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Today, we'll look at how a future Donald Trump presidency will impact electric vehicles.
Plus we're going to discuss why shares of Tyson Food surge the most in more than two years.
But first we dive into corporate earnings from the media and entertainment giant Walt Disney.
Walt Disney reported fourth quarter sales and profit that beat Wall Street expectations and forecast earnings growth for the next three years.
For more, John and I were joined by Githa Raganathan, Bloomberg Intelligence analysts on US media.
First, we asked Keitha for her take on Disney's most recent quarter.
What we saw was a lot of guidance, and we've never seen guidance laid out like this for us ever before. I mean, this was line by line item guidance for each of the different subdivisions at Disney, whether you know it was the theme park business or the streaming or movie studios. They kind of gave us, you know, segment
by segment numbers and exactly what to expect. And really the biggest thing for Disney over the past few quarters has just been this lack of visibility and so much of investor uncertainty, and they just cleared it all up in this one, you know, fell swoop with this earnings report.
They never did that for me, getha, I always had to guess and all that stuff. But for you, they just started up on silk platter. What got your attention the most from some of this guidance, What do you think the street really likes?
I think what the street really likes is you have high single digit EPs growth. Remember the street was projecting about four to five percent, So that's a nice uptick there for twenty twenty five, and then going into twenty twenty six and twenty twenty seven, they're looking at double digit earnings growth. And the other bright spots were, you know,
the theme park business. Now, we do know that there is a moderation when it comes to the domestic theme park business, but it looks like things might not be actually as bad as we had feared. So domestic parks actually performed a little bit better than we expected. And then they talked about some weakness going into the fiscal first quarter. Remember we did have those two big hurricanes in Florida. They do have a lot of cruise ships that they're launching, and so there's going to be some
launch costs weighing on profit. But then you get into the second half of fiscal twenty twenty five and they're expecting those cruise ships to contribute in a big way and kind of the theme parks to also come back. So I think that's again some source of you know, investor optimism and confidence.
I get this streaming part. I'm not sure that I understand that linear TV part and why that's still part of the empire.
Yeah, nobody understands it, john And that was actually a question for Hugh Johnston and Bob Eygert at the earnings call. They're like, you know, why should you be holding onto this business? You know, Comcast just recently said that they're going to be kind of considering spinning off their cable TV network business. And remember, the big thing that's really coming up for Disney in twenty twenty five is that
they are launching this standalone ESPN product. And if they had any reservations in the past about jettisoning, you know, the TV network's business because they were tied to the bundle through ESPN, you know, this kind of definitely opens up the field for them and it no longer ties them down to the bundle. So they were asked the question, they said that they're not looking into it. They like
their portfolio just the way it is. But we really think that once they get that ESPN standalone of streaming service up and running, they surely will kind of look into doing something more dramatic, I think with the TV networks, especially given you know, a regulatory change.
To talk to us about the streaming business. They've finally turned profitable on that business. Give us the delta that you think that streaming business go through from losses to potential profits.
Here, big big turnaround, Paul, And I mean this was really the big story for twenty twenty four. To go from four billion in losses in twenty twenty two, two and a half billion in losses in twenty twenty three, to finally squeaking out a profit here in twenty twenty four. And remember they've just barely broken even, so about one hundred and fifty million dollars in profit. But the whole story is how they kind of build on that one
hundred and fifty million dollars. So you know, Netflix this year is going to report about ten billion dollars in profit, and I think there's some encouraging commentary, so they already kind of guided. They gave us actually hard numbers for the streaming profit for both fiscal twenty twenty five and six. Twenty twenty five, they said over a billion dollars in profit, and in twenty twenty six they actually gave us a margin number, double digit margins. And remember this is the
big story. Everybody is chasing those twenty five percent operating margins that Netflix has already achieved, and so Disney is. It looks like, I mean, they obviously have a lot of catching up to do, but they're closing in.
Our Thanks to Githa Raganath in Bloomberg Intelligence analyst on US media, this.
Week, we focused on a Bloomberg Big Take story entitled Trump's win puts Musk in the White House's new C suite.
You can find it on Bloomberg dot com and on the terminal. The story looks at how Tesla CEO Elon Musk spent at least one hundred and thirty two million dollars to help Donald Trump's re election as US president and now Musk we'll have a role in Trump's new administration.
