1 00:00:04,019 --> 00:00:06,449 Sean Aylmer: Welcome to the Fear and Greed Business Interview. I'm Sean 2 00:00:06,630 --> 00:00:09,420 Sean Aylmer: Aylmer. There are so many different types of opportunities for 3 00:00:09,420 --> 00:00:12,689 Sean Aylmer: investors. We talk a lot about shares, about property, bonds, 4 00:00:12,690 --> 00:00:15,720 Sean Aylmer: a bunch of other asset classes, but what about private 5 00:00:15,780 --> 00:00:19,050 Sean Aylmer: equity? What is it? Where are the risks and opportunities 6 00:00:19,379 --> 00:00:22,349 Sean Aylmer: and how should investors think about it? To find out, 7 00:00:22,350 --> 00:00:24,689 Sean Aylmer: we've gone to someone who knows this space almost better 8 00:00:24,690 --> 00:00:28,260 Sean Aylmer: than anyone. I'm joined today by Rainer Ender, Global Head 9 00:00:28,260 --> 00:00:31,379 Sean Aylmer: of Private Equity at Schroders Capital. Schroders has more than $ 10 00:00:31,380 --> 00:00:34,949 Sean Aylmer: 90 billion in assets under management, with private equity a 11 00:00:34,949 --> 00:00:37,530 Sean Aylmer: big part of that. Remember, this is general information only 12 00:00:37,530 --> 00:00:40,979 Sean Aylmer: and you should always seek professional advice before making investment 13 00:00:40,979 --> 00:00:43,769 Sean Aylmer: decisions. Rainer Ender, welcome to Fear and Greed. 14 00:00:44,490 --> 00:00:46,470 Rainer Ender: Thank you, Sean. Pleasure to be here. 15 00:00:46,860 --> 00:00:49,379 Sean Aylmer: You are visiting Australia at the moment, is that right? 16 00:00:49,380 --> 00:00:51,060 Sean Aylmer: Normally, Zurich based? 17 00:00:51,690 --> 00:00:55,410 Rainer Ender: Correct. Traveling three times a year for two weeks through 18 00:00:55,410 --> 00:00:59,430 Rainer Ender: Asia to visit clients and looking at investment opportunities at 19 00:00:59,430 --> 00:01:00,029 Rainer Ender: the same time. 20 00:01:00,270 --> 00:01:03,059 Sean Aylmer: Ah. Fantastic. So let's start with the basics. So 101 21 00:01:03,059 --> 00:01:05,969 Sean Aylmer: on private equity. What is it exactly? What are we 22 00:01:05,969 --> 00:01:08,819 Sean Aylmer: talking about when we say invest in private equity? 23 00:01:09,719 --> 00:01:13,740 Rainer Ender: It's pretty simple. Basically if you think of public equity, 24 00:01:13,740 --> 00:01:16,860 Rainer Ender: it's shares and you own the equity of a company 25 00:01:16,860 --> 00:01:20,099 Rainer Ender: that is listed on the stock exchange. Private equity is 26 00:01:20,099 --> 00:01:23,849 Rainer Ender: being participating in the equity of any company that is 27 00:01:23,849 --> 00:01:27,389 Rainer Ender: not listed, the stock exchange. And this is a market 28 00:01:27,389 --> 00:01:31,530 Rainer Ender: that has been growing for over 40 years now into 29 00:01:31,770 --> 00:01:35,370 Rainer Ender: one of the main, so- called alternative asset classes. 