Bloomberg Audio Studios, Podcasts, radio News. Welcome to MEREN Talk to Your Money, the personal finance edition of Merin Talks Money. In these bonus podcasts, we talk about the best strategies for making the most of your money. I'm mere in Sunset Web and this would be focusing on private markets. It's not a topic John and I discussed that often, except for in a minthly disparaging way, but it is
something many of you have written in about. So we have decided to invite in a guest to help us talk about why you might want to get into private credit, private equity, etc. And if is an investment path that you want to go down, what exactly are the smart ways of interpreting what is out there? So with me Morning Star Chief executive Officer kun Al Capol. Morning Sara is a leading provider of independent investment insights and rating space in Chicago. Can not thanks so much for jo us today.
Thank you for having me. Mary.
Now, all of our listeners and readers will be very, very familiar with Morning starb because lots of them the first thing they will do when they go and look for a fund is they'll look up your rating on it and they'll see what they'll see, whether it's a
go silver fund, a bronze fund. Except for the various different ways of rating, but everyone is familiar with the idea that when it comes to ordinary listed funds holding assets in the public markets, you are one of the go tos in the markets for information and also for education. You provide a lot of research and education for ordinary investors.
But you're moving into a new ish area which is looking more at rating the private part of the market, so private credit, private equity, infrastructure, real estate, these kinds of funds. So tell us a little bit about why you're doing that and what sort of funds you'll be looking at. Vehicles should I say.
Yeah, let's dive right in, and let me just start by saying that I think your skepticism is warranted anytime you see a flood of money chasing a trend or anything like that, I do think putting a skeptical view on things is appropriate, and I have no doubt that as there's some new products that come out in this space, there are going to be some allusy products and it's going to be a morning storage job to help investors
navigate them. But if I back up further and kind of try to provide a broader view of what's going on around the world. As you know, there's just been a preponderance of money that's flowed into the private markets, and it's happened in private equity, where you see the number of companies in private markets that have taken funding from private equity far exceeding what's available in the public markets. In Europe alone, you have double the number of pe
back companies relative to public company. So just to contrast.
That, that is absolutely true in terms of numbers of companies, but in terms of value of companies, the listed markets still remain the higher value area.
Right. Yes, the largest companies for sure are listed, and that makes sense, but it's notable that the size of private companies has gotten larger and larger, and so that's notable.
Yeah, it is one of the things that we talk about a lot, which is this idea that companies list later and later and later if they list at all. So an awful lot of the growth that one might have previouly expected to get access to all the public markets is now only in the private markets.
Correct. Now, while private equity gets a lot of the headlines, and you can see why it's much more I think enticing to write about it and talk about unicorns and whatnot. The reality is that most of the action is really in private credit, and where investors like you and I and wealth managers are going to first encounter the private
markets is really in private credit. And so if you go back to post global financial crisis, a lot of the big money center banks around the world came out of that, either facing new regulations or generally taking a more cautious approach to how they wanted to manage things, or candidly being in a situation where they didn't have the capital to lend as much as they previously might have.
And so that opened the door to what i'll call sort of non large banking lenders emerging, and you saw particularly private equity firms starting to step into the space, some built up insurance capabilities and whatnot to invest here. And so private credit has really taken off and in many large markets around the world, and increasing amount of
debt is issued via private markets. And so what you're starting to see in some parts of the world is the arrival of products available to retail wealth investors that essentially allow them to access the private credit markets.
So what we're talking about when we talk about private credit is companies that are unable to borrow from banks, are unwilling to borrow from banks, looking for alternative places to borrow money and going to private companies to do that. Is that that simple? That's what we're talking about exactly.
They're raising the money the non banking financial institutions in many instances.
Yeah, but that debt remains tradable, just not on a listed exchange. Yeah.
I think tradable it could be, obviously, but they tend to be held in private hands and so they don't trade as much. Obviously. That's a bit of a distinction from what we call public high yield, which does trade, although it's very debatable as to how liquid that is as well.
Okay, so we're talking about entirely a liquid high yield to debt.
Yeah, that does not trade by the moment for sure.
I mean, what is the crossover between modern private credit and olden day's sub private ending.
Yeah. I think what you want to be careful about is you don't want to throw the baby out with the bathwater. There's certainly, as in the public markets, when you're investing in debt, the higher the chance of default, the greater the interest rate that you're going to demand.
