Speaker 1: This weekend on the podcast, another extra special guest from
Speaker 1: the world of private markets. The Partners Group is probably
Speaker 1: the largest private equity firm you've never heard of, perhaps
Speaker 1: because they were originally headquartered in Zook, Switzerland. They're the
Speaker 1: largest listed buyout firm in Europe. They also have headquarters
Speaker 1: here in the US in Colorado. They are decidedly not
Speaker 1: your typical private equity firm, not your typical Wall Street firm.
Speaker 1: They have a very thoughtful approach and a very long
Speaker 1: term approach to making investments in the private markets. I
Speaker 1: found David Layton, CEO of the firm, to be very
Speaker 1: thoughtful and very much different in how he thinks about risk, reward, liquidity,
Speaker 1: various market sectors, processes, just the whole gestalt of we
Speaker 1: are a steward of capital with our clients and we
Speaker 1: are aligned with those clients. It was really a fascinating conversation.
Speaker 1: I think you'll enjoy it. With no further ado, the
Speaker 1: CEO of Partners Group, David Layton. I'm Barry Ritults. You're
Speaker 1: listening to Master's Business on Bloomberg Radio. My extra special
Speaker 1: guest this week is David Layton. He is the chief
Speaker 1: executive officer of the Partners Group, which is Europe's biggest
Speaker 1: listed private equity and buyout firm, with a market cap
Speaker 1: of about twenty five billion dollars. They run over one
Speaker 1: hundred and thirty five billion dollars in assets. David is
Speaker 1: on the Global Investment Committee. He leads the executive team. Previously,
Speaker 1: he headed the firm's private equity business. He has been
Speaker 1: with the firm his entire career. David Layton, Welcome to Bloomberg.
Speaker 1: It's a pleasure to be here. So let's talk a
Speaker 1: little bit about that. That's kind of unusual these days.
Speaker 1: You went straight to the Partners Group after you got
Speaker 1: a bachelor's in finance from Bringham Young University and the
Speaker 1: Marriott School of Management, and you've stayed there your entire career.
Speaker 1: Seems kind of rare these days. Tell us about that. Yeah,
Speaker 1: so I found Partners Group out of school. I was
Speaker 1: actually running the investment banking club at BYU, and you know,
Speaker 1: thought I was interested in that, interested in going to
Speaker 1: Wall Street. I was. I was tentatively committed to to
Speaker 1: go to Lehman Brothers. And there was a one of
Speaker 1: the Partners Group founders. It was on campus and I
Speaker 1: went to convince him why he should come and be
Speaker 1: a part of what was called the investment banking boot
Speaker 1: camp that we were doing at the time to get
Speaker 1: students ready to go to Wall Street and do their interviews, etc.
Speaker 1: And I went to pitch this asset management guy on
Speaker 1: why he should come be a part of that process,
Speaker 1: and he Jiu jitsued me, and he ended up we
Speaker 1: ended up talking, and he was just this fascinating, bigger
Speaker 1: than life personality, and we ended up hitting it off,
Speaker 1: and I got linked up with Partners Group directly out
Speaker 1: of school. Yeah huh, that's really intriguing. You joined as
Speaker 1: an analyst, That's where you began. I joined as an analyst.
Speaker 1: I got an offer to Partners Group's New York office,
Speaker 1: and that's where I thought I was going. And I
Speaker 1: got a call not that long before I was supposed
Speaker 1: to start by one of the partners there who said,
Speaker 1: wait a second, Dave, you're not going to New York.
Speaker 1: He said, you're coming to Switzerland for like a year,
Speaker 1: maybe three years, until I tell you you're ready to
Speaker 1: go to New York. He said, how can you go
Speaker 1: join us in that market before you know anything about us? Right?
Speaker 1: How can you represent us in that mark before you
Speaker 1: know anything about us? Um uh. And so it was
Speaker 1: I hook up the phone and had an interesting conversation
Speaker 1: with my wife about go to Switzerland. But that was
Speaker 1: the firm's philosophy at the time. It was Switzerland was
Speaker 1: the center of gravity. UM, that's where the cultural um
Speaker 1: ethos was kind of formed and Zug. You went to
Speaker 1: Zoog Switzerland and UM and in that environment, you know,
Speaker 1: through proximity to the firm's founders, people kind of get
Speaker 1: culturally integrated. And then you went to different from the
Speaker 1: Swiss or German or French. UM. I took some some
Speaker 1: German lessons before I went there, and then I found
Speaker 1: out the Swiss German is a little different, and I
Speaker 1: didn't end up very different. It's a little different. It's
Speaker 1: a little different. So so, but everybody there speaks English.
Speaker 1: Everybody there speaks English. I was in an English speaking
Speaker 1: environment for sun up to sundown. It was very dynamic.
Speaker 1: My wife actually picked up more German than I did
Speaker 1: because she was out in the community. But in our
Speaker 1: context we had we had an English speaking environment in
Speaker 1: the office. So how does one get from analyst in Zooch,
Speaker 1: Switzerland to CEO in Colorado. Yeah, so when I started,
Speaker 1: after a couple of days, um my wife asked me,
Speaker 1: how do you like your boss? And I told her, look,
Speaker 1: I don't know how to answer that question. I have
Speaker 1: twelve people that tell me what to do. Bosses. It's
Speaker 1: that that was the I was just the youngest I was.
Speaker 1: I think it was the youngest person that they'd ever
Speaker 1: hired up until that point. And so I was just
Speaker 1: kind of sweeping up and doing whatever needed to be done.
Speaker 1: And it was so much fun working with different people
Speaker 1: in different groups, and I got a lot of good
Speaker 1: experience doing that. So I was, you know, when the
Speaker 1: firm launched its debt business, I was an analyst putting
Speaker 1: together some of the credit analysis on the first couple
Speaker 1: of loans that we had written. At the time, we
Speaker 1: had a group that was doing small growth capital investments
Speaker 1: in Germany and Switzerland at the time, fun doing secondaries
Speaker 1: and funds, and the senior people were more specialized, but
Speaker 1: as young people were just getting a very dynamic set
Speaker 1: of experiences and it was a lot of a lot
Speaker 1: of fun. And it sounds like a baptism by fire
Speaker 1: that you're just thrown right into the thick of it.
Speaker 1: It was a baptism by fire in a very entrepreneurial culture,
Speaker 1: and that very much aligned with who I was and
Speaker 1: what I was interested in. You gained a lot of
Speaker 1: experience fast, and so from there I went to New
Speaker 1: York helped to build up the firm's business in the Americas.
Speaker 1: We were really transitioning from back then outsourcing a lot
Speaker 1: of the investment content that we had done with other
Speaker 1: managers to bring a lot of that in house. And
Speaker 1: I helped to drive a lot of that in the
Speaker 1: America's early on. And then in twenty sixteen, we are
Speaker 1: thinking a little bit more strategically about our business in
Speaker 1: the Americas, and I championed this project to open up
Speaker 1: a headquarters for the firm in Colorado and away from
Speaker 1: the street, away from Wall intentionally away from Wall Street.
Speaker 1: And that's that's a part of the partners groups secret
Speaker 1: of success. I do think a lot of people ask
Speaker 1: us how we've been so successful in terms of innovating
Speaker 1: our business and evolving our business over time, and I
Speaker 1: think being in zoog early on helped with that. I
Speaker 1: was talking to one of our founders, he said, look,
Speaker 1: a lot of people think we're in Zoog for tax reasons.
Speaker 1: He said, we're here because this is where my mother lived.
Speaker 1: This is where I wanted to spend my time and
Speaker 1: live my life. And isn't that how private equity locates
Speaker 1: its headquar It's like where's mom? Great stop? And there
Speaker 1: are there that much tax advantages to be in Switzerland
Speaker 1: if you're operating throughout Europe. UM, I mean it's not
Speaker 1: Monaco or Lichtons. No, it's not like that. But it
Speaker 1: actually had nothing to do I don't think with the origins.
Speaker 1: It was all about this is where he wanted to
Speaker 1: live his life, and his founders agreed. And what that
Speaker 1: meant is that everybody that joined Partners Group at that
Speaker 1: time wasn't just a butt in a seat in a
Speaker 1: capital market changing jobs. They were moving their family somewhere
Speaker 1: and being and becoming a part of something, and that
Speaker 1: has created this very tight culture within our organization. We said,
Speaker 1: let's do the same thing in the Americas. Let's find
Speaker 1: a place where our people genuinely want to live their
Speaker 1: life and raise their babies and make that the center
Speaker 1: of our system. We decided to do that in Colorado.
