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RCG STABLE FUND 2023 FALL REVIEW

For nearly two years economists and market strategists have predicted the economy will slow and slip into a recession as the Federal Reserve tightened available credit by repeatedly raising interest rates. Despite these forecasts, the economy is continuing to show impressive growth with the gross domestic product (“GDP”) growing a surprising 4.9% in the 3rd quarter and the economy added 336,000 new jobs in September. Rapid economic growth tends to lead to widespread inflation, but recent data shows a slowdown in the rate at which prices are rising.

The cost of money continues to climb higher, and this is most evident in the steep rise in mortgage rates. The 30-year fixed rate is approaching 8.0%, more than one percent higher since June 30. These higher rates continue to dampen housing markets by reducing the affordability of new home purchases and limiting the number of existing homes being listed. Commercial real estate continues to deteriorate given the higher interest rates, remote work trends, and tight credit markets.

The adage to ‘not fight the Fed’ held true last quarter as both stocks and bonds lost ground. The S&P 500 Index fell 3.65% and the average intermediate bond fund lost 2.7% during the 3rd quarter. The RCG Stable Fund returned 2.58% for the quarter and its current annual yield is 10.75%.

While mortgage rates jumped significantly during the quarter, the Federal Reserve held its benchmark Fed Funds rate steady. Labor strikes at UPS and by the UAW labor union resulted in large wage concessions and improved benefits for workers, which may cause workers in other industries to take notice. Wage inflation due to tight labor markets is watched closely by the Fed, and an acceleration in the rate of wage growth will likely cause future rate hikes to ease tight labor markets.

Consumer spending remains surprisingly strong, but higher debt levels and lower savings rates indicate a likely slowdown in the months ahead. We see the economies of China and Germany slowing and anticipate these sluggish economies to soon impact U.S. growth rates. Recent data from American Express indicates corporate spending volume is slowing faster than expected. We have written before how a slowdown in economic activity may benefit the foundational footing of the global economy by recalibrating supply and demand imbalances and help keep inflation in check.

RCG STABLE FUND 2023 MID-YEAR REVIEW

The general economy has been quite resilient over the past year despite persistent inflation
pressures, rising interest rates, tight credit markets and a slumping China economy. Home
prices and labor markets have been pleasant surprises and have anchored the overall
economy. Home values – which usually represents a family’s single biggest asset – have
remained steady and have buoyed consumer confidence. Labor markets have also
unexpectedly outperformed all forecasts as seen by the addition of 2 million new jobs this year
alone. All eyes remain on the Federal Reserve later this month to see if interest rates are
pushed-up a notch.

The first and second quarters of 2022 witnessed slight declines in economic output, which led to
widespread anticipation of a prolonged and potentially deep recession. Prices were climbing
swiftly – along with interest rates – and many prognosticators warned of a sustained period of
stagflation accompanied by steep declines in asset values. Fast forward to today, and we see
the S&P 500 is up over 17% since the mid-year mark last year, unemployment is at record lows,
bond prices are stable, commodity prices are generally lower, and inflation is waning.
While the future is bright for the overall economy, banks have tightened credit at a time when
commercial real estate loans are coming due in big chunks. In the past few weeks, we have
learned that the biggest retail center in San Francisco defaulted on its $500 million loan, Jimmy
Buffet’s $310 million Margaritaville Resort in Times Square has declared bankruptcy, and
several large office towers in the southeast are on the brink of bankruptcy because of an
inability to refinance current loans. This is the beginning of an onslaught of CRE loans coming
due in the next three years and a potential catalyst that restricts credit further.

The RCG Stable Fund provides Collateralized Loan Obligations (CLOs) to businesses with
unencumbered assets which are used to secure a loan. The CLO market in the U.S. is $910
billion within the broader $12 trillion securitized loan market. Collateralized loans represent a
high yielding, scalable, floating-rate investment alternative with a history of stable credit
performance. The steady performance during the 2008 – 2011 financial crisis and COVID-19
cycles has supported growth in the CLO market, broadened its investor base and cultivated a
strong secondary market.

The Stable Fund has performed well since its inception in 2019 because of its credit and
structural research, analytical processes, and sophisticated structuring capabilities. The Fund’s
current yield has increased meaningfully as the Fed has increased rates and is now 10.75%.
Our focus on collateralizing variable rate loans with liquid corporate assets such as specialty
loan portfolios and inventory of finished goods has provided consistent loan portfolio
performance. We continue to see both strong loan demand and a favorable pricing environment.
due to tightening of available credit from traditional sources.

Banks Face New Challenges as $1.5 Trillion of CRE Loans Come Due

The collapse of Silicon Valley Bank in the Spring sparked debate about whether SVP was an isolated incident in an otherwise sound banking system or was this failure an indication of swiftly deteriorating balance sheets across the industry. Then Signature Bank was seized.

Then the First Republic was rescued. Suddenly, three of the four biggest bank failures in history happened seemingly overnight, and the safety and soundness of the entire system was under scrutiny.

