Speaker 1: Welcome to COI Time, a podcast series on markets and
Speaker 1: economies from DBS Group Research. I'm Tamra Wegg, chief economist.
Speaker 1: Welcoming you to our 151st episode.
Speaker 1: A couple of episodes ago, we had a lengthy discussion
Speaker 1: on private credit. Today it's time for private equity. Alicia
Speaker 1: Gregory is our guest. She is managing director at Blue Owl,
Speaker 1: a leading alternative asset manager based out of Australia.
Speaker 1: Prior to joining Blue Owl last year, Alicia was Deputy
Speaker 1: Chief Investment Officer for Future Fund, Australia's sovereign wealth fund
Speaker 1: that manages over $250 billion in assets. She oversaw all
Speaker 1: asset classes, both listed and private assets, and served on
Speaker 1: the fund's Investment committee. Alissa Gregory, welcome to COI time.
Speaker 1: You are our first guest from Australia.
Speaker 2: Thanks for having me here.
Speaker 1: It's it's great to have you and uh, we're gonna
Speaker 1: do like a one on one start on private equity, OK.
Speaker 1: So walk us through the journey of private equity as
Speaker 1: an asset class and if I correct in thinking that
Speaker 1: the leveraged buyout era of the 1980s basically brought private
Speaker 1: equity to the fore.
Speaker 2: Yeah, I think that's a fair assessment. Uh, perhaps if
Speaker 2: I start off, the private equity is an asset class,
Speaker 2: there are really 3 sub-categories I think about within private equity,
Speaker 2: there's buyout, there's growth equity, and there's venture capital.
Speaker 2: I think the origins of both buyout and venture capital,
Speaker 2: the very embryonic stages, uh, were probably the 50s and 60s.
Speaker 2: But as you rightly point out, I think 1980s was
Speaker 2: really the emergence of both buyout and venture capital as,
Speaker 2: as an asset class. And I think the catalyst for
Speaker 2: that was really institutional investors in the United States, and
Speaker 2: in particular endowments. Endowments for the first time,
Speaker 2: Uh, had an asset allocation to, uh, private equity, which
Speaker 2: did cut across both venture and buyout, and that really
Speaker 2: made the, the asset class grow over that next period.
Speaker 1: OK, so the US was the hotbed and by endowments,
Speaker 1: you're basically talking about universities who tend to have a
Speaker 1: huge amount of endowment that their alumni contribute to and,
Speaker 1: and they raise funds and then there's a large corpus
Speaker 1: of fund and typically they can be a little more
Speaker 1: patient in letting their long term strategies work out. Would
Speaker 1: it be safe to say that the pension funds like
Speaker 1: the Ontario teachers or Texas teachers, they also join the
Speaker 1: fray around the same time?
Speaker 2: Yeah, I think, uh, they were that, you know, everyone
Speaker 2: in a slightly different time period, I think, but after,
Speaker 2: after those US endowments, not, you know, over the next
Speaker 2: few years, many of the big pension funds came into
Speaker 2: the asset class as well. Um, and you, and their
Speaker 2: pension funds, like for example, um, the GM pension fund
Speaker 2: was one of the earliest investors in, in things like, um, in,
Speaker 2: in things like private capital and and venture capital in particular.
Speaker 1: OK, and when did the Aussies come to play?
Speaker 2: Yeah, it's a good question. I think that the Australians initially,
Speaker 2: probably in the 90s, late 1990s, uh was the emergence,
Speaker 2: and actually a lot of the Australians had a little
Speaker 2: bit of a home country bias. Probably not dissimilar to
Speaker 2: the US um for that, for that first few.
Speaker 2: Yeah, I think um it was really the early 2000s
Speaker 2: that the Australians really came to private, private equity as
Speaker 2: an asset
Speaker 2: class.
Speaker 1: And was there like some sort of a spillover from
Speaker 1: the US like you had like Wall Street bankers showing
Speaker 1: up in Australia and convincing the wealth managers that this
Speaker 1: is the way to go?
Speaker 2: Actually one of the earliest uh into private equity in
Speaker 2: Australia was Macquarie Bank, and so rather than, rather than
Speaker 2: the US banks coming in and creating the spillover, I
Speaker 2: think it was um, you know, everyone today will know
Speaker 2: Macquarie Bank, but back in that early 2000 period.
Speaker 2: Um, they were still really just growing up, and I think, uh, they,
Speaker 2: they were one of the earliest, one of the earliest
Speaker 2: players in the, in the sector, and, um, actually how
Speaker 2: I got to the asset class in that in that
Speaker 2: early 2000 period, Macquarie Bank did a listed private equity.
Speaker 2: Um, and you know, you know, popular again, the evergreen
Speaker 2: private equity, but actually a listed private equity fund in
Speaker 2: that early 2000s period, um, which, which kind of had the,
Speaker 2: the market looking at at the space here in Australia.
Speaker 1: OK, a little later, I'm gonna ask you what exactly
Speaker 1: is an evergreen equity fund. We'll get to that in
Speaker 1: a minute. But uh let's uh lay down a couple
Speaker 1: of basic building blocks. What's the appeal of private equity
Speaker 1: both from the perspective of the company and the investor?
Speaker 2: Yeah, it's a really good question, and the important one.
Speaker 2: I think if I think about it from a company's perspective, um,
Speaker 2: access to capital is very important, especially for a business
Speaker 2: that is looking to grow quickly. And when you're looking
Speaker 2: to grow quickly, the willingness or desire to pay out
Speaker 2: large dividends, um, not, not necessarily there because you want
Speaker 2: to use your cash flow to continue to grow. And
Speaker 2: I think that that that that is an important part
Speaker 2: of private markets.
