Private Equity Fees Are Ripe For The ’Vanguard Effect’

at Bloomberg dot com. Well, the Wall Street Journal is reporting that Vanguard Group held preliminary talks with private equity firms as it considers offering alternative investments to its clients. To get the latest returned to Eric call Tunist. Eric is a senior et f annalyst for Bloomberg Intelligence based in Princeton, New Jersey. Eric, thanks so much for joining us. What do you think Vanguard is doing here as it

takes a look at the private equity space. Yeah, I think a lot of people when they first look at this, they think they're going to offer mutual funds right for the masses, But this is a little different. What the story really taps into, in my opinion, is the growing advisory businesses Vanguard. Vanguard has five trillion a little more than that, actually in fund assets, but it's only got about a hundred billion in advisory assets. This is money

that it gives a tax. Advice manages your portfolio, but that's a growing business of theirs, And what they're what they're looking at is, hey, we're advisors now and we offer obviously exposure to public markets, but we see that there's less companies going public, they're waiting longer. Private equity is where there's a lot of wealth to be made.

Potentially we could offer this to those clients, at least the ones that pass the accredited investor test, which most retail investors I think that use Vanguard would uh, And so it's in my opinion pretty logical. The private equity market is expected to grow their skating to where the puck will be. The interesting part is will they be able to offer it in vanguardian fees? Right now private equity fund could be one or two percent, if not more.

Vanguard is used to offering funds at ten basis points. So yeah, that's a big question mark, but certainly it's not surprising, especially in the post Vogel Vogel Vanguard is a little more aggressive. Well, I want to pick up on exactly that point the whole concept of fees here, because Vanderguard is the indexing giant, They're really the ones with John Vogel, who really came up with the idea of a low fee type of funds that just tried

to track the market performance. Uh. They arguably have been responsible for what we've seen across the asset management industry with a lot of the firms facing a lot of print pressure is due to those lowered fees. Will Vanguard do the same thing to private equity? So yeah, I

think they could start that ball rolling. Uh. You know what's interesting is Vanguard has this situation where they offer active mutual funds and about half of the one point three trillion they have an active mutual point assets is subadvised. I think they could do something similar here. But what's interesting about those active mutual fund assets is that the asset weighted average fee is about twenty basis points. So they figured out a way to get active cheap. They

probably do the same thing with private equity. They're just not going to offer something expensive. Now. The question is, let's say they start doing this and they offer a fund for private equity that's say forty basis points or something. Um, yeah, I think that could start to create what we call this the Vanguard effect. It's not just Vanguard offering it cheap. It's that they force others in the neighborhood to lower their fees. That's just been going on in E T

F and funds for the last thirty years. So yeah, I think it could be something. It just probably is going to take quite a while. Again, given that the advisory assets they have is only about a hundred billion, so that's why this is going to be a very slow process. But look, I've looked at the fees. They're kind of right for disruption, I would say, and Vanguard

is the king of disruptors in asset management. So that brings me to my question, what has been the response from the private equity community today, Because when Vanguard you know, starts looking at you know, your business, much like when Amazon looks at you know, a certain business, whether it's retail or groceries, competitors take notice. Yeah. I've been looking

on Twitter at some of the reaction. I think a lot of people think, first of all, do you really want Vanguard type investors in all liquid uh, you know funds. That's one thing I don't. I think a lot of the best private equity and the best hedge funds because Vanguard offers hedge funds type alternative strategies in mutual funds already, so they do all. Uh, they haven't really you know, completely disrupted the hedge fund business with that, So I don't think there's a lot of fear. I don't think

there should be a lot of fear. Again, just like with mutual funds, if you're good and you've got something good going on, you'll be able to charge for it. So I think for the ones that might not be as good or might just be mediocre, those are the ones that probably should be worried about about being priced out or price down by a Vanguard. Just real quick, how much could this potentially be an effort of Vanguard to boost its own profits. I don't think it's much.

I really think Vanguard is playing a different game. They just are not like other companies generally. That's the DNA of Vogel still in there, the mutual ownership structure. I just think they're really boy scout in their nature, and they just want to serve their clients, and they feel like private equity is something that would be missing from a client portfolio in the future. Eric Baun, thank you so much for being with us and sharing that perspective.

