1
00:00:00,680 --> 00:00:02,400
Speaker 1: And to take us through where private equity and the

2
00:00:02,440 --> 00:00:05,320
Speaker 1: world of alternative investment where broadly is today. Well, so

3
00:00:05,400 --> 00:00:07,960
Speaker 1: who knows it terribly Well? He is Tony James. He

4
00:00:08,080 --> 00:00:10,880
Speaker 1: is the founder and chair of Jefferson River Capital and

5
00:00:10,920 --> 00:00:13,680
Speaker 1: of course for years was president and COO of Blacksmith. Tony,

6
00:00:13,680 --> 00:00:15,960
Speaker 1: thank you so much for being here, pleasure, David. So

7
00:00:16,160 --> 00:00:19,520
Speaker 1: this has grown rather dramatically over the time you've watched

8
00:00:19,520 --> 00:00:22,160
Speaker 1: it and participated, and it's like a twelve trillion dollar

9
00:00:22,239 --> 00:00:24,160
Speaker 1: business today. It didn't start out that way in the eighties.

10
00:00:24,560 --> 00:00:27,240
Speaker 1: So what gave rise to that? Why did it have

11
00:00:27,280 --> 00:00:29,520
Speaker 1: such an advantage over other ways of investing?

12
00:00:29,680 --> 00:00:31,720
Speaker 2: Well, as you point out, it started about fifty years ago,

13
00:00:31,760 --> 00:00:35,080
Speaker 2: so there's something appropriate for now dealing with that. It

14
00:00:35,120 --> 00:00:37,400
Speaker 2: started as a bit of a curiosity industry. It was

15
00:00:38,560 --> 00:00:42,720
Speaker 2: primarily dominated by investment bankers. They perceived that the public

16
00:00:42,760 --> 00:00:46,000
Speaker 2: markets were not what they are today. There were companies

17
00:00:46,040 --> 00:00:51,120
Speaker 2: that were undermanaged, asset heavy, kind of sleepy, and an

18
00:00:51,120 --> 00:00:53,519
Speaker 2: investment backer come in there, use the company's own assets

19
00:00:53,520 --> 00:00:56,640
Speaker 2: to buy itself, spin off some assets, cut some costs,

20
00:00:56,640 --> 00:00:58,560
Speaker 2: and then flip it out again and make some good returns.

21
00:01:00,040 --> 00:01:03,280
Speaker 2: That pulled in more capital, of course, and after a

22
00:01:03,320 --> 00:01:05,720
Speaker 2: while that became more competitive, so that the private equity

23
00:01:05,720 --> 00:01:08,679
Speaker 2: industry then needed to actually not only have the transactional skills,

24
00:01:08,680 --> 00:01:10,319
Speaker 2: but they need to be investors too. They need to

25
00:01:10,319 --> 00:01:13,640
Speaker 2: perceive value and where the company is going and will

26
00:01:13,640 --> 00:01:15,760
Speaker 2: it be a good company and will I be able

27
00:01:15,760 --> 00:01:19,880
Speaker 2: to exit it into good value? And so that expanded

28
00:01:19,880 --> 00:01:23,679
Speaker 2: a lot the opportunity set, but again the success of

29
00:01:23,680 --> 00:01:26,440
Speaker 2: that pulled in more capital, and so today it's evolved

30
00:01:26,440 --> 00:01:30,479
Speaker 2: to where private equity really needs to be operational as well.

31
00:01:30,480 --> 00:01:32,679
Speaker 2: You still need the transaction skills, you still need to

32
00:01:32,680 --> 00:01:34,920
Speaker 2: be an investor, but now you need to be able

33
00:01:34,920 --> 00:01:39,200
Speaker 2: to intervene in the company's fortunes and create value. So

34
00:01:39,240 --> 00:01:43,600
Speaker 2: at Blackstone we figured we could add by our own intervention,

35
00:01:44,040 --> 00:01:47,440
Speaker 2: five to ten percent on average of a company's EBITDA,

36
00:01:47,640 --> 00:01:54,760
Speaker 2: just by things like procurement, redesigning the healthcare plans, providing

37
00:01:54,800 --> 00:02:01,120
Speaker 2: AI and data science, lean manufacturing, pricing, marketing, all of

38
00:02:01,120 --> 00:02:04,760
Speaker 2: those things. And we could have world leading experts in that.

