business fixed investment stopped climbing at the meteoric rates that it had been driven by, let's call 'em non-AI businesses, but also AI businesses. But it was still positive. And when companies are going through that one quarter, we call it Q2 Q3, adjust process, it's very logical that on the margin they're not going to make the marginal higher, they're not going to make the marginal investment. 

(04:17): 

But as more certainty seeps in and everyone gets it, okay, we're realigning trade policy. The treasury is benefiting from a tremendous amount of revenue. Yes, certain businesses are going to be hurt, but there's going to benefit. Then again, it's not future consumption power, it's future investment power that was delayed but not denied. So you can really extend that like a whole host of areas. And I think the great news from our perspective, if you look at, and we'll get into this more, I know, but if you look at deal activity, particularly whether it's mergers acquisitions, whether it's private credit being lined up to facilitate business expansions or public to private transactions, commercial real estate, just like other areas slowed down a bit. Now it's come firing back. So all of our investment teams are really excited about the Ford pipelines for their ability to put capital to work at very attractive risk adjusted levels. 

Harrison Beck (05:09): 

Well, and as we're having this larger conversation about where sentiment is driving investors across the board, let's ground this conversation. What's often top of mind for investors, public equities? 

Troy Gayeski (05:21): 

Yes, 

Harrison Beck (05:22): 

We have witnessed amazing growth this year as you alluded to, but you've written that you're seeing less upside and more downside in US equity markets. Why is that? And where do you see investors getting extended? 

Troy Gayeski (05:35): 

Yeah, so I think extended to be a strong term, you have to understand that as we move through these cycles, and we've been in a tremendous bull market, make no mistakes since the 22 bottom. When you get to the higher end of the multiple ranges, let's call it 22.1 to 22.9 right now, and we approached these levels a couple of weeks ago, which is when I started talking about it just takes more and more capital inflows to drive higher prices because the market cap is larger. So that's 0.1. Point two is we all do this too much. I try to step back and focus everyone on technicals every now and again because everyone debates all these fundamentals. But it's really straightforward after the liberation date, mini bear market correction, multi-strategy hedge funds, re levered, and then to lesser extent long share equity hedge funds. And then a bunch of systematic investors, including trend followers, they help drive those higher multiples, those higher prices. 

(06:34): 

And of course, including that was retail. Retail has been very active for really the last 10 years. So a lot of that buying power has been exhausted. So there's just very little juice left in the tank. So really until share buybacks start, we're almost through earning season. So they'll start, and in some cases have started a little bit, the only ones that really matter, omega cap tech at the end of the day. But until that happens, there's just less liquidity to drive assets higher. And then the flip side, when you're at those extended valuations and you don't have a bunch of willing buyers either systematically driven or fundamentally driven on the sidelines ready to pounce if something were to go wrong again, whatever that something is, you would just have more downsides. So it's not like the world's ending, it's just, Hey, be realistic from here. We've enjoyed a tremendous year so far, once again, led by mega cap tech, despite all the haters out there and all the desire to let's do goofy international, let's do small cap, lets own market cap weighted indices, and then find the alternatives to compliment that, which is the main use case for middle market private equity. 

Harrison Beck (07:39): 

Well, and so speak a little bit more to that. What is your take on the options for complimenting public equities? 

Troy Gayeski (07:46): 

Yeah, so any way you approach it, if you approach it just fundamentally, you want to own market cap weighted indices, we have five, arguably the five greatest companies mankind's ever seen, the four hyperscalers Nvidia, some would throw Apple in there, not the company they used to be, but still a great company. I don't know why anyone talks about Magnificent Seven anymore because Tesla hasn't been magnificent for a long, long time. How you could put a company with negative 10% year over year revenue growth in that same vernacular is kind of kooky, but yet you still see analysis like Magnificent seven this. It's like, guys relax, let's get a little more focused. So you want to own some degree of that, right? And the degree really comes down to what your risk appetite is, how much volatility can you handle? Understanding the extended valuations, some of the cheaper, let's call 'em Fantastic Four or Fab Five are a little bit more expensive now than they were six months ago or three months ago. 

(08:42): 

So what do you compliment that with? When you look at the world, the world is really devoid of attractive growth other than the us there's a few great international companies. TSMC would come to mind. Novo had a chance somehow they torched it. There'll be case studies written in Harvard on that for years, no doubt. But there's very little growth overseas. There hasn't been for years, so it's very hard to get growth opportunities in Japan or emerging markets. When you think of the bricks, there's really only one brick left that's India and they've never been cheap. You have gotten growth. And then Europe, I mean it's been a sclerotic economy since the days of Gerhard Schrader and Jack Rock. So where do you go through growth? You got to be in the US obviously, but then within the US would you like to own cheap assets that have Nasdaq like revenue growth or do you want to own expensive assets that have very poultry revenue growth? 