The Federal Reserve bailed the system out (yet again) by acting as lender of last resort and opening the cash window to banks in trouble. Interestingly, these bank failures weren’t caused by the usual suspect – bad loans – but from bad asset management. Each bank failed because its investment portfolios held low yielding bonds with long maturities, and those bond values plunged as the Fed relentlessly pushed interest rates up. The building losses eroded regulatory capital levels and caused doubt that deposits were safe. While the system withstood the estimated $425 billion of withdrawals in the first quarter, liquidity has tightened as have lending protocols.

The Federal Reserve increased interest rates ten consecutive times since March 2022, hiking the prime rate to 8.25%, its highest level in 16 years. The impact from these rate hikes will certainly cause a drag on activity throughout the economy, but the commercial real estate industry is anticipating a particularly difficult period which may lead to an avalanche of loan defaults.

$1.5 trillion of CRE loans are coming due in the next three years according to data provider Trepp. CRE loans represent about 33% of all loans on the books of banks with assets between $1 billion and $10 billion according to Fitch, and higher interest rates will put many loans at risk of default.

While CRE mortgage delinquencies currently sit at a benign 0.76%, interest rates have more than doubled since January 2022 and refinancings will be tough to navigate for certain sectors of the market. To be clear, this is not a replay of the 2008 financial crisis as banks are much healthier today and CRE borrowers are generally much stronger financially than the sub-prime borrowers that lead real estate into the depths 15 years ago.  Still, we expect foundational cracks to surface in bank CRE loan portfolios, especially with those over exposed to office and retail sectors.

A wildcard for CRE borrowers refinancing properties will likely be sharply lower reappraised values set by banks. Office and retail sectors are in tough shape and borrowers will likely face steep mark-downs in property values. Meanwhile, losses in bank portfolios have tightened both liquidity levels and loan criteria which, among other factors, will require a higher percentage of cash equity to be in place to secure a refinancing. So, the challenges are real, and we expect some borrowers and lenders to struggle as the CRE market recalibrates with imaginative repurposing plans to rehabilitate underperforming properties.

1st Quarter 2023 Market Insights

The U.S. stock markets rebounded from a dismal 2022 in the first quarter led by the Nasdaq soaring 16.8%. The S&P 500 and the Dow Jones significantly lagged the Nasdaq, but still posted gains of 7.0% and 0.4% respectively for the quarter. 

The stock market’s first quarter performance was a bit unexpected given the Federal Reserve’s continued fight against inflation and increases in the federal funds interest rate. Despite these rate increases, the bond market rallied during the quarter to push government yields lower and help the Bloomberg U.S. Aggregate Bond Index post a 2.5% gain. 

A bounce was to be expected after both the stock and bond markets had a tough 2022, with both falling double digits. Investors were looking forward to a pause in interest rate hikes by the Fed and a slowing in the rate of inflation. Banking troubles, big layoffs in big tech, and a pullback in consumer spending forecasts choppy economic waters in the quarters to come. 

The S&P 500 is a weighted index, which means the biggest companies have an outsized impact on their performance. In fact, the ten biggest companies in the index represent 29.5% of its market capitalization and accounted for 90% of the gains during the first quarter. After the shellacking the index took in 2022, passive stock investors transitioned to equal weighted stock index ETFs in 2023. While this transition may have been ill-timed given the equal weighted index which fell 4.3% during the quarter, an equal weighted index is arguably a better benchmark for how the 500 largest publicly traded companies performed during a given time period. Looking back at 2022, when the weighted S&P 500 fell 18.11%, the equal weighted S&P 500 Index fell only 2.5%, representing a 20.61% difference in performance. Given these massive performance gaps, we believe using both performance benchmarks provide a better gauge for investors to measure the Fund’s performance. 

Despite a doubling in the 30-year mortgage rate over the past year, residential real estate continues to show impressive resiliency due to tight supply and sustained demand. While hot markets like Phoenix, Las Vegas, Austin and Boise, Idaho posted declines in average home prices, most markets in the Northeast, South and Midwest showed solid gains. This price stability is driven by existing homeowners’ unwillingness to exchange low mortgages on current homes for today’s higher rates on new homes. 

Click here to view Fact Sheets on the RCG Stable Fund and the RCG Select Opportunities Fund. 

Ridley Capital Enters Agreement with T2 Capital Management

Ridley to Provide Consulting Services to T2’s Flagship Fund

October 15, 2021 – Louisville, Kentucky

T2 Capital Management, a real estate investment management firm headquartered in Wheaton, Illinois, and Ridley Capital Group entered into an agreement for Ridley to provide services to grow assets under management in the T2 Strategic Real Estate Income Fund (SREI), T2’s flagship fund established in 2014 to provide high current income for institutional and qualified investors. The T2 SREI Fund seeks to achieve its investment objective by originating and investing in commercial real estate debt. Through September 30, 2021, the Fund has deployed more than $650 million in real estate investments and generated a net annual income yield to investors of >8.0%. Shawn J. Ridley, Managing Partner of Ridley Capital Group, said, “The T2 SREI Fund has offered consistently relatively high net income yields in returns since the inception of SREI in 2014.

