WEBVTT - Kopi Time E151 - Private Equity with Alicia Gregory, Blue Owl 0:00:06.059 --> 0:00:08.709 Welcome to COI Time, a podcast series on markets and 0:00:08.710 --> 0:00:11.989 economies from DBS Group Research. I'm Tamra Wegg, chief economist. 0:00:12.060 --> 0:00:14.779 Welcoming you to our 151st episode. 0:00:15.569 --> 0:00:18.579 A couple of episodes ago, we had a lengthy discussion 0:00:18.579 --> 0:00:23.000 on private credit. Today it's time for private equity. Alicia 0:00:23.000 --> 0:00:26.229 Gregory is our guest. She is managing director at Blue Owl, 0:00:26.270 --> 0:00:29.280 a leading alternative asset manager based out of Australia. 0:00:29.639 --> 0:00:32.799 Prior to joining Blue Owl last year, Alicia was Deputy 0:00:32.799 --> 0:00:36.430 Chief Investment Officer for Future Fund, Australia's sovereign wealth fund 0:00:36.430 --> 0:00:40.909 that manages over $250 billion in assets. She oversaw all 0:00:40.909 --> 0:00:43.909 asset classes, both listed and private assets, and served on 0:00:43.909 --> 0:00:47.869 the fund's Investment committee. Alissa Gregory, welcome to COI time. 0:00:47.990 --> 0:00:50.110 You are our first guest from Australia. 0:00:51.348 --> 0:00:52.630 Thanks for having me here. 0:00:53.470 --> 0:00:56.659 It's it's great to have you and uh, we're gonna 0:00:56.659 --> 0:00:59.889 do like a one on one start on private equity, OK. 0:01:00.099 --> 0:01:02.990 So walk us through the journey of private equity as 0:01:02.990 --> 0:01:06.620 an asset class and if I correct in thinking that 0:01:06.620 --> 0:01:09.540 the leveraged buyout era of the 1980s basically brought private 0:01:09.540 --> 0:01:10.500 equity to the fore. 0:01:11.419 --> 0:01:14.489 Yeah, I think that's a fair assessment. Uh, perhaps if 0:01:14.489 --> 0:01:17.720 I start off, the private equity is an asset class, 0:01:17.970 --> 0:01:21.649 there are really 3 sub-categories I think about within private equity, 0:01:21.970 --> 0:01:25.239 there's buyout, there's growth equity, and there's venture capital. 0:01:25.730 --> 0:01:29.819 I think the origins of both buyout and venture capital, 0:01:30.190 --> 0:01:34.179 the very embryonic stages, uh, were probably the 50s and 60s. 0:01:34.349 --> 0:01:37.150 But as you rightly point out, I think 1980s was 0:01:37.150 --> 0:01:41.250 really the emergence of both buyout and venture capital as, 0:01:41.260 --> 0:01:44.750 as an asset class. And I think the catalyst for 0:01:44.750 --> 0:01:48.910 that was really institutional investors in the United States, and 0:01:48.910 --> 0:01:51.900 in particular endowments. Endowments for the first time, 0:01:52.330 --> 0:01:56.970 Uh, had an asset allocation to, uh, private equity, which 0:01:56.970 --> 0:02:01.010 did cut across both venture and buyout, and that really 0:02:01.010 --> 0:02:05.370 made the, the asset class grow over that next period. 0:02:08.548 --> 0:02:12.339 OK, so the US was the hotbed and by endowments, 0:02:12.348 --> 0:02:15.389 you're basically talking about universities who tend to have a 0:02:15.389 --> 0:02:19.708 huge amount of endowment that their alumni contribute to and, 0:02:19.738 --> 0:02:22.377 and they raise funds and then there's a large corpus 0:02:22.377 --> 0:02:24.698 of fund and typically they can be a little more 0:02:24.699 --> 0:02:27.748 patient in letting their long term strategies work out. Would 0:02:27.748 --> 0:02:29.988 it be safe to say that the pension funds like 0:02:29.988 --> 0:02:32.958 the Ontario teachers or Texas teachers, they also join the 0:02:32.958 --> 0:02:33.978 fray around the same time? 0:02:34.889 --> 0:02:37.639 Yeah, I think, uh, they were that, you know, everyone 0:02:37.639 --> 0:02:40.710 in a slightly different time period, I think, but after, 0:02:40.919 --> 0:02:43.440 after those US endowments, not, you know, over the next 0:02:43.440 --> 0:02:46.250 few years, many of the big pension funds came into 0:02:46.250 --> 0:02:49.119 the asset class as well. Um, and you, and their 0:02:49.119 --> 0:02:53.800 pension funds, like for example, um, the GM pension fund 0:02:53.800 --> 0:02:57.899 was one of the earliest investors in, in things like, um, in, 0:02:57.919 --> 0:03:01.429 in things like private capital and and venture capital in particular. 