39
00:02:05,480 --> 00:02:09,079
Speaker 2: Because we can, we can deploy them and frankly deploy

40
00:02:09,120 --> 00:02:12,920
Speaker 2: their cost Over two hundred or so portfolio companies, medium

41
00:02:12,960 --> 00:02:15,040
Speaker 2: and small companies which are the focus of private equity.

42
00:02:15,040 --> 00:02:18,720
Speaker 2: You can't really afford to have world class experts in

43
00:02:17,800 --> 00:02:22,280
Speaker 2: all these especially areas, so a private equity firm is

44
00:02:22,360 --> 00:02:27,840
Speaker 2: very well positioned to create the value. And that's had

45
00:02:27,880 --> 00:02:32,320
Speaker 2: some other implications in the early days, the kind of

46
00:02:32,840 --> 00:02:36,120
Speaker 2: buy a company that's asset heavy, sell off some assets.

47
00:02:36,840 --> 00:02:38,520
Speaker 2: You made all your money, like in the first year

48
00:02:38,600 --> 00:02:40,280
Speaker 2: or so, you cut some cost, you sol those assets,

49
00:02:40,320 --> 00:02:43,200
Speaker 2: and then you flipped it. Now we're trying to create

50
00:02:43,200 --> 00:02:46,520
Speaker 2: great companies. We're trying to grow them, and transforming a

51
00:02:46,560 --> 00:02:48,799
Speaker 2: company takes the number of years and you sow the seeds,

52
00:02:48,840 --> 00:02:52,520
Speaker 2: but they don't blossom right away. So private aqas come

53
00:02:52,600 --> 00:02:55,680
Speaker 2: much much more of a long term holder and builder

54
00:02:55,720 --> 00:02:58,960
Speaker 2: of companies. And I wouldn't be surprised if in the

55
00:02:58,960 --> 00:03:03,560
Speaker 2: early days of the inn privacy actually cost jobs. But

56
00:03:03,600 --> 00:03:05,880
Speaker 2: today there's absolutely no doubt about it that it's a

57
00:03:05,960 --> 00:03:10,200
Speaker 2: job creator. And so I think the industry has evolved

58
00:03:10,240 --> 00:03:13,240
Speaker 2: to a better place. I kind of view. I mean,

59
00:03:13,560 --> 00:03:16,320
Speaker 2: the gains the private quo are always going to pensioners,

60
00:03:16,520 --> 00:03:18,440
Speaker 2: but now I view the private accy itself as a

61
00:03:18,480 --> 00:03:21,280
Speaker 2: force for good in the economy to a much greater

62
00:03:21,320 --> 00:03:22,400
Speaker 2: degree than it was way back.

63
00:03:22,440 --> 00:03:24,840
Speaker 1: When does that require more patience on the part of

64
00:03:24,880 --> 00:03:26,800
Speaker 1: people who are giving the money to invest I mean,

65
00:03:26,800 --> 00:03:29,000
Speaker 1: if you're holding the company a lot longer time to

66
00:03:29,040 --> 00:03:32,040
Speaker 1: get those operational benefits, and is there that patience? And

67
00:03:32,040 --> 00:03:34,040
Speaker 1: by the way, what about the liquidity issue. One of

68
00:03:34,080 --> 00:03:36,280
Speaker 1: the issues on private equity has always been I can't

69
00:03:36,320 --> 00:03:37,680
Speaker 1: pull my money out when I want to.

70
00:03:38,880 --> 00:03:43,200
Speaker 2: Right right, It does definitely require more patients. But most

71
00:03:43,200 --> 00:03:48,120
Speaker 2: investors now actually want longer holding periods because because you

72
00:03:48,200 --> 00:03:51,840
Speaker 2: get richer, you get richer compounding something at twelve percent

73
00:03:51,880 --> 00:03:55,320
Speaker 2: for twenty years than you do compounding at twenty percent

74
00:03:55,360 --> 00:03:58,680
Speaker 2: for five years. So the IRR that people talk about

75
00:03:58,680 --> 00:04:02,400
Speaker 2: the compounding, that's only one aspect of it. So a

76
00:04:02,440 --> 00:04:04,880
Speaker 2: lot of investors they want that money out, they want

77
00:04:04,880 --> 00:04:06,920
Speaker 2: that money working for them over a long period of time,

78
00:04:07,000 --> 00:04:10,520
Speaker 2: and they're content with with longer holding periods. We can

79
00:04:10,560 --> 00:04:14,160
Speaker 2: get into different investor classes, but there are other ways

80
00:04:14,160 --> 00:04:15,720
Speaker 2: you can get liquid if you really need it.

