WEBVTT - Navigating the Private Markets Boom

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News. Welcome to in the City.

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<v Speaker 1>Each week we unpack a story that's crucial to the

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<v Speaker 1>world's financial capitals and Francis Laqua And this week, while

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<v Speaker 1>everyone is talking about Donald Trump so called Liberation Day

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<v Speaker 1>and the TERRFF announcements he might make, we want to

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<v Speaker 1>look at what some of the consequences of those policies are.

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<v Speaker 1>In particular, one market that's getting a boost. Private credit

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<v Speaker 1>feels like the topic of the moment, So what's driving

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<v Speaker 1>the momentum.

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<v Speaker 2>Welcome to the City of London, the City of the City,

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<v Speaker 2>the City of London.

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<v Speaker 1>Please mind the gap between.

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<v Speaker 2>The Trump and the plant, the financial hearts of the country,

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<v Speaker 2>the city, the city. Welcome to in the city, stand

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<v Speaker 2>clear of the doors.

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<v Speaker 1>I'm glad to be joined here in the London studio

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<v Speaker 1>with our senior reporter, Silas Brown. Silence, thank you so

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<v Speaker 1>much for joining us.

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<v Speaker 2>Thank you very much for having me.

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<v Speaker 1>Private credit, I mean, it's the only thing that people

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<v Speaker 1>are excited about talking about, and it's an ass a

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<v Speaker 1>class that's grown exponentially really in the last couple of years.

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<v Speaker 2>Yeah, it was a great coincidence that I decided to

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<v Speaker 2>cover private credit just at the moment of the boom.

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<v Speaker 2>So I'm enjoying the boom as well. But yeah, no, Look,

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<v Speaker 2>private credit is growing, and in a way, it thrives

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<v Speaker 2>in moments of manageable uncertainty. And I think the rollout

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<v Speaker 2>of the tariffs has provoked a degree of uncertainty which

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<v Speaker 2>has made its arch rival, the leverage loan market, struggle,

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<v Speaker 2>and so private credit is a kind of clear beneficiary

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<v Speaker 2>of that.

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<v Speaker 1>So that's why has private credits actually increased so much.

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<v Speaker 2>Private credit is in essence a service provider for private equity,

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<v Speaker 2>and so I think, in very blunt terms, as the

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<v Speaker 2>private equity market has been expanding, this new form of

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<v Speaker 2>raising money to back the buy apps has risen, and

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<v Speaker 2>now it has grown to a sufficiently high amount that

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<v Speaker 2>even more players, even bigger asset managers, are piling money

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<v Speaker 2>and resources into developing their own franchises, and so the

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<v Speaker 2>increase of the market has become exponential.

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<v Speaker 1>So as there are two annual letters to shareholders that

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<v Speaker 1>I read religiously. One is Jamie Diamond and the other

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<v Speaker 1>one is Larry Fink. I was, you know, surprised or encouraged,

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<v Speaker 1>whatever word you want to use to see that Larry

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<v Speaker 1>Fink was so focused on private markets this week.

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<v Speaker 2>Yes, well, I hope other executives aren't upset by the

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<v Speaker 2>fact that you don't reach them religious.

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<v Speaker 1>I read a shareholder letters I just look forward to.

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<v Speaker 2>But yeah, no, I think it was. It was a

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<v Speaker 2>big statement, and I mean they've been on this kind

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<v Speaker 2>of acquisition spree unparalleled in the history of private markets.

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<v Speaker 2>With these two milestone acquisitions of g ip and and

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<v Speaker 2>HPS and also pre Quinn Data Provider. I think they

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<v Speaker 2>have acknowledged that there's two comparable markets, one which is

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<v Speaker 2>the established publicly traded market and the private market. One

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<v Speaker 2>is clearly growing and the other one is dwindling. And

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<v Speaker 2>so I think it's acknowledgment from Larry think that a

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<v Speaker 2>lot of the action is going private, and I think

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<v Speaker 2>that's for a series of reasons. One is pretty obvious,

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<v Speaker 2>which is that if you're looking for high fees, you

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<v Speaker 2>can find them in private markets, not in public markets.

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<v Speaker 2>Our brilliant colleague, Scilla Brush did did the maths, and

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<v Speaker 2>he said that one of BlackRock's biggest funds, the I Shares,

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<v Speaker 2>the brilliantly named I Shares Core SMP five hundred ETF,

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<v Speaker 2>which manages about six hundred billion of assets only has

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<v Speaker 2>a fee of zero point zero three percent, which brings

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<v Speaker 2>in one hundred and eighty million in annual revenue. Conversely,

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<v Speaker 2>the six hundred billion in alternative assets that Blackrock now

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<v Speaker 2>has its expected to bring in three billion, and that

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<v Speaker 2>doesn't include performance fees. By the way, the difference is stark.

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<v Speaker 2>And I think it's a big moment for private markets

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<v Speaker 2>because black Rock is an expert in bringing different financial

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<v Speaker 2>products to retail investors, and I think that's clearly something

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<v Speaker 2>that is going ahead in private markets.