0:03:01.919 --> 0:03:04.440 OK, and when did the Aussies come to play? 0:03:05.360 --> 0:03:08.440 Yeah, it's a good question. I think that the Australians initially, 0:03:08.550 --> 0:03:13.020 probably in the 90s, late 1990s, uh was the emergence, 0:03:13.229 --> 0:03:15.269 and actually a lot of the Australians had a little 0:03:15.270 --> 0:03:18.789 bit of a home country bias. Probably not dissimilar to 0:03:18.788 --> 0:03:21.429 the US um for that, for that first few. 0:03:21.535 --> 0:03:25.205 Yeah, I think um it was really the early 2000s 0:03:25.205 --> 0:03:28.845 that the Australians really came to private, private equity as 0:03:28.845 --> 0:03:29.353 an asset 0:03:29.354 --> 0:03:29.875 class. 0:03:30.205 --> 0:03:31.725 And was there like some sort of a spillover from 0:03:31.725 --> 0:03:33.883 the US like you had like Wall Street bankers showing 0:03:33.883 --> 0:03:36.884 up in Australia and convincing the wealth managers that this 0:03:36.884 --> 0:03:37.595 is the way to go? 0:03:38.830 --> 0:03:42.029 Actually one of the earliest uh into private equity in 0:03:42.029 --> 0:03:45.110 Australia was Macquarie Bank, and so rather than, rather than 0:03:45.110 --> 0:03:47.990 the US banks coming in and creating the spillover, I 0:03:47.990 --> 0:03:50.190 think it was um, you know, everyone today will know 0:03:50.190 --> 0:03:54.309 Macquarie Bank, but back in that early 2000 period. 0:03:54.639 --> 0:03:57.979 Um, they were still really just growing up, and I think, uh, they, 0:03:58.059 --> 0:04:00.380 they were one of the earliest, one of the earliest 0:04:00.380 --> 0:04:03.520 players in the, in the sector, and, um, actually how 0:04:03.520 --> 0:04:05.500 I got to the asset class in that in that 0:04:05.500 --> 0:04:10.600 early 2000 period, Macquarie Bank did a listed private equity. 0:04:10.785 --> 0:04:15.815 Um, and you know, you know, popular again, the evergreen 0:04:15.815 --> 0:04:19.734 private equity, but actually a listed private equity fund in 0:04:19.734 --> 0:04:24.274 that early 2000s period, um, which, which kind of had the, 0:04:24.295 --> 0:04:26.845 the market looking at at the space here in Australia. 0:04:27.630 --> 0:04:29.988 OK, a little later, I'm gonna ask you what exactly 0:04:29.988 --> 0:04:31.790 is an evergreen equity fund. We'll get to that in 0:04:31.790 --> 0:04:34.559 a minute. But uh let's uh lay down a couple 0:04:34.559 --> 0:04:37.750 of basic building blocks. What's the appeal of private equity 0:04:37.750 --> 0:04:41.019 both from the perspective of the company and the investor? 0:04:41.839 --> 0:04:44.059 Yeah, it's a really good question, and the important one. 0:04:44.269 --> 0:04:47.859 I think if I think about it from a company's perspective, um, 0:04:48.149 --> 0:04:51.339 access to capital is very important, especially for a business 0:04:51.339 --> 0:04:53.890 that is looking to grow quickly. And when you're looking 0:04:53.890 --> 0:04:57.549 to grow quickly, the willingness or desire to pay out 0:04:57.549 --> 0:05:01.190 large dividends, um, not, not necessarily there because you want 0:05:01.190 --> 0:05:04.190 to use your cash flow to continue to grow. And 0:05:04.190 --> 0:05:06.308 I think that that that that is an important part 0:05:06.309 --> 0:05:07.619 of private markets. 0:05:08.079 --> 0:05:10.380 I think the next coup, the next couple of features 0:05:10.380 --> 0:05:13.019 that I would touch on, often the company is looking 0:05:13.019 --> 0:05:16.619 for the expertise that perhaps the private, the private equity 0:05:16.619 --> 0:05:20.178 manager can bring. Uh, there are many specialist private equity 0:05:20.178 --> 0:05:23.980 firms today, and as companies are looking to grow and scale, 0:05:24.100 --> 0:05:28.420 that ability to partner with a, with a firm that 0:05:28.420 --> 0:05:30.820 has done it before and can help them do it 0:05:30.820 --> 0:05:32.779 can often be pretty important. 