Speaker 1: So that's interesting because UM Colorado obviously in the Rockies.
Speaker 1: Zoog is very much you know, how far are you
Speaker 1: from from the big ski resorts? That's a la side town.
Speaker 1: Some of the photos I saw quite charming. What was
Speaker 1: life like in Zoog? And any coincidence that Colorado is
Speaker 1: about as close as you're going to get to Switzerland
Speaker 1: in the US. No, you're you're in close proximity to
Speaker 1: the mountains there. It is an idyllic setting there in
Speaker 1: the postcard. In the postcard setting there in Zoog very charming.
Speaker 1: But you're on your own a little bit. As it
Speaker 1: relates to your ability to plug into the broader financial community. Right,
Speaker 1: so every client that we have, every asset that we own,
Speaker 1: is a result of somebody getting on an airplane and
Speaker 1: building a relationship. It's created a culture being there where
Speaker 1: we don't expect anything to come to us. We are
Speaker 1: an outbound driven firm, right, We're from that identifies opportunity
Speaker 1: and we hustle and get in front of it. And so, yes,
Speaker 1: beautiful setting there in the in the Alps. Yes, that
Speaker 1: did inform our choice with regards to location. Being in
Speaker 1: the mountains was important to us. We wanted to have
Speaker 1: that continuity of culture, if that makes sense. And and
Speaker 1: how does the business split between Switzerland and US. Are
Speaker 1: they the same types of business just different geographies? Is
Speaker 1: what is the division from from Colorado to Zook. Yeah,
Speaker 1: we are a global firm. Our teams, many of our
Speaker 1: teams are organized on a global basis. We have most
Speaker 1: of our clients from Europe, that's our biggest market, and
Speaker 1: most of our investment activity is in the Americas. Um
Speaker 1: it's been about fifty five percent of our investments that
Speaker 1: we've made are in the and that is an evolution
Speaker 1: that it hasn't always been the case. You know, a
Speaker 1: lot of people think of US as disproportionately European or Swiss,
Speaker 1: and they're surprised to learn that over the last decade
Speaker 1: we have invested most of our firm's capital into the
Speaker 1: US market. This is a big market, important market. And
Speaker 1: when you look at the economy for the past decade,
Speaker 1: or at least as judged by the public markets, Europe
Speaker 1: seems to have been a little sleepy the past decade,
Speaker 1: the US was where all the action was. Yeah, is
Speaker 1: that true in private markets as well as public markets? Well,
Speaker 1: we have a global relative value approach to investing, which
Speaker 1: means that our firm will hold up an investment opportunity
Speaker 1: from the US alongside opportunities from Europe, alongside opportunities from Asia,
Speaker 1: and we will fight about where we see the best
Speaker 1: relative value. And as indicated by the mix that I
Speaker 1: just described, we have found better relative value in the
Speaker 1: US markets. Not just about activity, but it's about relative value.
Speaker 1: Now we have still been active in Europe. We're actually
Speaker 1: bringing all of our investors to Vienna in just a
Speaker 1: couple of months, our biggest investors, for an investor conference,
Speaker 1: and I want to bring them to the most European
Speaker 1: of cities to send a reminder that even though there's
Speaker 1: a lot of people that are down on Europe at
Speaker 1: the moment, that's when a long term investor, and that's
Speaker 1: where private markets I think, can take a long term
Speaker 1: perspective and continue to find opportunities when others aren't looking.
Speaker 1: So I'm intrigued by the concept of relative value, looking
Speaker 1: at it globally by geography, how much is it the
Speaker 1: value of the company or investing in how much is
Speaker 1: the perspective market size, as well as how robust local
Speaker 1: economy is and by local I mean Asia, Europe or US. Yeah,
Speaker 1: I would say that this has evolved over the last decades.
Speaker 1: So it used to be within private markets that you
Speaker 1: would find a good business, apply quite a bit of
Speaker 1: leverage to it, at least in the private equity business,
Speaker 1: and be able to make a pretty good return by
Speaker 1: buying good, solid businesses as they are. That has changed.
Speaker 1: Leverage levels have come down materially. You're investing majority equity
Speaker 1: in most of the transactions that are occurring today. And
Speaker 1: it's all about the future. It's all about what are
Speaker 1: this company's prospects, How are you going to steer this
Speaker 1: company to be able to maintain its market position, What
Speaker 1: can we do with this business over the coming years.
Speaker 1: So it's much more about potential and how you can
Speaker 1: drive market leading strategies than it is necessarily about just
Speaker 1: buying good business and leveraging it up. So we're going
Speaker 1: to talk a little more about partners Group in a bit,
Speaker 1: but I want to stay with the investments. You guys
Speaker 1: seem to be very long term. You're not just buying something,
Speaker 1: putting a fresh code of paint and then flipping it.
Speaker 1: You buy companies to run them and manage them for
Speaker 1: the long haul. Tell us a little bit about the
Speaker 1: giant portfolio of companies you guys are managing. Yeah, so
Speaker 1: we manage a portfolio of several dozen companies. When you
Speaker 1: add together all of our portfolio companies, it's effectively one
Speaker 1: hundred billion dollar enterprise when you add all of our
Speaker 1: companies together across multiple sectors, and it's global in terms
Speaker 1: of its breadth and scope, and quite a few employees also. Yeah,
Speaker 1: So if you look at our business, we have about
Speaker 1: eighteen hundred people at the management company, and then across
Speaker 1: our portfolio over two hundred thousand employees of our various
Speaker 1: portfolio companies. So we are a large owner of assets,
Speaker 1: and I think we take that stewardship very very seriously.
Speaker 1: That's one of the reasons why we really haven't identified
Speaker 1: ourself as a financial firm or as a money management firm.
Speaker 1: That's not the proper lens through which to view Partners Group.
Speaker 1: I think we are very much an owner of assets.
Speaker 1: We're a builder of businesses, and we're a steward of
Speaker 1: these companies, and we take that very seriously. So I
Speaker 1: wouldn't be surprised in the future if you didn't look
Speaker 1: at us and we looked more like an industrial conglomerate.
Speaker 1: That's where like a private equity firm. That's really interesting.
Speaker 1: You sit on the board of directors on a number
Speaker 1: of portfolio companies. Tell us a little bit about what
Speaker 1: that experience is like. You own them, but yet they
Speaker 1: manage themselves and you guys are involved in that. How
Speaker 1: does that operate? It sounds like there's a lot of
Speaker 1: independence amongst all these different holdings. If you think about
Speaker 1: the role that we play as owners, it is a
Speaker 1: real responsibility that we have to develop these companies over time.
Speaker 1: The role of the board years ago maybe isn't that
Speaker 1: critical or wasn't that important Today, it is absolutely paramount
Speaker 1: to your success as an investor. And so we are
Speaker 1: very very focused on making our boards the center of
Speaker 1: vision and strategy and accountability. Our board members work more
Speaker 1: intensively with our companies, have a greater time commitment than
Speaker 1: most board members are used to. This is not come
Speaker 1: together once a quarter, eat chicken dinner, and rubber stamp
Speaker 1: a couple of things. But this is really roll up
Speaker 1: your sleeves and have a commitment to helping to chart
Speaker 1: the appropriate path moving forward. And I have always taken
Speaker 1: that stewardship very very seriously and h and that that's
Speaker 1: the culture that we're creating is to take those board
Speaker 1: assignments very seriously. Yes, there is a lot of of
Speaker 1: steering of individual strategy that goes on in the portfolio companies.
Speaker 1: At the same time, Partners Group is developing a business
Speaker 1: system STEM that we are looking to apply across our
Speaker 1: portfolio companies. We're looking to create a culture that is
Speaker 1: similar with regards to how we set strategy, with regards
Speaker 1: to how we create accountability on that strategy, with regards
Speaker 1: to how our boards get involved in driving that strategy.
Speaker 1: And that's something that we think is essential to differentiation
Speaker 1: in the future. Really interesting Gear headquartered in Colorado. How
Speaker 1: often do you get back to Switzerland. I'm in Switzerland
Speaker 1: about a week a month. Oh really that much? Wow,
Speaker 1: that's a lot of travel from Colorado. That's a lot
Speaker 1: of travel. Yep, that comes with the territory. Quite interesting.
