Katherine Lucas: Private markets or alternative asset classes that include private equity, venture capital, private credit, real estate and infrastructure. They've really seen this exponential growth in recent years, as the investors are really looking to prioritize diversification and seek higher returns in in some really kind of rough macro and geopolitical environments. So, Donna, I want to dive right in with you. Let's unpack this a little bit. Why do you think that this is?
Donna Milrod: Well, first of all, I'd go back to when interest rates were so low and that helped drive a lot of the private market's activity for some time. And obviously, you highlighted some of the macro economic and geopolitical shocks. But you can see inflation easing around the world, which, you know, helps bring private markets back into the frame. But that's not the only reason and dynamic. There are, you know, kind of a need for an increasing need for longer term returns and longer term investments. Also you see increasing investor demand. And retail investors are looking for private markets exposure. And at the same time, you have different fund structures that allows retail investors to get more exposure to private markets exposure. We also have seen really fiscal policy changing around the world in different geographies. You see countries from a government point of view looking to bolster infrastructure spending. You certainly seen that in the United States, but also in geographies like the Middle East, where governments are looking to diversify away from, you know, an oil based economy and really bringing capital back, repatriating capital back into their own countries to like, really focus on domestic growth.
Katherine Lucas: I think that's interesting. And one of the things we saw in our recent private market survey, right. We heard that as many as a third of institutions think that retail style fund vehicles will be taking roughly half of all private markets flows in 2 to 3 years time. So, Don, if you don't mind, I want to stay with you. But, Scott, I want to come to you next, so be ready. Why do you think that is?
Donna Milrod: Well, I talked already about like the demand side that's coming from retail investors. I think that also technology has gotten a lot better where you can really start to provide the kind of speed of information to and transparency of information that retail investors require. And I think that there's a recognition, certainly amongst the regulatory universe as well, that that this shouldn't just be limited to institutional investors.
Katherine Lucas: Scott, your thoughts?
Scott Carpenter: Just to build on some Donna's points there, I think it's probably a little early to predict that two years from now that 50% of flows into private markets could be retail. But we're certainly down that path. I think we're well established on a trend of semi-liquid vehicles that are allowing distribution into the mass affluent wealth channels. That's been a trend for the last five years or so. We also our research indicates investor types of all stripes are looking for more exposure to private markets. And we are seeing creativity amongst our customer base where traditionally private markets, firms and traditional asset managers are joining up in partnerships that take advantage of investment strategy and distribution skills to try and tackle some of this retail ization. The other thing I would just say is in order to get to true democratization and true retail distribution of private markets funds, there are operating norms that would have to change, right? So as it stands right now, valuations are very infrequent. The process to close a net asset value takes up to 30 days. There's very high degrees of complexity and allocations and waterfalls. All of those things need to be solved in order to get to a true retail distribution, where you don't have a liquidity drag on the returns of the portfolio. And our research also indicates that private markets could be the biggest beneficiary of tokenization. As we get down a digital path here in the coming years.
Donna Milrod: I'd also just add that you don't forget you're starting to see or we've seen over the past, I don't know, 5 to 10 years, a reduction in of companies coming into the public markets. So as IPOs decrease, those good companies are finding their way into the private markets and having, you know, letting a retail or a wealth, you know, kind of the wealth segment have access to good companies that are growing, you know, they need to expand their ability to go beyond the public markets.
Katherine Lucas: Absolutely, absolutely. Scott, I want to come back to you for a minute. And one of the things that we're seeing is more than half of the 13.1 trillion in private markets is taken by private equity, right. And we're also hearing that some LPs are reporting what they think is an overexposure in that area and that part of the market. So tell me a little bit about your view on the PE market, as well as kind of what you think this new impact or this new outlook might be?
