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Speaker 1: David Hunt is the president and chief executive officer over

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Speaker 1: at PGM, which recently boosted its private alternatives business. David,

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Speaker 1: great to have you here in the studios.

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Speaker 2: For having me. It's nice to be back.

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Speaker 1: I think the last few times we've spoken, we've spoken

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Speaker 1: a lot about private market because quite frankly, that seems

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Speaker 1: to be what clients are interested in right now. How

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Speaker 1: has that evolved in terms of what specifically they're asking for?

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Speaker 2: It really has changed a lot, remaining in the last

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Speaker 2: year or two, I would say that we've had a

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Speaker 2: bit of a front row seat at this I mean,

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Speaker 2: we're at three hundred billion in Aumaua. We're probably one

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Speaker 2: of the largest private alternative managers. But our footprint is

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Speaker 2: a bit different, and that we didn't start with private equity.

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Speaker 2: We really started with real estate and much more of

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Speaker 2: a bent toward private credit. And in fact, that's been

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Speaker 2: what's growing really quickly for us. It's been real estate

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Speaker 2: debt to some extent, infrastructure and some of them were

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Speaker 2: specialized forms of debt, including private private credit. And what

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Speaker 2: people I think don't appreciate is that this is not

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Speaker 2: just a short term phenomena. This is a change in

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Speaker 2: how the economy is being financed. If you go back

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Speaker 2: ten years, banks did all of this. Banks did lending

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Speaker 2: to middle markets, Banks did infrastructure, banks did project finance.

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Speaker 2: They aren't putting money into these markets, and so institutional

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Speaker 2: investors are stepping in and doing that, and it's being

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Speaker 2: architected by asset managers such as ourselves, as well.

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Speaker 1: As sort of more clients become interested in as of course,

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Speaker 1: you have to come up with ideas for new ways

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Speaker 1: to invest this money in new products, if you will.

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Speaker 1: We were speaking a little bit earlier with Edwin Conway,

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Speaker 1: who heads one of BlackRock's main divisions, and he kind

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Speaker 1: of made the point, you know, I mean, as I'm

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Speaker 1: sure you know, alternatives in the old days was just

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Speaker 1: that it was a real estate commodities and that was

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Speaker 1: about it. And now it is just so vast, and

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Speaker 1: I know PGM is now exploring new businesses, including something

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Speaker 1: like reinsurance.

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Speaker 2: No, the alternative definition really is much broader. And I

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Speaker 2: think that if you look out five to seven years

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Speaker 2: at an institutional investors portfolio, you're going to see a

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Speaker 2: higher proportion in privates. You're going to see a higher

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Speaker 2: proportion in privates that are debt oriented and you're going

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Speaker 2: to see, I think fundamentally much more variety in the types,

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Speaker 2: in the types of strategies. So let's take the one

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Speaker 2: that you mentioned, which I think is a great example,

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Speaker 2: which is reinsurance. So obviously PGM, owned by Prudential, we

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Speaker 2: have benefited from the company insurance co. We've benefited from

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Speaker 2: being able to invest with insurance liabilities backing that for

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Speaker 2: fifty years. You know, in the last ten years a

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Speaker 2: number of the private equity firms and others have sort

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Speaker 2: of figured out this magic a little bit to get

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Speaker 2: in and so what we did announce last week was

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Speaker 2: a big step forward and a new platform that we're

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Speaker 2: developing together with warbur Pinkus to make reinsurance much more

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Speaker 2: available to institutional investors, so.

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Speaker 3: They have another option. In other words, they do.