Eric Boltun as a senior et F analyst for Bloomberg Intelligence. New York State has passed some of the most sweeping overhauls to rent end property legislation in its history, having some pretty big ripple effect throughout the real estate market. Joining us down to discuss Francis Greenberger, chairman and chief executive officer of Time Equities Incorporated, based in New York City. So, New York State agreed to strength and rent laws and

tenant protections. From your perspective, what are the most important parts of this legislation. Well, I think the legislation represents very bad social and economic policy for the city and state, and I'm happy to tell you why. Uh. Politically, it's the narrative is that it's protecting one point three million tenants, but it really isn't because all of those tenants are rent stabilized and they were protected against under existing law, and the increases to the last five years have ranged

between zero and one. Uh. Now, the part that is being affected are the few people that choose to lead those apartments, and it's about the new tenants who come in. Under the prior law, there were incentives for fixing up those apartments. There were extra increases which gave the owners some balance to pay the increased expenses and operating taxes and taxes which were not being covered by the zero

or rent allowance for existing tenants. So was it there was a certain amount of balance that has been lost, and now owners will simply face increasing losses every year. So it's not good economic policy. So what is your expectation about what this new rent law will due to the value of housing. I think it will dramatically decrease the value of housing, which will have another effect, which is that it will erode the city's tax base. The city needs those taxes, So what are they going to do.

They're going to increase the taxes on people own their own homes, whether their co opt condominiums or private houses. They will have to subs at eye these few thousand apartments that we're turning over and providing the economic lifeline for rental housing. So Francis just walk us through how

it would dramatically lower property values in New York City. Well, if you buy a property where you expect your income to go down every year instead of stay the same or go up, you're obviously going to pay a lot less for it. Well, I guess one question that I have is there's one thing about buying an apartment building in order to rent out the individual units. It's another thing if you have a condominium building and you sell units to people. There's a question of whether there might

be a greater demand for the condominium type units. If you are going to guarantee a certain degree of maintenance, etcetera. That might be UH sort of left behind a little bit on the rental units due to fee pressures. Well, clearly the future of rental house UH and the maintenance of it UH is in doubt because when owners don't have income to pay the costs, where is the money

going to come from. We see that in the in the housing that the that the government owns, the Nightsha housing, and what a disaster that is because they are base basically starved it in this case their own revenue streams

and didn't do the necessary repairs. So, yes, condominium or co op housing will be superior in the event in the sense that it will be UH better maintained On the other hand, those are the people who are going to be picking up the bill for the UH for for taking away this income stream and tax space on

rent on the rental housing side. Another potential effect here is that as this situation increases, and again I think it's really very important to focus on the fact that this law really affects few thousand apartments that turn over every year and we're then being rented at UH significant

increases or UH twenty. They used to allow increases, so um by taking that away, it made force increases on the people that are stabilized tenants in place, whereas I said, current law has left those increases at zero or one, so those people may also have to pick up the bill. This is a complete disbalancing of what previously was a working solution. So, for instance, how will this impact you're investing across a New York City. Well, I think that's

the other thing. Uh Again, as I said, there was a semi balanced picture before, and now the political process has taken that away, which means that in the eyes of business people and investors like me, the state and the city are no longer reliable partners. And I think any person who invested with people who turned out to

be unreliable certainly wouldn't come back and be invested. So I think you're going to see more and more people uh turning their investments to states that have a more reliable pattern of unfair pattern of treating business and investors in their in their states fairly. So friends, as which states are you turning your sites to instead of New York when it comes to investing, Well, we're currently we're just started a construction project in Florida. We just finished

one in Michigan in a place called Grand Rapids. Uh, we're about to begin one in Chicago. So from your perspective, is this something that again it seems like it's a relatively uh low number of units we're talking about across you know, a big market. I mean, is the material it just doesn't seem that matio real to the overall

economics of real estate in this market. Well, I think in addition, as I say, it disturbed the balance that existed between allowing existing tenants zero or one percent increases and still allowing landlords to maintain, not increase their profit margins. But they were able to pay the increased expenses out of the increased rents on the vacancies, so that has been taken away and landlords have been left with a

losing proposition. You know, that leaves a very bitter taste in people's minds and and and in their investment intentions. And just like the Amazon reaction to politics in New York was negative, I think you're going to see this spread and this is a a second uh nail in the uh in the coffin, so to speak. So francis just just just real quick here, how much do you how much do you expect prices to go down in

