The Future of Private Markets
Transcription:
Kali Jakobi:
Welcome to Data Disruption, a podcast all about data problems, solutions and innovations, disrupting the private markets. I’m your host, Kali Jakobi. Let’s talk data. Hi everyone and welcome back to Data Disruption. As always, I’m your host Kali Jakobi, and today I’m joined by two guests, James Redgrave, VP of thought leadership and editorial at State Street and Ali Mamujee, head of product at Charles River for Private Markets to discuss the findings of State Street’s latest private market survey. We have some very interesting stats to share with you today, but first, James, Ali, welcome to the show.
James Redgrave:
Thank you for having me.
Ali Mamujee:
Pleasure to be on, Kali.
Kali Jakobi:
James, let’s kick it off by you just telling us a little bit about why the survey was conducted and tell us what you found most surprising when reviewing the results.
James Redgrave:
Yeah, sure. Thank you very much. So we conducted the survey. We actually conducted a smaller survey in 2021, high level questions about various investment institutions, allocation plans, and the reasons why they were growing their private market exposures, which was itself obviously a trend that the market had been seeing for several years going on before that. So we wanted to get a bit of an insight into it. And it was good, but sort of, as I say, fairly sort of brief survey, and we wanted to go a little bit deeper into what we found. And we found obviously what you might expect, that people expected allocations to continue rising and that the various reasons in terms of returns and diversification and yield, et cetera that were driving that. And they varied a little bit between sub-segment of institutional investor. And then obviously we hit a very different economic environment over the course of the last year as well.
Inflation kicked off, interest rates rose, so we really wanted to see both how the long term plans were affected by this new environment, and also get a little bit more into the weeds of which particular sub-asset classes of private markets were of interest. And in terms of what I found surprising. So there was definitely a very clear-eyed response to the macroeconomic environment, the inflationary environment, from respondents. Generally speaking approximately two thirds, it varied a little bit by institution type, were of the view that certainly as of late last year inflation was going to be a medium term trend, that it wasn’t going anywhere anytime soon.
And that it was certainly going to affect their ability to invest in the asset class, particularly in so far as it leveraged elements of the asset class where interest rates affect ability to borrow. But it didn’t really seem to a particularly large extent to affect their desire to get into the assets. So similar numbers, a substantial majority, approximately 70% intended to continue with their growing asset allocation plans to private markets, despite acknowledging that they were going to have a much more challenging environment in which to do so.
Kali Jakobi:
James, tell me a little bit more about the demographics of this survey. I know I jumped in excited for the most exciting results, but just for our listener’s point of view, they can’t read this as of now, but we will link to it later on. Who exactly took this survey?
James Redgrave:
So it was just under 500 respondents globally and it was a combination of private market specific asset managers, large global asset managers who have private market divisions within them, asset owners, the pension fund and institution type, and insurance companies as well. And it was broadly evenly split across those segments, and fairly evenly split between regions. I think Europe was the largest in terms of number of responses, then North America, then Asia-Pacific.
Kali Jakobi:
Wonderful. Now, based on the survey, let’s talk more about where investors are expected to increase allocations. Ali, I know that you made yourself very familiar with this survey, and you’re very interested in all the data. Maybe you can tell us a little bit about what you found on the survey, and James, comment on anything that you additionally saw.
Ali Mamujee:
Some interesting areas that I saw looking at the survey that are congruent with conversations we’re having here at Charles River for Private Markets is one, a growing focus on data oversight and regulation. So over the last 15 years where I’ve been in private markets, I would say the focus around technology has been around efficiency and how do we get our team members to scale better and faster. That has changed completely. Now the focus has been around data regulation and risk, and private markets right now is at 12 trillion AUM, according to Preqin, and according to most reports, private markets are growing 12 to 15% per annum. So people don’t realize that doubles every five years. So just within the next decade private markets is expected to be around 50 trillion assets under management. And just to take a step back, public markets is around north of 100 trillion.
So just thinking about the next 10 years, private markets will be around 50% of all total AUM in the global market. So there’s been a growing focus of not efficiency in conversations, and more focus around regulation and data governance. And we’re seeing more and more executives talk about data risk, and that’s been an interesting change. Second, the survey picked up the growth of secondaries. Secondaries is a very hot market right now. Liquidity is king and with inflation being high and valuations being depressed, we’re seeing secondaries be a hot topic across the fund managers, asset owners, and the whole segments within private markets. And the biggest gap the survey picked up is the lack of transparency around valuations. And there’s so many use cases that Charles River for Private Markets is dealing with today around valuations, and the need of transparency, and how do we roll up these asset level models to a portfolio level, then to a fund level, because investors want this transparency.