Speaker 2: I think the next coup, the next couple of features
Speaker 2: that I would touch on, often the company is looking
Speaker 2: for the expertise that perhaps the private, the private equity
Speaker 2: manager can bring. Uh, there are many specialist private equity
Speaker 2: firms today, and as companies are looking to grow and scale,
Speaker 2: that ability to partner with a, with a firm that
Speaker 2: has done it before and can help them do it
Speaker 2: can often be pretty important.
Speaker 2: I think the third factor would be that long-term focus
Speaker 2: that you touched on about the endowments. I think one
Speaker 2: of the, the constant, um, things you hear from entrepreneurs
Speaker 2: who take private capital is the long-term nature of the
Speaker 2: private capital market to allow them to really think about
Speaker 2: how to grow a business over 5 to 10 years
Speaker 2: is is an important attribute.
Speaker 2: Uh, and then, if I, if I, if I go
Speaker 2: to the other side of the equation and what you
Speaker 2: asked about, like for investors who think about why should
Speaker 2: I invest in private capital, I think the first one clearly, um,
Speaker 2: is looking for access to higher returns than you can
Speaker 2: earn out of the public markets, which are, which are
Speaker 2: much more liquid. A couple of other things though that
Speaker 2: I think a lot of people think about, um, access
Speaker 2: to both innovation,
Speaker 2: And if I think about innovation in today's world and
Speaker 2: productivity growth, two really important themes that many countries are
Speaker 2: talking about the the importance of. And if you look
Speaker 2: today at the NASDAQ, nearly over 90% of companies listed
Speaker 2: on the NASDAQ started with venture some sort of venture
Speaker 2: capital or private equity funding.
Speaker 2: And actually the Magnificent Seven too, if you look through
Speaker 2: early funders, have, have support from there. And so this
Speaker 2: ability to innovate, do things differently, often starts actually in
Speaker 2: the private markets. And as an investor of a large portfolio,
Speaker 2: access to diversification, innovation becomes a really important theme for,
Speaker 2: for many.
Speaker 2: I, I think the final part I would say, um,
Speaker 2: as an investor in the asset class is alignment of interest.
Speaker 2: One of the most important things you can do in
Speaker 2: private equity, um, is really set up an alignment and
Speaker 2: uh between management, um, uh, you as an investor, um,
Speaker 2: and the company, and that can drive to really strong outcomes.
Speaker 2: And so I think when you get all of that right,
Speaker 2: as an investor, it can be a really attractive asset class.
Speaker 1: Sure, uh, Alicia, I'm glad that you had this reference
Speaker 1: to the Magnificent Seven because I think that non-specialists listening
Speaker 1: to this conversation would sort of realize that private equity
Speaker 1: is not that exotic, it is actually pretty ubiquitous, uh,
Speaker 1: and it's been around for a long time. So give
Speaker 1: us a sense of how large is this as a class.
Speaker 2: Yeah, it's a really good question. I think at at
Speaker 2: Blue Hour we estimate that there's about $200 trillion in
Speaker 2: assets under management in the world, and actually only about
Speaker 2: 12 trillion of that is private markets, and of that,
Speaker 2: you've obviously got property, infrastructure, private equity. Private equity probably
Speaker 2: makes up about a third of that. And so whilst
Speaker 2: a lot of people talk about the strong growth in,
Speaker 2: In, um, private markets and in particular in private equity
Speaker 2: over the last 10 or 15 years. The reality is,
Speaker 2: private markets make up about, you know, under that estimate,
Speaker 2: about 6%, 7% of all assets globally under management. And so,
Speaker 2: you know, it's the, the, it's still the minority of investments,
Speaker 2: I think you see, uh, globally.
Speaker 1: Still trillions of dollars.
Speaker 2: Yeah, indeed,
Speaker 1: yes. And has there been some conversation between regulators, let's
Speaker 1: say the Reserve Bank of Australia or the Fed and
Speaker 1: the investment community about this asset class becoming so large
Speaker 1: that there are some systemic implications are so far it's
Speaker 1: sort of flying under the radar.
Speaker 2: I think um we, you've definitely seen in many jurisdictions
Speaker 2: throughout the world changing regulation in private markets, and obviously,
Speaker 2: as the asset class has continued to grow, um, the,
Speaker 2: you know, the regulators have spent some more time, uh,
Speaker 2: looking at the different asset classes. um, but like I said,
Speaker 2: it's still relatively small compared to what goes on in
Speaker 2: public markets.
Speaker 1: Sure, um, earlier, uh, when you were describing the, uh,
Speaker 1: genesis of private equity, you mentioned a couple of structures,
Speaker 1: things like uh buyout fund and growth equity fund and VC, uh,
Speaker 1: would you sort of walk us through those a little bit?
Speaker 2: Yeah, sure, and so, um, venture venture capital funding is really, um,
Speaker 2: everything from the ID stage, so seed funding all the
Speaker 2: way through until, um, what can be later stage, uh,
Speaker 2: venture capital, really a company that is, um, growing very quickly,
Speaker 2: often consuming cash, um, and trying to enter new markets,
Speaker 2: build new product, and.
Speaker 2: Create a structure. At the other end of the spectrum
Speaker 2: is buyout investing, and buyout investing is really, um, it's private,
Speaker 2: private companies, um, that are up and running, have cash
Speaker 2: flow attached to them, and you're buying them on, not, not,
Speaker 2: you're pricing them not dissimilar to how you price a
Speaker 2: public market stock.