Speaker 1: So let's talk a little bit about the firm. It
Speaker 1: has a market cap over twenty five billion dollars. That's
Speaker 1: bigger than Credit Swiss, which means you're a pretty substantial entity.
Speaker 1: Tell us a little bit about the corporate culture, which
Speaker 1: is decidedly different than the typical Wall straight bank. Yeah, first,
Speaker 1: let me put into context some of our views with
Speaker 1: regards to how our industry is evolving, and that'll help
Speaker 1: to inform some of the decisions that we've made with
Speaker 1: regards to how to set our company culture. The private
Speaker 1: markets is not a young industry, necessarily been around for
Speaker 1: for forty years. But the skills, the talents, the attributes
Speaker 1: that allowed people to be successful in this industry historically
Speaker 1: are not necessarily the attributes that are going to be
Speaker 1: successful in propelling firms in the future. If you think
Speaker 1: about the way private markets functioned twenty years ago, twenty
Speaker 1: five years ago, people would with a transactional skill set
Speaker 1: provide access into an inefficient asset class, right. They would
Speaker 1: do that by buying and selling things, and they were
Speaker 1: able to make a good living doing that, and that
Speaker 1: this transactional skill set is something that was praised. You'll
Speaker 1: hear teams call themselves deal teams. You'll call individuals call
Speaker 1: themselves deal professionals, and this deal side of the business
Speaker 1: is really what was emphasized. Now I want you bring
Speaker 1: that up. I have to ask a question. I kind
Speaker 1: of read a shocking thing. You guys banned the word
Speaker 1: deal from the company. Explain that if fits into context.
Speaker 1: It's because the things that made people successful, that deal
Speaker 1: doing mindset is not the things that are going to
Speaker 1: make us successful in the future. We meaning the over
Speaker 1: emphasis on transactional drop a ticket, get the next trade
Speaker 1: in flip it as opposed to building something exactly. Our
Speaker 1: business is no longer about doing deals and providing access.
Speaker 1: It's about building businesses, and so we don't want to
Speaker 1: we don't want to put too much emphasis on the
Speaker 1: transactional side of things. We think that's been overdone historically.
Speaker 1: We really want to emphasize the rolling up your sleeves UH,
Speaker 1: strategy setting, building businesses side of things. And because of that,
Speaker 1: we've we've asked our people to change their terminology. We've
Speaker 1: done things like change our job titles. We don't have
Speaker 1: senior vice presidents, you know, twenty five year old senior
Speaker 1: vice presidents running around anymore. That's the terry level position president.
Speaker 1: We've we've we've changed that. That's again a reference to
Speaker 1: kind of Wall Street culture, and that made sense maybe
Speaker 1: years ago when you had to sound important on the phone,
Speaker 1: but in today's environment, we don't think it's you know,
Speaker 1: it makes a lot of sense. And so the culture
Speaker 1: that we're creating is a more industrial culture focused on
Speaker 1: rolling up your sleeves and building businesses. And that's reflective
Speaker 1: of we think the environment moving forward. So so now
Speaker 1: I understand why your headquarters in Colorado has a sign
Speaker 1: on the wall that says this is not Wall Street. Yeah,
Speaker 1: so not only are you locating the firm two thousand
Speaker 1: miles away from from Wall Street, you are making a
Speaker 1: very conscious effort to behave very differently. And by the way,
Speaker 1: when you walk through the door, it's immediately apparent to
Speaker 1: you because when you walk through that that office in Colorado,
Speaker 1: it is brick, steel stone. We have built a more
Speaker 1: industrial business building feel that is in direct contrast to
Speaker 1: what you you see in most places within our industry.
Speaker 1: So where are you in Colorado? So we're just outside
Speaker 1: of Boulder in a town called Broomfield. Really interesting. So
Speaker 1: you are knowing near val Or some of the sheshier
Speaker 1: parts of Colorado. Is that is that a fair state? Yeah?
Speaker 1: We're down the mountain um, which is a good three
Speaker 1: hours depending on the depending on the weather, in the traffic,
Speaker 1: it can be a bit um. But let me tell
Speaker 1: you something. When we first decided to move to Colorado, Um.
Speaker 1: Uh it was you know, in a way, UM, a
Speaker 1: part of this whole move um away from Wall Street.
Speaker 1: UM create an environment that's somewhat similar to the Zoog
Speaker 1: you know culture that we came from. You know, we
Speaker 1: talked a little bit about being in Zoog. One of
Speaker 1: our founders grabbed me one time and said, hey, UM,
Speaker 1: why don't you figure out where you want to live
Speaker 1: your life and see if people want to move there also,
Speaker 1: right and follow you? And and uh, you have any
Speaker 1: nexus with with Colorado? Or was this just hey, big country,
Speaker 1: let's go here. Um. It's just a fantastic environment. Uh.
Speaker 1: And the and the people that are there, um are
Speaker 1: so happy. It's the one of the highest quality of
Speaker 1: life uh anywhere, um that you'll find. And I think
Speaker 1: that makes a difference. Right when we first opened up,
Speaker 1: people are kind of scratching their heads what are these
Speaker 1: guys doing? Today we get more resumes into our Colorado
Speaker 1: office than our next six offices combined. It really has
Speaker 1: set us apart and is something that's quite unique. And
Speaker 1: it's also directly in line with what we've been talking
Speaker 1: about it. It's different from Wall Street. It creates an
Speaker 1: environment for us where we can be independent thinkers and that.
Speaker 1: So let's drill down into that a little bit. I
Speaker 1: was reading about the firm and its investment process, and
Speaker 1: it seems like you guys can spend as long as
Speaker 1: five years studying a company before you make an acquisition,
Speaker 1: Whereas in most of finance it's competitive and sometimes you
Speaker 1: need to make a decision now or someone else is
Speaker 1: gonna outbid you. How do you go about kicking the
Speaker 1: tires of a company for three or four or five years.
Speaker 1: That seems to be inormately lengthy compared to the way
Speaker 1: traditional finance operations. Yeah, when I came up in the industry,
Speaker 1: when a company would come up for sale, we would
Speaker 1: have four or five months to research that business and
Speaker 1: to do due diligence and to meet the management team
Speaker 1: and to build our models. And that's enough time to
Speaker 1: get to know a space, and to get to know
Speaker 1: a sector, and to get to know a company and
Speaker 1: decide if you want to make an investment or not.
Speaker 1: With the competition that's increased within our space, it's more
Speaker 1: like four or five six weeks that you need to
Speaker 1: make that decision, okay, And you just can't do the
Speaker 1: type of work that you need to do to write
Speaker 1: a large check in four or five six weeks to
Speaker 1: buy an entire company. And so we have really put
Speaker 1: emphasis to our team on doing work well before a
Speaker 1: company sale process to make sure that when that company
Speaker 1: comes up for sale that we are expert on that space,
Speaker 1: we're expert on that subsector, and we're doing confirmatory work.
Speaker 1: We're not starting from scratch. That's something that's really emphasized
Speaker 1: within our culture. And you know, if you think about
Speaker 1: the current environment, right rates have changed, leverage levels have changed,
Speaker 1: and that means there's a couple hundred basis points of
Speaker 1: returns that's come out of our industry if you're just
Speaker 1: doing things the same way. So you need to be
Speaker 1: investing in a different profile of business. You can't just
Speaker 1: hope to lever up a good company and generate a
Speaker 1: return that way. Today you have to find sectors that
Speaker 1: are transforming right businesses that we can transform through active
Speaker 1: ownership in order to generate the same type of returns
Speaker 1: that have happened. And we think that that's going to
Speaker 1: be a critical part moving forward. So we put all
Speaker 1: of our emphasis today from a sourcing and origination perspective
Speaker 1: around around thematic work that's a big topic. We're gonna
Speaker 1: talk a little more about sectors later. Now I have
Speaker 1: to ask you mentioned the time horizon for evaluating companies
Speaker 1: and the competitions. Your size puts you in the same
Speaker 1: league as private equity firms like Blackstone and Aries. How
Speaker 1: often are you bumping into competition when you're kicking the
Speaker 1: tires on a company for a couple of years, when
Speaker 1: those guys tend to write a check after eight weeks. Now,
Speaker 1: I often look at the public markets and a little
Speaker 1: green within the sometimes to be honest, because in the
Speaker 1: public markets, you find a sector that you like, they
Speaker 1: find a company that you like, you hit the buy
Speaker 1: button and you create that exposure for yourself or your clients.