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Speaker 2: And what's important I think about this reinsurance announcement that

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Speaker 2: we made is it's not just a transaction. We actually

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Speaker 2: announced a platform. So while the transaction was the reinsurance

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Speaker 2: of some Prudential liabilities, this is set up so that

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Speaker 2: we can do many more types of those transactions and

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Speaker 2: we can do other third party insurance companies. So while

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Speaker 2: delighted at the ten billion in assets to be able

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Speaker 2: to manage in that. This will over the foreseeable future

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Speaker 2: grow to multiples of that as we get more and

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Speaker 2: more reinsurance assets in. And this is a powerful growth

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Speaker 2: driver for PGM because you know, two of our big

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Speaker 2: growth areas. One is this private alternatives. We've talked about

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Speaker 2: this fuels a lot of that and solutions. More and

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Speaker 2: more clients are looking for ways that they can actually

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Speaker 2: use multi asset class to drive returns and diversification, and

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Speaker 2: this is exactly what they're looking for.

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Speaker 3: Okay, multi asset classes driving returns. Your clients want increase

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Speaker 3: allocations to private assets, private credit in your case, what

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Speaker 3: is this increase coming at the expense of what are

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Speaker 3: they making room in their portfolio? What are they not buying,

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Speaker 3: What are they not spending money on or putting money

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Speaker 3: into in order to make room for private credit.

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Speaker 2: You know, it's a great question, and I think there's

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Speaker 2: a longer term answer and a shorter term answer to that,

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Speaker 2: because right now we're in this kind of strange period

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Speaker 2: where many of our clients have obviously had all of

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Speaker 2: their public securities marked down a lot as interest rates

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Speaker 2: rose very rapidly, Their privates didn't come down so much,

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Speaker 2: and we can argue about the legitiacy of that, but

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Speaker 2: in any of it, they didn't. So they have this

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Speaker 2: problem where right now on their asset allocation they're over

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Speaker 2: allocated to privates. So they've got to work theirselves out

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Speaker 2: of that a bit in the very near term. They've

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Speaker 2: actually taken money in the last two years out of

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Speaker 2: public fixed income to fund a bunch of this. That

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Speaker 2: is about to change, and I think the real bell

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Speaker 2: weather for this is when we have assurance that the

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Speaker 2: FED has topped out and is beginning to move down,

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Speaker 2: And when that happens, we're going to see an enormous

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Speaker 2: shift back into public fixed income. And then where's the

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Speaker 2: liquidity going to come from? Equities? Public equities have been

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Speaker 2: in outflows about among institutional investors for quite a long time,

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Speaker 2: particularly active and I think that that probably continues.

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Speaker 1: Well when we talk if that does is that if

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Speaker 1: that ends up being true, is that because of the

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Speaker 1: return differential? Is it because of the risk differential?

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Speaker 2: What's it's all of the above. I mean, I think

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Speaker 2: it's partly that it's easier to have real alpha in

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Speaker 2: the private markets. Many public equity managers you know, net

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Speaker 2: of fees have struggled to be index fives and they've

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Speaker 2: run too close to the benchmark, and so in our

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Speaker 2: strategies we run you know, much higher concentration pieces and

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Speaker 2: don't have that problem, but the industry overall has. So

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Speaker 2: you've got better returns after after fees, and you've got

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Speaker 2: better diversification because the private markets operate on a different cycle.

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Speaker 1: Yeah. Well, you talk about the idea that, of course,

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Speaker 1: when we get a sense of that the FAT has

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Speaker 1: sort of ended its rate hiking cycle, that that maybe

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Speaker 1: ends up being the inflection point. I have to ask

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Speaker 1: you about some of the economic data we've gotten. I mean,

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Speaker 1: what do you make of it? Because I can look

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Speaker 1: at that economic data and say, yeah, the FED probably

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Speaker 1: is done. I can look at that same economic data

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Speaker 1: and make a case that the FED is going to

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Speaker 1: do more.

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Speaker 2: Yeah, it's very hard to know exactly when we've hit that.

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Speaker 2: I think we can say, for with some ma surety

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Speaker 2: that they are a lot closer to the top. Whether

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Speaker 2: we can completely call it or not, I don't know.

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Speaker 2: But I think that the piece that the markets have

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Speaker 2: wrong is that I think there's this view that somehow

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Speaker 2: the FED will kind of somewhat rapidly begin to come down.