New York City? Uh? You? Um, real estate often trades on futures rather than existing and this has taken away to the future, the hope for something better and it's and it's replaced it with an expectation of something worse. Is that reduction? Is it more? I'm not sure the market will tell our storyection that would be news. Francis Greenberger, value of all rental housing in New York. Francis Greenberger, Chairman CEO of Time Equity, Inc. Thank you so much

for joining us. Well about a year after shuttering it's US operations, toys are us is back to get a sense of what's going on there. We welcome to good friend Burt Flickinger, Managing director of Strategic Resource Group, joining us here in our Bloomberg Interactive Brooker Studio. So correct me if I'm wrong, Bert, So, the US business of Toys r US UH shuttered their operations about a year ago, but now they're coming back. How are they doing that?

Coming back with a couple of stores, But it's already a proven concept and that they have scores of stores that are very successful Asia, India, parts of Europe. And it was affirmed by Kroger fred Meyer brilliant CEO Rodney McMullen that put six hundred Jeffrey Jeffries Toy Box Toys r US departments and stores within the Kroger stores, which

are doing tremendously well. The other key comparable on the Bloomberg terminal is the toys have catalyzed a big part of Walmart, Target and Amazon's growth and on a total return basis in the last year, Walmart and Target are both up about forty or sent Amazon about the same and compared to the x RT or the SMP Retail Index is barely up at all, and they still can't handle the big box stores still can't handle the demand of the ten billion that Toys r Us did in

the US retail So it sounds like Richard Barry has come up with this concept of reincarnating Toys r US with smaller stores but in some of the same footprints, shrunken footprints, because he saw an opportunity there that was still being unmet by the big box retailers. My question is, UH, what what exactly is this reincarnation. Is it just taking the name and then re envisioning the modern toy store

or is this basically just restarting without the debt? Lisa, It's both restarting without the debt, that's key, and the landlords of the major malls will pay for the UH fit out a lot of the equipment build out, so they'll be next to no capital commitment. The key thing

you references the name UH. They'll have the name. The stores were about fifteen years behind UH, caught in a bowl constricted proverbial choke hold from RNADO and the original legacy owners and now with Richard Barry, it's the chief merchant who goes all the way back to the seminal genius Charles Lazarus who uh started Toys r US and

built it into a worldwide powerhouse. Barry knows how to merchandise the stores, work with Disney, Marvel, Lucas studios for the licensed goods, but also to make the stores exciting from a digital interactive standpoint. So they'll have the name, but the stores will catch up about fifteen years because they'll have the capital along with the skill and hopefully the scale. So what I understand about this is Toys Rust is looking to open about it maybe a half

a dozen stores for the holiday season. Do you think this might just be the first step and maybe bringing back Toys Rust and bigger way in US? Yes, the first step, and and our research indicates with mall support, they'll be able to do at least fifty, likely a hundred plus stores in the major malls across the US which would love to have Toys or US and Babies

or US as a co anchor. And what's interesting from our researches, Amazon has an achilles heel in this thing too, is Amazon's almost de facto price gouging on anything that's either heavier weight or large and shipping size. So if it's a baby crib or baby stroller. Amazonal charge a hundred dollars more delivered Amazon Prime members than say even Alby's on the West Side of Manhattan or any other

major toy retailer in the US. There's a lot of room with the support from UH Jack's, Marvel, Marvel has Bro, the studios and the hardlines and soft lines vendors, and also Amazon went bankrupt with diapers are US, so there's a big window for Toys r US to re estate wish itself. One thing you talked about was reimagining the stores and making them more enticing to the modern child,

which means having all sorts of electronics there. I'm just wondering what type of investment uh they really need to get these stores into a shape to be an experience, which really is the name of the game in retail right now. Perfect variable you're referencing, Lisa. If it's an investment on toys or US as part, it could be

a million plus per store. If they get the support of Disney behind Star Wars, UH Frozen, Future Toy Story releases, Kung Fu Panda, whatever it is, and get the studios to co invest and ideally get somebody like UH Bob Pittman at Clear Channel Outdoor use their skill outside on the air rights of the store, the walls and the departments inside the store could be spectacular. Would would the actual vendors, the toy vendors, Would they prefer to do business with toys r US over say Amazon or Walmart?

UH definitely prefer to do business with toys. Are USO over Amazon? Going back to the Hachette Books, UH and I trust case for UH anti competitive practices, potential predatory pricing that seems to be ubiquitous beyond books to toys, etcetera. Walmart under Doug McMillan, Target under Brian Cornell are more enlightened buyers, but they don't have the physical space and the stores to carry the full depth and range of toys.