30 00:01:35,610 --> 00:01:38,009 Sean Aylmer: If you think of that universe that you've just described, 31 00:01:38,010 --> 00:01:42,450 Sean Aylmer: that is a lot bigger than listed stocks. When we're 32 00:01:42,450 --> 00:01:45,269 Sean Aylmer: talking about the different types of assets, obviously we can 33 00:01:45,270 --> 00:01:47,340 Sean Aylmer: think about companies, but it's much broader than that. 34 00:01:48,240 --> 00:01:52,020 Rainer Ender: Yes. Well, basically on company level for private equity as 35 00:01:52,020 --> 00:01:55,920 Rainer Ender: pure play topic, we would start on the very early 36 00:01:55,920 --> 00:01:59,550 Rainer Ender: stage of founding a company, so startup financing, right? That 37 00:01:59,550 --> 00:02:04,979 Rainer Ender: is called venture capital. Examples would be Google in 1998, 38 00:02:06,960 --> 00:02:10,260 Rainer Ender: got the financing round of $ 40 million and that was 39 00:02:10,260 --> 00:02:14,250 Rainer Ender: all they needed to get to their IPO in 2004 and ever 40 00:02:14,250 --> 00:02:18,389 Rainer Ender: since everybody knows them. Then there is businesses that have 41 00:02:18,389 --> 00:02:22,590 Rainer Ender: grown on their own, bootstrapped as we call that, but 42 00:02:22,590 --> 00:02:25,139 Rainer Ender: then at some point want to grow faster and the 43 00:02:25,139 --> 00:02:29,668 Rainer Ender: entrepreneurs are looking for additional capital injection for an acceleration 44 00:02:29,669 --> 00:02:33,359 Rainer Ender: of the growth. That will be growth equity investments, and 45 00:02:33,360 --> 00:02:36,150 Rainer Ender: that can be for businesses that have good revenue but 46 00:02:36,150 --> 00:02:39,630 Rainer Ender: are at the edge of being profitable or even already 47 00:02:39,630 --> 00:02:42,990 Rainer Ender: profitable, but want to grow further. And then there is 48 00:02:42,990 --> 00:02:46,918 Rainer Ender: a market where it's about owning and controlling a business, 49 00:02:46,919 --> 00:02:50,970 Rainer Ender: which means you take maturity control and are the maturity 50 00:02:50,970 --> 00:02:55,919 Rainer Ender: owner, and that is called buyout investments. So the buyout 51 00:02:55,919 --> 00:02:58,709 Rainer Ender: space is the largest segment of the private equity market, 52 00:02:58,709 --> 00:03:02,700 Rainer Ender: and that, again, can be split into very large transactions. 53 00:03:03,000 --> 00:03:07,680 Rainer Ender: The multi- billion dollar enterprise values, which is called large 54 00:03:07,680 --> 00:03:14,249 Rainer Ender: leverage buyouts run by firms like the KKR, et cetera. So the very large brand 55 00:03:14,250 --> 00:03:17,999 Rainer Ender: names that pursue such transactions. And then there's a much 56 00:03:18,090 --> 00:03:23,399 Rainer Ender: larger number in universe, in smaller businesses, which are normal 57 00:03:23,400 --> 00:03:27,569 Rainer Ender: family businesses that need a new ownership structure. And that's 58 00:03:27,570 --> 00:03:33,630 Rainer Ender: where we see the most clean private equity philosophy of 59 00:03:33,630 --> 00:03:38,580 Rainer Ender: really helping businesses to grow and continue under a more 60 00:03:38,580 --> 00:03:39,780 Rainer Ender: institutional ownership. 61 00:03:40,740 --> 00:03:44,099 Sean Aylmer: Okay. So let's think about return and risks here. On 62 00:03:44,099 --> 00:03:48,389 Sean Aylmer: the return side, how has private equity performed in more 63 00:03:48,389 --> 00:03:50,490 Sean Aylmer: recent times? And the background to this, of course, if 64 00:03:50,490 --> 00:03:53,279 Sean Aylmer: you think of public markets, the tech stocks have done 65 00:03:53,279 --> 00:03:56,160 Sean Aylmer: really well, particularly the big six in the U. S. 66 00:03:56,160 --> 00:03:59,970 Sean Aylmer: but many other equities haven't done so well and listed 67 00:03:59,970 --> 00:04:02,040 Sean Aylmer: equities haven't done so well. What about private equity? How has 68 00:04:02,040 --> 00:04:03,840 Sean Aylmer: that performed over the last decade or so? 69 00:04:04,679 --> 00:04:07,859 Rainer Ender: Yeah, that's a very important question and important point. So 70 00:04:07,860 --> 00:04:11,309 Rainer Ender: private equity over the last, basically 40 years, since it 71 00:04:11,309 --> 00:04:16,740 Rainer Ender: started has consistently outperformed public equity. We call this the 72 00:04:16,740 --> 00:04:20,880 Rainer Ender: illiquidity premium. So because why would investors invest in something 73 00:04:20,880 --> 00:04:23,639 Rainer Ender: that is less liquid if they don't get more for 74 00:04:23,639 --> 00:04:27,388 Rainer Ender: it, and private equity has delivered to that. So that's 75 00:04:27,389 --> 00:04:30,270 Rainer Ender: in the long run and it's really been very consistent 76 00:04:30,270 --> 00:04:34,980 Rainer Ender: and also especially in times of more turmoil. So, very 77 00:04:34,980 --> 00:04:39,659 Rainer Ender: recently for ourselves, and we have outperformed the benchmarks for 78 00:04:39,660 --> 00:04:44,669 Rainer Ender: private equity over the last 10, 15, and five years equally, 79 00:04:45,178 --> 00:04:48,270 Rainer Ender: performance has been pretty resilient. Venture capital had to take 80 00:04:48,270 --> 00:04:52,200 Rainer Ender: a bit of a correction in 2022 against its very 81 00:04:52,200 --> 00:04:59,250 Rainer Ender: strong upside development and high performance through COVID. So leveling 82 00:04:59,250 --> 00:05:03,299 Rainer Ender: out and moderating a bit from that super performance while 83 00:05:03,299 --> 00:05:07,020 Rainer Ender: the buyout space for the larger end had a bit 84 00:05:07,020 --> 00:05:10,560 Rainer Ender: of correction in 2022 and the smaller end in our own 85 00:05:10,560 --> 00:05:15,389 Rainer Ender: portfolio had a very good high single digit performance, even 86 00:05:15,389 --> 00:05:18,238 Rainer Ender: in 2022 and also into 2023. 87 00:05:18,928 --> 00:05:20,520 Sean Aylmer: Stay with me, Rainer, and we'll be back in a 88 00:05:20,520 --> 00:05:30,150 Sean Aylmer: minute. My guest this morning is Rainer Ender, Global Head of 89 00:05:30,150 --> 00:05:35,279 Sean Aylmer: Private Equity at Schroders Capital. Okay, you mentioned liquidity premium, 90 00:05:35,610 --> 00:05:38,940 Sean Aylmer: the ability to buy and sell is somewhat less in 91 00:05:39,000 --> 00:05:43,289 Sean Aylmer: private markets. That's a risk of investing in private equity. 92 00:05:43,289 --> 00:05:45,960 Sean Aylmer: You can't just go and sell your shares on a 93 00:05:45,960 --> 00:05:48,990 Sean Aylmer: day. Is that the key risk? What are the main 94 00:05:48,990 --> 00:05:50,700 Sean Aylmer: risks in private equity? 95 00:05:51,599 --> 00:05:54,178 Rainer Ender: Yeah, so one risk in private equity is clearly you 96 00:05:54,178 --> 00:05:57,270 Rainer Ender: own equity, right? So equity is risk, private equity is 97 00:05:57,450 --> 00:06:02,220 Rainer Ender: comparable risk. The governance structures are a bit different, so basically 98 00:06:02,220 --> 00:06:05,940 Rainer Ender: there's a fund manager who controls the business in the buyout 99 00:06:06,300 --> 00:06:10,529 Rainer Ender: concept, and you're invested in the fund that is run 100 00:06:10,529 --> 