Speaker 1: In the private markets, you find a sector that you like,
Speaker 1: you do your research, you find a company that you like,
Speaker 1: You have to wait for years until an event comes up,
Speaker 1: and then there's only one firm that's allowed to create
Speaker 1: that exposure. Okay, and you have to go up against
Speaker 1: some of the most aggressive, smart individuals that you will
Speaker 1: ever come across in your life, and you have to
Speaker 1: differentiate yourself and partners group has I think done a
Speaker 1: good job of winning more than its fair share of
Speaker 1: transactions in the market by being a differentiated kind of firm,
Speaker 1: a differentiated kind of owner, one that's a true partner
Speaker 1: to industry, a partner for growth, and that's helped to
Speaker 1: distinguish us against some pretty stiff competition. Not a coincidence
Speaker 1: that you're named Partners Group. That didn't happen by act. No,
Speaker 1: not by accident at all. So let's talk a little
Speaker 1: bit about some of your closed end funds. Typically, most
Speaker 1: private equity or buy out funds tend to be a
Speaker 1: quarter million dollars or more. You have a fund that
Speaker 1: requires a minimum investment of fifty thousand dollars. Tell us
Speaker 1: the thinking behind making access to this sort of investing
Speaker 1: easier for people who might not have a quarter million
Speaker 1: dollars lying around. Yeah, so, if you're an institution investing
Speaker 1: one hundred billion dollars today or fifty billion dollars or
Speaker 1: ten billion dollars, private markets is already a big part
Speaker 1: of your portfolio. But for individuals, historically there have not
Speaker 1: been great options to invest into private companies. It's been
Speaker 1: one of the best performing asset classes for decades, and
Speaker 1: there's a real democratization of access to private markets and
Speaker 1: we're one of the firms that's been leading that. Look,
Speaker 1: our parents all had pension funds, our kids are all
Speaker 1: going to have four o one ks, and so the
Speaker 1: sources of funds for our industry is going to change
Speaker 1: as a result of that. It's been primarily pensioned historically,
Speaker 1: it's been a lot of insurance and that sort of thing.
Speaker 1: And the future is private individuals, and we think define
Speaker 1: contribution programs and we're a firm that is really cutting
Speaker 1: edge and leading with regards to providing the types of
Speaker 1: solutions that those type of clients are. So, when you're
Speaker 1: offering a fund to a smaller investor of fifty thousand
Speaker 1: dollar investor, how does the ownership within what those folks
Speaker 1: invest in? How does that compare to what partners group
Speaker 1: at large invest in? It? Is it a particular strategy
Speaker 1: or a multi strat approach? How do you how do
Speaker 1: you think about that? Yeah, so our clients get access
Speaker 1: to all of our investment content that that particular fund
Speaker 1: is targeting. We have been really focused as a firm
Speaker 1: on not creating silos, not having one team that just
Speaker 1: works for this particular financial product, and this team that
Speaker 1: works with this financial product but all of our investment
Speaker 1: professionals work for all of our clients collectively, and that
Speaker 1: gives us the ability to create a vehicle, for example,
Speaker 1: for an individual client, of a spoke solution for an
Speaker 1: individual client, or a structure for a group of like
Speaker 1: investors like you know, private clients, and have them participate
Speaker 1: in the exact same investment content that our other large
Speaker 1: investors get access to. And so that vehicle it's you
Speaker 1: don't have to worry about having the A team on
Speaker 1: the big institutional money and the B team on the
Speaker 1: retail money, which is something that some people do worry about.
Speaker 1: Our investors get equal access to the opportunities that our
Speaker 1: global teams. So in other words, I'm not liquid for
Speaker 1: a billion dollars. I don't remember where I left that.
Speaker 1: So even if I don't have a billion, I could
Speaker 1: still participate similarly to an endowment that does have a
Speaker 1: billion dollars. Yeah, that's the and I think that's the future.
Speaker 1: You know, limited partnerships that have been the traditional structure
Speaker 1: that our industry have. You these are archaic structures, right,
Speaker 1: they were innovated in the nineteen seventies and eighties. Is
Speaker 1: a tool for individual wealth creation and they have been
Speaker 1: jerry rigged effectively to now made US ten trillion dollars
Speaker 1: of assets, which is pretty incredible. They are a lot
Speaker 1: of money. They are not the future, right. The future
Speaker 1: is we think vehicles that have some structure to them
Speaker 1: that allows for easier access. And so when you talk
Speaker 1: about ten trillion dollars you have discussed you think this
Speaker 1: is going to end up being a thirty trillion dollar
Speaker 1: market place. Yeah, so if there's ten trillion dollars and
Speaker 1: you believe it's structured in a way that won't work
Speaker 1: for the average investor, where is the next twenty trillion
Speaker 1: dollars going to come from? Is it going to be institutional?
Speaker 1: It's going to be individuals, some combination. Where do you
Speaker 1: see the growth here? Yeah, it's going to be some combination,
Speaker 1: but individual investors and define contribution coming online more fully
Speaker 1: is certainly UM an element of that. UM. You know,
Speaker 1: our industry has been growing for a long period of time. UM.
Speaker 1: It has grown across different rate environments UM and UH
Speaker 1: and and we're big believers that it will continue to
Speaker 1: to grow UM and UH and that this is going
Speaker 1: to be an industry that continues to benefit from from
Speaker 1: some of the tailwinds that that do exist. So I'm
Speaker 1: surprised to learn you guys acquired Brightling, the big watch company.
Speaker 1: Tell us a little bit about the thinking behind that acquisition. Yeah. Uh, Brightling,
Speaker 1: I think is one of the coolest Swiss watch companies
Speaker 1: ever with its aviation heritage and the partnerships that it's
Speaker 1: done and in the automotive space and diving in space.
Speaker 1: It's it's got such an incredible heritage and we're really
Speaker 1: happy to be a part of it. Um. I saw
Speaker 1: a pistachio dial chronograph that they put out that was
Speaker 1: just unique and gorgeous. Really yeah, no, the I mean
Speaker 1: the innovation at that company today is really really incredible.
Speaker 1: And um, you know, there's a lot of people who
Speaker 1: kind of say, what are you doing investing into a
Speaker 1: consumer business? It's environment competitive, it's in an environment like this,
Speaker 1: and that's a business you know, growing at twenty five
Speaker 1: percent last year. It's got enormous potential in the in
Speaker 1: the Asian and US markets where it's it's growing really
Speaker 1: really strong. And um, and uh, you know people think
Speaker 1: about as a very masculine company, but it's it's female segment.
Speaker 1: Is has a tremendous amount of potential. And with some
Speaker 1: of the innovation that they're driving, with some of those colors,
Speaker 1: et cetera that you're talking about, it's a lot of that.
Speaker 1: Not a timepiece, a lot of potential. Oh, it's a timepiece.
Speaker 1: I mean, the mechanics are for sure, are fantastic. Um,
Speaker 1: but but it's a fashion accessory. Well, it's a piece
Speaker 1: of jewelry. It's a fashion accessory. It's more than just
Speaker 1: telling time is perhaps a better way to describe it. Yep.