So the vendors are seeing a lot of growth with Macy's committing a full floor at Harold Squared to Toys and some of the other stores, but nobody can do it like Toys r US and Richard Berry. The one variable is David Pico, who is the genius of real estate strategy and development, got picked off by Chris Baldwin and his team to go to BJ's wholesale, So toys are us is skating shorthanded with a key player on the development side. But Richard Berry's the end and he'll

break through with this format. To Paul's point on on a very strong continuum of future growth. Really interesting to see the revival here. I Frankly Brick and Mortar. Bert Flickinger, thank you so much for being with us. Always a pleasure. Bert Flickinger is Managing director for Strategic Resource Group. Well, many companies are developing products to reduce sugar intake by consumers.

One such company is Duma Talk and has really startup that has created a sugar reduction solution that uses targeted delivery technology to reduce the amount of sugar used up to per serving. To help us dig into the details of this new company, we welcome Iran Baniel, chief executive officer and president of Duma Talk based in Israel. Aron, thank you so much for joining us. I wonder if you could just briefly kind of tell us kind of what is the solution, uh that your company has that

reduces the sugar intake. So nice to be with you guys. When you take a bite into a cake, say over eight of the sugar in the cake will never see a sweet receptor, so it contributes nothing towards the sweetness

of the product, so only would probably hit receptors. What we do is by loading the sugar onto a mineral or a fiber carrier, we actually create clusters of sugar molecules and when those hit the receptors, they get they stick to the receptors longer, and they keep pumping sugar molecule to the receptors, sort of cheating you to experience a sweetness that is disproportionate to the amount of sugar in the cake or in the biscuit or in the chocolate. So you literally use less two taste more that is

flavored delivery improved in efficacy. So the results of this, if I am correct, is that you can reduce by more than of sugar content in some of these sweets or other products by using your technologies. I'm wondering have there been any big companies that have adopted some of

your techniques. So we are now in the process of a providing large pilots to some those large CPGs um taking existing products and making the doumatalk version of the product, which would be not only reduced in sugar, but also

rich in fiber and rich often in proteins. So we also have developed a whole host of data on how you can replace the photy percent of sugar you've taken out with really much better for you nutrition and actually, in blind tastings, consumers seem to prefer the Doumatalk reduced version to the original products. So we started by wanting to be as sweet, we are now understanding that we are very often preferred and we seem to fare better

than the original. So that's really, uh, the first time that someone that we are aware of can propose a sugar reduced version of products that don't disrupt the need we have for indulgences for the products we love. So, is this going to be another colored packet, packet of sweeteners in the bowl when I go to a restaurant. I've got pink, I've got blue, I've got yellow. Is this going to be another those your competitors? No, what,

the existing sugar reductions are not sugar based. We are sugar based, and sugar is not It's not bad for you, and unless you over overdo it. So sugar, if you consume sugar in measured quantities. You'll find it gives you energy, its bulk, it's taste, its color, its happiness. Sugar is happiness, but only if consumed as recommended. So what we do is we actually allow you to consume the products you

love without actually overdoing the sugar intake. Run. One question that I have is people have found that sugar replacements actually don't necessarily contribute to weight loss because people feel hungrier, their bodies feel like they're going to be getting a certain amount of sugar, so they eat more to compensate for that. Has there been any study done in a similar vein with Tom talk, It's a very good question,

and thank you for asking it. We are the funding is there and angst others to fund much larger trials than we've done. But one of the mode of actions that we have developed is called muco adhesive. The area of the tongue is the best probably area for dispersing in a very same way things like sugars, but also people. It's been used for pharmaceuticals as well. So what we actually do is we have this cluster, let's say, of

sweetness come to the receptor. It sticks by the receptor longer and and the sweetness is very satisfying, so you don't really reach out for another bite so quickly. Yeah, you are really getting the full beauty of the sweetness with the first bite, and you are not rushing into the second, third bite. Aaron Vanielle, thank you so much for being with us, chief executive officer and president of Duma Talk based in Israel. They just raised two million

dollars in a series B round funding. This is Bloomberg. Thanks for listening to the Bloomberg pen L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Bramoy. It's I'm on Twitter at Lisa A. Bramwoit's one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.