Speaker 2: I think in the middle of that is growth, growth
Speaker 2: equity investing, and there is, there is this ability, and
Speaker 2: the difference here is often growth equity investing is a
Speaker 2: company that,
Speaker 2: Has a very large opportunity to grow very quickly. Often,
Speaker 2: you know, we talk about the rule of 40, and
Speaker 2: that's really talking about the fact, um, that it could be,
Speaker 2: you know, you're looking to grow at sort of that 40%
Speaker 2: kind of rate, um, and so, whilst the company, if
Speaker 2: you were growing a little bit slower, could have, um,
Speaker 2: Pretty good earnings, you're reinvesting a lot of those earnings
Speaker 2: to go after growth and really enter new markets, build
Speaker 2: market share, do those type of things. And so they're
Speaker 2: the three different segments, um, that, and generally speaking, you
Speaker 2: need different skills, uh, if you're working with a business
Speaker 2: that is just starting out, like you are in venture capital.
Speaker 2: A business that's really scaling very quickly, like you might
Speaker 2: be in growth equity, or in a, in a buyout business,
Speaker 2: where um it's a more mature business, probably with a
Speaker 2: a bigger management team, but a very big footprint off it.
Speaker 1: So, from a sort of an incentive perspective, a startup
Speaker 1: founder who wants large access to capital, but maybe not
Speaker 1: big enough or doesn't have a track record to warrant
Speaker 1: a bank becoming interested in them, would be showing up
Speaker 1: for early stage investing from VCs so basically you graduate
Speaker 1: from friends and family, and then you go to the
Speaker 1: VCs and then when you become consequential and huge growth potential,
Speaker 1: private equity comes to play.
Speaker 2: Yeah, that's it, that's exactly it.
Speaker 1: Um, the, uh, question that I had, ah, recently, it's
Speaker 1: not that much in the news, but a couple of
Speaker 1: years ago, it was very much in vogue with Sacks.
Speaker 1: Were the private equity players sort of instrumental in making Sacks, ah,
Speaker 1: you know, popular?
Speaker 2: Oh look, I think that is a good question. I,
Speaker 2: I mean, I think what drove Sacks was what was
Speaker 2: going on in the public market, right, and so, um,
Speaker 2: that ability to, uh, list a vehicle in in and
Speaker 2: and do that with the company, um, was really driven
Speaker 2: by what was a pretty buoyant public market, in particular
Speaker 2: for growth companies, um, you know, we've seen this often
Speaker 2: over the last 25 years from,
Speaker 2: The late 90s, where there was, you know, real bullishness
Speaker 2: for growth in public markets, and then that sentiment turned
Speaker 2: uh '99, 2000, and you see, you see ebbs and flows,
Speaker 2: I think in, in public market desire to both price
Speaker 2: growth and want growth versus um versus sort of stability
Speaker 2: and income, and so,
Speaker 2: Um, I think what you saw with SAS was a
Speaker 2: period where the public market, um, was pretty hungry for
Speaker 2: growth type assets, and so that was sort of an innovation, um,
Speaker 2: that came about or, um, was utilized, given, given that
Speaker 2: demand that we were seeing.
Speaker 1: It's interesting, Lusia, that although stock markets have been pretty
Speaker 1: buoyant in recent years, they've done pretty well, uh, when
Speaker 1: we look at the IPO market, by and large, it's
Speaker 1: not that vigorous. So as a private equity investor, how
Speaker 1: does one, or rather a private equity fund that is
Speaker 1: trying to return capital to their investors, they try to
Speaker 1: have an exit through an IPO and then everybody monetizes
Speaker 1: the asset and then you move on to the next fund.
Speaker 1: But in there is a drought of IPOs, how do
Speaker 1: private equity funds find exit?
Speaker 2: Yeah, it's a good question. I think um there there
Speaker 2: are 3 mechanisms, generally speaking, that a private equity fund
Speaker 2: can use for exits.
Speaker 2: The first of those is IPO like you just touched on, um,
Speaker 2: but over the long-term, that's actually, you know, the minority
Speaker 2: of exits for private equity backed companies. The second one
Speaker 2: is sale, um, to a strategic bus to a strategic buyer,
Speaker 2: and the third is a sale to another financial buyer. Um, and,
Speaker 2: and so 3 different mechanisms.
Speaker 2: You tend to find time periods where strategic buyers have
Speaker 2: plenty of cash and are pretty bullish and want to,
Speaker 2: and really want to go out and, um, acquire assets,
Speaker 2: and then you find other periods, um, where they're not there,
Speaker 2: the same can be said for the IPO market, and again,
Speaker 2: the same can be said for strategic financial buyers, and so,
Speaker 2: They tend to be the three mechanisms um that are
Speaker 2: utilized uh to exit private equity deals, and um, you
Speaker 2: tend to find they all of them can sometimes be open,
Speaker 2: sometimes be shut.
Speaker 1: And you as an investor, you don't have any preference
Speaker 1: as long as you know, any of which allows the exit,
Speaker 1: you're OK.
Speaker 2: Look, I think the way I think about that is
Speaker 2: what's best for the company. I think one of the, the,
Speaker 2: the most important components of the private capital system, especially
Speaker 2: when you've been off, so often you buy a business,
Speaker 2: Um, you own it for 57 years, and then we're talking,
Speaker 2: if we get to this, you're looking to exit the business, uh,
Speaker 2: and realize your investment. Um, you've been working with that
Speaker 2: business for the last 5 or 7 years, seeing it
Speaker 2: get owned by the right next owner to allow it
Speaker 2: to continue to grow and flourish.
Speaker 2: Is is generally really important to private capital investors, and so,
Speaker 2: you know, for different businesses, there are different places that
Speaker 2: it's probably the most like should be the place that
Speaker 2: it should, it should be owned next, and that's the
Speaker 2: way I think about that. So they can all be
Speaker 2: really strong, viable opportunities depending on what the business is.