Speaker 1: And so we're really excited about that, that investment in
Speaker 1: that partnership. Quite quite interesting. There are some quotes of
Speaker 1: yours that I really like and I have to ask
Speaker 1: you about, starting with there is a Darwinian struggle ahead
Speaker 1: for private markets. Tell us why you believe that is
Speaker 1: the case. The world has changed, right, We are in
Speaker 1: a new rate environment and many of the tailwinds that
Speaker 1: have allowed many firms to be successful and generate strong
Speaker 1: returns have turned into headwinds. Uh. And we had a
Speaker 1: long period of cheap capital and high amounts of free
Speaker 1: capital essentially and large amounts of leverage being available. That
Speaker 1: was a tailwind. We had a long period of global
Speaker 1: z right, where we could take costs out of our
Speaker 1: portfolio companies, take them out into a global marketplace and
Speaker 1: improve margins, strong macro growth environment, and many of those
Speaker 1: factors have changed, and some of them have even turned
Speaker 1: into headwinds. And so as a result of that, the
Speaker 1: formula for success that I think many of these more
Speaker 1: transactionally oriented firms are pursuing, we think is going to
Speaker 1: be challenged. And as a result of that, you this
Speaker 1: this environment that we're and is going to initiate a
Speaker 1: period of natural selection whereby the strong firms will get
Speaker 1: stronger and the weak firms will struggle and struggle to
Speaker 1: raise new capital. And this isn't dissimilar from what's happened
Speaker 1: in prior eras within the financial services sector. I mean,
Speaker 1: if you think about the public markets in the eighties, right,
Speaker 1: you had stockbrokers that were driving ferraris right, and the
Speaker 1: value system was built around transactions and transactional skill sets
Speaker 1: then as well, Right, it was an inefficient market. People
Speaker 1: would get their newspapers and read their ticker. They would
Speaker 1: talk to their broker with no idea of where the
Speaker 1: market actually was at that moment, and the whole incentive
Speaker 1: system for the industry the public markets at that time
Speaker 1: was around how much transaction volume can you generate in
Speaker 1: an inefficient market? Think about ten years later, right, it
Speaker 1: wasn't about individuals generating transaction point it's about which institutions
Speaker 1: can build something that's truly differentiated, a platform with a
Speaker 1: different way to engage with clients and have a differentiated
Speaker 1: client engagement model. And we think that, you know, the
Speaker 1: private markets may very well follow a similar path, and
Speaker 1: the values of our industry need to shift from individuals
Speaker 1: generating transactions and that being where the emphasis is towards
Speaker 1: platforms that are building something truly differentiated. So there's another
Speaker 1: quote of yours which I suspect could be related to
Speaker 1: the Darwinian struggle, which is it's never been more expensive
Speaker 1: to be naive. Explain that, because that's quite a loaded sentence.
Speaker 1: Whether we're talking about investors or various firms, it's always
Speaker 1: expensive to be naive. And you're saying it's as bad
Speaker 1: as it ever gets right here. Well, you know, the
Speaker 1: generalist investor model where you look for interesting businesses and
Speaker 1: you know invest in them. You know out of a
Speaker 1: generalist perspective is tough. It's going to be tough. We
Speaker 1: think for a long time. If you think about what
Speaker 1: is going to differentiate firms in the future, we think
Speaker 1: it's going to be having a real perspective on the
Speaker 1: way an industry is going to move and how it's
Speaker 1: going to evolve. There's so much digital transformation occurring, so
Speaker 1: much disruption occurring that if you invest into a space
Speaker 1: not being a specialist in that area, we think it's
Speaker 1: really tough. Our firm is putting a tremendous amount of
Speaker 1: emphasis on thematic research. We want our people to be deep,
Speaker 1: as we talked about before, spend a couple of years
Speaker 1: on a space before ultimately investing into that space, to
Speaker 1: make sure that they understand how that market's going to evolve,
Speaker 1: who the winners likely are going to be. And we're
Speaker 1: putting our emphasis not on what's the size of the
Speaker 1: business today, but we put our emphasis around which company
Speaker 1: is likely to be a market leader four or five
Speaker 1: six years from now in that particular space. And that
Speaker 1: takes work, that takes research. So you're looking out five years,
Speaker 1: that means that sectors that are doing well today you
Speaker 1: may have been thinking about five years ago pre pandemic.
Speaker 1: Tell us what sectors today seem to be coming into
Speaker 1: their own and what other sectors are beginning to look intriguing. Yeah,
Speaker 1: and the COVID environment has actually accelerated some of those
Speaker 1: themes that we were thinking about and have been thinking
Speaker 1: about for a long time. So the digital trans the
Speaker 1: digital payment space, for example, that's not a new topic, right,
Speaker 1: There's been a transition to digital payment for a long
Speaker 1: period of time, but COVID helped to accelerate that. And
Speaker 1: so we invested into one of Europe's largest electronic toll
Speaker 1: collection companies. Here in New York you have you have
Speaker 1: easy pass and other markets there's sun passed and other
Speaker 1: things like that. We invested into Europe's largest electronic toll
Speaker 1: collection company. And that's an example of a trend that
Speaker 1: we were watching for a long time and then COVID
Speaker 1: helped to really accelerate that and I really stopped using cash,
Speaker 1: let me tell you during that period of time. I
Speaker 1: like the way you phrased it because a lot of
Speaker 1: the things that have become very large existed long before COVID,
Speaker 1: but they were kind of on the front. I just
Speaker 1: signed a whole bunch of bank docs through document signed
Speaker 1: on my laptop. That's been around forever, but it's ubiquitous now, Like, wait,
Speaker 1: you want me to FedEx you documents to get a
Speaker 1: wet signature on it and then have the other eight
Speaker 1: people sign it and that sort of stuff. It feels archaic,
Speaker 1: but just three years ago we were doing that but
Speaker 1: right and the ability to do things. When I launched
Speaker 1: my firm, me and my partners, we were national, so
Speaker 1: we were always in the cloud and we were always virtual.
Speaker 1: I found the pandemic kind of amusing for lots of
Speaker 1: people discovered video chat and screen sharing. All these technology
Speaker 1: is a decade old. How do you get ahead of
Speaker 1: a curve when suddenly you have a two year just
Speaker 1: rush into that space. How do you separate the winners
Speaker 1: from the also rands? Yeah, Um, it's it's through a
Speaker 1: lot of work, it's through a lot of research, and
Speaker 1: it's by having people that specialize in that particular area.
Speaker 1: It's about surrounding yourself with not specially not generalist consultants
Speaker 1: that come in and tell you this market is big
Speaker 1: and growing. Right. We want we want our teams to
Speaker 1: engage with organizations um that uh that are specialized or
Speaker 1: better yet, individuals that have been running companies in those
Speaker 1: spaces and that have been there and done that and
Speaker 1: know where the bodies are buried. Those are the people
Speaker 1: that we want to align with as we're going into
Speaker 1: due diligence. We want to you know, work with them
Speaker 1: and have them join the boards of our companies and
Speaker 1: and um, and so it comes by surrounding yourself with
Speaker 1: the right people and the right kind of people, uh
Speaker 1: as you go into researching these type of businesses. So
Speaker 1: you mentioned earlier, the marketplace is changing. What was tailwinds
Speaker 1: very often today are headwinds, which raises the important question
Speaker 1: how important are private markets to the economy relative to
Speaker 1: public markets. In fact, you had suggested public markets decoupled
Speaker 1: from the real economy and now it's all about what's private. Well,
Speaker 1: I wouldn't say it's all about what's private, but there
Speaker 1: has clearly been an evolution that a lot of people
Speaker 1: haven't been fully conscious of. It's been a shift in
Speaker 1: roles really that the public markets are playing and the
Speaker 1: private markets are playing. It used to be the private
Speaker 1: markets where where you went to bed speculative investments. This
Speaker 1: is where you went to get your risky venture capital
Speaker 1: exposure or your highly leveraged equity exposure. It was called
Speaker 1: an alternative asset class because you know, you were meant
Speaker 1: to allocate maybe this small little sliver of the economy
Speaker 1: and the public markets is where you go to invest
Speaker 1: into bedrock companies that anchor the economy, household names, etc.