About Ridley Capital Group: Ridley Capital Group is a diversified financial services firm providing capital consulting services to general partners, asset management firms, financial service companies, real estate companies and broad consumer product companies. Ridley entities also serve as general partner to the RCG Stable Fund and the RCG Select Opportunities Fund. For more information, email info@ridleycap.com or call 502-654-8950.

Ridley Capital Group Launches Total Return Fund

The RCG Select Opportunities Fund is Fourth Fund

September 30, 2021- Louisville, Kentucky

Ridley Capital Group announced the launch of a total return investment fund – the RCG Select Opportunities Fund – the fourth offering since its inception in 2009. The fund will focus on providing investors with long-term capital appreciation and relatively high current income through the investment in public and private asset classes. “We expect returns in most asset classes to consolidate over the next few years,” commented Shawn J. Ridley, Managing Partner of
Ridley Capital Group. “Rising interest rates due to inflationary pressures and growing national debt will cause economic headwinds and create select opportunities in both public and private investment markets.” The management team of the Fund will deploy its extensive investment experience in balancing portfolio risk while utilizing its completive advantages to create sustainable value during both good and challenging markets. The Fund is an evergreen fund, which indicates it will be open to qualified new investors indefinitely.

This is the fourth investment fund offered by Ridley Capital Group since its founding in 2009, and its first evergreen fund with an investment objective of growth and income. The firm also manages the RCG Stable Fund, an alternative debt fund offering qualified investors high, stable monthly income by providing secured, short-term debt solutions to growing businesses. The Stable Fund is also an evergreen fund and remains open to investors. For more information, please email info@ridleycap.com or call 502-654-8950.

About Ridley Capital Group: Ridley Capital Group is a diversified financial services firm providing capital consulting services to general partners, asset management firms, financial service companies, real estate companies and broad consumer product companies. Ridley entities also serve as general partner to the RCG Stable Fund and the RCG Select Opportunities Fund.

Ridley Capital Group Enters into Agreement with Prodigy Investments

Companies Believe First of Several Strategic Agreements

September 15, 2021 – Louisville, Kentucky

Ridley Capital Group announced that it entered into a strategic consultant agreement with Prodigy Investments to provide strategic capital assessment and planning for a significant mixed-use real estate development project sponsored by Prodigy. Ridley will determine appropriate risk-adjusted capital strategies in assessing the project’s best and most sustainable uses. In sequence, Ridley, its affiliates and strategic partners are expected to lead the structured capital formation in the first or second quarter, 2022.

About Ridley Capital Group: Ridley Capital Group is a diversified financial services firm providing capital and capital consulting services to general partners, partnerships, asset management firms, financial service companies, real estate companies and broad consumer product companies. Ridley affiliates also serve as general partner to several proprietary investment funds.

Ridley Capital Announces the Launch and Initial Funding of RCG Stable Fund.

October 7, 2019 – Louisville, Kentucky

Ridley Capital Group announced the formation and initial funding of the RCG Stable Fund Partnership, LLLP, an asset-backed, alternative lending vehicle to enable fundamentally stable businesses meet robust demand.  RCG Stable Fund offers investors with a high, monthly income and stability of principal while providing corporate borrowers with an alternative to banks or expensive equity capital.

The Fund intends to focus on companies in the financial services and niched consumer growth markets with strong cash-flows and stable customers.  The Fund lends on an asset-base, or secured basis, to reduce risk of capital loss.  Additionally, the Fund limits initial loans to one-year, but it has the ability to renew loan commitments up to 18 months.

The Fund is a private stable-priced investment vehicle available only through Ridley Capital Group, and will remain open to qualified investors for the foreseeable future.

For more information on the Fund’s investment objective, investor qualifications and Fund documents, please email info@ridleycap.com or call (502) 654-8950. 

Ridley Capital Group Announces Sale of ABE.AI

January 2, 2019 – Louisville, Kentucky

ABE.AI, an artificial intelligence company focused on advancing ease to financial services to mobile consumers, and sponsored and funded by Ridley Capital Group, announced the close of its sale to Envestnet (ENV: NYSE). Terms are not publicly available.

Shawn Ridley, Managing Partner of Ridley Capital Group, commented that “ABE.AI is led by great talents, and I’m excited to see its powerful applications adopted by a powerful financial services company that wants to enhance customer engagement.” Ridley continued to say, “We started ABE with an idea, defined our cause, and engaged our market that is desperately in need of customer engagement.”

Ridley Capital Closes Integrated Capital Structuring with T2 Investments for Taurus Capital Management

September 23, 2018 – Louisville, Kentucky

Ridley Capital Group announced the closing of an integrated capital structure with T2 Investments for Taurus Capital Management.  The new capital structure allowed Taurus to simultaneously close on a mixed-use, commercial property in downtown Louisville, Kentucky.  Terms were not disclosed.  T2 Investment is a Chicago, Illinois based private investment firm focused on real estate investment properties.  Taurus Capital Management is a Louisville, Kentucky based commercial real estate investment and management firm with specific focus on the Louisville metro market.