Speaker 1: All right, I'm gonna ask you, I, I hope this
Speaker 1: is not a hard question, but I really hope that
Speaker 1: you have a great answer for that. Earlier, you're talking
Speaker 1: about that the investors with a longer time tolerance would
Speaker 1: be interested in private equity, hoping for superior returns. So,
Speaker 1: are there good studies in journals of finance or economics
Speaker 1: or business that sort of so conclusively that private equity
Speaker 1: offers superior returns over the medium term?
Speaker 2: It's such a good question. I, uh, I, I'm gonna
Speaker 2: start with, um, the, the, I think conclusively studies show
Speaker 2: that the dispersion of returns in private equity is much
Speaker 2: larger than you find in just about, um, any other
Speaker 2: asset class. And so one of the things, what, so
Speaker 2: what does that mean? That means the cost of getting
Speaker 2: it right.
Speaker 2: Wrong, can be pretty high. Um, and, you know, and I,
Speaker 2: I was saying to, I would say to one of
Speaker 2: my friends in, in the equity market, um, you know,
Speaker 2: the difference between top quartile and bottom quartile might be 2%. Um,
Speaker 2: and you look through in private equity, and that can be,
Speaker 2: that can be as wide as 7 or 8%, depending
Speaker 2: on the time periods, right? And so,
Speaker 2: Um, the cost of getting private equity wrong can be higher,
Speaker 2: and the cost of getting it right, um, can be pretty,
Speaker 2: can be pretty valuable. And so, many studies, academic studies have, have,
Speaker 2: have run this and different time periods of.
Speaker 2: Showing different things. I think your question was, does it
Speaker 2: prove it, you know, unequivocally? I think that, um, most
Speaker 2: of the studies show that if you're in the top quartile, um, you,
Speaker 2: you can deliver pretty strong performance relative to the alternatives
Speaker 2: over the long term. Um, if you look at it
Speaker 2: on an, like, just year by year basis, it can
Speaker 2: be a little bit, uh, you know, you can get different,
Speaker 2: you can get different results.
Speaker 1: Are there any geographical variations like, you know, are the
Speaker 1: Australian funds more successful than Americans or Americans more successful
Speaker 1: than everybody else, I mean, what's the sense?
Speaker 2: Yeah, interestingly, the data does support, uh, look, Australia has
Speaker 2: been a really strong market for private equity and in
Speaker 2: particular both buyout and venture, and I think as part
Speaker 2: of that, um, one of the ones we would say
Speaker 2: here in Australia is that, you know, the, the demand
Speaker 2: and supply for capital in the private market industry can,
Speaker 2: can lead to, um, but you know, the way the
Speaker 2: performance outcomes that get driven.
Speaker 2: And here in Australia, we haven't had a huge influx
Speaker 2: of capital from other parts of the world, um, and
Speaker 2: so that supply and demand is pretty much held in
Speaker 2: balance over a period of time, and if you look
Speaker 2: through the data, actually Australia's been one of the top
Speaker 2: performing buyout markets in the world over the last 7
Speaker 2: to 10 years, and so, and I think a big
Speaker 2: part of that is to do with that supply and
Speaker 2: demand of capital.
Speaker 1: Fascinating. Are we going through good times in the private
Speaker 1: equity world? Are investors by and large getting decent returns
Speaker 1: these days?
Speaker 2: I, I think it all depends on when you started
Speaker 2: and what that looks like. I think I get asked
Speaker 2: this a little bit, but if you look at, and
Speaker 2: let's put aside the last couple of weeks, but through
Speaker 2: till the end of last year, um, for calendar year
Speaker 2: 23 and calendar year 24, equity markets had phenomenal returns, um.
Speaker 2: And so, you know, and then as an Australian investor,
Speaker 2: investing in global equities, it would depend on your hedging
Speaker 2: and all of that, but you know, when you're getting 20%
Speaker 2: plus returns out of equities, um, many a private equity
Speaker 2: portfolio looks to return 5 to 6% above its equity portfolio,
Speaker 2: that's a pretty high hurdle. Very hard.
Speaker 2: And so I, and I say to people, people ask
Speaker 2: me often, and I say listen, if you think equities
Speaker 2: will continue to do 21 to 22% per annum,
Speaker 2: You should probably put all your money there, right? Um,
Speaker 2: because that'll be a really hard hurdle, um, for PE
Speaker 2: to outperform over that kind of time period. I think
Speaker 2: what you see, and I used to have this conversation
Speaker 2: with people and, and my boards, you know, 5 and
Speaker 2: 6 as well. In, in, in 2006, I remember sitting
Speaker 2: in front of my board and equity markets had just
Speaker 2: had a great ER and they're like, PE's lagging right now.
Speaker 2: What do you think? And, you know, we all know
Speaker 2: what happened after.
Speaker 2: Yeah, right. And so I think if you look through,
Speaker 2: you know, 5 year numbers continue to show private equity
Speaker 2: is doing very well, um, I think where you've invested,
Speaker 2: what you've invested in does matter. And so I, that's not, and, um, but,
Speaker 2: you know, if, if what you're looking at is the
Speaker 2: last 12 months, it's been a hard hurdle to beat
Speaker 2: the public equity markets that have had a really stellar run,
Speaker 2: putting aside the the more recent volatility.
Speaker 1: Right, but I think despite the fact that equities had
Speaker 1: such an awesome 23 and 24, I don't think enthusiasm
Speaker 1: and private equity ebbed as a result.
Speaker 2: Look, it's definitely harder to raise money in private equity
Speaker 2: today than it was in 20122, um, you know, and I,
Speaker 2: and I say that easily because, uh, I, I, I watch, um,
Speaker 2: and you can see that,
Speaker 2: Everybody wants to ring and ask, what's Australia like today
Speaker 2: and should I come down there and fundraise? And so
Speaker 2: I know that it must be harder to fundraise when
Speaker 2: people want to ring me, uh, from all over the
Speaker 2: world and say, I'm thinking of coming down, can we talk? Um,
Speaker 2: and so that's always a great sign that it's harder
Speaker 2: to fundraise when people are willing to spend that long
Speaker 2: on a plane to come and talk to investors.