Speaker 1: That has changed. If you look at the companies that
Speaker 1: have been going public, the capital formation that's been occurring
Speaker 1: within the public markets, a lot of people are shocked
Speaker 1: when they dig into it and they learn that only
Speaker 1: twenty percent of the companies that have been going public
Speaker 1: more recently have an earning's history. Okay, the vast majority
Speaker 1: are technology companies selling the dream or their shell companies
Speaker 1: without financial substance. Those are the companies going public. There's
Speaker 1: a lot more speculation happening in the public markets these days. Meanwhile,
Speaker 1: the public the private markets have been increasingly relevant to
Speaker 1: owning the real economy. If you think about the food
Speaker 1: value chain for example, right, what are the types of
Speaker 1: companies that are going public? Right in the food value chain,
Speaker 1: you have the ones that have a big brand and
Speaker 1: a network effect, right like a grub hub or something
Speaker 1: along those lines like that that is in the public
Speaker 1: eye and draws the interest of public investors. Meanwhile, if
Speaker 1: you think about the rest of the food value chain,
Speaker 1: right the agricultural businesses, the fertilizer companies and crop protection
Speaker 1: protection companies that are out there, the logistics companies that
Speaker 1: are out there, a lot of them are not appealing
Speaker 1: to public markets investors because they don't have the sizzle
Speaker 1: right and don't have it, so they're not marketing to
Speaker 1: the end consumers. So the average person in those lives,
Speaker 1: they don't know about them. So interesting. Interesting, a lot
Speaker 1: of those businesses are now owned by private markets firms
Speaker 1: ten trillion dollars of assets that are anchoring the economy,
Speaker 1: and so there's been this shift in rolls where the
Speaker 1: private markets used to be very speculative. Now that's where
Speaker 1: you go to get exposure to the real economy. And
Speaker 1: the private markets used to be you know, bedrock companies
Speaker 1: that anchor the economy, and now it's a technology index
Speaker 1: effectively for many investors. And I think that isn't well
Speaker 1: known by a lot of investors, and it's one of
Speaker 1: the things that's driving interest in our space by investors
Speaker 1: that haven't traditionally had access. That's one of the reasons
Speaker 1: why private investors, for example, are increasingly interested in private
Speaker 1: markets is because that's the only way you can place
Speaker 1: that you can go to access certain sectors. So that
Speaker 1: raises a couple of really fascinating questions. The first is,
Speaker 1: given that private markets were previously speculative and now you're
Speaker 1: suggesting public markets are, the first question is what does
Speaker 1: that mean in terms of how we value each of
Speaker 1: those two types of investments? And then the related question
Speaker 1: is how dependent are private markets on public market valuations?
Speaker 1: I think they're very closely linked in many regards. There
Speaker 1: are some differences. The public markets did experience a lot
Speaker 1: more hype in certain periods of time, and so a
Speaker 1: lot of people look at the private markets and say,
Speaker 1: shouldn't there be a correction in the private markets that
Speaker 1: is on par with what we're seeing, you know, in
Speaker 1: the public markets. And so let me just create a
Speaker 1: little bit of context for some of the differences in
Speaker 1: valuation that have been out there between you know, the
Speaker 1: twenty eighteen time period and twenty twenty one. The public
Speaker 1: markets experience multiple expansion on an EV to ebada basis
Speaker 1: of about eleven twelve times historically, I think went up
Speaker 1: to eighteen times at the peak, and it's come down
Speaker 1: to thirteen or fourteen times or whatever it is more recently,
Speaker 1: a pretty substantial kind of pullback. Over that same period
Speaker 1: of time, the private markets, your average private markets company
Speaker 1: increased in value from about eleven times to about twelve times. Okay,
Speaker 1: And so you're not, you know, we pretty steady evaluation.
Speaker 1: Not in every space, not in every sector, and not
Speaker 1: for every type of company. You do see some big
Speaker 1: valuations there, but on average, as an industry, our average
Speaker 1: company didn't participate in the in the hype necessarily fully
Speaker 1: that the private markets experienced, and so it shouldn't surprise
Speaker 1: people that your average private markets company doesn't correct in
Speaker 1: value at the same level. In addition to that, the
Speaker 1: private markets has historically been pretty good at driving assets,
Speaker 1: aligning interest with management teams having a pretty compelling business
Speaker 1: case that they're driving. And so for example, our average
Speaker 1: portfolio company has had double digit growth over the past year,
Speaker 1: and that helps to offset some of the downward pressure
Speaker 1: that you know, the markets bring. So I want to
Speaker 1: get to the issue of alignment in a moment, but
Speaker 1: I have to follow up on what you just hinted at,
Speaker 1: which is why are the private markets so steady compared
Speaker 1: to the ups and downs, the multiple expansion and contraction
Speaker 1: that we see in public markets. And I know there
Speaker 1: may not be any definitive answer. What's your theory here, Well,
Speaker 1: you have a market that's driven by decisions by sophisticated
Speaker 1: investors to invest or to divest. Okay, you don't have
Speaker 1: a lot of fear based selling right going on within
Speaker 1: the private markets. Um an advantage of not getting a
Speaker 1: print every tech, every minute, every constantly to exact freak
Speaker 1: people out. It's uh, and I think that is a
Speaker 1: big part of it. We're always going to be an
Speaker 1: asset class that puts emphasis on long term performance over
Speaker 1: short term liquidity. It just is what it is. So
Speaker 1: we don't feel pressure to sell things at all when
Speaker 1: the markets start to bounce around, and if anything, there's
Speaker 1: an a liquidity impediment to making those sort of decisions.
Speaker 1: The old line is, you don't get a price on
Speaker 1: your house every minute of every day. If you did,
Speaker 1: you might get panicked out of it. You don't even
Speaker 1: have that option of panic selling if you want in
Speaker 1: the vast majority of your holdings. I'm going to assume, Yeah,
Speaker 1: the panic selling is rarely a thing within private markets,
Speaker 1: and it is sometimes a thing in the public markets,
Speaker 1: and that's a big difference with regards to how people
Speaker 1: think about their holdings between the two asset classes. That's
Speaker 1: really very intriguing. So let's talk a little bit about alignment.
Speaker 1: You have said we are fully aligned with our clients,
Speaker 1: and I think of you as having two sets of clients.
Speaker 1: One set are the outside investors who give you their
Speaker 1: capital to invest. The other set of clients are the
Speaker 1: companies you acquire and our partners with. How do you
Speaker 1: align your interest with these two diverse sets of clients.
Speaker 1: I think the private markets is a fantastic asset class
Speaker 1: from an alignment of interest perspective. We win when our
Speaker 1: clients win, and that comes from having our capital invested
Speaker 1: alongside theirs and having very strict requirements for performance before
Speaker 1: we get paid performance fees. And I think that alignment
Speaker 1: of interest is something that is really really strong. In turn,
Speaker 1: we then create the same types of relationships with our
Speaker 1: management teams. So it goes all the way down the
Speaker 1: chain with regards to alignment of interest, meaning the portfolio
Speaker 1: companies their interests are going to be determined by their
Speaker 1: performance as well. So from the investor to partners group
Speaker 1: to the portfolio companies. Everybody is aiming in the same place,
Speaker 1: and everybody gets paid when the results work for everybody.
Speaker 1: And we're a very client centric firm. You know. We
Speaker 1: talked a little bit about our Colorado campus and how
Speaker 1: we've created a field. It's a little bit more like
Speaker 1: a factory feel. You know. When I was a kid,
Speaker 1: I remember my dad random manufacturing facility and I remember
Speaker 1: being with him on the floor, you know, at the
Speaker 1: manager's window or whatever, and him walking around that floor,
Speaker 1: and I had in my mind, you know, the feeling
Speaker 1: like there's no question in my mind who these people
Speaker 1: work for. Like he walked that floor and he really,
Speaker 1: you know, drove it. And I always loved that visual
Speaker 1: of the manager's window, you know, in a factory. And
Speaker 1: so on our floor, we have client conference rooms that
Speaker 1: look out over our employees that represent a manager's window.
Speaker 1: And so the message to our team, the message to
Speaker 1: our people is it's the people in that room that
Speaker 1: you work for. Those are the people that you report to,
Speaker 1: Those are the people that you owe something to. And
Speaker 1: we've really tried to create that sense of client centricity
Speaker 1: and alignment with our clients, not just in our documentation
Speaker 1: and with our incentives, but also culturally within the fabric
Speaker 1: of our firm. Quite quite interesting. So let's talk a
Speaker 1: little bit about this reallocation from public markets to private
Speaker 1: markets that you think is going to lead to the
Speaker 1: private market sector tripling over the next let's call a decade.
Speaker 1: Am I being to conservative or is that about right? Yeah,
Speaker 1: we'll see, We'll see how the environment plays into it.
Speaker 1: But directionally we think that that's so where is this
Speaker 1: going to come from? How much of this is going
Speaker 1: to be individual? How much of this is going to
Speaker 1: be institutional? And are we going to see four oh
Speaker 1: one ks orfer the opportunity to make the sort of
Speaker 1: private equity investment. Yeah, you know, I came from an
Speaker 1: interesting client meeting this week, Fortune one hundred company that
Speaker 1: is in the process of reclassifying some of their investment buckets,
Speaker 1: and they're actually going to take their long term bond
Speaker 1: portfolio and blend it together with their private credit portfolio
Speaker 1: because they think that private credit offers better risk return
Speaker 1: in the current market environment and not less risk, etcetera.
