Katherine Lucas (KL): Today we're diving into the key challenges and opportunities in private markets. You know, we had a discussion earlier this year, and I think it's been really fascinating to see how the market has evolved and how it continues to evolve. So today, to help us navigate this really complex landscape, we've got Scott Carpenter, our global head of alternatives, as well as Chris Coleman, our global head of sales and client coverage. Guys, love seeing you as always.

Scott Carpenter (SC): Thanks.

Chris Coleman (CC): Thank you.

KL: Excellent. So we're going to jump straight in. Okay. So of course we all know the saying the only constant is change right. We love that saying. And that really does embody this category. So Scott I'd like to start with you if I may. And you know, I know you deal with a really wide range of topics and companies in your role.

So, what trends are you seeing in the market?

SC: Yeah, sure, Katherine. I mean, it does feel like a time of phenomenal change in private markets. And some of those changes are driven by macroeconomic or fundraising trends. And in other cases, it's really just innovations in investing and in distributing that are hallmarks of the private markets industry that we're seeing. So, I'd highlight three main things that we've seen change fairly rapidly. Number one, I mentioned distribution. And we are seeing a lot of firms that are now looking to distribute to the mass affluent through wealth channels, and that's changing the dynamic from typical General Partners (GP) and Limited Partner (LP) funds that might have had a couple hundred investors and now have tens of thousands investors, which is a stressor to processes, systems and other capabilities around the space.

The second trend that I would point to would be around liquidity. So historically, private markets funds were seven or 10 year capital locks closed ended. And that was it. And now we're seeing an increase in the number of evergreen funds, the number of open ended funds. And also semi liquid products business development companies, Intervale funds, European Long-Term Investment Fund (ELTIFS), Long-Term Asset Funds (LTAFs), all of which offer investors some degree of liquidity, which again is a stressor to the environment where firms haven't been used to accommodating that type of liquidity.

And then the final trend that I would point to, that seems quite prevalent, is a blurring of the lines between general partners, limited partners, asset owners, sovereigns, where historically take an asset owner as an example. They would have entered through a GP structure or a fund to fund structure to get exposures to private markets. Increasingly, firms like that are now directly investing in infrastructure products. Directly lending to companies without an intermediary of a fund. So there's a difference now between who's who in the market. But everyone now is looking for a total portfolio solution as well, in terms of how do they bring together their investments in traditional funds, direct investments and public and private. So very interesting.

KL: Those are massive changes. Chris, for your part, what are you seeing?

CC: You know, I'd agree with, with what Scott said. Nice. I would also say that value creation has become critical to the general partners. They need to move beyond traditional methods to enhance cash flow. This could include, strategic mergers and acquisitions, optimization or working capital, digital capabilities as well. And, the focus is just on innovative pathways to, to meet their investors’ expectations. There's also a huge push on data, right. There's a convergence of the traditional and the alternative here. This is largely unstructured data on the alternative side. And it's not a trivial, exercise for asset managers and asset owners alike to bring this all together.

KL: We're going to come back to data in a little bit. You've spoken, you you've sat down with me before. You know, it's my favorite topic. But I do want to stay on the overall dealmaking environment a little bit. It's really interesting to me. I saw a McKinsey report recently, and they noted that while total deal value has rebounded by, I think it was around 20 percent this year, transaction levels are still really kind of below the highs that we saw in 2021 and 2022.

Scott, what do you think is driving this?

SC: Yeah. So I think, we see the same thing through our customer base where, 2024 has been a slower year in terms of fundraising. And I think it relates to slowdown in portfolio exits. So a lot of investors LP's and these products have said, I'm happy to participate in your next vintage, but I have to start to see some returns from the previous vintage investments that I've made. So I think that's a large driver of what slowed things down a little bit this year.

KL: Interesting. No, that makes a lot of sense. So what role do you see technology and digital transformation playing in this environment. Right.

Is it still a major focus or has the narrative kind of shifted with the tighter capital?

SC: Yeah, sure. And my focus being on kind of the operational, components of private markets, I would say the technology is pivoting from a kind of fact of life that people knew they had to be focused on to something that is really a growth enabler. And so many of our customers, as an example, are looking to over the next few years, double, triple, quadruple their assets under management. And technology is really one of the ways that folks are looking to do that, right?

Everyone wants to grow that assets under management, but nobody wants to double, triple, quadruple their operating budget or their technology budget. So increasingly, we're seeing firms come to us asking for us for the latest in technology and the most scalable solutions to enable that growth.

KL: Interesting, interesting. So obviously technology costs are growing, and that's something that investors have to watch.

But Chris, how are investors protecting margins in other ways. What are you seeing out there?