81
00:04:15,760 --> 00:04:17,960
Speaker 1: Well, I was going to ask about this secondary there's

82
00:04:17,960 --> 00:04:19,880
Speaker 1: a second market now as I understand it, So actually

83
00:04:19,960 --> 00:04:22,240
Speaker 1: you can get your money out through secondary market, as

84
00:04:22,279 --> 00:04:23,200
Speaker 1: I understand explain that.

85
00:04:23,920 --> 00:04:27,760
Speaker 2: Sure, Well, this twelve trillion dollars, it's mufftroomed out there.

86
00:04:28,080 --> 00:04:30,520
Speaker 2: Inevitably a certain number of vestors want to get their

87
00:04:30,560 --> 00:04:34,400
Speaker 2: money out, and not necessarily for because assets not performing

88
00:04:34,400 --> 00:04:36,640
Speaker 2: for them. Private actually has been the best performing asset

89
00:04:36,680 --> 00:04:41,200
Speaker 2: class for most institutions, and just a sidelight. One of

90
00:04:41,240 --> 00:04:44,240
Speaker 2: the ironies of that is if an institution has an

91
00:04:44,279 --> 00:04:47,720
Speaker 2: asset allocation model, so twenty percent in private equity, forty

92
00:04:47,720 --> 00:04:50,080
Speaker 2: percent in public aedeke, forty percent in debt, let's just say,

93
00:04:50,360 --> 00:04:53,480
Speaker 2: and private equally outperforms, what happens is that all of

94
00:04:53,520 --> 00:04:56,320
Speaker 2: a sudden they have more than twenty percent in private equity, right,

95
00:04:56,720 --> 00:04:59,080
Speaker 2: and so now they need to sell down private equity.

96
00:04:59,400 --> 00:05:03,520
Speaker 2: So it's got a kind of a counterintuitive The success

97
00:05:03,720 --> 00:05:06,800
Speaker 2: means they need to be net sellers, which is kind

98
00:05:06,800 --> 00:05:09,040
Speaker 2: of odd, but that's the way. That's the way it works.

99
00:05:09,920 --> 00:05:15,000
Speaker 2: So but but but reallocating, rebalancing the portfolio strategy changes

100
00:05:15,360 --> 00:05:18,520
Speaker 2: with with with corporate pension funds. When they've become fully funded,

101
00:05:18,680 --> 00:05:20,599
Speaker 2: they then want to go out of risk assets of

102
00:05:20,720 --> 00:05:25,520
Speaker 2: just essentially lock in the with double a credit stuff

103
00:05:26,279 --> 00:05:29,960
Speaker 2: the liabilities so defeats the liabilities. If if in retail

104
00:05:30,000 --> 00:05:32,160
Speaker 2: investor you have life changes, you get divorced, you have

105
00:05:32,240 --> 00:05:35,760
Speaker 2: the state planning, so all those reasons. There are sellers

106
00:05:36,520 --> 00:05:40,520
Speaker 2: of LP interest and the and and this business secondaries

107
00:05:40,839 --> 00:05:45,599
Speaker 2: has has ballooned to as the primaries have. It's still lagging,

108
00:05:45,920 --> 00:05:48,839
Speaker 2: but to be a provide that liquidity.

109
00:05:48,560 --> 00:05:50,640
Speaker 1: Tony, you just mentioned retail investors. I think if you

110
00:05:50,720 --> 00:05:52,320
Speaker 1: go back ten years ago, I wouldn't have thought of

111
00:05:52,320 --> 00:05:55,479
Speaker 1: retail investors in the same sentence with private equity. How

112
00:05:55,520 --> 00:05:57,880
Speaker 1: has that changed to what extent are retail investors coming

113
00:05:57,880 --> 00:06:00,000
Speaker 1: in and what is the profile of those retail investor

114
00:06:00,200 --> 00:06:00,680
Speaker 1: in general?

115
00:06:01,480 --> 00:06:05,039
Speaker 2: Well, it started off as very high net worth investors.