Speaker 1: OK, that's a very good metric to look at. Alicia,
Speaker 1: walk me through the process of investment screening. You look
Speaker 1: at deal flows, you see all sorts of companies coming
Speaker 1: through your door. What is your criteria for a good
Speaker 1: solid pitch and then, then you sort of go for it.
Speaker 2: Yeah, of course. I think, um, and maybe, maybe I start,
Speaker 2: I mean, with a fund like funding, like if I'm
Speaker 2: thinking about investing in a fund versus a single company, right? Um, uh,
Speaker 2: perhaps if I, if I bring you to a private
Speaker 2: equity fund, I think plenty of good, you know, we
Speaker 2: always look, three things I look for when I think
Speaker 2: about a fund, and it's, um, what is their investment
Speaker 2: philosophy and and region and strategy.
Speaker 2: Um, what is their process and what process do they
Speaker 2: think about to go after that? And, and what sort
Speaker 2: of people do they hire, and do they have the
Speaker 2: right skills to execute on that? And I, and then,
Speaker 2: and there's a 4th, like a 4th component to that
Speaker 2: which is this alignment of interest question, and how am
Speaker 2: I creating that alignment of interest. And,
Speaker 2: There is no perfect answer, you don't like, you, you
Speaker 2: can have different investment philosophies, you can have different processes,
Speaker 2: but what you need, just like in public markets actually,
Speaker 2: is all of those things aligned so that the, the,
Speaker 2: the philosophy aligns them with the process and that aligns
Speaker 2: with the people you hire.
Speaker 2: And that is, if you look back, almost at, um,
Speaker 2: what have led to great fund outcomes and probably where
Speaker 2: you look back and go, oh, I, I, I wish
Speaker 2: I hadn't done that one, something in that broke along
Speaker 2: the way, um, and, and so that that would be the,
Speaker 2: the criteria.
Speaker 2: I think that next piece, in private markets, unlike public markets,
Speaker 2: you are likely invested for the next 10 years, um,
Speaker 2: and then, you know, and we can touch on, um,
Speaker 2: the structure and how that works, but this is not
Speaker 2: something you can just trade in and out of, and,
Speaker 2: you know, a lot of my equity friends, they'll initially
Speaker 2: put a small piece on and then as they build
Speaker 2: more and more conviction, maybe put a bigger position on.
Speaker 2: That's not how in private markets works. All of your
Speaker 2: work has to be done before that 1st $1 leaves
Speaker 2: because you're stuck with it for the next at least
Speaker 2: 10 years, right? Um, and so there's this, I'm gonna
Speaker 2: call it front loading of, of diligence, and then once
Speaker 2: you're in,
Speaker 2: Over that 10 years, something's gonna go wrong somewhere, right?
Speaker 2: And that's where I find alignment of interest becomes really important.
Speaker 2: If you're aligned, you find solutions to whatever's going wrong,
Speaker 2: wherever it is, and you actually lead to really good outcomes,
Speaker 2: and often it's when you don't have that alignment of
Speaker 2: interest quite right, um, when something does inevitably go wrong somewhere, um,
Speaker 2: that things can sometimes breakdown.
Speaker 1: Yeah, it's fascinating. Just as a side note, um, sometimes
Speaker 1: I hear that, you know, like SpaceX is not a
Speaker 1: public company, but you can trade it. uh XAI is
Speaker 1: not a private company, but there are sort of, you know,
Speaker 1: structures available to go along that. So, are, are, are
Speaker 1: those things also sort of linked to the world of
Speaker 1: private equity?
Speaker 2: Yeah, of course, and I think um, you know, there
Speaker 2: there is a lot more commonality like that, that goes on, um,
Speaker 2: You know, and if you look at, if you can
Speaker 2: have a look over in a lot of the public
Speaker 2: market portfolios today, most of them have a sleeve to
Speaker 2: hold pre-IPO and late stage private companies, even though it's
Speaker 2: a public market mandate, um, and, and vice versa, right?
Speaker 2: So that, the line between the markets has definitely, uh,
Speaker 2: blurred in the, over the last, I'm gonna call it
Speaker 2: 10 years, um, and there's a lot, there's a lot more,
Speaker 2: the way to think about things, um, has changed.
Speaker 1: OK, at the earlier part of the discussion, you mentioned
Speaker 1: evergreen private equity structures. What's that all about?
Speaker 2: Yeah.
Speaker 2: So maybe if I take that back, I think a
Speaker 2: traditional private equity, um, investment, um, is generally through a
Speaker 2: closed-end limited partnership. And the way a closed-end limited partnership
Speaker 2: works is as a, as an investor, you make a commitment, um,
Speaker 2: to the, to the fund, and in a you know,
Speaker 2: there's a period where you make that commitment, that capital
Speaker 2: that you commit is generally drawn down over 3 to
Speaker 2: 5 years.
Speaker 2: The typical hold period um for each asset within the
Speaker 2: fund is about 5 to 7 years, and that's how
Speaker 2: you get to this average life of 10 years of
Speaker 2: a fund, right, because they draw it down over that
Speaker 2: 1st 3 or 4 years, they hold the assets for
Speaker 2: an average of 5 to 7 years, and the and
Speaker 2: then at the end when they sell assets, the capital
Speaker 2: is returned to you, um, over that period.
Speaker 2: I think, and so that is the typical structure that
Speaker 2: private equity has been invested in. If you, if I
Speaker 2: compare that, um, to a public market portfolio, you don't
Speaker 2: kind of commit to your public market fund manager, they
Speaker 2: tell you what the portfolio is likely to be, and
Speaker 2: when they, you know, over and over a period of
Speaker 2: time once those stocks hit their limits and they sell them,
Speaker 2: they give you your money back and you've got.