For more, guest host Jess Meant and I were joined by one of the story's authors, Max Chafkin, Bloomberg BusinessWeek Senior reporter. We first asked Max what we know about Elon Muck's new role.
And we learned a little bit more.
Just after this story was published, Donald Trump made something official that he had teased and that Elon Musk can tease repeatedly on the campaign trail, Elon Musk will be the person charged with providing advice on the streamlining of government. Now, that could mean any number of things. It could mean, I think very little. It could also mean that, as Donald Trump prepares to enact his you know, very ambitious agenda, that Elon Musk will be at his side, and that'll
be my bad. I mean, I think the job thing is probably a distraction. You know, the most important question in the Trump White House is who has Trump's ear, and right now that's Elon Musk. And I think as we put together the story and as I've been thinking about this, you know, Elon Musk throws him into these companies, and famously he has six different companies, you know, Tesla and SpaceX, his car company, and rocket Company being.
The big ones.
I think we need to start thinking about politics, and in particular Elon Musk's role in right wing politics, whether it's the Trump the next Trump administration, or even beyond on that as his other big company, as something that he is going to be devoting a lot of time to and trying to use it frankly to benefit his other interests.
Leading a commission specifically outside of government, Elon Musk doesn't have to divest his personal and financial holdings when making recommendations to the White House on federal spending and regulations that he wants to cut. I mean, what sort of precedents do we have for something that's created sort of that's supposed to be specifically outside government, And what power can he yield and not yield? Do we have any indications?
Sure have been lots of presidential commissions. You know, this kind of thing is not necessarily anything new. It's really just a question of how closely is Donald Trump listening to it? And when Elon Musk, He's suggested all kinds of very radical things, things that are likely to be either difficult to achieve, like practically working within the confines of government, or wildly unpopular or both. So you know, he's said he suggested, for instance, that he's going to
twitter the US governmentsuggessing, you know, massive layoffs. Remember he laid off eighty percent of the Twitter staff. He is not going to lay off eighty percent of the US government. I think that would be a very very very surprising thing if it were to happen that said, you know, Trump has has is going to try to defund aspects of the government, and it really seems like Elon Musk is going to play a role in deciding what gets defunded, which is of course, is going to raise all sorts
of ethical concerns and questions. And because because there are ways that President Trump, president elect Trump is going to be in a position to say, squash investigations into Elon Musk companies, or direct funds to Elon musk companies, or slow down some of Elon Musk's competitors, and and so you know, it's it's it's going to keep journalists busy.
It's gonna I'm sure that the left is going to be very focused on this over the next couple of years because Elon Musk, who's a polarizing guy, is going to be tied to this administration very closely.
I mean, Elon Musk, you cite it in your article, and you just mentioned here all the companies he runs, Tesla, SpaceX, orally on and on and on. How many hours in a day does this guy have?
I mean, I mean, I mean, you know you have.
Mentioned when you think about how many companies to plays a lot.
Of video games, which you know is one of the many head scratchers with this extraordinary man.
Uh. I think we've seen.
Investors in some of these other companies get concerned. And you know, right now we're in the middle of this kind of honeymoon phase. You know, there's a mania to the way Elon Musk is talking about this stuff. Is in mar A Lago, he's in Washington. You know, Trump family members are referring to him as uncle Elon.
You got to think that.
This is not going to last, and if it were to last, that there would be a bit of a coutdown because because as you say, Tesla is a big, complicated company with lots of challenges, and right now we're seeing a lot of investors bid up the stop, but there isn't a ton of It's not like there's a clear rationale for why Tesla is suddenly worth like forty percent more than it was before the election, except that, hey,
maybe Trump's gonna make things better. But but you know, they're gonna be challenges and distraction is going to be something that we're gonna be looking at.
And what about ev policies because it seemed like they were more beneficial toward Tesla maybe under the Biden administration rather than the prior Trump administration. So how does this sort of shift? And you have kind of the Trump two point.
Zero coming up.
And this is one of the things that's so strange because Elon Musk became much more conservative during the Biden years, but the Bid years were incredibly good to Tesla.
Tesla's value, you know, shot way up.
