2020 Knowledge Brokers

Dan Krivinskas

Managing Principal
Chicago, Illinois

Known for his ability to ask probing questions, Dan Krivinskas, managing principal of the real asset advisory firm Alignium, LLC, has unique perspectives when it comes to risk. As an econ and public policy undergraduate, he worked for the both the United Nations Development Programme as well as USAID in college, where he learned varied international perspectives. After law school, he became a bankruptcy attorney, and developed a unique skillset when it comes to due diligence. In fact, he once uncovered that an ex-US manager was operating out of a hotel room, and likely saved his client future grief. “Frankly none of their LPs recognized that that address was actually a hotel and that suite number was a room number. They didn’t have a permanent address,” he said.

Part of Krivinskas’ process is to start at the back of a manager’s book and review the underperformers. (“You can discern where there is a difference between what they actually do versus what they are claiming to do,” he said.)  He’ll also look closely at geographies when it comes to emerging markets. (“For example: India vs. Brazil: One is a net exporter of commodities, one is a net importer of commodities of oil and natural gas. In terms of population growth, one is going to be the biggest country in the world in the next 15 years, the other one is much more advanced with regard to demographic growth. All these things are important,” he said.)

Krivinskas is also loathe to lump real estate into one risk bucket. (“A triple net lease strategy backed by Amazon is a very, very different risk profile than building a ground-up luxury resort in Maui,” he said. “The first is like a bond, the other one is more like a venture capital investment.”)

His advice to chief investment officers? “I know it’s difficult because CIOs have so much to focus on, but it’s important for them to discern how their real estate investment programs react to different things, whether it be economic growth, whether it be inflation, deflationary forces, etc.” For example: How much of the portfolio is tied to economic growth? What percent is a deflationary hedge? 

He’s dialing back from large coastal cities and thinks offices of the future will have lower densities as people may share desk space as they work parts of the week from home. He’s cautious about student housing in areas where schools don’t have a large demand for enrollment, now that a baby bust has begun.

CIO: What (actionable thing) have you learned over the course of your career that has proven itself this year?

Krivinskas: After graduating law school, I started my legal career as a bankruptcy attorney.  While I left the day-to-day practice of law long ago, the understanding of how many ways things can go wrong in an investment has been one of the single-best lessons I have learned during my career. Every company that I represented had well-crafted plans and models. They all ended up where they did because something was not incorporated in their (sometimes very intricate) planning and modeling. Focusing on how things can go wrong and ways to mitigate that risk—and incorporating a sense of humility to know that one often cannot predict what will go wrong—has helped me virtually every day of my career. It certainly has proven itself this year, as not one manager—not one of the hundreds we meet with per year—mentioned a pandemic as something to consider when we talk about macro risks. 

So, expect that things will go wrong and make sure that your analysis incorporates a lot of “wiggle room.” In other words, it is important to incorporate a healthy amount of humility in your analysis of opportunities. For Alignium, this applies whether we are evaluating blind pool funds where we are relying on a manager’s expertise and track record, open-ended structures where we evaluate both managers and their portfolios, or direct investments where the asset is the primary focus, while also making sure to incorporate adequate corporate governance protections.

With that said, I have also noted that once one has evaluated an opportunity and is comfortable with the risks, one should not be afraid to take the leap. I can point to many investments where clients were on the fence after rigorous analysis (and decided to proceed with them), which turned out to be some of the best investments in their portfolios. On the other hand, some clients regret not taking advantage of opportunities, given short-term noise that had distracted from the long-term trends—even after having evaluated all of the risks and being comfortable with the investment previously—which in hindsight turned out to be fantastic, but for someone else. 

CIO: What investments (specific securities or sectors) look good to you now? And why?

Krivinskas: Generally, our investment focus has not changed too much since last year. We were cautious coming into 2020, focusing on secular themes in the real estate equity space. This includes industrial, datacenters, and residential assets where demand trends have been favorable and have continued to be through the downturn. We don’t see the long-term trends changing, even after we get back to a post-COVID “normal.” Other areas we like include select medical office, student housing, and senior living assets. This last group (particularly student and senior) surprises some people. Indeed, we are being very selective, and the downturn has provided us an opportunity to increase that selectivity to only the best assets that can meet our clients’ return objectives.  

With that said, we believe that some strategies in out-of-favor asset classes could make sense—but only if one is paid for the risk and uncertainty in the coming years. Often, that means going into non-first loss positions (i.e., debt or preferred equity) in high-quality, out-of-favor, assets.  For example, we have had clients invest in high-quality retail, but not in a first-loss position.  This has cushioned us against the COVID downturn. While COVID has caused most retail cash flows to suffer, we are comfortable at our basis and have been paid current throughout the crisis. 

CIO: What ones don’t? And why?

Krivinskas: Building upon the secular themes we spoke about above, we have been skeptical about most retail and hospitality strategies. Retail’s woes have been well-documented. On the other hand, some groups have made a lot of money (and some have lost a lot of money) in hospitality. While people will travel again, and some assets may look cheap, many groups have underestimated the length of time the COVID crisis will last. The operating expense load with some hospitality assets can crush even the best operators without a sustained pickup in demand. Caution is warranted.

There is a corollary to this—we are skeptical of opportunistic, blind pool funds with few leverage limits sponsored by managers without a clear, demonstrated edge or focused strategy.  Our team has spoken to countless managers over the years trying to raise opportunity funds, and this view has not changed. What has changed is that, today, many groups are touting opportunistic, blind pool strategies to take advantage of the distress in retail and hospitality.  Moreover, we note that many managers today are flush with unfunded commitments. It seems everyone is waiting for the distress to come—but the pressure to deploy capital will likely lead to bidding up assets once again. Caution is warranted. 

With that said, we have clients who have invested in opportunistic, blind pool funds. Managers who are humble about their strengths, acknowledge where they do not have an edge (and therefore don’t play in those waters), and have demonstrated capabilities are those we favor.  Unfortunately, however, most opportunistic funds are way too expensive and way too aggressive (in terms of fees, leverage limitations, sector focus, geography, or other aspects), in case something goes wrong. This can lead to disappointing performance. 

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