Speaker 2: Choose where, where to go and put your money next, right?
Speaker 2: And so, the evergreen fund, um, you know, is really a,
Speaker 2: it's an, it's an open-ended structure like you see in
Speaker 2: public markets. And the way that works is that that
Speaker 2: would mean that the fund is available, you can commit
Speaker 2: to it sort of at any time. It doesn't have
Speaker 2: a fixed period that you have to make your commitment.
Speaker 2: And you would generally be funded immediately into it, and
Speaker 2: so if you commit $100 that $100 is invested into
Speaker 2: the fund immediately, and there is no fixed term, and so, um, that,
Speaker 2: that portfolio manager will continue to buy, sell, trim assets,
Speaker 2: and ultimately build a portfolio.
Speaker 2: And liquidity gets created in a different way, obviously as,
Speaker 2: as the portfolio is um growing and building um and
Speaker 2: you can trim positions. So, you know, it's, it's much
Speaker 2: more akin to the way you might build an active
Speaker 2: equity portfolio, but in private companies.
Speaker 1: Very interesting. What is the, what is the information flow? Uh,
Speaker 1: I have invested in a public structure, I know that
Speaker 1: it's a 57, 10 year journey, but am I getting
Speaker 1: some sort of a mark to market sense? Do I
Speaker 1: know if the investment is underwater or way above water?
Speaker 1: What kind of information are you looking at?
Speaker 2: Yeah, so generally speaking, um, funds will mark their assets
Speaker 2: once a quarter, and, and that is done on a
Speaker 2: fair market value basis. Uh, that includes, look at it
Speaker 2: depends on, you know, for businesses that are more buyout focused, um,
Speaker 2: there is the earnings basis.
Speaker 2: There is the multiple, and then a multiple that's applied
Speaker 2: on a, on a venture capital basis, um, it's often,
Speaker 2: you know, those businesses don't have that earnings basis and
Speaker 2: so you're looking really at revenue growth, um, and, and again,
Speaker 2: but not dissimilar to how growth businesses get valued in the,
Speaker 2: in the public markets.
Speaker 1: OK, right, so I'm a macroeconomist. I had to throw
Speaker 1: in a macro question sooner or later, so here it comes. Um,
Speaker 1: between 2007 and 2022, we were living in this world
Speaker 1: where interest rates were basically, you know, close to their floor,
Speaker 1: went up a little bit in 60.
Speaker 1: 1718 came down again crashing during the pandemic. Only the
Speaker 1: last three years have we seen a proper interest rate cycle.
Speaker 1: I have colleagues, Alicia at DBS who've never lived through this,
Speaker 1: you know, people in their thirties, never seen a proper
Speaker 1: interest rate cycle. So the fact that we had a
Speaker 1: big rate hike, you know, cycle in 23, 24, and
Speaker 1: then rates have come down a bit, not a whole lot.
Speaker 1: We're worried that all the tariff stuff that's going on
Speaker 1: may actually leave interest rates high because it's going to
Speaker 1: add to inflation at least in the next.
Speaker 1: 6 to 12 months. So, the link between cost of
Speaker 1: funding going up and performance of private equity, where do
Speaker 1: we stand?
Speaker 2: Yeah, and look, uh, you know, as a macroeconomist, you
Speaker 2: kinda know this better than me, but from my perspective,
Speaker 2: you know, the most important thing as an asset owner,
Speaker 2: like if you're an asset owner, is actually the real
Speaker 2: rate of return that you can earn on an asset, right,
Speaker 2: and so,
Speaker 2: Yeah, and, and, you know, that big one of those
Speaker 2: big changes that you're talking about in that analysis, um,
Speaker 2: when interest rates were between 0 and 1, but inflation was,
Speaker 2: it was north of 1, right? The real return on,
Speaker 2: on that cash rate was a negative number, like a
Speaker 2: pick your period of how negative, but it has been
Speaker 2: for investors, a negative return to be on the credit
Speaker 2: side of the equation.
Speaker 2: Um, and right now, if you look at, I don't know,
Speaker 2: the 10 year rate, 4.3, 4.4, and, and you can
Speaker 2: buy 10-year inflation rate, starting with a 2 in the market.
Speaker 2: And so the real rate of return right now, um,
Speaker 2: starts probably with a 2. And so that, that changes
Speaker 2: the pricing, I would argue, not only for PE, but
Speaker 2: for every asset.
Speaker 2: Because, um, you know, the fundamental of what you can
Speaker 2: earn in the risk-free rate or in credit as a
Speaker 2: as a real return has moved. Um, and I think
Speaker 2: that fundamentally impacts many types of asset classes. And actually,
Speaker 2: you know, the first derivative of that, and this this
Speaker 2: doesn't surprise me at all, over the last 12 months
Speaker 2: as you've watched, you know, an ability to earn real rates.
Speaker 2: Um, be really emerge, spreads in credit have come right in.
Speaker 2: And someone looked at me and said, oh, a spread's
Speaker 2: too tight. And I said, Well, you know, and we,
Speaker 2: as you talk through some of that, um, the reality is,
Speaker 2: I think part of that is, um, that as spreads
Speaker 2: have come in, because people are seeing this opportunity to, um,
Speaker 2: To being credit and earn a real rate of return,
Speaker 2: and so it's the combination of this real rate of return,
Speaker 2: as well as, um, that I think investors, um, large
Speaker 2: investors globally, really think about.
Speaker 1: Um, spot on, uh, the one way I look at
Speaker 1: sort of the risk in the equity market is the
Speaker 1: difference between risk-free returns and the dividend coming from the
Speaker 1: public equity markets and the gap is rather worrisome right now.