It went from being kind of a niche player to one of the large American car companies. And you know, Trump, as you kind of hint, was very critical about electric vehicles on the campaign trail. Now, now there are two things here that are probably worth bringing up. One is where Tesla is now is very different than it was four or five years ago. And you could make an argument that these electric vehicle subsidies actually do more for Tesla's competitors than they do for Tesla itself.
So like, if you were to remove all.
These subsidies, yes, it might cost Tesla investors money, but it would also sort of help Tesla lock in its very very dominant position in the market. And the second thing, probably the more important thing, is that Elon Musk is desperately trying to move beyond the auto business. He wants Tesla to be an AI company. He wants to have robotaxis.
There is no regulatory regime there, and I think what investors are hoping, and again I don't know that they have much sort of clear factual basis for this hope. But this is the rationale that Trump will basically legalize this business, that he will take a.
Very dicey regulatory situation.
And make it less dicey, and that will be worth a lot of money to Tesla and ultimately to as shareholders.
Thirty seconds left, Max.
How much time do we think Elon Musk is going to allocate to the government stuff?
Well, right now it seems like he's he's it's a full time job, right I mean, he seems to be there quite a lot. I think this is going to be something that he's very very focused on, you know, probably as long as it lasts, which which maybe that's only going to be a couple of months.
Maybe it's going to be longer.
You know.
He did he has signaled that he wants to play in politics beyond this, beyond twenty twenty four. He's talking about the midterms already so interesting, you'll see, all right.
Thanks to Max Chafkin, Bloomberg BusinessWeek senior reporter, coming up wi a breakdown how oil producers will be impacted by a Donald Trump presidency.
You're listening to Bloomberg Intelligence on Bloomberg Radio, providing inpth research and data on two thousand companies and one hundred and thirty industries. You can access Bloomberg Intelligence via b I go on the terminal. I'm Paul Sweeney.
And I'm John Tucker. This is Bloomberg.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern car playing then broud Otto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
I'm Paul Sweeney and I'm John Tucker filling in for Alex Steele. Last week, Donald Trump was elected the forty seventh President of the United States, reclaiming the White House and pulling off a stunning political comeback. And how many industries are wondering how they'll be impacted In twenty twenty five. For more against hoos, Matt Miller and I were joined by Steve Man, Bloomberg Intelligence Global Autos and Industrials Research Manager.
We first asked Steve for his take on how the EV industry will be affected by Donald Trump.
Yeah, if Trump decides to kind of remove or cut the seventy five hundred tax credit or EV tax credit, I think most people believe that the EV penetration will stall. If not stall, it'll probably fall because a lot of the consumers are relying on that that's seventy five hundred dollars to make sure, you know, to bring down the price, the effective price of the vehicle. Most evs sold in America are still very expensive. There's only a limited number
of them that are under fifty thousand dollars. So the fear is, you know, it's going to stall EV penetration. The automaker is going to have a hard time because they's already invested. They've already committed investing a lot of money under the Inflation Reduction Act about one over one hundred and fifty billion dollars to onshore a lot of supply chains. So it's going to cause a lot of chaos within the industry.
So they'll be under no pressure whatsoever moving forward, possibly to increase sales of evs.
Yeah, I think the automaker is going to have to increase incentives. I think what could happen if the EV penetration rate does decrease from about eight percent currently in the US. He's going to be left with the strongest players. And to me, that looks like Tesla, because Tesla does have the lowest costs structure amongst all the EV makers in the US, and if the market shrinks, the weaker ones will probably fall on the wayside.
And oddly enough, First Bro or what do we call him, first friend, Elon Musk, he's not necessarily in favor of these these tax subsidies for evs.
Yeah, I think, you know, to him, I don't. He thinks Tesla doesn't need them, and I you know, it's it's partly true. If you look at the amount of cars that are least and eligible for the seventy five hundred, actually a lot of the seventy five hundred tax credit as actually from leased vehicles. If you look at the amount of least vehicles that Tesla have sold in the past twelve months, it's about twenty percent. So you know they'll get impacted. But if you compare it to Rivian.
You know, Rivian has about fifty percent of their vehicles leased and those and eligible for the seventy five hundred, so it could be a bigger impact in Reviant.
Yeah, there's a limit on you don't get the tax credit if you're buying a vehicle that costs more than eighty thousand dollars. And I believe there's a household income requirement as well, you have to be below a certain level. But if you lease it, you can get around at least one part of that tax credit. Isn't that right, Steve?