Speaker 1: So they're they're they're thinking about opening up access to
Speaker 1: a private credit out of this portfolio. So institutional investors
Speaker 1: are thinking about how I think they can use private
Speaker 1: markets more effectively within their portfolio, and individual investors, we think,
Speaker 1: in many instances can benefit to having access to a
Speaker 1: strong performing asset class like the private markets. Now, it's
Speaker 1: certainly not for everyone, right. The amount of allocation that
Speaker 1: people people put into private markets certainly depends on people's
Speaker 1: risk tolerance. This is an a liquid asset class. We
Speaker 1: can do things as an industry to make it more
Speaker 1: convenient and to create some degree of liquidity and in
Speaker 1: good times, but this is always going to be an
Speaker 1: asset class again that prioritizes long term performance over near
Speaker 1: term liquidity, and so it depends on the investor's desire
Speaker 1: to do that. But by and large, the investors that
Speaker 1: we talked to are looking to increase their allocations to
Speaker 1: private markets because it is such an important part of
Speaker 1: their allocation. So let's talk about private credit for a minute.
Speaker 1: Back when interest rates were at zero and the ten
Speaker 1: year yielded practically nothing, we saw a lot of institutional
Speaker 1: interest in private credit. Hey, listen, we're getting some yield.
Speaker 1: There's an illiquidity concern, but we know what our future
Speaker 1: liabilities are and we can ladder that out so it
Speaker 1: wasn't a challenge for a big institution. So the first
Speaker 1: question is, now that rates have come up quite a bit,
Speaker 1: FED is just coming up on five percent. Is there
Speaker 1: still the same demand for that sort of private credit
Speaker 1: when there is an alternative you're no longer competing with,
Speaker 1: you know, a one and a half percent ten year
Speaker 1: How does that play in? I think the private credit
Speaker 1: industry has has really come into its own since this
Speaker 1: rate hike cycle began, and demand for absolutely private credit
Speaker 1: has increased disproportionate to a lot of other asset types
Speaker 1: that are more dependent. And so if you think about
Speaker 1: like the equity side, for example, I was sitting down
Speaker 1: with a client recently and trying to illustrate the impact
Speaker 1: that this changing rate environment would have, and I pulled
Speaker 1: out an old model for an investment that they liked
Speaker 1: in particular, and it was a twenty one percent return
Speaker 1: that had been underwritten. And here's the here's the assumptions
Speaker 1: that we had with regards to leverage levels, with regards
Speaker 1: to rate, etc. And I punched in the new environment,
Speaker 1: I just said, Okay, that six point seven times leverage,
Speaker 1: you're not going to get that anymore, right, But that's
Speaker 1: going to be more like four four and a quarter. Right,
Speaker 1: we change that, and there was two hundred fifty basis
Speaker 1: points to return gone because of that that element. Okay,
Speaker 1: this cost of capital is no longer applicable, is more
Speaker 1: like double that today, and that brought it down by
Speaker 1: another one hundred fifty basis points or whatever. And then
Speaker 1: and then we took a look at Okay, now you know,
Speaker 1: within private credit you can lend at four four point
Speaker 1: two five times EBITDA and gets in some cases a
Speaker 1: double digit return doing that if you're kind of structuring
Speaker 1: solutions for the right type of clients, and then you
Speaker 1: have to wonder, you know, on the equity side, you
Speaker 1: really have to work right to generate that out performance.
Speaker 1: And so on a relative value basis, there's a lot
Speaker 1: of investors that are finding private credit is a particularly
Speaker 1: attractive place to invest right now. And we have a
Speaker 1: lot of a lot of very interesting dialogue with our clients,
Speaker 1: and especially considering the past decade, not counting twenty twenty two,
Speaker 1: but the decade prior to that, you saw thirteen fourteen
Speaker 1: percent a year in US equities, which is way over
Speaker 1: his historical eight percent a year. One in surprise, if
Speaker 1: you know five to six percent a year, six seven
Speaker 1: percent a year, you're you're mean reverting, especially in the
Speaker 1: face of higher rates and cost of capital. Wouldn't be
Speaker 1: outrageous to make those of it wouldn't be outrageous. And
Speaker 1: what that means is you really have to pick your spots.
Speaker 1: It used to be you know that you know, you
Speaker 1: could invest into a good grower and just assume the economy,
Speaker 1: you know would would take care of some portion of
Speaker 1: the value creation strategy. Today you have to be buying
Speaker 1: companies that are growing really disproportionately strong in order to
Speaker 1: go long equity. And so the average company that we
Speaker 1: invested the equiside was growing at double digit growing its
Speaker 1: earnings by double digits. And those are the type of
Speaker 1: businesses that you can continue to generate strong returns on.
Speaker 1: But it requires that thematic research to make sure you're
Speaker 1: getting your spots really well, and it also requires an
Speaker 1: ownership model that's quite intense to drive transformation. And on
Speaker 1: the credit side, there's a real opportunity today to invest
Speaker 1: at attractive returns. I see that in the investment committee
Speaker 1: every week. Huh. Really interesting. One of the things we
Speaker 1: haven't talked about if you're appealing more to individual investors.
Speaker 1: Typically that comes along with regulation and compliance, standards and
Speaker 1: oversight from the government, something that the world of private
Speaker 1: markets really doesn't spend a lot of time with. The
Speaker 1: assumption is, hey, these are big, sophisticated investors making big
Speaker 1: investments into companies, and everybody here is an adult, and
Speaker 1: so we don't need a paternalistic over Once you bring
Speaker 1: in smaller I'm not even saying mom and pop, but
Speaker 1: a credited investors or non institutional investors, there's a different
Speaker 1: level of scrutiny that comes with that. How our private
Speaker 1: markets and private equity going to manage that sort of regulation. Yeah,
Speaker 1: So the industry as it's expanded from a small niche
Speaker 1: industry years ago to an industry today already managing ten
Speaker 1: trillion dollars of assets, already a fiduciary for the funds
Speaker 1: of hard working capital. There's regulation has already increased substantially.
Speaker 1: Compliance needs have increased substantially within our industry, and I
Speaker 1: have no doubt that that trend will continue. We continue
Speaker 1: to appeal, I think, to particularly sophisticated investors, and that
Speaker 1: has to continue to be the case. This is not
Speaker 1: an asset class that I think like retail retail investors
Speaker 1: are going to allocate. You even in that fund that
Speaker 1: you mentioned previously, where it's you know, a minimum of
Speaker 1: fifty thousand or whatever it is, I think our average
Speaker 1: investor there's two hundred thousand. So it's a it's a
Speaker 1: sophisticated investors that's allocating. It's not a Robin Hood investor.
Speaker 1: It's not absolutely not. And if you think about four
Speaker 1: oh one K plans, for example, the place that our
Speaker 1: asset class is going to be most relevant for the
Speaker 1: near term is in the defined contribution portions of that
Speaker 1: four oh one K market, where you still have a
Speaker 1: sophisticated portfolio manager that's putting those portfolios together. I don't
Speaker 1: think that anybody in the near term expects within their
Speaker 1: four oh one K allocation to be able to go
Speaker 1: in there and bounce to a big private equity fund.
Speaker 1: That's not going to be the case. But you know,
Speaker 1: we are going to attract demand from from an increasingly
Speaker 1: individual set of investors, and that's going to come with regulation,
Speaker 1: and the big firms will be able to deal with that.
Speaker 1: So I have to ask one question related to the
Speaker 1: interest rate environment. You mentioned the Darwinni and struggle the
Speaker 1: changing environment. How zero cap cost the capital was a
Speaker 1: tailwind before now rising rates are a headwind. You've talked
Speaker 1: a bit in public about the Federal Reserve suggesting you
Speaker 1: think they're going to overshoot on the rate hikes. You
Speaker 1: have a unique perspective to observe this through your hundred
Speaker 1: plus portfolio companies. Tell us why you think the FED
Speaker 1: is going to end up going too far and overtightening. Well,
Speaker 1: I think it's possible. The Fed had a choice of
Speaker 1: either taking a big ratchet all at once, shocking the
Speaker 1: market and changing behavior ye, or doing it slowly and incrementally.