Speaker 1: I mean, it is as high as it has been
Speaker 1: since 2007, and we all know what happened after that. Uh, so, uh,
Speaker 1: so yeah, the, the valuation of the equity market is
Speaker 1: also exceptionally high in the public equity side and the
Speaker 1: fact that
Speaker 1: Both the nominal and the real rate of return and
Speaker 1: the risk-free asset is still substantial. Um, that is my
Speaker 1: headache for 2025. Even if there was no tariff war Alicia,
Speaker 1: I would have been worried about that dislocation risk. Um, we,
Speaker 1: we talked a little bit about the secondary market. I
Speaker 1: just want to sort of
Speaker 1: Refer to this one number, I think this was in
Speaker 1: the Financial Times last month. The secondary market volumes traded
Speaker 1: globally reached 162 billion in 2024, in which PE investors
Speaker 1: sell their stakes to new investors for cash or fund
Speaker 1: managers themselves sell company stakes to new funds. Um, is
Speaker 1: this a phenomenon or it's like it's something that's been
Speaker 1: going on for a while?
Speaker 2: Yeah, so the secondary market really was created in the
Speaker 2: early 2000s. I'm gonna say the original player was collar Capital, um, and,
Speaker 2: and the genesis of that market was buying, so if
Speaker 2: you have LP interests in funds, and so what I
Speaker 2: mean by that is I committed to that 10 year fund,
Speaker 2: and I get 5 years in, and I think.
Speaker 2: Actually, I don't want to be in this anymore. There
Speaker 2: are buyers out there, secondary buyers who will buy my
Speaker 2: position within the fund. And so buying positions from LPs.
Speaker 2: And over, over the last, you know, period, um, actually
Speaker 2: that market has been for, for managers willing to buy
Speaker 2: positions in funds, secondary managers, um, around that, somewhere between.
Speaker 2: $50.70 billion dollars per annum. I think what's really seen
Speaker 2: a marked change in the secondary market is, um, the
Speaker 2: evolution of what are called continuation vehicles, and continuation vehicles
Speaker 2: really only emerged, um, in the last 5 or 6 years,
Speaker 2: and they now make up somewhere between 40% and 50%
Speaker 2: of all volume in the.
Speaker 2: Secondary market. And so, the secondary market numbers like you
Speaker 2: just quoted, we still have that $50 to $70 billion
Speaker 2: of LP interest that have changed hands at that kind
Speaker 2: of rate for quite some time, but you've got this
Speaker 2: new and emerging, um, continuation vehicles. And actually, one of
Speaker 2: the really interesting parts of and so what is a
Speaker 2: continuation vehicle, I guess, um, a continuation vehicle is where,
Speaker 2: An existing fund manager who is somewhere in that journey,
Speaker 2: probably later in that journey of the 10 year fund life, um,
Speaker 2: says this company is not yet either ready to be sold,
Speaker 2: or needs to remain in private markets for another 5 years,
Speaker 2: and I believe there's another whole leg of growth to go.
Speaker 2: And I wanna continue to own it. And instead of just,
Speaker 2: you know, given that that that there's a finite life
Speaker 2: in that investment, um, that fund manager sells it from
Speaker 2: the existing fund.
Speaker 2: And buys it with a new group of investors, often
Speaker 2: a secondary player, and so that is the phenomena that
Speaker 2: has really allowed, and you've seen the secondary market to
Speaker 2: grow very substantially as a result of the emergence of
Speaker 2: these continuation funds.
Speaker 1: Very good. Um, yeah, I'm not sure whether I'm about
Speaker 1: to ask a provocative question, but maybe there's a very,
Speaker 1: it's a very mundane question. Is there some circularity between
Speaker 1: private debt and private equity?
Speaker 2: Yeah, I think, um, a little bit like you might say,
Speaker 2: uh if I step us back to the public markets,
Speaker 2: and I'll, I'll use Australia just because I'm sitting here
Speaker 2: at the moment, but if you look in public markets,
Speaker 2: some of the biggest stocks are the banks, um, CBA, Westpac, and,
Speaker 2: and if you go into the public debt market, um,
Speaker 2: some of the biggest issuers, um, of whether that be, um,
Speaker 2: of public debt, whether that be all the way through.
Speaker 2: Through the hybrids, high yield, all of it, are the banks, right?
Speaker 2: And so, um, the commonality that you can find between
Speaker 2: private equity and private debt is there are often common companies,
Speaker 2: just like I was talking about there in CBA that
Speaker 2: need both equity and debt. And as those companies generally
Speaker 2: have equity and debt in them, they have two options, right,
Speaker 2: for the debt, that, I mean, there's many versions of this,
Speaker 2: but they can go to the public market, or they
Speaker 2: can go to the private market.
Speaker 2: And similar for equity, um, and so, the, the commonality
Speaker 2: between private debt and private equity is often, um, that
Speaker 2: there are common companies, uh, sitting in portfolios between private,
Speaker 2: private debt managers, uh, and private equity managers.
Speaker 1: And then you are one of those, right?
Speaker 2: We are, yeah.
Speaker 2: Yeah, one of the private debt managers and blew
Speaker 1: out. Exactly, um, talk about multi-asset. um, Alicia, the conversation
Speaker 1: so far has been about institutional investors, but I increasingly
Speaker 1: read articles about ETF vacation or private equity or retail
Speaker 1: investors finding options to get into the private equity world.
Speaker 1: So tell us a little bit about this phenomenon.