CC: Let me give you an example of how, we've been able to apply technology to the benefit of our clients. State Street Alpha for private markets, for example, uses natural language processing to quickly sort through, large volumes of unorganized data, which is obviously very common in this segment. Spreadsheets, call transcripts and such. And this would have taken weeks, months or not been available at all to our clients. So now we are able to provide new insights to them by harnessing this technology.

KL: Artificial intelligence backed by real intelligence I like it.

So obviously we see that technology costs are growing. And that's something investors really have to watch. Right.

But Chris, how are you seeing investors protecting margins in other ways?

CC: Sure. We are seeing our clients and prospects really, embrace scaling with their service partners. Now, this can take on two forms, particularly in the private market space, either through consolidation of partners, service providers, administrators or embracing outsourcing as a tool or tool to leverage expense cost control it to provide a better outcome. There's so much growth in this space. Partnering with the right outsource provider allows these clients to, to scale accordingly.

KL: So it seems to me like 2025 is going to present some unique challenges. So I want to come to both of you for this question. Scott, I might start with you, if I may. What in your view is going to be kind of the most pressing issue that investors are going to be grappling with?

SC: Sure. So, I mean, I think a lot of it comes back to that macro environment that I described earlier. And one of the things that drives dealmaking are interest rates. And certainly with a rising interest rate environment like we've seen over the last few years, capital that's raised and, and financed through debt has become less attractive. Right. So we'll obviously watch very closely to see where interest rates go over the coming quarters in years. But in the, in the absence of a lower rate environment, we're seeing more firms that are looking at portfolios, investments that don't have leverage, that are just back to the value creation, themes that Chris mentioned earlier. Absolutely.

KL: And Chris, what are you seeing?

CC: Well, I think, 2025 is going to be the year of data, right? This is an opportunity for us to take a 15 year pedigree, in our data pursuit, the massive investment we've made in our tools and capabilities to deliver out to clients, to provide differentiating insights. And, although we've been on this journey for, for quite some time in conjunction with our clients, it's going to be much more mainstream. And, I think drive quite a bit of our discussions next one.

KL: So I'm sure people, when they think about 2025, they're also concerned. There's also a level of concern, right, given the instability in many areas of the world. So let's talk a little bit about risk management more broadly.

So with the geopolitical risks and regulatory shifts, Scott, really how are you seeing investors adjusting their risk models in private markets?

SC: Yeah, sure. It's definitely a big focus Katherine, because there's a lot going on in the world right now, whether it's politics, conflicts, wherever the case may be. So we're seeing customers that are trying to shift from historical based risk analysis to more scenario based. So understanding what ifs, we have at State Street a research and insights team that helps us collect information and make good, informed decisions. And then we've also seen, you know, places where, you know, regulatory changes in China are driving people's investment decisions. To a certain extent. We see energy security moving up as an important part of portfolio construction. We have ESG as, especially in Europe, as a large driver now, not just of kind of compliance, but also overall portfolio decisions. So I think that in terms of gathering the right insights, plugging in the right scenarios, there's a lot of things that people can plan for. Maybe not perfectly, but more optimally than we have in the past with a historical based approach only.

KL: Absolutely. So to wrap up, I want to hear from both of you, Chris. Maybe I'll come to you first. Okay. Excellent. So I want to hear from both of you about your outlook for private markets over the next 12 to 18 months.

Do you see these challenges easing? Is more turbulence on the horizon?

CC: Yeah, I'd say I'm optimistic. In general. I think, to call out some of the themes, those that can balance, cost control with, with value creation will succeed. Some of the sectors where I think there'll be opportunity is clean energy, health tech, digital infrastructure, for instance. And, we've got to find the right clients to partner with, obviously, to offer our solution set. But I think those that are balancing, short term liquidity constraints with a focus on long term strategic growth are the type that we want to partner with. So, I'm very optimistic for 25 and beyond.

KL: I love that. Scott? Your views.

SC: Also optimistic and say that, there are there are some things that will play out over the coming year in 2025. And some of the things I mentioned earlier in terms of distribution into wealth channels, you know, I expect that there will be regulatory challenges on some of that distribution in terms of the appropriateness of some of the assets and strategies for a broader investor base. And so but nevertheless, I'm optimistic that, that those things will play out. Well, and I do think that we'll see. While 24 was really more of, you know, kind of an exit type year. I'm everything I'm hearing suggests the 2025 is going to be back to a return to a gangbuster year in terms of fundraising, new launches. And then certainly for us, as Chris mentioned, with dynamics around outsourcing or lift outs and expansion of available market for State Street, we see on the horizon for 2025 as well.

KL: Wonderful. Well, on those two lovely notes of optimism, we will wrap. As always, thank you guys for sitting down and chatting with me very much. Appreciate your insights and perspective.