0:05:33.390 --> 0:05:36.820 I think the third factor would be that long-term focus 0:05:36.820 --> 0:05:40.269 that you touched on about the endowments. I think one 0:05:40.269 --> 0:05:44.709 of the, the constant, um, things you hear from entrepreneurs 0:05:44.709 --> 0:05:48.868 who take private capital is the long-term nature of the 0:05:48.869 --> 0:05:52.428 private capital market to allow them to really think about 0:05:52.428 --> 0:05:55.010 how to grow a business over 5 to 10 years 0:05:55.299 --> 0:05:57.119 is is an important attribute. 0:05:57.649 --> 0:05:59.649 Uh, and then, if I, if I, if I go 0:05:59.649 --> 0:06:01.609 to the other side of the equation and what you 0:06:01.609 --> 0:06:04.649 asked about, like for investors who think about why should 0:06:04.649 --> 0:06:09.428 I invest in private capital, I think the first one clearly, um, 0:06:09.440 --> 0:06:12.769 is looking for access to higher returns than you can 0:06:12.769 --> 0:06:16.159 earn out of the public markets, which are, which are 0:06:16.160 --> 0:06:19.209 much more liquid. A couple of other things though that 0:06:19.209 --> 0:06:22.570 I think a lot of people think about, um, access 0:06:22.570 --> 0:06:23.850 to both innovation, 0:06:24.410 --> 0:06:28.659 And if I think about innovation in today's world and 0:06:28.660 --> 0:06:32.500 productivity growth, two really important themes that many countries are 0:06:32.500 --> 0:06:36.420 talking about the the importance of. And if you look 0:06:36.420 --> 0:06:41.500 today at the NASDAQ, nearly over 90% of companies listed 0:06:41.500 --> 0:06:44.700 on the NASDAQ started with venture some sort of venture 0:06:44.700 --> 0:06:46.480 capital or private equity funding. 0:06:46.859 --> 0:06:49.450 And actually the Magnificent Seven too, if you look through 0:06:49.450 --> 0:06:52.410 early funders, have, have support from there. And so this 0:06:52.410 --> 0:06:57.729 ability to innovate, do things differently, often starts actually in 0:06:57.730 --> 0:07:02.079 the private markets. And as an investor of a large portfolio, 0:07:02.709 --> 0:07:08.390 access to diversification, innovation becomes a really important theme for, 0:07:08.488 --> 0:07:09.279 for many. 0:07:09.959 --> 0:07:12.410 I, I think the final part I would say, um, 0:07:12.420 --> 0:07:16.890 as an investor in the asset class is alignment of interest. 0:07:17.299 --> 0:07:19.940 One of the most important things you can do in 0:07:19.940 --> 0:07:23.619 private equity, um, is really set up an alignment and 0:07:23.619 --> 0:07:28.359 uh between management, um, uh, you as an investor, um, 0:07:28.380 --> 0:07:31.929 and the company, and that can drive to really strong outcomes. 0:07:32.019 --> 0:07:34.130 And so I think when you get all of that right, 0:07:34.339 --> 0:07:37.470 as an investor, it can be a really attractive asset class. 0:07:38.790 --> 0:07:41.290 Sure, uh, Alicia, I'm glad that you had this reference 0:07:41.290 --> 0:07:44.010 to the Magnificent Seven because I think that non-specialists listening 0:07:44.010 --> 0:07:47.049 to this conversation would sort of realize that private equity 0:07:47.049 --> 0:07:49.820 is not that exotic, it is actually pretty ubiquitous, uh, 0:07:49.890 --> 0:07:51.690 and it's been around for a long time. So give 0:07:51.690 --> 0:07:53.970 us a sense of how large is this as a class. 