Speaker 2: Yeah, look, as, as you will know, this has been
Speaker 2: a phenomenon in other ISAC classes now for the last
Speaker 2: 20 years, right, you know, Vanguard and our friends that
Speaker 2: created ETFs in equities, um, and we've watched this trend
Speaker 2: for for quite some time. I think, and other private
Speaker 2: asset classes, shorter duration, private asset classes, um, have also
Speaker 2: taken on this trend, and I think,
Speaker 2: One of the last frontiers that have done less of
Speaker 2: this is private equity, and so, um, it look, you know,
Speaker 2: that hence the conversation that you hear about, um, should
Speaker 2: private equity be next for this, and if you look
Speaker 2: at the horizon of assets that have done it.
Speaker 2: You've started with the most liquid types of assets, and
Speaker 2: over time you've gone really sequentially through to, um, shorter duration,
Speaker 2: private assets, and we're now talking about longer duration private assets, um,
Speaker 2: and going through these types of structures.
Speaker 1: But there is an illiquidity issue. There's a leverage issue.
Speaker 1: Are retail investors equipped to deal with risks like these?
Speaker 2: I think there are different ways you can deal with that,
Speaker 2: and if I, if I bring that back out, you know,
Speaker 2: I think institutions, um, have liquidity needs as well, right?
Speaker 2: And so institutions for a long time and and institutions
Speaker 2: have very different liquidity needs, some have, you know, if
Speaker 2: I think about here in Australia,
Speaker 2: The superannuation system, they get, they get funds flow and
Speaker 2: cash in every week, right, as people are paid, whereas
Speaker 2: at the Future Fund, we didn't have inflows, right, so
Speaker 2: we're managing a portfolio more like an endowment. And so,
Speaker 2: I think there's um relatively sophisticated mechanisms today. If you
Speaker 2: roll back 20 or 25 years ago, some people would say,
Speaker 2: if you don't have cash flows, like if you're more endowment-like,
Speaker 2: how do you,
Speaker 2: Manage liquidity and all of those type of things. And so,
Speaker 2: I think, um, it does make it a little bit
Speaker 2: more complicated to manage a portfolio. It makes it a
Speaker 2: little bit more complicated to rebalance a portfolio. Um, but
Speaker 2: there are definitely tools that have been developed in the
Speaker 2: institutional world that are just as applicable to think about
Speaker 2: that can allow for the right type of investor to
Speaker 2: have a little bit of liquidity in their portfolio.
Speaker 2: Um, and hopefully earn that return premium that we were
Speaker 2: talking about earlier, as well as potentially get access to
Speaker 2: things like innovation, um, and, and new and emerging themes.
Speaker 1: Well yeah, I'm absolutely fascinated by this because, you know,
Speaker 1: the Americans have 401ks in Singapore, we have CPF, the
Speaker 1: Provident Fund of the population, and these are illiquid investment vehicles.
Speaker 1: The government will not let you access these till you
Speaker 1: reach retirement age. So it seems like you're suggesting that.
Speaker 1: Vehicles like this, there's a room for private equity.
Speaker 2: Look at, if you look at Australia, Australia's superannuation system
Speaker 2: is a defined contribution system.
Speaker 2: And they they've they've found ways to bring private equity
Speaker 2: into it. Um, and so, uh, like I said, different
Speaker 2: ways that you can think about liquidity, if that makes sense.
Speaker 2: But for, for the right type of investor, um, to
Speaker 2: get access, like I said, to hire, if you have
Speaker 2: a long-term horizon, um, you, you can leave some return
Speaker 2: behind by not thinking about private markets.
Speaker 1: OK, final question. I was having dinner with a friend
Speaker 1: who runs a private equity fund last night, and his
Speaker 1: way of looking at the world is through what is
Speaker 1: known as IITA. It was II at this and II
Speaker 1: at that, and I reminded him that Warren Buffett is
Speaker 1: not a big fan of that particular accounting treatment of
Speaker 1: looking at company's performance. Where do you stand on this?
Speaker 2: It completely, I mean, it depends, um, it depends on
Speaker 2: what the company is, it depends on the industry it's in.
Speaker 2: And I would say to you, I never look at
Speaker 2: a single metric anyway, right? And so look, if you,
Speaker 2: you know, that'd be, you know, a part of this,
Speaker 2: it's a, it's a common question, but if I say,
Speaker 2: and I say back to my equity friends, do you
Speaker 2: just look at earnings or do you also look at
Speaker 2: free cash flow, right? Like, I mean, putting aside whether
Speaker 2: it's IIA, whether what the metric is, right? I think
Speaker 2: all financial investors, you, you triangulate the financials of a company.
Speaker 2: Um, for a business that is very low in capex,
Speaker 2: you know, you, there's quite a different version of the,
Speaker 2: the type of, the type of earnings you're thinking about
Speaker 2: versus businesses that are very high in capex, for example.
Speaker 2: And so, I think, um, what industry, what the company is,
Speaker 2: the stage of the company, but I'd generally say you
Speaker 2: need to look at many financial metrics before you make
Speaker 2: a decision on what price you want to buy.
Speaker 2: Um, a business for, and look, IED is just one
Speaker 2: of those.
Speaker 1: It's been such a great conversation. Alicia, thank you for
Speaker 1: demystifying what some people think is an exotic asset class,
Speaker 1: but I think you have made it seem pretty mundane.
Speaker 1: Thank you so much for your time and insights.
Speaker 2: Teyma, thank you for having me along. I really appreciate it.
Speaker 1: It's great to have you and thanks to our listeners
Speaker 1: as well. Kope Time was produced by Ken Delbridge at
Speaker 1: Spy Studios. Violet Lee and Daisy Sherma provided additional production assistance.
Speaker 1: All 151 episodes of this podcast are available on YouTube,
Speaker 1: as well as on Apple, Google, and Spotify. As for
Speaker 1: our research recommendations and webinars, you can find them all
Speaker 1: by Googling DBS Research Library. And remember, nothing that we
Speaker 1: discuss form any trade recommendations. Have a great day.