00:06:14,130 Rainer Ender: by a fund manager who owns this company, basically. And 101 00:06:14,969 --> 00:06:18,479 Rainer Ender: that fund in the traditional sense is illiquid. It's a closed- 102 00:06:18,480 --> 00:06:22,680 Rainer Ender: end fund where you make a commitment and then you 103 00:06:22,680 --> 00:06:25,650 Rainer Ender: have to wire the money when it's needed and you 104 00:06:25,650 --> 00:06:27,419 Rainer Ender: will get back the money when a company is being 105 00:06:27,420 --> 00:06:31,800 Rainer Ender: sold, 5, 6, 7 years down the road. So that's 106 00:06:31,980 --> 00:06:35,849 Rainer Ender: the illiquidity. So you need to be able to park 107 00:06:35,850 --> 00:06:39,180 Rainer Ender: your money for some time. Right? Now, this is the 108 00:06:39,180 --> 00:06:43,650 Rainer Ender: traditional way of doing private equity, closed- end funds, limited 109 00:06:43,650 --> 00:06:48,449 Rainer Ender: partnership structures. It's called the institutional investors put 10 million 110 00:06:48,450 --> 00:06:52,020 Rainer Ender: or even more commitment into an individual fund to be 111 00:06:52,020 --> 00:06:56,220 Rainer Ender: participating in this. More recently, the market has opened up 112 00:06:56,220 --> 00:07:00,659 Rainer Ender: also for the wealth channel for individual investors, also with 113 00:07:00,660 --> 00:07:04,229 Rainer Ender: structures that have some semi liquidity. And the goal there 114 00:07:04,230 --> 00:07:08,489 Rainer Ender: is really to make private equity more accessible. And there's 115 00:07:08,490 --> 00:07:12,150 Rainer Ender: basically three things that are a challenge. First of all, 116 00:07:12,450 --> 00:07:15,480 Rainer Ender: not every individual can commit 10 million, so you need 117 00:07:15,480 --> 00:07:19,290 Rainer Ender: to have a lower minimum amount to make an investment. 118 00:07:19,800 --> 00:07:22,859 Rainer Ender: And that is now, we have a fund in Australia 119 00:07:22,860 --> 00:07:26,340 Rainer Ender: on the market as well for that investor base, it's 120 00:07:26,340 --> 00:07:30,750 Rainer Ender: 20,000 Australian dollars as the minimum investment amount. Second is 121 00:07:30,750 --> 00:07:34,560 Rainer Ender: the administrative burden in the institutional way. You get capital 122 00:07:34,560 --> 00:07:37,050 Rainer Ender: calls, you have to wire money, you get money back, 123 00:07:37,050 --> 00:07:39,719 Rainer Ender: you don't know when and so forth, and you're locked 124 00:07:39,719 --> 00:07:43,859 Rainer Ender: up for a contract of 12 years. In the new 125 00:07:43,860 --> 00:07:46,680 Rainer Ender: way of form it's a so- called semi- liquid fund, 126 00:07:47,160 --> 00:07:50,040 Rainer Ender: it's much closer to a mutual fund, but with the 127 00:07:50,040 --> 00:07:54,630 Rainer Ender: restrictions on when you can redeem, and in a normal case 128 00:07:54,630 --> 00:07:57,900 Rainer Ender: you can redeem every three months with a notice period 129 00:07:57,900 --> 00:08:02,700 Rainer Ender: of three months, and the redemptions in aggregate cannot be 130 00:08:02,700 --> 00:08:05,159 Rainer Ender: more than 5%. That's the kind of rules of a 131 00:08:05,160 --> 00:08:09,570 Rainer Ender: typical semi- liquid fund. And with that, the entry barrier is lower, 132 00:08:09,930 --> 00:08:14,340 Rainer Ender: the liquidity issue is lower, and the administrative burden is lower, 133 00:08:14,340 --> 00:08:17,400 Rainer Ender: and that makes the whole private equity market more accessible 134 00:08:17,849 --> 00:08:19,410 Rainer Ender: to individual investors. 