0:07:55.010 --> 0:07:57.079 Yeah, it's a really good question. I think at at 0:07:57.079 --> 0:08:02.250 Blue Hour we estimate that there's about $200 trillion in 0:08:02.250 --> 0:08:06.929 assets under management in the world, and actually only about 0:08:07.160 --> 0:08:10.790 12 trillion of that is private markets, and of that, 0:08:10.850 --> 0:08:15.160 you've obviously got property, infrastructure, private equity. Private equity probably 0:08:15.600 --> 0:08:18.989 makes up about a third of that. And so whilst 0:08:18.989 --> 0:08:21.890 a lot of people talk about the strong growth in, 0:08:21.950 --> 0:08:25.299 In, um, private markets and in particular in private equity 0:08:25.299 --> 0:08:29.369 over the last 10 or 15 years. The reality is, 0:08:29.640 --> 0:08:32.619 private markets make up about, you know, under that estimate, 0:08:32.750 --> 0:08:38.169 about 6%, 7% of all assets globally under management. And so, 0:08:38.340 --> 0:08:41.299 you know, it's the, the, it's still the minority of investments, 0:08:41.340 --> 0:08:43.530 I think you see, uh, globally. 0:08:44.150 --> 0:08:45.289 Still trillions of dollars. 0:08:45.859 --> 0:08:46.669 Yeah, indeed, 0:08:47.330 --> 0:08:51.530 yes. And has there been some conversation between regulators, let's 0:08:51.530 --> 0:08:54.010 say the Reserve Bank of Australia or the Fed and 0:08:54.010 --> 0:08:58.010 the investment community about this asset class becoming so large 0:08:58.010 --> 0:09:01.169 that there are some systemic implications are so far it's 0:09:01.169 --> 0:09:02.598 sort of flying under the radar. 0:09:03.690 --> 0:09:07.390 I think um we, you've definitely seen in many jurisdictions 0:09:07.390 --> 0:09:12.500 throughout the world changing regulation in private markets, and obviously, 0:09:12.789 --> 0:09:16.329 as the asset class has continued to grow, um, the, 0:09:16.419 --> 0:09:19.150 you know, the regulators have spent some more time, uh, 0:09:19.190 --> 0:09:22.739 looking at the different asset classes. um, but like I said, 0:09:22.789 --> 0:09:26.210 it's still relatively small compared to what goes on in 0:09:26.210 --> 0:09:27.390 public markets. 0:09:28.080 --> 0:09:32.109 Sure, um, earlier, uh, when you were describing the, uh, 0:09:32.119 --> 0:09:34.619 genesis of private equity, you mentioned a couple of structures, 0:09:34.719 --> 0:09:39.039 things like uh buyout fund and growth equity fund and VC, uh, 0:09:39.200 --> 0:09:41.039 would you sort of walk us through those a little bit? 0:09:42.229 --> 0:09:48.590 Yeah, sure, and so, um, venture venture capital funding is really, um, 0:09:48.710 --> 0:09:52.830 everything from the ID stage, so seed funding all the 0:09:52.830 --> 0:09:57.429 way through until, um, what can be later stage, uh, 0:09:57.590 --> 0:10:03.580 venture capital, really a company that is, um, growing very quickly, 0:10:03.830 --> 0:10:08.709 often consuming cash, um, and trying to enter new markets, 0:10:08.830 --> 0:10:10.640 build new product, and. 0:10:10.705 --> 0:10:14.914 Create a structure. At the other end of the spectrum 0:10:14.914 --> 0:10:21.684 is buyout investing, and buyout investing is really, um, it's private, 0:10:21.844 --> 0:10:27.895 private companies, um, that are up and running, have cash 0:10:27.895 --> 0:10:32.843 flow attached to them, and you're buying them on, not, not, 0:10:32.895 --> 0:10:35.614 you're pricing them not dissimilar to how you price a 0:10:35.614 --> 0:10:36.844 public market stock. 0:10:37.359 --> 0:10:39.659 I think in the middle of that is growth, growth 0:10:39.659 --> 0:10:43.939 equity investing, and there is, there is this ability, and 0:10:43.940 --> 0:10:49.219 the difference here is often growth equity investing is a 0:10:49.219 --> 0:10:51.469 company that, 0:10:52.130 --> 0:10:56.349 Has a very large opportunity to grow very quickly. Often, 0:10:56.539 --> 0:10:59.218 you know, we talk about the rule of 40, and 0:10:59.219 --> 0:11:02.580 that's really talking about the fact, um, that it could be, 0:11:02.659 --> 0:11:05.340 you know, you're looking to grow at sort of that 40% 0:11:05.340 --> 0:11:10.140 kind of rate, um, and so, whilst the company, if 0:11:10.140 --> 0:11:13.750 you were growing a little bit slower, could have, um, 0:11:14.039 --> 0:11:17.598 Pretty good earnings, you're reinvesting a lot of those earnings 0:11:17.599 --> 0:11:21.450 to go after growth and really enter new markets, build 0:11:21.450 --> 0:11:24.250 market share, do those type of things. And so they're 0:11:24.250 --> 0:11:28.679 the three different segments, um, that, and generally speaking, you 0:11:28.679 --> 0:11:31.869 need different skills, uh, if you're working with a business 0:11:32.320 --> 0:11:35.750 that is just starting out, like you are in venture capital. 