That's right.
That's actually what I'm referring to. So when we look at the companies who's going to get impacted, we really look at, you know, how many of those vehicles are leased. If you look at EV's in general in the US, the you know, the leasing penetration is actually upwards of seventy five eighty ninety percent, So a lot of people that actually buy evs are leasing it to get that seventy five hundred dollars.
What does the EV market look like right now? I mean, I know, if you read the headlines, you would think that no one has bought an EV this year, Like, you know, the industry is in trouble because they're so unpopular, not just politically, but you know, since there's difficult to charge for a lot of people, it's just not an option. However, don't we still see EV sales actually growing?
Oh, we are.
We are seeing EV sales growing, especially in the second half of this year, because there's been a lot of price cuts right over the past eighteen twenty four months in the industry, and a lot of these vehicles have become more affordable, and even especially in the used EV market, those vehicles are very competitive to gasoline cars. What the industry is really facing is getting more impacted by the
fact that interest rates are high. A lot of people cannot afford expensive cars these days, and EV's are a little bit more expensive than ice at the moment. So what the industry was trying to do, and I think what the IRA was trying to do, was trying to onshore a lot of the production while on shore a lot of the supply chain in the US and hopes of brain costs down so automakers can offer more affordable evs.
And that's what we were expecting. We were actually expecting the EV penetration rate to rise, especially into twenty twenty six and twenty twenty seven.
I got to break in here because I feel like, you know, Americans have shown a propensity for taking one thousand dollars plus monthly payments.
I don't think it's about the price.
Frankly, what do you think.
That's the big problem.
I'm test driving right now at GMC Sierra EV. It is a fantastic vehicle. It's expensive, but I think a lot of people are willing to take on debt to own a car like that. The problem is there's nowhere to charge it. I park in a garage across the street in Manhattan, you know, capital of the world, and the only option they offer is the slowest potential charge for twenty dollars a day.
So it's just not worth it.
Yeah, I think that's a very good point. Affordability is not the only hurdle. It's the charging and the range, and you know, dependent on the use. I think a lot of people with the second vehicle make it an EV. Someone who's using it for daily commutes make an EV. But you know, America is a big country and people love to drive cars, and there are a big majority of car buyers that are you know, probably staying away from ev.
Because of that, all right? Thanks to Steve Man, Bloomberg Intelligence, Global Autos and Industrials Research Manager.
Each week we look at research from Bloomberg and EF previously known as New Energy Finance.
They're the team at Bloomberg that tracks and analyzes the energy transition from commodities to power, transport, industries, buildings, and agriculture sectors. This week, we took a look at how Donald Trump's upcoming presidency will impact the oil industry.
For more guests, Sos, Molly Smith, and I were joined by ty Lou b n E, f oil market specialist. We first asked, Hi, if it is a fair assumption that Donald Trump will be good for the energy industry.
I think the USL industry and the gas industry can benefit from Trumpet administration in the number of ways. I think the first off, the bed is like a lower corporate tax rate.
So personal see.
That Trump has mentioned has indicated he would like to lower corporate tax rates from the current twenty one percent to fifteen percent.
So if the materializes, that's the way of the BED.
That's like more money for the industry and for the shareholders.
What are they going to do with that money?
Then?
Are you suggesting it would be share buybacks?
Yeah?
So there's definitely like a number of options these companies can do with this quote unquote extra money. They can, like you said, they can do more buyback for the shares, they can issue more dibidend payouts, they can reduce the debt, and finally they can always they always have the option to funnel some of these money into capital expenditures, which ultimately retranslates into more production down the road.
From the regulatory standpoint, I mean, can I go down there now and drill a well? Can I make a pipeline to take my natural guess to corporate christ Year wherever it needs to get to. Is it can be easier under a second Trump administration to build energy stuff?
Yeah, I would definitely think so.
So under the Parton administration, that's the government has imposed a lot of regulations. There are team that's unfriendly to the only gas industry. The government is issued during rights moratorium they issued they placed the pause on energy exports permits, and they also increase royalties on federal land leases.
Uh.
And I would presume and all of.
These like we're pretty hostile and created a lot of uncertainty to the industry.