So we’re seeing a growing need around the secondary market. Last but not least is this data orchestration challenges. In the data management section in the survey there’s a two by two chart, and on the bottom right of that chart it picked up one of the more important less developed areas around data management is a lack of integration of new tech across legacy systems. And at Charles River we call this the data orchestration challenge, is how do you have the right workflow or the right data circulatory system, not across a given team, but across a given organization. And that’s one of the biggest challenges that we’re working with clients today is how do you create that data circulatory system. That’s been a huge area that Charles River for Private Markets is focused on. We have a major release coming in the next 68 weeks that we’re excited to share the market that touches on this challenge. So excited to talk more about that Kali, here in a couple months.
James Redgrave:
The transparency point is a particularly interesting one. There’s a tension, I think, in the data, between the acknowledgement on behalf of respondents to this survey, that there’s a strong demand for investors lower down the AUM chain, more retail type investors, to get involved with these assets. For fairly obvious reasons, when you look at returns and diversification, and what’s driving institutional interest as well. But along with that acknowledgement is the equal acknowledgement that at the moment, that data and transparency isn’t there to enable retail investors to have the daily pricing, the visibility of the value of their assets, and a lot of other things which retail investors will demand. There’ll be a very different ESG data demand if these asset classes become more widely distributed amongst individual investors as well. And I think from the top down government level, we’re seeing regulators trying to push this trend. In Europe here we have LTIFs, LTAFs, fund structures like that, other initiatives around the world similarly. So that’s a real driver I think for meeting this data challenge.
Kali Jakobi:
So you both said a word that I think has easily become a buzzword in private markets, and that is transparency. We hear that word thrown around a lot in private markets, but let’s talk about what does that actually mean, and any specific stories you all can share.
Ali Mamujee:
I break down transparency. First off, no investor is looking for less transparency, but transparency specifically I think about it in three categories. One, valuation transparency, second is asset level transparency, which I throw ESG into that mix. And last is forward looking transparency. So if I wanted to know the stock or value of Apple, I could do it within a click of a button to figure that out. In private markets, if you’re valuing a wind farm in Zambia, or a solar plant in Arizona, at the minimum you’re waiting 100 days minimum to understand what that value of that given asset is. And there’s so many different valuation techniques in private markets, and asset owners and insurance companies who are investing in private markets are asking our fund managers to provide a lot more transparency when it comes to these valuations.
As a former private equity associate myself, I touch the model hundreds if not thousands of times when I’m valuing a given infrastructure asset or real estate asset. And it’s unbelievable the lack of transparency a given fund manager has across the investment lifecycle for a given fund. Next, asset level transparency. Traditionally in private markets was okay to provide performance at the fund level, and basic data at the portfolio/company level. That is no longer the case. Investors are looking for a lot more granular transparency. So if I’m a real estate investor, investors now want to have granularity on not only the portfolio companies, but the sites, the actual real estate sites, whether it’s hotels or commercial real estate. What’s the tenant breakdown on that, what’s the demographic breakdown of that data? So this is all really critical data to make better investment decisions from the retail level down.
And last but not least, forward looking transparency. Since models are completely bespoke when valuations are done, there’s no ability to ask what if questions. James mentioned interest rates being so high right now, a simple… And the private markets is so dependent on interest rates when it comes to private credit, every asset class in private markets has some sort of leverage. So just saying what 100 bits impact has to a given asset, this is information that’s critical to know the future value, or the current value of the investment by forecasting out future cash flows. And investors are now asking more questions of what happens if X, Y or Z happens, and it takes our clients months if not years to do that effectively, and we’re working actively with clients to make that more real time as possible.
James Redgrave:
Yeah, I mean that’s a pretty comprehensive answer, I would say. Just the only thing I’d add is that when we are looking at the valuation transparency, for example, it’s not just comparing a listed company to a wind farm, it’s comparing it to another company that’s not listed, which does exactly the same thing as that. So Apple’s share price falls off a cliff, but a privately owned technology company’s valuation remains static for however long until it’s next valued. So you’re not buying these things on a level playing field, as it were, and again, for the market to grow into more of a retail style distribution environment, that clearly will have to change. And the same thing goes on the administrative side. I think Ali briefly mentioned ESG, and the G part of that, governance, the decision making structures, the ownership structures are, not necessarily, but frequently, far more opaque, simply because of the lack of required reporting in private equity compared to public. And that’s something that again, regulators and investors will demand more transparency on.
Kali Jakobi:
So let’s go into where private markets is heading. What should CXOs start thinking about from an investment data strategy and execution lens?