(09:39): 

And that's really what it comes down to in this growth at a reasonable price thesis. I always tell our sales team, our clients, whether it's a drawdown vehicle or an evergreen vehicle, whether it's a primary, a secondary, or a co-invest, it all starts with the asset class growth that we can hopefully add alpha on top of like we've done historically. And then from there, you're at rock bottom prices. We're roughly depending on the metric, 25 to 30% cheaper than 2021. We're right now about 40% cheaper than the Russell 2000 on an e vd EBITDA basis. And you're getting, let's call it two to six times the revenue growth of the Russell. And you're getting more than double the revenue growth of the s and p, which by the way is dominated by mega cat tech, which you kind of already own. So when you go through it proactively, okay, what do I want to own? For what reason? All roads lead to garp. When you can find it, you grab it. And if you do a process of elimination, you come to the same conclusion. Now, I would say that doesn't mean that small cap can't rally for two weeks or four weeks. I know that's a sell side favorite right now given that the fed's about to cut. But in terms of a strategic holding, when you can find growth at a reasonable price, you want to grab as much of that as you can to compliment your large mega tech exposures. 

Harrison Beck (11:03): 

That makes a lot of sense. Speaking a little bit more about private equity, you've written about how you're paying attention to headline grabbing themes like AI infrastructure, like robotics, but also some less glamorous themes, HVAC and lawn care improvement, rollup and consolidation. What are some of the other themes and ideas within private equity that you're paying attention to? 

Troy Gayeski (11:26): 

So I think when you start at the top level from just a sectoral asset allocation standpoint, one of the things that's pleasantly surprised us, and part of this was tied a little bit to liberation day, some of it's tied to the rather aggressive treatment of certain large endowments by the new tax cut and job acts extension. The secondary opportunity is persisting much more than we would've guessed into the year. We're expecting record volumes, not at the prices they were at 22, but certainly at still attractive pricing. That's one thing that's pleasantly surprised us in terms of middle market P in general, to your point in terms of headline grabbing themes, we don't invest to grab headlines, but you'd have to be asleep at the wheel to not understand this incredible AI infrastructure boom. And by the way, that doesn't make an investment great just because tied to that. 

(12:25): 

But if you can find, again, assets at very reasonable prices that have really the greatest business fixed investment theme, I'd say going back to electrification or locomotives, building railroads, it's dwarfed what happened in telecom. And the companies doing it are deep pocketed that have basically unlimited resources. So the concept of being another telecom outcome is kind of goofy. So healthcare in particular, one tied to robotics, others tied to other aspects of healthcare has been really fascinating to me just from a theoretical investment standpoint, because everyone that's followed healthcare, invest in healthcare over 20, 25 years knows that it's been this great secular growth theme, meaning demographics getting older, there's more money being spent, and that's great, but it's been very hard to make money from, unless you are a mega cap pharmaceutical company with patent protection and the ability to just let academia and smaller businesses figure out what works and then go in and buy 'em or patent it or use some other marketing resource to really monopolize, I shouldn't say monopolize, but ize a certain market segment. 

(13:35): 

Other things have been really tough. Biotech's been tough for a long, long time. Drug delivery has been tough. And so it's one of those theoretical concepts should be a great investment opportunity. But man, oh man, it's been really hard to make money. So that's one of the reasons I'm so fired up because these, again, they fit squarely in the garb theme, whether they're tied to robotic surgery or whether they're tied to clinical drug testing or whether they're tied to other aspects of healthcare. They all have well above s and p revenue growth well above s and p EBITDA growth in a sustained trend that, again, things always can go wrong, but when you look at robotic surgery, it's got a long way to run. When you look at all the emphasis on drug testing, that's a reliable revenue source. Infusion care would be another home treatments and another, aside to all this is everything in healthcare, you have a Medicare and Medicaid cloud over that you have to make sure you can withstand either lack of Medicare growth or in some cases draconian Medicaid cuts. 