Scott Carpenter: So I think it's hard to talk about the private equity industry without talking about dry powder. I think that's the the dynamic in private equity and likely the thing that is making investors pause to see if they're overexposed to private equity or not. And over the last decade, we have seen a relentless march in the build up of dry powder to around 1 trillion 10 years ago to over 4 trillion today. And just Definitionally dry powder is committed capital where people have said they want exposure and they want to invest in private equity funds. But the GP themselves have not found the investment opportunity to call and deploy that capital yet. So as that dry powder level has been raising, there becomes this concern that it must be a crowded field, that there's going to be high competition for the few deals that are available out there. And that means a couple of different things. That means that people could rush into trades that aren't great. It could also mean that the economics that you get on the returns are compressed if there's high competition for those deals. So I think, interestingly, April of 2024 is the first month in over a decade where levels of dry powder actually reduced. And that's, Donna mentioned earlier, some of the inflationary dynamics, some of the potential for recession, the regulatory dynamics. And as more experts are predicting a less likely scenario of a recession, there are more deals opening up as inflation eases, there are more deals opening up. And so I think that's why we've seen for the first time in April, this drop in overall dry powder levels. Now it only dropped by one basis point. So it's not material yet, but it looks like a trend.
Donna Milrod: Feels like it's in the margin of error.
Scott Carpenter: Yeah, exactly. And and certainly for for our business, we remain very bullish on the opportunities to grow in private equity.
Katherine Lucas: Absolutely. Donna I want to shift gears a little bit again, touching on our upcoming report on global private markets focusing on fundraising and deal distribution. It's really interesting to me as I was reading some of the preliminary results because we're seeing some real regional nuances emerge. Can you elaborate on some of these and what some of your favorites might have been? Or most interesting?
Donna Milrod: Sure, I can try anyway. Look, I think I think you're right also, you know, going back to kind of the inflation story, it's not true for everywhere that inflation is easing. So you see the dynamics on capital moving into private markets, you know, kind of, reacting to kind of that different story around inflation around the world. But for APAC, specifically in the developed the developing parts of APAC that's growing more and more as a fund raising venue, you see bigger liquidity pools among institutional investors there. I think the institutional investors, the sovereign funds in particular, are driving both kind of what's happening at the GP level as well as in some cases, the LP level. So you see both fund raising and deal distribution coming from that dynamic of official institutions in APAC. European private debt is on a tear. It's one of the most appealing markets for fund raising through these private debt vehicles in Europe. If you think about what's happening in the Middle East, they are really looking at this notion of repatriating capital, meaning they put a lot of their sovereign wealth out, cross-border to invest in private equity, private debt, vehicles and what's as they kind of look internally at ways to kind of diversify their economies and grow their economies, they're really looking to repatriate that capital back to really support, you know, fiscal policy with respect to growing infrastructure and diversifying their economy. And then, of course, in the US, where inflation has eased, you see a lot of the themes that we've talked about above before, which is, again, the government fiscal policy really focused on infrastructure. So that is encouraging a different kind of fundraising as well as distribution.
Katherine Lucas: So Scott, we see a lot out there in the market. There's a lot of focus on private credit, but I kind of want to dig in more. I liked our little conversation on real estate. So I want to I want to pull on a thread for some other asset classes a little bit real estate. Okay. So real estate is an asset class. You know, I think there's there's a little bit of a theme out there. Some people think it's kind of lost its shine. Right. We've already talked about the high interest rate environment. And then some of the additional post pandemic pressure on commercial real estate. But there are real pockets, I think, in the real estate market where the supply demand dynamic is, is really clearly positive and it's pointing at, you know, some lucrative opportunities, not just the risks. So talk to me a little bit about the real estate opportunity that you see.
Scott Carpenter: I would start by saying just like private markets is many different things, real estate is also many different things. You have a lot of different subsegments and asset classes, which as you said, there may be some of these that are under pressure, but there are actually many that are performing quite well. And so as we look at the overall landscape, we find a couple of things. We find nber one. And mainly focused on the US property markets in major metropolitan areas. Headquarters and new buildings are renting very quickly, in fact more quickly than they were pre-pandemic. There is pressure on office space outside of major metropolitan areas, but in the big cities, a lot of demand for those. We're also seeing warehousing and distribution, logistics, types of real estate performing very well. So if you think about Amazon and how they distribute before all the drones arrive to deliver things automatically to all of us, there's a huge network of distribution facilities, and those are performing very well as real estate investments. And then coming back to some of the things we've talked about in terms of inflation. Properties that are anchored by grocery stores or by home improvement stores are performing very well. Right. So I think that there are a lot of places where there is a lot of optimism for real estate investing, and in the places where it's depressed and that there is some, some potential issues. The majority of those capital, the majority of the capital in those vehicles is long term capital that's locked for 7 to 10 years, so that there is time for markets to rebound before investors would be harmed.