So I would assume I would.
Think that Trump administration would remove a lot of these regulations. There are team that's ownerds to our gas producers, so definitely beneficial from that point of view.
You mentioned before, you know, increasing capex potentially and how that would mean more production.
Got to the worry about prices.
If you are producing so much more, what happens to the supply demand equation. There is that already some thing that drillers are thinking about of how much more they might want to maybe not go in too much.
Yeah, that's for sure.
So if you look at the past ten years, use oil producers have on server occasions crashed the aill process when they decided to turn on the production tabs. So they're very cognizange of the risks this time around. On top of that, that's like a lot of shareholder pressures on these oil and gas companies to maintain capital discipline
and to increase capital payback. So from that sense, I think even though if there's like more money to grow around in the industry, it would be more much harder for the oil producers to grow production the way they.
Did in the past ten years.
So when did the US become a net exporter like twenty sixteen or something like that. I think so, okay, so we were a net importer forever, then we became thanks to the shell find so we became.
A net exporter.
How does the US oil industry and not sure if you can being characterize it or is it just individual companies? How does the US oil industry interact with O Peck if at all?
So the way I think about that, very competitive, like natural competitors against each other. So if if lower taxes in the Trump administration materializes, it would definitely make the US O patch a lot more competitive. It will also the brick given calculations there be and there would be more money to grow around, so it would be it will make it much harder for OPEC.
To increase the output.
So it's going to place O pack on a more difficult grant.
You know, something that in part got Donald Trump reelected to the White House was the idea of bringing prices down. And you know, gas prices obviously a big sticking point for a lot of Americans. Gas prices have been coming down pretty consistently over the past, you know, six months or so down to now, like about roughly three dollars a gallon on average nationwide.
What can Trump really do for gas prices?
Well, when I think about gas prices, there are two pieces to it. That's the crude oil price art and then the that's the refinery margin part. Now, on the refinery margin, there's probably not much a person can do to it because you basically have to increase refining capacity and that takes years to build out. If you want to prove their part, the outer part will be the all price prize. Now, if you wed regulations make it easier for companies to drill, you.
Can pre rent. Theoretically, you can prevent some of the.
Possible price spikes in all price in all prices, just because it's less onerous for these jurists to put more capital into the ground. So in this sense, you can help prices from seeing more spikes. But however, I don't think these companies will really go out and go all and endure again the way they did before, for the reasons we talked about before.
So what's happened to the Russian oil It's been a couple of years now, and if it's not going to Germany.
Where's it going.
Yeah, so it's not going to the Western European nations, and Western Nations has placed sanctions on Russian So a lot of this has been brought up.
By unconscries like India and China.
So they're pretty really benefiting from these sensions.
So these sanctions aren't really working, are they.
They'll be directing trade flow.
It's the redirecting trade flow, and.
They're making it harder for Russia to ship the ows around the world. So it does increase the costs on the Russian all producers. So that's an impact, but the impact I feel like it's probably more limited.
All Right, thanks to Tyler B and E f oil market specialists. Just to head on the program, we're going to look at how Wall Street math wizards are decoding private market returns.
You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on two thousand companies one hundred and thirty industries. You can access Bloomberg Intelligence via b I go on the terminal.
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I'm Paul Sweeney and I'm John Tucker filling in for Alex Steele.
We move next to corporate earnings from Tyson Foods. This week shares a Tyson food surge, the most in more than two years.
That's after the company beat fourth quarter earnings expectations and projected stronger results next year. And this comes as a turnaround at Tyson's chicken business offset losses in beef for More.
Guest host Jess Mett and I were joined by Jen bartashis Bloomberg Intelligence senior retail analysts. We first asked Jen for her take on Tyson's Foods the most recent.
Quarter, and I think what we've really thought was they were able to end their fiscal year on a high note. That's really been a culmination of a lot of effort to streamline and improve their business. They've been very inconsistent in the last few years, so it is a little refreshing to see that they finally seem to have gotten their arms around some of the problems that they were having, and I seem to be on a very good trajectory going forward.
Talk to us more, maybe about the inflation picture, because it looks like Tyson's second largest source of revenue actually demand for chicken actually improved because consumers were looking for those cheaper alternatives to beef. So what do you think this tells us about inflation right now?