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<v Speaker 1>Lear rethink basically promise to open up private markets to

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<v Speaker 1>millions of every day investors, not just a wealthy few

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<v Speaker 1>a How will he do that and does that change

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<v Speaker 1>the proposition for private markets?

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<v Speaker 2>I think that is the key point when it comes

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<v Speaker 2>to black Rock's introduction into private markets is their ability

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<v Speaker 2>to move and sell financial products to retail investors. The

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<v Speaker 2>key thing for me with private markets is to do

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<v Speaker 2>with scale. They've picked the low hanging fruit of pension

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<v Speaker 2>funds and softeign wealth, and now they're moving on to

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<v Speaker 2>insurance and also retail, and that's the key drivers for

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<v Speaker 2>growth in the industry. So I think it's significant that

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<v Speaker 2>black Rock is energetically figuring out ways of selling private

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<v Speaker 2>markets products to retail investors.

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<v Speaker 1>So this is one of my favorite codes from Larry.

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<v Speaker 1>Think it's quite dramatic. They're in private markets locked behind

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<v Speaker 1>high walls with gates that only open for the wealthiest

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<v Speaker 1>or largest market participants, and so he's trying to sell

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<v Speaker 1>this idea of your democratizing.

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<v Speaker 2>Yeah, it sounds like one of Bloomberg News's articles brilliantly worded. Yeah, no,

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<v Speaker 2>I think that's Shakespeare. But okay, I think that's the

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<v Speaker 2>key thing. His point is that there's only a small

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<v Speaker 2>group of investors that are benefiting from this attractive proposition

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<v Speaker 2>that private markets has to offer. By the way, he's

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<v Speaker 2>not alone in wanting to do this. If you look

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<v Speaker 2>at the earnings calls of Blackstone or Apollo, you will

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<v Speaker 2>also find a motivation to construct different ways of bringing

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<v Speaker 2>high net worth slash retail people into private markets.

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<v Speaker 1>Sounds this President trump push on tariff's must mean bad

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<v Speaker 1>news for public markets, but are news for private markets?

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<v Speaker 2>I think so. The canny among private equity firms have

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<v Speaker 2>done is sort of reincarnate themselves like the phoenix, and

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<v Speaker 2>they've moved from being known as buyout firms to being

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<v Speaker 2>known as private markets firms. So the lights of Blackstone

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<v Speaker 2>and Apollo, they're as proficient in investing in credit and infrastructure,

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<v Speaker 2>and I think that naturally makes the investment proposition all

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<v Speaker 2>the more appealing. I think with public markets, obviously they

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<v Speaker 2>are at least superficially more affected by volatility, and so

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<v Speaker 2>I think to bring a company to IPO, or to

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<v Speaker 2>even sell debt for a company in the publicly traded

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<v Speaker 2>markets is much trickier in times of uncertainty, and I

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<v Speaker 2>think with private credit and private equity firms, I think

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<v Speaker 2>one of their key advantages is their ability to price

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<v Speaker 2>through uncertainty, provided it's not an uncertainty that it's like

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<v Speaker 2>totally unmanageable.

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<v Speaker 1>Is there just simply better returns and more money in

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<v Speaker 1>private market?

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<v Speaker 2>I think this is the real question of the decades.

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<v Speaker 2>I think private equity and to a certain lesser extent,

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<v Speaker 2>private credit flourished in a low interest rate environment where

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<v Speaker 2>the ability to buy and sell companies was a bit easier.

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<v Speaker 2>Now with a prolonged period of high interest rates, and

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<v Speaker 2>often a lot of these companies having already been bought

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<v Speaker 2>by private equity a lot of the attractive companies. The

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<v Speaker 2>ability for them to deliver returns for investors, I think

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<v Speaker 2>is the key question of the next five years. And yeah,

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<v Speaker 2>we'll wait and see. I mean it certainly the practitioners

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<v Speaker 2>think it is, and presumably Larry think does as well.

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<v Speaker 2>So I guess it's a wait and see.

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<v Speaker 1>So silas you mentioned higher for longer interest rates have

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<v Speaker 1>gone up so quickly, do we really know that the

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<v Speaker 1>valuations of a lot of these private companies and private

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<v Speaker 1>credit aren't correct.

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<v Speaker 2>I think the challenge for private equity firms is with

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<v Speaker 2>a prolonged period of higher in trust rates when they've

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<v Speaker 2>bought companies when the rates were lower, will the valuation

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<v Speaker 2>judgments that they applied when they bought the companies bear

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<v Speaker 2>out when they sell the companies. I think M and

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<v Speaker 2>A has fallen globally, and perhaps that informs us as

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<v Speaker 2>to why that there is a challenge selling these businesses

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<v Speaker 2>at their lofty heights that they valued them when they

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<v Speaker 2>bought them. On the private credit side, again it is

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<v Speaker 2>a hot topic how do you value these loans? And

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<v Speaker 2>I think there are actually different judgments as to how

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<v Speaker 2>you value these loans, both in Europe and the US.