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Speaker 2: And our view is the economy is stronger than most

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Speaker 2: people think, at least in the US. We can talk

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Speaker 2: about some other but in the US it's stronger. The

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Speaker 2: labor market is stronger, and that means that rates are

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Speaker 2: going to stay higher for longer than the market's currently

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Speaker 2: priced in. At least that's how we're positioned.

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Speaker 3: At the moment. And with rates staying higher for longer,

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Speaker 3: the dollar are continuing to stay strong. What does that

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Speaker 3: mean for the appeal of US assets, whether it's in

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Speaker 3: public markets or private markets from overseas. You travel the world,

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Speaker 3: you talk to clients all over the world. What are

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Speaker 3: they telling you.

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Speaker 2: They're saying that she David talked to us about the

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Speaker 2: hedging costs because they believe that the US is going

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Speaker 2: to outperform in terms of the kind of local currency

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Speaker 2: alpha that they can create. But the dollar has been

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Speaker 2: very strong, and so for the most part they are

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Speaker 2: hedging it back into euros or again. And when those

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Speaker 2: costs get very expensive, this whole trade really comes under

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Speaker 2: some scrutiny.

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Speaker 3: But at the.

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Speaker 2: Moment they're able to hedge that, and we are seeing

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Speaker 2: many of our clients overweight to the US at the moment.

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Speaker 3: You said earlier that investors are making making room in

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Speaker 3: their portfolios for private assets by not being in say,

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Speaker 3: public fixed income markets now and down the road maybe

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Speaker 3: public equities. The thing about public markets is they're liquid.

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Speaker 3: What is your confidence that private assets, private credit will

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Speaker 3: be liquid when investors need them to.

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Speaker 2: Be so Liquidity is I think one of the most

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Speaker 2: important issues in all of that, because of course these

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Speaker 2: these markets are not liquid, and indeed, part of the

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Speaker 2: reason you're getting a spread over public is you're getting

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Speaker 2: paid for that illiquidity. And I think that people need

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Speaker 2: to construct their portfolios knowing that that is true, and

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Speaker 2: knowing that they won't be able to immediately get liquidity.

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Speaker 3: On that now.

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Speaker 2: I will say that over time, there are ways of

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Speaker 2: mitigating that. And one of the best examples of that

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Speaker 2: is you know the secondary's market, so you know, for

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Speaker 2: many years, if you were in private equity and others,

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Speaker 2: you were kind of in there for the duration we

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Speaker 2: have a private equity secondaries business is actually extremely busy

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Speaker 2: right now because clearly a lot of people are saying,

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Speaker 2: I have a too much private equity, but I don't

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Speaker 2: have enough money to allocate to new private equity. What's

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Speaker 2: the solution to that the secondary's market, and so we

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Speaker 2: will see these become more liquid over time as other

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Speaker 2: secondary markets grow up, in real estate and in private credit.

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Speaker 1: I am curious looking forward here, David, what's the big

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Speaker 1: risk that you are keeping your eye on right now?

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Speaker 2: Well, I think that whenever you get in situation like

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Speaker 2: this where debt has grown pretty dramatically over the last

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Speaker 2: five or six years, and even before that and before

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Speaker 2: COVID you saw pretty big rises and the kind of

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Speaker 2: search for yield. So we're keeping our eye really clearly

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Speaker 2: on areas where there's a lot of leverage. You know,

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Speaker 2: we are watching this seal O market closely. We are

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Speaker 2: watching some of the private equity firms that have actually

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Speaker 2: levered up, you know, at the fun level as well

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Speaker 2: as at the individual level. We're looking very closely at

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Speaker 2: the bank loan market. So there are clearly areas where

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Speaker 2: there's been a lot of leverage put in, and I

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Speaker 2: think we all need to be a bit careful in

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Speaker 2: those areas.

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Speaker 3: We always appreciate your candor. David Hunt is CEO and

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Speaker 3: president of PGM