0:11:36.200 --> 0:11:39.960 A business that's really scaling very quickly, like you might 0:11:39.960 --> 0:11:43.799 be in growth equity, or in a, in a buyout business, 0:11:44.090 --> 0:11:47.289 where um it's a more mature business, probably with a 0:11:47.299 --> 0:11:50.979 a bigger management team, but a very big footprint off it. 0:11:52.809 --> 0:11:57.409 So, from a sort of an incentive perspective, a startup 0:11:57.409 --> 0:12:01.690 founder who wants large access to capital, but maybe not 0:12:01.690 --> 0:12:04.119 big enough or doesn't have a track record to warrant 0:12:04.119 --> 0:12:07.570 a bank becoming interested in them, would be showing up 0:12:07.570 --> 0:12:11.530 for early stage investing from VCs so basically you graduate 0:12:11.530 --> 0:12:13.429 from friends and family, and then you go to the 0:12:13.429 --> 0:12:16.760 VCs and then when you become consequential and huge growth potential, 0:12:16.969 --> 0:12:18.049 private equity comes to play. 0:12:18.869 --> 0:12:20.848 Yeah, that's it, that's exactly it. 0:12:21.250 --> 0:12:26.169 Um, the, uh, question that I had, ah, recently, it's 0:12:26.169 --> 0:12:28.289 not that much in the news, but a couple of 0:12:28.289 --> 0:12:31.609 years ago, it was very much in vogue with Sacks. 0:12:31.849 --> 0:12:35.789 Were the private equity players sort of instrumental in making Sacks, ah, 0:12:36.169 --> 0:12:37.049 you know, popular? 0:12:38.559 --> 0:12:41.000 Oh look, I think that is a good question. I, 0:12:41.039 --> 0:12:43.718 I mean, I think what drove Sacks was what was 0:12:43.719 --> 0:12:47.189 going on in the public market, right, and so, um, 0:12:47.239 --> 0:12:51.549 that ability to, uh, list a vehicle in in and 0:12:51.559 --> 0:12:56.679 and do that with the company, um, was really driven 0:12:56.679 --> 0:12:59.880 by what was a pretty buoyant public market, in particular 0:12:59.880 --> 0:13:03.929 for growth companies, um, you know, we've seen this often 0:13:03.929 --> 0:13:05.950 over the last 25 years from, 0:13:06.849 --> 0:13:11.309 The late 90s, where there was, you know, real bullishness 0:13:11.309 --> 0:13:14.789 for growth in public markets, and then that sentiment turned 0:13:15.239 --> 0:13:19.189 uh '99, 2000, and you see, you see ebbs and flows, 0:13:19.239 --> 0:13:24.000 I think in, in public market desire to both price 0:13:24.000 --> 0:13:29.159 growth and want growth versus um versus sort of stability 0:13:29.159 --> 0:13:30.349 and income, and so, 0:13:30.690 --> 0:13:33.260 Um, I think what you saw with SAS was a 0:13:33.260 --> 0:13:38.580 period where the public market, um, was pretty hungry for 0:13:38.580 --> 0:13:42.070 growth type assets, and so that was sort of an innovation, um, 0:13:42.380 --> 0:13:46.900 that came about or, um, was utilized, given, given that 0:13:46.900 --> 0:13:47.939 demand that we were seeing. 0:13:48.880 --> 0:13:51.539 It's interesting, Lusia, that although stock markets have been pretty 0:13:51.539 --> 0:13:54.590 buoyant in recent years, they've done pretty well, uh, when 0:13:54.590 --> 0:13:56.869 we look at the IPO market, by and large, it's 0:13:56.869 --> 0:14:01.229 not that vigorous. So as a private equity investor, how 0:14:01.229 --> 0:14:04.109 does one, or rather a private equity fund that is 0:14:04.109 --> 0:14:06.710 trying to return capital to their investors, they try to 0:14:06.710 --> 0:14:09.069 have an exit through an IPO and then everybody monetizes 0:14:09.070 --> 0:14:10.809 the asset and then you move on to the next fund. 0:14:11.030 --> 0:14:14.030 But in there is a drought of IPOs, how do 0:14:14.030 --> 0:14:15.869 private equity funds find exit? 0:14:17.049 --> 0:14:20.200 Yeah, it's a good question. I think um there there 0:14:20.200 --> 0:14:25.919 are 3 mechanisms, generally speaking, that a private equity fund 0:14:25.919 --> 0:14:27.479 can use for exits. 