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<v Speaker 1>You know, we speak to a lot of private market

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<v Speaker 1>chief executives, and I always feel the need to push

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<v Speaker 1>them a little bit, say, you know, the problem is

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<v Speaker 1>that some of the valuations could be a concern, Like

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<v Speaker 1>the difference between a public company and a private company

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<v Speaker 1>is that they could have a lot more debt and

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<v Speaker 1>you don't really know how to value it unless you

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<v Speaker 1>sell it.

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<v Speaker 2>Yeah, I mean, look, we've done a lot of reporting

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<v Speaker 2>on valuation mismatches in private credit. I think the mismatches

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<v Speaker 2>become more stark naturally in private equity. I think regulators,

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<v Speaker 2>both in the US and Europe are keen to understand

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<v Speaker 2>valuation methodologies more. The key things I think from a

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<v Speaker 2>regulatory perspective that keep coming up are valuations. How do

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<v Speaker 2>you value an asset that isn't traded? I don't have

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<v Speaker 2>the answer. It's a tricky one. But also just transparency.

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<v Speaker 2>It's a totally different realm to public companies and their

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<v Speaker 2>disclosure requirements. But having said that, conversely, and slightly slightly ironically,

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<v Speaker 2>one of the reasons why I think private markets are

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<v Speaker 2>booming is because companies don't have to go through the

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<v Speaker 2>kind of onerous rigmarole of quarterly earnings and disclosures, and

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<v Speaker 2>so if you are bringing disclosures to private markets, you

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<v Speaker 2>may find similar frustration both in finance and also corporate executives.

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<v Speaker 1>Wasn't it something like a couple of weeks ago at

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<v Speaker 1>the FCA was reviewing valuations across threety six firms serving

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<v Speaker 1>UK clients and they basically said that they failed to

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<v Speaker 1>police conflicts of interest. The concern with private markets full

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<v Speaker 1>stop is that they can be a little bit murky. Yeah.

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<v Speaker 2>I think they are a lot more discreet and secretive

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<v Speaker 2>than their public market counterparts. You have interesting contradictions. For example,

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<v Speaker 2>the largest private equity firms also owned some of the

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<v Speaker 2>largest private credit units. I think you can find conflicts

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<v Speaker 2>of interest across the board in all financial markets. But

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<v Speaker 2>I think a lot of the evolution of private markets

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<v Speaker 2>is really untested and still I think hard for regulators

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<v Speaker 2>to understand. A lot of the strength in private markets

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<v Speaker 2>is trying to correct problems that were inherent in financial

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<v Speaker 2>markets already through the banking industry, and I think to

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<v Speaker 2>a certain extent they've done that on the credit side.

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<v Speaker 1>If you open private at a private companies private investments

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<v Speaker 1>to retailers, does the regulation have to change.

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<v Speaker 2>I think that's an important question. In a way, there's

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<v Speaker 2>been limited regulatory scrutiny over private markets because the market

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<v Speaker 2>has been somewhat closed off from retail investors, And one

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<v Speaker 2>of the questions going forward is will the regulation have

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<v Speaker 2>to change as a result of opening the market to

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<v Speaker 2>the people on the street. I think it would be

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<v Speaker 2>a natural conclusion to say it would. And I think

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<v Speaker 2>it would be a fair conclusion to say it would,

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<v Speaker 2>because ultimately regulators are interested in protecting retail investors from

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<v Speaker 2>financial risk. With the dawn of this opportunity set, which

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<v Speaker 2>is clearly attractive to some retail investors, that would naturally

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<v Speaker 2>beg the question of when's the regulation going to adjust

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<v Speaker 2>to that too.

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<v Speaker 1>And if black Rock wants to open up this asset

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<v Speaker 1>class to reach tail investors, will others do the same?

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<v Speaker 2>Yes? I think with or without black Rock, there's been

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<v Speaker 2>a concerted effort to build and develop financial products that

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<v Speaker 2>would be suitable to retail investors, particularly in the US,

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<v Speaker 2>and you see firms you know, Apollo and Blackstone and Ares,

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<v Speaker 2>the kind of titans of private markets also discussing ways

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<v Speaker 2>to accommodate retail investors. I think you can say with

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<v Speaker 2>a high degree of certainty that this will be the

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<v Speaker 2>topic going forward or one of the key topics going

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<v Speaker 2>forward for both private credit and private equity.

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<v Speaker 1>Silas, thank you so much, Thank you thanks for listening

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<v Speaker 1>to this week's In the City from Bloomberg. This episode

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<v Speaker 1>was hosted by me Francin Laqua. It was produced by

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<v Speaker 1>Summersati and Moses and Dam with sound design by Blake Maples.

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<v Speaker 1>Brendan France Newnham is our executive producer. Special thanks to

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<v Speaker 1>Silas Brown. Please subscribe, rate, and review wherever you listen

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<v Speaker 1>to podcasts.