By Kathy Warbelow

A stalled economy, locked-up bank lending, volatile public markets and deep uncertainty about the future are hardly the components of a promising investment climate.

But public and private-sector investment managers and investors at the McCombs School’s Alternative Investment Conference said there are new opportunities in a rapidly changing world for investors who can handle the risk. Joshua Harris, senior managing partner and cofounder of Apollo Management Co., the sponsor of the event, summed it up this way: “Be courageous in a smart way” in making decisions.

Four panels covered the landscape of alternative investing, including private equity, natural resources, hedge funds and real estate. The hosts were McCombs’ centers for investments, private equity, energy management and innovation, and real estate finance and investment.

This was the first year that McCombs had combined multiple sectors in a single event, which gave the 300 attendees a panoramic perspective on opportunities and risks. There were some common themes: Global financial distress is creating opportunities. Constrained bank lending has opened new doors for alternative investors in areas including energy. 

And investors should get used to operating in a climate of pervasive uncertainty.

“We are entering a period of global uncertainty that is unprecedented in our lifetime,” said Jack Taylor, managing director and global head at Prudential Real Estate Investors.

Here’s what the panelists had to say.

Private Equity

“There is a significant opportunity in distressed debt in the world today, particularly in Europe,” said Richard Hall, senior director of private markets for the Teacher Retirement System of Texas. 

In Europe, government mandates are forcing banks to quickly sell off more than one trillion euros worth of assets, including loans.

The glut of distressed debt relative to the amount of capital targeted at this investment opportunity “should provide good returns” for investors, Hall said. 

“Emerging markets also are an area we need to continue to pursue” over the long term.

The fundraising environment is challenging, and dicey public markets are making it harder for private equity investors to find exits via traditional methods such as IPOs. 

But private equity has proven its resilience as an asset class, said Rich Kracum, managing director of Wind Point Partners, which focuses on middle-market companies. 

“The industry succeeds through a lot of economic cycles,” Kracum said, and made it through the recent economic crisis — “a pretty good test.”

Natural Resources

The shift to nontraditional sources, including Texas’ rich natural-gas shale fields, has created a huge demand for capital, especially among smaller energy independents.

Those operators will need an estimated $1 trillion in capital over the next several years to finance drilling in areas such as the Eagle Ford and Marcellus shale formations. 

But the independents are finding the doors closed at traditional lenders.

“They can’t get capital,” said Ron Hulme, CEO of Parallel Resource Partners. “The markets have broken down for these smaller private players.”

The independents have an advantage because they moved into those areas before the big companies, Hulme said. “They’ll be the innovators.” 

Another avenue for investors: Direct ownership of oil and gas resources in the ground.

“It’s an underappreciated investment opportunity,” said Marc Lipschultz, global head of energy and infrastructure at KKR. 

That’s especially true in the United States, where big companies are selling off parts of their portfolios as they shift into other areas. 

It’s a buyers market, Apollo’s Harris said at the conference lunch. “Hundreds of millions in natural resource assets are for sale, but there’s not enough people to buy them.”

Hedge Funds

More institutions and pension funds are getting into hedge funds, which have shorter time horizons and higher liquidity than private equity vehicles, said Sean McGould, co-chief investment officer of Lighthouse Partners, with $5.6 billion under management.

“Hedge funds are the ultimate form of active management and flexibility,” he said.

The unsettled global economy is creating new avenues for hedge funds, said Tim Collins, director of Capital Markets at GoldenTree Asset Management, which manages $13.8 billion for investors. 

“Europe is a little bit shut down now, but there will be opportunities when investors can focus on the fundamentals again,” he said.

Collateralized loan obligations in the U.S. and Europe, “will be an opportunity over the next one to two years,” Collins said.

On the issue of more regulatory scrutiny in the wake of the Madoff debacle, the panelists said no amount of regulation would prevent dishonesty.

The Securities and Exchange Commission “has a better quality of people than it did a few years ago, but not enough of them” to match its growing responsibilities, said Charles Davidson, who oversees absolute return strategies and opportunistic investments for the $150 billion New York State Common Retirement Fund.

Real Estate

Panelists said more rough weather is ahead for the commercial real estate market.

“We’re in about the second inning” of a massive delevering of a sector that overindulged on debt, Taylor said. 

For investors, there is an opportunity to “capitalize on distress,” said Bret Wilkerson, managing director of Hawkeye Partners, a real estate private equity firm that works with large institutional investors.

In the U.S., owners of some high-quality properties are “starved for capital,” and don’t have the resources to pay for tenant improvements or leasing commissions.

That creates an opening for investors to do recapitalizations and rescues.

In Asia, a future hot area will be development focused on the growing middle class in China and India, such as business hotels and retail outlet malls, said Grant Kelley, managing director and head of Asia for Apollo Global Real Estate.

Five years from now, he said, “That’s where the action will be.”