0:14:27.950 --> 0:14:31.510 The first of those is IPO like you just touched on, um, 0:14:31.520 --> 0:14:34.510 but over the long-term, that's actually, you know, the minority 0:14:34.599 --> 0:14:38.909 of exits for private equity backed companies. The second one 0:14:39.119 --> 0:14:43.510 is sale, um, to a strategic bus to a strategic buyer, 0:14:43.880 --> 0:14:49.440 and the third is a sale to another financial buyer. Um, and, 0:14:49.640 --> 0:14:51.280 and so 3 different mechanisms. 0:14:51.705 --> 0:14:57.424 You tend to find time periods where strategic buyers have 0:14:57.424 --> 0:15:00.075 plenty of cash and are pretty bullish and want to, 0:15:00.385 --> 0:15:03.775 and really want to go out and, um, acquire assets, 0:15:03.784 --> 0:15:07.614 and then you find other periods, um, where they're not there, 0:15:07.784 --> 0:15:11.104 the same can be said for the IPO market, and again, 0:15:11.145 --> 0:15:14.744 the same can be said for strategic financial buyers, and so, 0:15:15.140 --> 0:15:17.900 They tend to be the three mechanisms um that are 0:15:17.900 --> 0:15:23.140 utilized uh to exit private equity deals, and um, you 0:15:23.140 --> 0:15:26.219 tend to find they all of them can sometimes be open, 0:15:26.500 --> 0:15:27.539 sometimes be shut. 0:15:28.640 --> 0:15:32.760 And you as an investor, you don't have any preference 0:15:32.760 --> 0:15:35.760 as long as you know, any of which allows the exit, 0:15:35.770 --> 0:15:36.250 you're OK. 0:15:37.369 --> 0:15:39.890 Look, I think the way I think about that is 0:15:39.890 --> 0:15:42.960 what's best for the company. I think one of the, the, 0:15:42.969 --> 0:15:48.130 the most important components of the private capital system, especially 0:15:48.130 --> 0:15:51.159 when you've been off, so often you buy a business, 0:15:51.739 --> 0:15:56.049 Um, you own it for 57 years, and then we're talking, 0:15:56.099 --> 0:15:59.090 if we get to this, you're looking to exit the business, uh, 0:15:59.099 --> 0:16:02.659 and realize your investment. Um, you've been working with that 0:16:02.659 --> 0:16:05.859 business for the last 5 or 7 years, seeing it 0:16:05.859 --> 0:16:08.369 get owned by the right next owner to allow it 0:16:08.369 --> 0:16:10.059 to continue to grow and flourish. 0:16:10.140 --> 0:16:14.039 Is is generally really important to private capital investors, and so, 0:16:14.369 --> 0:16:17.330 you know, for different businesses, there are different places that 0:16:17.330 --> 0:16:20.250 it's probably the most like should be the place that 0:16:20.250 --> 0:16:23.169 it should, it should be owned next, and that's the 0:16:23.169 --> 0:16:24.890 way I think about that. So they can all be 0:16:24.890 --> 0:16:28.440 really strong, viable opportunities depending on what the business is. 0:16:29.440 --> 0:16:31.710 All right, I'm gonna ask you, I, I hope this 0:16:31.710 --> 0:16:33.190 is not a hard question, but I really hope that 0:16:33.190 --> 0:16:35.349 you have a great answer for that. Earlier, you're talking 0:16:35.349 --> 0:16:39.270 about that the investors with a longer time tolerance would 0:16:39.270 --> 0:16:42.739 be interested in private equity, hoping for superior returns. So, 0:16:43.109 --> 0:16:46.989 are there good studies in journals of finance or economics 0:16:46.989 --> 0:16:51.750 or business that sort of so conclusively that private equity 0:16:51.750 --> 0:16:53.549 offers superior returns over the medium term? 0:16:54.580 --> 0:16:57.849 It's such a good question. I, uh, I, I'm gonna 0:16:57.849 --> 0:17:02.520 start with, um, the, the, I think conclusively studies show 0:17:02.729 --> 0:17:06.770 that the dispersion of returns in private equity is much 0:17:06.770 --> 0:17:09.859 larger than you find in just about, um, any other 0:17:09.859 --> 0:17:12.968 asset class. And so one of the things, what, so 0:17:12.969 --> 0:17:18.489 what does that mean? That means the cost of getting 0:17:18.489 --> 0:17:19.849 it right. 