It's a great question, And with regards to inflation, there's a dual effect that Tyson has. The first is because they are so big in chicken, it's obviously a benefit to them when people are trading down or they're seeking cheap protein to put on their table. Chicken is a big answer to that question, and Tyson is definitely reaping the benefits of that. A little bit harder and a little bit more nuanced is the impact that inflation has
on their prepared food segment. That's on the things that you find in the frozen aisle, in the refrigerated aisle. Those are higher cost items usually and they're a little bit higher margin for Tyson. So finding the right balance has been important as consumers look for those prices to come down a little bit further as well.
So what drives their business top line revenue drivers is is it kind of a GDP stories, It's something different than that.
It really is a reflection of where the consumer is. It is really about where the demand is going to fall when it comes to cost drivers. For Tyson, they really benefit from lower grain prices. So when corn comes down, soy comes down. That's good because that's the feedstock for the animals. But the way that Tyson goes usually follows just the general consumer and where they're trending and how incomes are progressing.
Something earlier this year I thought was interesting because I talked to you about kind of price mix when it came to another segment in the consumer staples category, when
it came to consumer package good type companies. Obviously, if you look at Tyson's Food too, when it comes to those types of food, beverage, food product type companies that are distributing packaged foods and meats, how do you view kind of when you were talking to me earlier this year about promotiontional sales for a lot of these types of companies in the back half of the year, like
buy one, get one free, different things like that. As far as what this shows us about maybe consumer spending and what a lot of these companies when they are distributing these types of goods, how they're faring.
It's a big topic for these companies. And so when you're looking at volumes, almost every package food company started this year saying they were going to grow volumes, and yet very few have actually been able to actually realize volume growth this year. And that's really because the shoppers have been so conservative on their spending and they've been
seeking deals. There's been a lot of pressure to run promotions, and so we've seen promotional activity tick up substantially in the last quarter and in the second half of this year overall, and we're seeing more deals, more discounts, and all of that is usually coming at the price of the package food company, not necessarily the retailer. So that's good news for consumers who are looking for deals. It makes it a much harder process to manage for the
packa food companies. So for Tyson, you know, part of what they've really been working on is increasing their innovation pipeline things where they can bring new products to market and have a different price point for those and that's a similar strategy to what a lot of these other package food companies are trying to do to just generate consumer interest in their products.
Again, so Jenna know Tyson, they actually have adjusted operating income losses for beef and pork.
Why is that, Yes, Well, when you look at the beef market, we have a shortage of beef. The animals are getting bigger, so there's still beef there, but because of that, prices have been a lot higher and it's been a little bit more expensive for consumers in terms of purchasing beef and certainly specific cuts of beef. And what we're seeing in the cattle market are very few
signs that that's going to change anytime soon. So at this moment, we're thinking we're not going to see big signs that the cattle market is going to expand again until the end of twenty twenty five, so that's still a good ways away, which is part of why the company guided to a loss and adjusted operating income for the beef segment for twenty twenty five.
All Right, Thanks to Jen Bartashis Bloomberg Intelligence Senior Analysts, Retail staples and packaged food.
This week, we took a look at a Bloomberg Big Take story entitled Wall Street math Wizards are Decoding Private market Returns.
You can find it on Bloomberg dot Com and the Terminal. The story looks at how a small band of math wizards want to demystify private market returns.
For more, guest host Molly Smith and I were joined by the stories author Justina Lee, Bloomberg Markets reporter. We first asked Justina for more context on our latest story.
If we kind of think about, you know, what's been happening to active management in the stock market for the past few decades. I mean, these days were really used to talk about like you know, alpha and beta and kind of how does your performance compare to the benchmark? And that's really killed a lot of the business. And I think what my story tries to bring up is
could we see a similar revolution in private markets? And of course it's a way harder math to crunch, because as you mentioned, you know, you don't have the numbers as often and a lot of the time, you know, the numbers are quite subjective. But we are seeing a lot of interesting quant research here and they are trying to kind of use some statistical techniques to kind of reveal the risks and also to compare performance within private markets.
And so much of what comparing performance needs is obviously a benchmark. And talking about how the S and P five hundred is the natural benchmark for so many companies.
Does that still apply in private markets?
Does that still make sense to be comparing these returns against a publicly a basket of publicly traded companies.