135 00:08:20,160 --> 00:08:23,670 Sean Aylmer: And are you seeing, at Schroders Capital, an influx of 136 00:08:23,670 --> 00:08:28,170 Sean Aylmer: that non- institutional money into the market? Because we certainly 137 00:08:28,170 --> 00:08:29,790 Sean Aylmer: talk a lot more about private equity. 138 00:08:30,630 --> 00:08:35,250 Rainer Ender: Yes, that's indeed a major trend, right? So if you 139 00:08:35,250 --> 00:08:39,660 Rainer Ender: think endowments, they own half of their asset base in 140 00:08:40,260 --> 00:08:47,520 Rainer Ender: alternative assets, mainly private equity, institutional pension funds, insurance companies, 141 00:08:47,820 --> 00:08:53,040 Rainer Ender: a meaningful allocation to private equity. And the wealthy investors, they've 142 00:08:53,040 --> 00:08:57,420 Rainer Ender: been a bit left behind and are now catching up, 143 00:08:57,870 --> 00:09:00,780 Rainer Ender: thanks to the regulatory structures that are improving and making 144 00:09:00,780 --> 00:09:02,310 Rainer Ender: this possible, more easily. 145 00:09:03,570 --> 00:09:07,560 Sean Aylmer: Okay. So you mentioned Google earlier on, and I mean 146 00:09:07,800 --> 00:09:10,440 Sean Aylmer: you said a $ 40 million round, it's now worth $ 1. 147 00:09:10,770 --> 00:09:15,389 Sean Aylmer: 7 trillion or thereabouts. I mean, that's a great example. 148 00:09:16,289 --> 00:09:18,478 Sean Aylmer: Have you got some other examples, that mean good and 149 00:09:18,480 --> 00:09:23,130 Sean Aylmer: the bad? Because of course, if I'm investing my $20,000 or $100, 000 150 00:09:23,130 --> 00:09:26,759 Sean Aylmer: in a manager, I'm relying on that manager to pick 151 00:09:27,630 --> 00:09:31,080 Sean Aylmer: a company which they can add value to, and there's 152 00:09:31,080 --> 00:09:33,000 Sean Aylmer: always a risk in that as well. So have you 153 00:09:33,000 --> 00:09:34,618 Sean Aylmer: seen the good and the bad? 154 00:09:35,429 --> 00:09:39,000 Rainer Ender: Yeah, so basically, I mean, we again have to differentiate 155 00:09:39,000 --> 00:09:43,650 Rainer Ender: between different segments of private equity. Google is obviously a 156 00:09:43,650 --> 00:09:47,130 Rainer Ender: venture example and one of the very, very best as 157 00:09:47,130 --> 00:09:49,650 Rainer Ender: a venture investment, as well as now as a public 158 00:09:49,650 --> 00:09:53,399 Rainer Ender: stock for the last 25 years, right? Today you have 1, 159 00:09:53,400 --> 00:09:57,390 Rainer Ender: 000 unicorns, which is venture- backed companies that are worth 160 00:09:57,390 --> 00:10:01,050 Rainer Ender: more than 1 billion. Some of them are very well- 161 00:10:01,050 --> 00:10:04,439 Rainer Ender: known. Some of them may still have to prove themselves. 