Ali Mamujee:
Well, the question every executive, and the question we throw out to them, is your current data strategy an asset or a liability? And you get a lot of looks around the room, and that’s a fundamental question that we should be asking everyone. Everyone should be looking internally. Just like good will is an intangible asset in financial statements today, I fundamentally believe data is going to be a good will item, and a lot of fund managers, asset owners and insurance companies, most answers wouldn’t say liability, but they all agree there’s a lot of improvement to make on an asset level. A new movement we’re also seeing in the market is what our market is coining the one office method, is private markets have been extremely siloed and there’s a front, middle, and back office, we all hear about it. And real estate teams would start procuring technology to solve a portfolio monitoring challenge.
Infrastructure team would be procuring a deal management software system to solve their challenges. And we’re seeing this focus of this one office centralization of data strategy, and it’s flipping a script of going from a bottom up approach. And we’re going to see that continue because I think there’s a fundamental belief that there’s a flywheel effect that happens when your team is raising capital, deploying capital, and managing capital. And the more access you have to that data and that ecosystem, the more better decisions each group can make individually. And the last piece of advice is, I really think about data strategy in three pieces. It’s one, getting the strategy, getting the people right, and last but not least, it’s the execution part of that. So coming up with a data strategy, and my favorite definition of strategy is what are you not going to do? And then getting the people that one, have the skillset, but more importantly are accountable to execute against it. And then execution, you need top-down senior leadership to hold accountability in periodic reporting to make sure you’re effective in making that data an asset in the organization.
James Redgrave:
Yeah, I think there’s a certain amount of circular cause and effect here, isn’t there? We started off talking about organic demand for private markets from different investor types and how that was driving growth. And then that growth drives demand for transparency and better data. And as that comes through, better data inputs, better platforms and software for analyzing that data, it improves your ability to distribute, to fundraise and sell your investments in. So that then in turn drives more growth of the sort that we were talking about before. So again, the whole thing becomes a virtuous circle.
Kali Jakobi:
Well there’s certainly a lot of data to unpack in this survey. I highly recommend anyone listening going to the link in this episode’s description to read the full survey. But for those who are avid Data Disruption fans, you know that the final question is never about data, it is always a personality question. And personally, my favorite question of the whole episode, because I get to learn more about my guests. But today’s is a particularly fun one, and that is James, Ali, if you all could turn into any animal right now, what would it be and why?
James Redgrave:
Okay, well I think probably not so much the animal that interests me as the abilities of the animal, but I think I’d want to be a large bird with an ability to fly long distances. I think the ability to travel, to see the world, to get around. I don’t know, an osprey or a large eagle type creature, it could really cover a lot of ground and see a whole load of different environments and parts of the world in a short space of time. That would be it for me.
Kali Jakobi:
I know, it must be nice to be able to just pick up and fly.
James Redgrave:
Yeah, exactly. Without having to queue and go through security and make sure you don’t have a bottle of water on you or anything like that. Yeah.
Kali Jakobi:
Have your passport, heaven forbid. Ali?
Ali Mamujee:
Well, James took mine. I was going to say bald eagle. I’m a sucker for the northwest area of the United States. I’m an outdoors type of guy, and being around the trees and the woods and flying around, that would be amazing. And I’m a big fan of that Alaska area as well, but I’m not going to accept that as an answer Kali. So I would say we have this conversation with my daughters around the dinner table, and my daughters say I would be a panda bear a lot because I just love the outdoors and just lounging around. So just for my daughter’s sake, she’d be awesome that I mentioned this. So I give her a reason to listen to this. So I always get told by my daughters that I remind them of a panda bear just lounging around eating some bamboo in the outdoors, so I’ll leave it at that, Kali.
James Redgrave:
I had you down as an eagle to be honest, which is why I got in first because I knew you were going to…
Ali Mamujee:
Great.
Kali Jakobi:
I love it. I love it. My first thought was also an eagle just for the travel’s sake, but when I think about what I would really find interesting is I’d love to be a cheetah. I’d love to be able to go that fast, just within an instant. Just some fun things for your Thursday today, listening to this episode. But James, Ali, thank you for answering my personality question. Thank you for giving us your expertise on data, and the State Street survey and thank you all for joining the show.
James Redgrave:
Thank you very much. Really, really great to be here.
Ali Mamujee:
Thanks Kali. Thanks James. I could finally check this off my career bucket list.
Kali Jakobi:
Thanks everyone for joining today. Click the link below to read the full survey, and as always, if you’d like to reach out, please do so via email. Thanks so much. Till next time. Thanks for listening to this episode of Data Disruption via Charles River. If you like what you heard, share and leave us a review. It helps others discover the show and I thank you for it. And if you’d like additional insights related to this conversation or others, go to our website at www.crd.com. Till next time.
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The material discussed is for informational purposes only. The views expressed in this material are the views of the author and are subject to change based on market and other conditions and factors, moreover, they do not necessarily represent the official views of Mercatus and/or State Street Corporation and its affiliates.