And you see that in private markets as well. Candidly, man and there's a high degree in my view of likely correlation between public and private markets because we are kind of in a period where you know, things have generally gone well in the public and the private markets, and so generally speaking, risk is something that I think people have been de emphasizing in a way that is going to probably be problematic regardless of whether you're looking
at public or private markets if you have a correction, so I think your line of questioning maybe is heading down the path that private is maybe more risky. There's certainly some factors that make it so, but I wouldn't say that in a wholesale manner. If you look at some of the lenders and firms that have got involved, you have large firms like the Blackstones and the Apollos
of the world. They come with solid reputations and the ability to do the research, just as you would expect on the public side as well.
No, sure, I suppose. My question really is that if you are a company and you need burrows of money, your first point of call is going to be a bank or publicly listed markets, because maybe that would be cheaper for you. So if you end up not going to a bank, no.
Not anymore. It certainly used to be the case that one could generalize in that way. But you're starting to see, even when there's large m and A taking place, that many firms are not going to the public markets and they find it quite efficient to go to private markets
to raise money. And so I think that is the underlying point here, both in terms of equity and credit, is that what used to just be the purview of public markets is no longer just that you're right to be skeptical at a high level, but the underlying trends show that there is some change in terms of the nature of what's available to invest on the private side.
Letter although we vaguely wonder if there won't come a day when in the equity side we'll move back to people being more interested and enlisted than private Given that as rates don't go back to their previously low level, that becomes increasingly obvious that the private equity app performance is not quite what maybe we thought it was. So we wonder if on the equity side at least you might see US wing back towards listed.
I think that's a really important point. But in general, I would say that investors should expect lower returns from public and private markets going forward.
Now I would probably agree subtainly in the US maybe if not elsewhere. But I suppose the point about that is that if it is the case that in times of normal interest rates, private equity returns are more or less the same as public equity returns, i e. Turns out that private equity is simply equity with not much transparency and a whole balladett why would you take private equity over public equity? And that's a question that I think we will have answered over the next decade.
Yeah, that's totally the case, and we'll need to look at that. I think it's hard to generalize, and at least so far, our data so we own pitchbookens, we have years and years of data on this. It does show that while you're trading liquidity, you do get a little bit of return premium, and so you're right, we'll have to see. But my hunch is that the markets are going to be way more correlated on the public and private side than most people believe, and so we'll see how it clays out.
We are contact me being told that we use private equity as a diversifier, but you're rather suggesting that going forward unity that is the case.
I think it's true of most asset classes today that because they've all had strong runs, there's a higher degree of correlation and it's going to be harder to differentiate. That's my personal view. I realize others feel differently, but you know, you just have to look at this here.
And even what happened in April, you had the public markets kind of fall sharply before recovering, and similarly, in private markets, while you didn't have a marked to market event, so to speak, you certainly didn't see deals getting done. And now again with the public markets back, you're sort of starting to see a desire to get deals done again. So it seems to me that there's more correlation than
is the case. Clearly, if you can hold something for longer, though, which is the case with private equity, I think potentially the benefit is you're not trying to trade in and out. Maybe that explains some of why the returns have been.
Kind of less. You can hold it for longer than you have to hold it for longer, right, correct. So when you talk about going into this market, you're talking about beginning to rate what you call semi liquid funds. Explain to us what we mean by semi liquid.
Notion of a semi liquid fund in the US, it's large in the category what we call interval funds. In Europe, it's in the category of things such as altaffs, so ltafs. And the notion with these types of investment vehicles is that you can come in and out of them on a schedule or a schedule. And what I would say is that they are different, obviously from the funds that you and I started this conversation talking about, because those
have instant liquidity. Essentially, if you're in an ETF, for example,
it's near instant liquidity. If you're in a regular mutual fund, you at least have daily liquidity, and what you have in semi liquid funds is a situation where you get liquidity let's say once a quarter, so there's a predetermined date where you can buy in or sell out, and this allows the manager to take the assets and then put them to work in investments that are not liquid but The benefit at least of these types of vehicles is that they do provide access with some degree of
liquidity relative to what a traditional private equity of private credit fund would do, which is not provide liquidity for a longer period.
Tough on a manager if they know when they have to produce cash, they don't know how much cash, and if in private equity and private credit you are holding for the long term, particularly in private equity, you can't be sure that you can exit at any particular time. It's still a tough way to manage money.