162 00:10:05,460 --> 00:10:08,130 Rainer Ender: Revolut would be an example from Europe, which is a 163 00:10:08,160 --> 00:10:11,369 Rainer Ender: challenger bank. Some people may know them as a credit 164 00:10:11,369 --> 00:10:16,650 Rainer Ender: card provider with no FX spreads for the clients. So 165 00:10:16,650 --> 00:10:21,059 Rainer Ender: very popular thing and trending upwards, had a very high 166 00:10:21,059 --> 00:10:25,499 Rainer Ender: fundraising round in 2021, have to be downward valued a 167 00:10:25,500 --> 00:10:28,319 Rainer Ender: bit since then, but the business is doing well. That's 168 00:10:28,379 --> 00:10:32,520 Rainer Ender: venture, right. So there's lots of later stage venture companies 169 00:10:32,520 --> 00:10:34,949 Rainer Ender: nowadays that are very visible, that are also used by 170 00:10:34,950 --> 00:10:39,118 Rainer Ender: consumers, et cetera. On the small buyout side as a 171 00:10:39,120 --> 00:10:43,110 Rainer Ender: contrast, these are typically businesses that are hidden champions in 172 00:10:43,110 --> 00:10:45,930 Rainer Ender: a certain very specialized market. And if they are not 173 00:10:46,230 --> 00:10:50,130 Rainer Ender: in the consumer space, nobody would know them. We have 174 00:10:50,130 --> 00:10:54,570 Rainer Ender: had, if I just take a very simple but interesting 175 00:10:54,570 --> 00:10:59,939 Rainer Ender: example, a small heating, ventilation and air conditioning business in 176 00:10:59,940 --> 00:11:03,780 Rainer Ender: the Chicago area that we owned through a direct investment 177 00:11:03,780 --> 00:11:06,870 Rainer Ender: of ours, you would not imagine to make much money 178 00:11:06,870 --> 00:11:09,900 Rainer Ender: with such a business model. But this was a perfect 179 00:11:09,900 --> 00:11:14,309 Rainer Ender: buy and build execution by the management, right. Adding on 180 00:11:14,309 --> 00:11:18,540 Rainer Ender: smaller businesses and building a bigger platform as a service 181 00:11:18,540 --> 00:11:23,580 Rainer Ender: organization. And this alone made a high money multiple for 182 00:11:23,580 --> 00:11:28,110 Rainer Ender: us in a very traditional industry. So the spectrum is 183 00:11:28,110 --> 00:11:34,469 Rainer Ender: very wide, and sometimes you also don't make money and you 184 00:11:34,469 --> 00:11:38,490 Rainer Ender: may lose some. That's also why diversification is very important, 185 00:11:38,490 --> 00:11:43,110 Rainer Ender: and diversification can be well achieved if you invest through 186 00:11:43,110 --> 00:11:47,730 Rainer Ender: the right structures and funds. Certain funds, especially ours, we 187 00:11:47,730 --> 00:11:52,049 Rainer Ender: focus on a broad diversification as an investment portfolio into 188 00:11:52,050 --> 00:11:57,660 Rainer Ender: smaller businesses, all with ambitious growth. Some will perfectly succeed, 189 00:11:57,660 --> 00:12:01,439 Rainer Ender: some will succeed somewhat, and a few will fail. Right. 190 00:12:01,440 --> 00:12:04,230 Sean Aylmer: Yeah. Rainer, thank you for talking to Fear and Greed. 191 00:12:04,710 --> 00:12:05,550 Rainer Ender: Well, it was a pleasure. 192 00:12:06,150 --> 00:12:08,578 Sean Aylmer: That was Rainer Ender, Global Head of Private Equity at 193 00:12:08,580 --> 00:12:11,160 Sean Aylmer: Schroders Capital. This is the Fear and Greed Business Interview. 194 00:12:11,460 --> 00:12:13,860 Sean Aylmer: Remember, this is general information only and you should seek 195 00:12:13,860 --> 00:12:17,608 Sean Aylmer: professional advice before making investment decisions. Join us every morning 196 00:12:17,609 --> 00:12:19,710 Sean Aylmer: for the full episode of Fear and Greed, Australia's best 197 00:12:19,710 --> 00:12:22,530 Sean Aylmer: business podcast. I'm Sean Aylmer. Enjoy your day.