Yeah, that really is a big question here, because even if you use a lot of these quant techniques, you still need to choose a benchmark to compare private markets to. And actually it can tell you a very different kind of story depending on which benchmark you pick. Like in my story, I cited this paper from Public Market Quants saying that you know, if you compare PE to S and P five hundred, I mean, the average P fund actually does quite well. But if you compare it to
like small cap value, you know, come up. Maybe perhaps you might think that looks more like a P portfolio. It actually loses to small cap value. And I think that really is the big question here, because if you're an investor and you can get better returns in public markets. I mean, you're paying way less fees in public markets, and so you wouldn't want to be EPE.
What is the direct alpha approach?
Yeah, so this staric alpha approach was kind of invented by this guy, Barry Griffiths, who was at Landmark Partners for a long time and then when that was acquired by Ares, he was the head quantum ARES. And the math is actually not that complicated. It's mostly to compare kind of the cash flows you get from PE kind of with the opportunity cost of what you would have gotten if you had invested that in public markets. And so the idea there is kind of a more apples
to apples comparison to what you could have gotten. And then that's supposed to kind of raise a question of you know, where the fees worth it? Or was locking up your money worth it, Because even if you are getting better returns in private equity, a lot of the time it might not be worth it if you think it's riskier because you cannot sell out of it, or
you think it's riskier because it's using more leverage. And so I think a lot of the quant research is kind of bringing forth to these questions give.
Us a sense of what some of these fees are like, because on the public side, it's really been such the story as the race to the bottom in fees, especially with the proliferation of ETFs and other funds that you can get into with passive management.
So how expensive is it if you're.
An investor in some of these private funds?
Yeah, I mean so a lot of these private funds do have a hurdle rate, And interestingly, the hurdle rate is pretty standard, like around eight percent, and that you kind of start earning kind of carry above and beyond that, and that carry has actually increased the steer because we are seeing a bit more deal making pick cup as well.
All Right, here's my big issue with private investments is just the marked to market. It's so I think it's just so unevenly applied. I don't feel like there's any consistency. Again, as I was mentioning to Molly, private equity folks are happy to mark the market on the way up, But I don't recall anybody reporting terrible marks in twenty twenty two when stocks and bonds were both down double digits.
Talk to us at that part of the business.
Yeah, And I think that is the big question right now, because the defining theme of the last two years is that we're not really seeing a lot of exits from PE investments and because of that, a lot of investors, you know, your pensions and your endowments are not getting their cash back. And the reason for that seems to be that a lot of PE firms don't want to
sell into this market. They're not getting valuations that they like, even though the market has been kind of going up, And I think that kind of reflects sort of the disconnect here, like maybe maybe private markets haven't really caught up with sort of the twenty twenty two adjustment from
higher interest rates here. And so if you actually kind of look at some of these math techniques that's being used to unsmooth the volatility, what you get is actually a volatility level that's very similar to the S and P five hundred. So, but a lot of people would say maybe investors do like the smooth volatility, even if it's not the truth. So that is one sin of code Taque that we hear a lot.
What do you hear from other people outside of private markets about some of these math techniques?
Do they pass the so called sniff test.
You know, they seem legit or cause I guess like for maybe like some where my head is going, is you know the way that companies can sometimes make like really creative adjustments.
To what their earnings looks like.
And it's like, hmm, is that like maybe just a little bit to Rosie, So tell us a little bit about like what the feedback has been on what these quants are doing.
Yeah, I think, you know, using these cont techniques is definitely not the standardier And I think if you talk to a lot of allocators they will tell you sort of the practical side of things, which is that, you know, since two thousand and eight, PE generally has at least on the surface, done better than you know, public markets, and most people are pretty happy with that, and they kind of feel like, you know, even if it is
actually riskier, who cares, right. I have a kind of a quote from a guy who's very familiar with PEE where he's like, well, there's more cash coming out of this box, So do we really need to dig that deeper?
Do we really need to torture the data? But I think there's also more interest in these methods right now because there's a sense out here that with interest rates higher and kind of with maybe just riding valuations getting a bit more difficult, we're entering into a tougher period for private equity, and so people will actually start to ask these questions, all right.
Thanks to Justina Lead, Bloomberg Markets Reporter.
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