The curse of financial innovation, investment structures and systemic risk | Delilah Rothenberg and Raphaële Chappe

In episode 95, Alex Proimos speaks with Delilah Rothenberg, co-founder and executive director of the Predistribution Initiative and Raphaële Chappe, economic advisor for The Predistribution Initiative and assistant professor of economics at Drew University. The podcast is episode two in a special three-part series in association with the Predistribution Initiative as we explore the layers of Influence in the capital markets value chain, incentives, portfolio construction, and financial analysis practices at the asset owner and allocator level that cascade down to the rest of the economy.
This episode explores the impact of institutional investors moving up the risk-return spectrum into higher-risk asset classes – such as leveraged buyout private equity, high yield bonds, leveraged loans, collateralized loan obligations, and venture capital. However, with huge sums of capital flowing into these asset classes, there is a rising concern about weakening underwriting standards, high levels of global indebtedness, a divergence from fundamentals, and risks of bubbles and defaults. From an ESG perspective, many would argue it is not just investors who take the risk with these structures. 

Companies with highly leveraged capital structures may need to cut costs relating to the quality and affordability of goods and services or quality jobs to service debt or entirely restructure – shifting unwelcome and uncompensated risk to workers and communities. Moreover, as institutional investors grow in size, there is a risk that efforts to allocate capital efficiently (e.g. to larger fund managers) may inadvertently contribute to both fund manager and corporate consolidation, thereby further reducing diversification and opportunity in the real economy and market. This session will also explore how such investment practices can contribute to systematic risks for Universal Owners and reduced chances of returning to normalised interest rates. 

All views expressed on this podcast are subject to change and do not necessarily reflect the views of Conexus Financial. This podcast is for educational purposes only and should not be relied upon as investment advice.
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