0:17:20.030 --> 0:17:23.760 Wrong, can be pretty high. Um, and, you know, and I, 0:17:23.819 --> 0:17:26.458 I was saying to, I would say to one of 0:17:26.459 --> 0:17:30.540 my friends in, in the equity market, um, you know, 0:17:30.619 --> 0:17:37.079 the difference between top quartile and bottom quartile might be 2%. Um, 0:17:37.140 --> 0:17:39.660 and you look through in private equity, and that can be, 0:17:39.780 --> 0:17:43.300 that can be as wide as 7 or 8%, depending 0:17:43.300 --> 0:17:45.369 on the time periods, right? And so, 0:17:45.729 --> 0:17:50.520 Um, the cost of getting private equity wrong can be higher, 0:17:50.859 --> 0:17:54.619 and the cost of getting it right, um, can be pretty, 0:17:54.780 --> 0:18:00.790 can be pretty valuable. And so, many studies, academic studies have, have, 0:18:00.800 --> 0:18:03.020 have run this and different time periods of. 0:18:03.135 --> 0:18:06.084 Showing different things. I think your question was, does it 0:18:06.084 --> 0:18:11.724 prove it, you know, unequivocally? I think that, um, most 0:18:11.724 --> 0:18:15.925 of the studies show that if you're in the top quartile, um, you, 0:18:15.964 --> 0:18:19.444 you can deliver pretty strong performance relative to the alternatives 0:18:19.444 --> 0:18:22.765 over the long term. Um, if you look at it 0:18:22.765 --> 0:18:25.363 on an, like, just year by year basis, it can 0:18:25.364 --> 0:18:27.484 be a little bit, uh, you know, you can get different, 0:18:27.604 --> 0:18:28.915 you can get different results. 0:18:29.770 --> 0:18:33.728 Are there any geographical variations like, you know, are the 0:18:33.729 --> 0:18:37.010 Australian funds more successful than Americans or Americans more successful 0:18:37.010 --> 0:18:39.089 than everybody else, I mean, what's the sense? 0:18:39.839 --> 0:18:43.430 Yeah, interestingly, the data does support, uh, look, Australia has 0:18:43.430 --> 0:18:46.719 been a really strong market for private equity and in 0:18:46.719 --> 0:18:49.959 particular both buyout and venture, and I think as part 0:18:49.959 --> 0:18:53.000 of that, um, one of the ones we would say 0:18:53.000 --> 0:18:58.239 here in Australia is that, you know, the, the demand 0:18:58.239 --> 0:19:02.430 and supply for capital in the private market industry can, 0:19:02.750 --> 0:19:06.760 can lead to, um, but you know, the way the 0:19:06.760 --> 0:19:08.469 performance outcomes that get driven. 0:19:08.819 --> 0:19:13.270 And here in Australia, we haven't had a huge influx 0:19:13.270 --> 0:19:16.469 of capital from other parts of the world, um, and 0:19:16.469 --> 0:19:18.670 so that supply and demand is pretty much held in 0:19:18.670 --> 0:19:20.589 balance over a period of time, and if you look 0:19:20.589 --> 0:19:23.510 through the data, actually Australia's been one of the top 0:19:23.510 --> 0:19:26.109 performing buyout markets in the world over the last 7 0:19:26.109 --> 0:19:28.550 to 10 years, and so, and I think a big 0:19:28.550 --> 0:19:30.709 part of that is to do with that supply and 0:19:30.709 --> 0:19:31.739 demand of capital. 0:19:32.619 --> 0:19:36.020 Fascinating. Are we going through good times in the private 0:19:36.020 --> 0:19:39.479 equity world? Are investors by and large getting decent returns 0:19:39.479 --> 0:19:39.969 these days? 0:19:41.300 --> 0:19:44.270 I, I think it all depends on when you started 0:19:44.270 --> 0:19:46.670 and what that looks like. I think I get asked 0:19:46.670 --> 0:19:49.109 this a little bit, but if you look at, and 0:19:49.109 --> 0:19:51.869 let's put aside the last couple of weeks, but through 0:19:51.869 --> 0:19:55.319 till the end of last year, um, for calendar year 0:19:55.319 --> 0:20:01.510 23 and calendar year 24, equity markets had