Katherine Lucas: See, I like that, there is the good news out there. So often you only hear the doom and gloom, but there is a lot of opportunity. It's really interesting. Asset class I agree with you. Let's touch briefly on infrastructure. So infrastructure has a well-established it's an attractive risk return profile. And it also has some very strong defensive characteristics trait that's probably likely going to serve that asset class very well in 2024 and beyond. So what what do you think 2024 is for infrastructure as an asset class. Is this kind of a crucial year for for infrastructure?
Scott Carpenter: Any year where you have the potential for major political change is a big year for infrastructure investing. And obviously there's elections on the United States this year and the UK and many places around the world, and the unmet demand for infrastructure investing is astronomical. It's well over $50 trillion worth of unmet demand for new bridges, for new infrastructure, for railroads, for airports, etc.. And the big question is always, how much of that is going to be met by public government funding versus how much of that is going to be met by private capital. So depending on who winds up in office in these different countries around the world, you could have places where more private capital is needed, which would be great for our business in terms of raising money to fund some of these projects and for folks to get that long term uncorrelated return. If there are other places where you have a lot of government funding, if you look at as an example the funding that China, their Belt and Road program has had over the last decade, that has actually stopped some of the opportunity for private capital going into infrastructure projects. So I think not to get political, not to talk about elections, but that is a factor in terms of how the the fund industry around infrastructure will or won't grow in the coming years.
Katherine Lucas: All right, last question. And it's going to come to both of you. And anyone who knows me knew this question was coming. There are a lot of challenges. We've discussed a lot, right. And there's a lot of opportunity, but there's still a lot of challenges, specifically with data in the private market space. Right. And this can act as a massive headwind against some of the trends that we've just discussed democratization, increased allocations, etc. So how are we seeing the industry respond to this? Donna, how about I start with you?
Donna Milrod: Yeah. So first, I think you have to realize that all the players in the ecosystem are feeling the same pinch. So if you're an LP, you're looking to get better data, more timely and more consistent, and they want that from their GPUs. And the GPUs, of course, need to respond to what the LPs would like. But also, you know, getting more frequent and consistent portfolio, holding data for them, for themselves, and also to kind of obviously pass along to their LPs, the regulators. Similarly, you know, in order for us to continue on this path of democratization and for the retail investor to get exposure, the regulators are really going to worry about investor protection. So that means more transparency, more disclosure, better valuations, more dependable valuations, more timely information. You know, if you think about the ecosystem, they have the same the same challenges in just in just different ways. What we're also seeing is as this need for better, better data continues, we especially from a manager point of view, as well as an official institution or an asset owner, they really want a whole portfolio view of their private holdings, but also in many cases right next to their public holdings. So how how do they from a from a CIO point of view or a portfolio manager point of view, how do they see everything from the entire portfolio point of view? You can't do that unless you have better data as you think about portfolio construction and and risk and things like that. And I'd also just say that they have those similar data challenges. When you try to look at things that are valued daily versus things that are not valued daily at, you know, kind of on a more base, on a more base level.
Katherine Lucas: Scott, your thoughts?
Scott Carpenter: Just to add to that, in addition to the convergence of private and public information and funds and the need to bring all those things together side by side, we also see convergence among the different subsegments within private markets. So firms that were historically private credit managers have gone out and bought a real estate capability or have bought a direct private equity capability. And so they've wound up with really stacks of technology and requirements to manage information where everything doesn't line up. And so our research indicates that approximately two thirds of managers are going to look to outsource, to find a data management solution that can help to acquire, normalize and present information in a coherent fashion, which will allow them to run their businesses more effectively.
Donna Milrod: And I would just add that given the earlier part of the conversation with how high the growth rates are in, in private markets, managers are starting to recognize that they can't continue to support a growth rate of 2023, 25% and expect to grow their expense base, either because they're investing in technology or data solutions at the same rate. So that's another, another reason why they're really looking for outsourced providers who can really help them find the scale that they need to support that growth.
Katherine Lucas: Well, an excellent conversation with two excellent colleagues. Thank you both so much for taking the time to join me today. Thanks, guys.
Donna Milrod: Thank you Katherine.