(14:38): 

So those are very exciting. And then the more boring ones, again, nothing's boring. That's grown EBITDA and revenue at 10 to 15%, right? That's exciting. But yeah, obviously lawn care maintenance and consolidation plays in growing aspects of the US economy. That's kind of one of the bread and butters of what middle market private equity does, is find these great concepts that have been applied well in a small geographical footprint and then expand them, bring in outside capital professional management, make 'em as efficient as possible, and then just duplicate. The thing with data centers is they also need to be cooled, right? So shockingly, one of the greatest growth verticals there is, you guessed the data centers. So there's a lot of kind of meat and potatoes opportunities, and then there's some that, to use your term, are a little more headline grabbing. But I just want to remind everyone that what we're talking about is not like early stage VC or phase two trials. That's much more speculative capital. That's the domain of venture or public markets to finance. We're focusing on operating businesses that are profitable. And then the question is, how can we make them more profitable and help them grow? Right? And that is really what middle market, private equity, constructive middle market private equity is all about. 

Harrison Beck (15:56): 

Makes a lot of sense. Well, let's move on from private equity to talking about credit. So what are some of the meaningful opportunities you are seeing in credit and why do these themes have your attention? 

Troy Gayeski (16:08): 

Yeah, so look, I think every investment manager, whether you're public or private, obviously in private it takes more time to evolve portfolios, but you're always looking at the best way to incrementally increase the return versus risk profile of a portfolio. 

(16:25): 

And so as we go through that process, I'd say commercial real estate would be a great example where you step back to 2021, industrials have never had a fundamental problem. The issue was lending terms got a little too cuckoo caru, right? LTVs got too high spread to SOFR at the time it was L-I-B-O-R. People forget that. We're like 2 20, 2 40 over. And we were also fortunate because there was no law that said hospitality was going to come back at that same point, but it just so happened it did. So we can lean in there. And so right now, there's a couple areas that we continue to industrial has come back to us. We were very, very patient. This happened about 18 months ago. Terms got better. We reengaged the market. And if you think about multifamily, almost all you need to know, people talk in all this grandiose detail is it's over 40% more expensive to own a home in the US than it's to rent. 

(17:20): 

That's unfortunate for first time home buyers. But the economic reality is if you have any financial constraint at all, it works in your favor to rent rather than own. So that means substantial demand as far as I can see. And unfortunately, we don't expect major help on mortgage rates. The Fed is certainly not doing a QE again anytime soon. So that is what it is. Now, if you go a little more in the weeds and you think about supply demand on the side, there were, let's just call it a lot of real estate investors that didn't understand how far behind the curve the Fed was and what inflation even meant. And ooh, the fed's going to hike by 50 basis points. I'll never forget some of the panels I did back at the end of 21 with some of those folks, and they just had no idea what was coming in real estate in terms of a correction. 

(18:12): 

But after the correction, what that led to is a complete slowdown in new construction. So you had this big wave of construction that hit the market that helped drive prices lower in even great areas of the country, like in Austin or in Nashville that were marginally overbuilt. And now you see this complete supply cliff ahead of you. So whether it's industrial, multifamily, you know, have strong demand, and now you're seeing supply absolutely collapse relative to where it's been for five seven, in some cases 10 years, that bodes really well for the Ford outlook on commercial real estate. We still favor lending over owning because there's still a couple more years to go before cap rates get materially higher than borrowing rates. But big picture, we we're in really good shape there. I'd also say if you're focused on equity part of the capital structure, make sure it's an income play first and then understand that it's going to take several years before you get material appreciation. 

(19:14): 

So focus on the income right first. And then on private corporate credit, I mean, as usual, we're up to all sorts of really creative stuff. And I would say three areas of the most creative we've been, let's call it the last three years, has been lifting assets off bank balance sheets that came and went. We made hay while the sun was shining. And let's face it, there's been a change in the regulatory environment and banks feel a lot better about their balance sheets. So we locked in some very high yielding safe assets for our clients. But the other two, one would be considered countercyclical lending or opportunistic lending to either companies or sectors of the economy that are going through a short term pain patch for whatever reason. And then lastly, I'd say on private credit, a lot of what we do is upper middle market, large mega cap. 

(20:06): 

We're really created an asset based finance. We talked about commercial real estate lending already, but we also have a team that focuses in on non-sponsored lower middle market. And what's so great about that is you get additional yield and there's an additional alpha proposition because of the small nature of the companies and the fact that management teams are far more willing to negotiate tighter covenants and provide a little bit more of a payout because of the growth profile. So yeah, a lot of exciting stuff in private credit. And I think if you probably pulled all 10 top BDCs or top 20 private credit players, everyone was so fired up coming into the year and then it was like, whoops, liberation day. And a lot of activity slowed down and now it's coming back very, very strong, which bodes well for attractive income 

Harrison Beck (20:54): 

Streams. Well, and that was great. I feel like we covered credit and also covered commercial real estate in terms of equity, in terms of lending. So let's close it out on this whistle stop tour through the asset classes. Let's talk liquid markets. What are some of the timely opportunities you're seeing and what sorts of ongoing shifts or evolutions should investors be aware of? 