Speaker 1: I mean, it was a fast rate hike obviously, but
Speaker 1: the first one anyone was a little shocking, Yeah, the
Speaker 1: first one, but really doing something shocking to change behavior
Speaker 1: of consumers, of people that are out participating in the market,
Speaker 1: or making these incremental changes that are more or less
Speaker 1: in line with consensus on what the FED should be doing.
Speaker 1: And they've chosen to go in a more or less
Speaker 1: consensus driven pattern for most of the changes. And so
Speaker 1: what that means is opposed to shocking the market and
Speaker 1: changing behavior through setting a tone up front, they need
Speaker 1: to wait for the impacts of those rate hikes to
Speaker 1: flow through, and that just takes some time. So I
Speaker 1: have no doubt that it will take some time for
Speaker 1: the full impact of many of these hikes to be
Speaker 1: felt into fully changed behavior, and therefore there could be
Speaker 1: the potential of over deering or overshooting as a result
Speaker 1: of that curveball question. You guys are very much the
Speaker 1: anti Wall Street, both in location and by design. You
Speaker 1: almost ended up at Lehman Brothers. Did you you know,
Speaker 1: did you dodge a bullet there? What would have happened
Speaker 1: if you ended up going into Wall Street proper given
Speaker 1: your current philosophy. Yeah, I absolutely dodged a bullet there.
Speaker 1: Um and uh, And I'm grateful every day actually that
Speaker 1: I landed in a place in a culture that is thoughtful, right,
Speaker 1: that is thinking towards the future. That's that's a little
Speaker 1: bit more humble and able to navigate an environment to
Speaker 1: suppose of getting lost in an ego. Um, I absolutely
Speaker 1: am grateful every day that I dodged a bullet there. Uh,
Speaker 1: no question, great answer. I know I only have you
Speaker 1: for so much time, So let me jump to my
Speaker 1: favorite questions that we ask all of our guests starting
Speaker 1: with what do you what do you do for entertainment
Speaker 1: out in Colorado? What have you been streaming and watching
Speaker 1: over the past couple of years? Tell us what's kept
Speaker 1: you in the family entertained. So my wife owns the
Speaker 1: remote at home, and so if we're streaming something, it's
Speaker 1: usually something about British baking or Indian dating or something
Speaker 1: along those lines. I really love this Mandalorian series and
Speaker 1: getting into that. I think season three comes out later
Speaker 1: this year. Yeah, yeah, looking forward to that. That's intriguing.
Speaker 1: Tell us about some of your mentors who helped to
Speaker 1: shape your career. Um, well, I think my parents had
Speaker 1: a big influence. My dad was a business person and
Speaker 1: I had a tremendous work ethic. My mother's an unbelievably
Speaker 1: loyal person and helped to inspire that in me. I've
Speaker 1: got a couple of partners, in particular, one Walter Keller,
Speaker 1: who he is just an elephant memory right every way
Speaker 1: that we've screwed up as a firm. He's got it
Speaker 1: in his head and he brings it up and he
Speaker 1: keeps us out of trouble to the point where actually
Speaker 1: close to my office in the campus for everybody to
Speaker 1: see everybody on the floor. I have all of the
Speaker 1: lessons learned of the firm every way that we've lost money,
Speaker 1: and that's largely a download out of Walter's head for
Speaker 1: the rest of our colleagues to kind of understand the
Speaker 1: lessons that we've had over time. And he's been a
Speaker 1: great mentor, and our three founders have all been in
Speaker 1: their own way real mentors to me as well. Tell
Speaker 1: us about some of your favorite books and what you're
Speaker 1: reading right now. So I just finished Bono's memoir Surrender.
Speaker 1: I usually read something a little bit more light and
Speaker 1: a little bit more serious. There's also a book called
Speaker 1: The Weirdest People in the World that was a really
Speaker 1: interesting read. I recall hearing about that. Yeah, it's interesting.
Speaker 1: I've got a couple in the chamber when my wife
Speaker 1: gave me that's called This is Your Mind on Plants,
Speaker 1: and then one called chip War by Peter Miller that
Speaker 1: I'm looking forward to getting into. What sort of advice
Speaker 1: would you give to a recent college grad interested in
Speaker 1: a career in either investing or private markets. Yeah. So
Speaker 1: I do spend quite a bit of time with our hires,
Speaker 1: our new hires, and I think we're gonna hire fifty
Speaker 1: five kids out of school this year directly into our
Speaker 1: analyst program where they rotate across their different things. And
Speaker 1: I always set the tone first day of training when
Speaker 1: they come in, and one of the things that I
Speaker 1: tell them is that this is no longer a young
Speaker 1: asset class, right. This is an asset class. It's been
Speaker 1: around for a little while. And it might have been
Speaker 1: the fast money lore of doing deals and kind of
Speaker 1: transactions that got you interested into this space. This is
Speaker 1: an asset classic. You can have a tremendous impact as
Speaker 1: an owner, but you've got to be prepared to roll
Speaker 1: up your sleeves and work. So we're spending sending many
Speaker 1: of our young professionals to work in our portfolio, right
Speaker 1: to get experience how to run projects and how to
Speaker 1: run businesses, and send them to work for our CEOs
Speaker 1: as much as they spend time working, you know, within
Speaker 1: our halls. And I think that's something that young professionals
Speaker 1: need to be aware of the needs of young talent
Speaker 1: or changing get some operating experience. And our final question,
Speaker 1: what do you know about the worlds of private equity investing, buyouts,
Speaker 1: private markets today that you wish you knew twenty plus
Speaker 1: years or so ago when you were first getting started.
Speaker 1: I would say that investing is a team sport. I
Speaker 1: always maybe thought about it growing was more of an
Speaker 1: individual pursuit. You know. I had a client recently who
Speaker 1: pulled out my track record. They were in a due
Speaker 1: diligence session. They said, Dave as a fantastic track record,
Speaker 1: what's the secret of your success? And I thought, that's
Speaker 1: a that's an ego affirming question, right you kind of
Speaker 1: you'd like to hear that to some degree, get that
Speaker 1: little tingle up your spine. And I thought about how
Speaker 1: to answer it. And what I told or was, what
Speaker 1: you don't see on that list is company A, company B,
Speaker 1: company C D. Those are all companies that I had
Speaker 1: under exclusivity at some point during my career. But my partners,
Speaker 1: people that used to be my bosses that are today
Speaker 1: my partners, wouldn't let me invest. And I'm telling you,
Speaker 1: if you average together those investments that I didn't make
Speaker 1: together with the investments that we did make, I would
Speaker 1: have a much more average track record. Those investments were
Speaker 1: done by other firms. I've gone back and looked at it.
Speaker 1: They were not as successful as the ones that did happen,
Speaker 1: and so rounding yourself with partners that are going to
Speaker 1: challenge you and push you and cover your blind spots
Speaker 1: is something that's really important. There's a lot of investment
Speaker 1: firms that get founded by an individual and they have
Speaker 1: a type of transaction that they're known for, and they
Speaker 1: build a financial product around themselves, and they build a
Speaker 1: team around themselves, and that type of a strategy works
Speaker 1: until it doesn't work. And we at Partners Group have
Speaker 1: really tried to build a culture where it's about the debate, right,
Speaker 1: It's about the fight, it's about challenging each other, it's
Speaker 1: about diversity of perspectives when you're making those investment decisions,
Speaker 1: and that is an absolutely critical part to investing that
Speaker 1: far too many people think about and talk about. Thank you,
Speaker 1: David for being so generous with your time. We have
Speaker 1: been speaking with David Layton. He is the CEO of
Speaker 1: Partners Group. If you enjoy this conversation, well you can
Speaker 1: check out any of our previous five hundred or so
Speaker 1: such discussions we've had over the past eight plus years.
Speaker 1: You can find those at YouTube, Spotify, iTunes, wherever you
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Speaker 1: out our daily reading list. You can find that at
Speaker 1: Riholtz dot com. Follow me on Twitter at Rihaltz. You
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Speaker 1: I would be remiss if I did not thank the
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Speaker 1: Justin Nilner is my audio engineer, Atiko val Bron is
Speaker 1: my project manager, Sean Russo is our head of research.
Speaker 1: Paris Wold is my producer. And an extra special thank
Speaker 1: you this week goes out. If you like the new
Speaker 1: music that is our audio signature, we just change that.
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