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