Troy Gayeski (21:17): 

So on the liquid market side, remember almost everything else we do, we're focused on risk adjusted returns, I should say. Everything we do, we focus on risk adjusted returns, but some strategies are for growth, some strategies are for income, some are for diversification. What bonds used to be back before the Fed started to hike, we put a number on that, roughly four. But whether it's three or five it, you won't know it's difference. And so there, I think as you've seen this year evolve, you remember the whole merger art thesis was regardless of election outcome, the policy environment would change and become more beneficial to mergers. And at the time, deal break risk was actually double what it had been historically, but you were getting paid like three to four times that. So that's kicked in some good upside until we get into the fall. 

(22:05): 

It's not something we're looking to ramp up in the short term convert arb. Again, not to get too much in the weeds, but given all the volatility in markets early half of the year, which we don't expect will continue, obviously balls dropped a lot. There were a lot of great trading opportunities. But one of our favorite themes that had really lagged this year for primary technical reasons was prepayment sense of RMBS, where we're taking advantage of this secular slowdown and refi activity driven by higher mortgage rates. And so it's really nice to see that start to perform. And I think we're in an enviable position now as we've deployed our balance sheet. As an investment manager, you always want to have more ideas than money, more ideas than money. When you think of how folks get into trouble, nine out of 10 times they have more money than ideas. 

(22:51): 

Hence why so many perpetual BDCs have such high syndicated bank debt exposure. But that's for another takeaway, I'm sure. And so we're in a really good position, we think, to achieve that return goal with heavily more heavy balance sheet deployment, not only in income oriented strategies like prepayment sense RBS or structured credit, but also event driven strategies like merger arb or even a sub basket of that is bank consolidation, like a mini theme within event driven. And then convert ARB has always been a classic go-to hedge fund strategy where you can monetize high levels of volatility. You don't have equity like upside when everything goes right, but you have far less downside, which is exactly what we're trying to solve for at the broader portfolio level. 

Harrison Beck (23:34): 

Well, that makes a lot of sense and certainly some interesting things to watch in that area. Finally, as we wrap up this episode, it's the name of the show and a great way to summarize our conversation. What's the takeaway you want listeners to have from our time together today? 

Troy Gayeski (23:49): 

Yeah, so takeaway one is please start ignoring every pessimist that's out there that always finds a new reason why things are going to go wrong. Look, I'm the first admit that when liberation day happened, recession risk went from zero to we cuffed it at roughly one in three, right? One in three is a lot different than 80% or 90%. The US economy continues to be incredibly resilient. Number two, we didn't even talk about, we'll save it for later, but the Fed is going to cut, right? There's a lot of cognitive dissidents. That's three strategy notes for now. Hopefully I'll be able to get it out soon enough to be relevant, but the Fed is going to cut. The conditions are there for them to cut. Tariffs are attacks. They suck consumption out of other parts of the economy, and the economy's in good shape, but the labor market has weakened. 

(24:35): 

The consumer is not as powerful as they were. So that's two, three. As you're looking at different alternative strategies, I would strongly suggest that you focus on those that have more ideas than money, that are able to opportunistically refocus their attention on the sectors within their strategy that have the best risk reward and aren't just married to like, yeah, we're commercial real estate lenders. All we do is multifamily industrial. We love that now, but guess what? We ramped up hospitality, we've faded industrial. And then on the private credit side, having the ability to do non-sponsored, lower middle market, that's really powerful, very powerful. Having the ability to go after asset-based finance, which is a very inefficient market where we have a clear kind of thought leadership position, not knocking anyone else, but having that flexibility enables you to deliver better risk adjusted returns over time. 

Harrison Beck (25:35): 

Powerful things to think about and to put into practice. Well, to go in depth on the latest in private market strategy, read Troy Gay's latest perspective, delayed but not denied. Find it at the link in the description or get this insight and more@futurestandard.com. Troy, thanks for a great conversation. 

Troy Gayeski (25:55): 

Happy end to the summer. Happy Labor Day, everybody, and we'll see you soon. 

Harrison Beck (25:59): 

See you soon.