It's a tough way to manage money, but it's no tougher than on a daily basis when you have to provide liquidity, you know based on who's coming in and out. So I don't find that to be an insumuntable challenge. Daily liquidity funds have all kinds of challenges too. You have to kind of anticipate and hold cash for instance, to think about what's coming in and out. So I don't view that as insumountable. I think, what's the bigger challenges?
Are you really adding value and providing a premium for the reduced liquidity that you're providing in that vehicle, and our ratings essentially go to try to answer that question and also to put public in private on an equal footing. So if you're going to buy a private vehicle, not only do you want to make sure that you get the benefits, but you want to make sure you outperform the public vehicles. And so we want to be conscious
of not separating the public and private universes entirely. And you'll see that in our methodology when we roll out these ratings beginning here in the US and the back half of this year, that the idea is also to really rate them based on our view of whether they're going to outperform similar strategies in the public markets.
And how are you going to film that view?
Well, our analysts obviously are going to do the diligence as they do on public market vehicles today. So you know, it starts by working to understand the parent you know, building these vehicles, so we have a parent rating, and then from there we dig into the actual management of the fund and produce an opinion based on a view of management's ability to deliver our performance as well as you know, key factors such as.
Expenses, expenses and fees are an interesting part of this whole sector. I mean that was more opaque than one would like. A lot of the time. The fee structure is something that ordinary investors have some trouble getting to grips with quite a lot of the time. The wire being included and rated right.
Yeah, Yeah, it's no different than the fight morning store of art in public markets to get common investors access to knowledge about what they are paying today. And so I think transparency is a good thing investors. I think we'll have that opportunity here in the private markets by bringing some transparency in competition.
With your sense of how private equity, private credit is becoming part of the investing universe. And I talked to earlier about you know, the likes of Larry Think and how much they think one should have in a private portfolio. What do you think a portfolio should look like these days in terms of allocation to private assets for.
Most rank and file investors. Let me just start by saying, simplicity really matters. And if you feel good about your portfolio and you're all in public markets of public equity and public data, I think that's fine. You don't have to change that. This isn't for everybody, and one of the most important things about investing is that it should allow you to sleep at night and to hit your goals. And if you can do that with the portfolio you have,
you don't necessarily need to change that. I think for most rank and file investors going forward, if you have an interest in the private markets, the reality is, at least in the near term, it's going to be hard to get true access to private equity, and so I have a hard time saying you should be allocating X or Y, because the vehicles as yet aren't in place to provide that at scale. They will be in toime. My personal view is that where these belong is in
your retirement assets. In your retirement assets, if you've never owned something like this, it's probably good to start with a very small allocation to the extent that you're interested, so that you can start to get a feel for what it means to have something like that in a portfolio, because you will really immediately understand what it is to not have the type of liquidity that you otherwise might have.
And so I would say that for most investors today, starting off with no more than about five to ten percent of your retirement assets parked in these vehicles is probably an appropriate way to learn a little bit about how you feel about them, how they behave, how you want them in a portfolio.
So if you are already retired plausibly even you have started draw down, this may not be the asset for you.
I would say that's accurate.
Well, while on the subject of retirement assets, how do you feel about the British government about Rachel Reeves's idea that some of our penchophones should be obliged to have ten percent of their assets in private market.
I think it's a good idea for long dated asset pools to have exposures to the private market. So I like that idea. I'm personally not off the mindset that it needs to be prescriptive. I think ultimately these are pools of money that are and should be managed by professionals who should have clear opinions and what types of
allocations they want. And you know, you certainly see around the world different pools of asset owners that have different views on this, going from some that don't put anything in private markets to some that are well known and have chosen to put close to half their assets in private markets. So I think at a high level, I absolutely agree that it's a good idea for long dated
asset owners to be looking at the asset class. But I think the ultimate drivers should be matching the time wherese into the liquidity needs of those that you're serving, and so I would sort of leave that up to the individual investment officers there.
That is all fascinating and really useful, and I think that we all be really really pleased with what you're doing and the idea of bringing transparency with a little bit more due diligence, et cetera to a market like this and helping people get intowitter is super helpful. Thanks for listening to this week's Marin Talks to Your Money. If you like us, share rate, review, and subscribe wherever you listen to your podcasts, although be sure to follow me in John on ex or Twitter. I'm at marinsw
and John is John Underscore Stepic. This episode was produced by Samasadi Production, Sport and sound designed by Blake Maple's questions and comments on this show and all our shows are always welcome. Our show email is Merri Money at Bloomberg dot net.