116
00:06:05,120 --> 00:06:07,920
Speaker 2: There are almost many institutions in a way, but now

117
00:06:07,920 --> 00:06:10,719
Speaker 2: it's down to the mom and pop and the industry

118
00:06:10,720 --> 00:06:13,320
Speaker 2: has evolved to create products that are more and more

119
00:06:13,360 --> 00:06:17,279
Speaker 2: appropriate for smaller investors. And retail investors have the same

120
00:06:17,360 --> 00:06:21,440
Speaker 2: need for returns that institutions do. And you know, we've

121
00:06:21,560 --> 00:06:23,919
Speaker 2: essentially had a forty year downtrend in interest rates, but

122
00:06:23,960 --> 00:06:27,560
Speaker 2: that's pulled the returns across all asset classes down, so

123
00:06:27,640 --> 00:06:30,880
Speaker 2: the need for added returns becomes more and more acute.

124
00:06:31,600 --> 00:06:35,120
Speaker 2: At the same time, institutions realized, particularly the first The

125
00:06:35,120 --> 00:06:37,640
Speaker 2: first were the endowments of the universities. They are the

126
00:06:37,640 --> 00:06:40,080
Speaker 2: most sophisticated David Swinson and so on and so forth.

127
00:06:40,560 --> 00:06:43,240
Speaker 2: Then there were the pensions, and then and now to

128
00:06:43,279 --> 00:06:46,960
Speaker 2: the high net worth individuals. Endowments have about fifty percent

129
00:06:47,240 --> 00:06:50,960
Speaker 2: of their endowments in private assets, pension funds about twenty five,

130
00:06:51,279 --> 00:06:57,000
Speaker 2: retail investors less than five, so they still have ways

131
00:06:57,080 --> 00:07:00,520
Speaker 2: to go. And what the institutions realized is, I don't

132
00:07:00,560 --> 00:07:03,000
Speaker 2: need all that liquidity. I'm never going to need to

133
00:07:03,680 --> 00:07:09,200
Speaker 2: raise to liquidate everything overnight. And I think increasingly high

134
00:07:09,200 --> 00:07:14,080
Speaker 2: networth institute individuals are realizing the same thing. If you

135
00:07:14,160 --> 00:07:16,560
Speaker 2: have assets financially, if you own your home and you

136
00:07:17,240 --> 00:07:19,120
Speaker 2: say you're lucky enough to have a second home, and

137
00:07:19,120 --> 00:07:21,680
Speaker 2: you have financial assets multiples for annual spending, do you

138
00:07:21,800 --> 00:07:25,640
Speaker 2: really need to be able to liquate everything tomorrow? Because

139
00:07:25,680 --> 00:07:27,800
Speaker 2: it has a real cost. It has a real cost

140
00:07:27,800 --> 00:07:31,560
Speaker 2: in lower return, and so it also has a cost

141
00:07:31,600 --> 00:07:35,200
Speaker 2: because it's tempting. Because individuals tend to do the wrong thing.

142
00:07:35,240 --> 00:07:38,119
Speaker 2: They get worried when the markets are collapsing, that's probably

143
00:07:38,160 --> 00:07:39,880
Speaker 2: the time they should buy, but they end up selling

144
00:07:40,600 --> 00:07:42,720
Speaker 2: and they get ebulent when they see everyone making a

145
00:07:42,720 --> 00:07:44,680
Speaker 2: lot of money and they throw them theirselves in the market.

146
00:07:44,720 --> 00:07:46,960
Speaker 2: That's probably the time they shouldn't do that. So it's

147
00:07:47,000 --> 00:07:53,680
Speaker 2: got to counterintuitive negative too. So yeah, sort of the

148
00:07:53,720 --> 00:07:56,960
Speaker 2: new frontier is retail investors, and the big new frontier

149
00:07:57,000 --> 00:08:02,600
Speaker 2: is not they're ultraed networth, but the mass market and

150
00:08:02,680 --> 00:08:05,120
Speaker 2: that's growing very much. Yeah.

151
00:08:05,280 --> 00:08:07,320
Speaker 1: Okay, Tony, really great to have you with us on wallshirt.

152
00:08:07,360 --> 00:08:10,920
Speaker 1: I really appreciate that's Tony James of Jefferson River Capital