phenomenal returns, um. 0:20:01.959 --> 0:20:05.430 And so, you know, and then as an Australian investor, 0:20:05.719 --> 0:20:08.760 investing in global equities, it would depend on your hedging 0:20:08.760 --> 0:20:11.520 and all of that, but you know, when you're getting 20% 0:20:11.520 --> 0:20:16.760 plus returns out of equities, um, many a private equity 0:20:16.760 --> 0:20:22.359 portfolio looks to return 5 to 6% above its equity portfolio, 0:20:22.400 --> 0:20:24.479 that's a pretty high hurdle. Very hard. 0:20:24.880 --> 0:20:27.109 And so I, and I say to people, people ask 0:20:27.109 --> 0:20:29.869 me often, and I say listen, if you think equities 0:20:29.869 --> 0:20:33.380 will continue to do 21 to 22% per annum, 0:20:33.849 --> 0:20:36.150 You should probably put all your money there, right? Um, 0:20:36.329 --> 0:20:40.540 because that'll be a really hard hurdle, um, for PE 0:20:40.540 --> 0:20:44.050 to outperform over that kind of time period. I think 0:20:44.050 --> 0:20:46.569 what you see, and I used to have this conversation 0:20:46.569 --> 0:20:50.089 with people and, and my boards, you know, 5 and 0:20:50.089 --> 0:20:53.329 6 as well. In, in, in 2006, I remember sitting 0:20:53.329 --> 0:20:55.400 in front of my board and equity markets had just 0:20:55.400 --> 0:20:58.810 had a great ER and they're like, PE's lagging right now. 0:20:58.930 --> 0:21:00.810 What do you think? And, you know, we all know 0:21:00.810 --> 0:21:01.448 what happened after. 0:21:03.420 --> 0:21:06.530 Yeah, right. And so I think if you look through, 0:21:06.619 --> 0:21:09.819 you know, 5 year numbers continue to show private equity 0:21:09.819 --> 0:21:13.339 is doing very well, um, I think where you've invested, 0:21:13.459 --> 0:21:18.609 what you've invested in does matter. And so I, that's not, and, um, but, 0:21:18.719 --> 0:21:20.420 you know, if, if what you're looking at is the 0:21:20.420 --> 0:21:22.979 last 12 months, it's been a hard hurdle to beat 0:21:22.979 --> 0:21:26.050 the public equity markets that have had a really stellar run, 0:21:26.339 --> 0:21:29.369 putting aside the the more recent volatility. 0:21:29.790 --> 0:21:32.750 Right, but I think despite the fact that equities had 0:21:32.750 --> 0:21:36.310 such an awesome 23 and 24, I don't think enthusiasm 0:21:36.310 --> 0:21:38.349 and private equity ebbed as a result. 0:21:39.790 --> 0:21:42.510 Look, it's definitely harder to raise money in private equity 0:21:42.510 --> 0:21:46.900 today than it was in 20122, um, you know, and I, 0:21:46.949 --> 0:21:51.540 and I say that easily because, uh, I, I, I watch, um, 0:21:51.550 --> 0:21:52.989 and you can see that, 0:21:53.489 --> 0:21:57.319 Everybody wants to ring and ask, what's Australia like today 0:21:57.319 --> 0:21:59.520 and should I come down there and fundraise? And so 0:21:59.520 --> 0:22:01.959 I know that it must be harder to fundraise when 0:22:01.959 --> 0:22:04.599 people want to ring me, uh, from all over the 0:22:04.599 --> 0:22:09.280 world and say, I'm thinking of coming down, can we talk? Um, 0:22:09.560 --> 0:22:11.959 and so that's always a great sign that it's harder 0:22:11.959 --> 0:22:14.880 to fundraise when people are willing to spend that long 0:22:14.880 --> 0:22:17.119 on a plane to come and talk to investors. 0:22:17.869 --> 0:22:20.670 OK, that's a very good metric to look at. Alicia, 0:22:20.869 --> 0:22:24.579 walk me through the process of investment screening. You look 0:22:24.579 --> 0:22:28.069 at deal flows, you see all sorts of companies coming 0:22:28.069 --> 0:22:31.948 through your door. What is your criteria for a good 0:22:31.949 --> 0:22:34.819 solid pitch and then, then you sort of go for it. 0:22:35.630 --> 0:22:39.218 Yeah, of course. I think, um, and maybe, maybe I start, 0:22:39.339 --> 0:22:42.300 I mean, with a fund like funding, like if I'm 0:22:42.300 --> 0:22:47.329 thinking about investing in a fund versus a single company, right? Um, uh, 0:22:47.420 --> 0:22:50.780