Multi-Asset Management Across Public and Private Markets

By Rome. TV banker, Bloomberg Media. Alright. Well, I'll put your prime someday, I guess, we'll get to the point where this will just all merge into one and we won't really have these distinctions anymore. But it's great to have all of you here because you all kinda sit in different sort of places in the capital ecosystem from South Wales, real assets, external managers, direct co investment, I just wanna start off just kind of talking about it. Maybe just once sentence to kinda get us started here. One of the biggest changes that you've seen in our alternative assets function within a multi asset portfolio? How does that changed over the last five years? And I'll just start to do there to just bear here. Well, I think that the the equation investors are looking at gas and fossil property some of the investors are also changing. So, specifically, part of wealth is really emerging as a significant interest investor within the last several broadly. Last year at Rhine's private wealth was about 25% of our total capital raise. And this year, it'll be about 50%. So it shows kind of the significant benefit on shift. And I think those investors are under allocated and they're looking at the current market that we're in as one where they put some inflation protection. And they're looking at supply shocks that are happening in the market around us and seeing where last that's as a safe haven, but also driver of growth next five years. Thanks. I thank you for having me here as well. Teach upon ten twenty this year, and we've always been practicing total portfolio approach for this entire time. So we try not to make a huge distinction between the after classes, remain to your point, is more around what is risk that we're trying to get. What is the in the portfolio? And so we've always been proposed of alternative assets we've If anything, it go well, we're living in today, we think I would say these monitor the days heightened uncertainty compared you should expect to get from illiquid assets to be much higher than what we historically got in the past. And that's something we've gotta be conscious about. The second thing that then also is a dictation to know the relative mix between different operative assets. I mean, if look in the last five, ten, fifteen, twenty years, private equity has been clear in about 500 basis points returns over, let's say, private credit or infrastructure. And if you look at most of So you would probably see you see that for a shift in terms of how people thinking on allocation across different private assets that you've and Bill. Good afternoon. And to Roy's point, what I would add is we and the way we approach and asset allocation is creating as much diversification. And ensuring that we do not have in the portfolio investments that are high Well, our conversations with clients have moved beyond asset allocation in a traditional sense. And now let's really much more about what are the exposures the interaction function. How are those exposures interacting with the economic cycle? How are the exposures interacting with each other? Are they interacting with liquidity? And in today's world, you have to have the geopolitical environment which is also to having some influence on how you're constructing and portfolio. And so we spend a lot of time documenting the interaction of these different factors. Approach look like in this day and age? I think a lot of looking at comparison. And we apply the same lens. We always look at of this opportunity. What is the role in the portfolio, and what is the risk we're thinking and then making it really not. And so it is a really spectrum based and it leads to a lot of internal collaboration, and sometimes that is a lot more needed. But it does you know, it's very purposely built. It's not overly diversified and Yeah. So Yeah. We which traditionally give us much higher returns than this Now in the context of what I've said right now, we're looking to do more So let's say 20% to one twenty five. But we're more Because it has showed the duration, and hasn't had high cash yield, again, it can't and particularly in areas where we can on trends. We see So AI is not this one. One level we can say, we see the opportunity. You are double the exposure we have So when you look at that, then one of the types of things you look at more to hard assets. So more of the infrastructure, more of commodities, And then when you look at these acidic dosities, say these are also acidic dosage which do better in a higher inflation environment. And for our portfolio which otherwise more growth oriented in this provides more balanced decisions. So, ultimately, that's what we've heard too. When we're looking at different pieces, we try to see how to match So you have to construct your portfolio to be able to have a narrow rate of outcomes across the environment. So which is why, again, we're looking at royalties, stock insurance, other things which are noncorrelated with equities. And, therefore, from five years ago, where our main alternative acid class, fiber acid class is risk and the return out of the current environment, and you construct your force with your body. One one point would it have that's always good point of duration with credit. Are looking at credit, particularly in real assets and real estate specifically. But to remember that you're getting the duration question is, I mean, a real one because you're already getting that money back. At some point. And what's happening, at least on the equity side, where the uncommon investment point on the equity And what you don't learn is investors to get all that money back after equity has fully recovered. Clearly is it's a great strategy, but just in the right quantity. And I think it's particularly more important right now because on private equity, your duration can extend more and more. So you wanna have that balance And, ultimately, having liquidity, I think, is a thing that I keep emphasizing. Today's environment, that's, like, the biggest source of resilience in the portfolio. And that's why we can let it go forward I agree with our people are trying to sell? It also trades a different way because we So we need liquidity to make new investments. Mhmm. And usually, you could do that through investments. But you can't always find divestments depending on the cycle you're in. So liquidity is key. Secondly, there's so many shops we cannot predict who would have thought that we are in the situation we are right now. We want to make sure that our portfolio has strong balance and they're liquid. So that when they have these shops even some items, If can slide the shops, probably know how okay. And then sometimes, we would need to put a gap into those companies. I mean, last example was COVID. You know, Singapore Airlines, which we have a We have to inject $15,000,000 into the company. Not just so it will survive, but when anyone else was short of capital, they renew their fleet, become a fruition, So liquidity was a big source of resilience at that point of time. And I think that's where I'm coming from from our perspective. Did did did income? Is it diversification? Is it the inflation hedge, economy hedge? What are they looking for right now? Well, I think I think right now, with us, we Looking down at the investment cycle of that brand. They're looking at what we have raised in obvious pricing fixed income house pricing. And they're looking at real estate real assets. As something that is at the early innings of the recovery. So the the reset happened in 2022 when rates went to 500 basis points, and we're still bumbling along the bum, if you will. And that's, I think, a really important point when you're looking at relative value. Think the second reason that investors are focused on real assets with new lens is this investment cycle that we're in. I mentioned supply shocks earlier. I think it's really important point in terms of what's happening right now in the global economy. And it's the supply shocks of of policy of legal which is a much bigger theme. Also it's it's what's happening with national resiliency. Right? And countries everywhere are looking at their supply chains, looking at everything from energy, chips, events, you name it. And that is driving a whole new wave of demand. In all the major geographies around the world. So that that also is is creating these new porters of demand that's gonna support the new economy as we go forward. Okay. Alright. So Back in 2021 during the pandemic, we can't Possibly higher inflation, and more volatility We made a we added strategies to that one more diversifying. Added workplace protection in the portfolio in the way And just try to unshear again your In the back? Well, yeah, man. If you look at what's happening in the world right now, there is massive industry disruption that's being driven by lack of liquidity in private markets in general. And so if you go back over four or five years, you have the Fed rates raised by 500 basis points in 2022. If you look at private markets in general, you should expect to see as a percentage of NAV about 20% come out of portfolios in years. That's been running between 10 to 13% Now for a pulse rate here, so what's the impact of that? Fundraising is down as of 28% since 2021, which is putting a lot of stress Your real estate has been through or four cycles in the last thirty years, and they got hit by an extra straight shot it's not contained to real estate managers. You also see it, obviously, the post '21 venture world, a lot of disruption. And so I I think what you have happening is a shomi moment among managers because all of us expect both different passive classes, different exposures, and different executioner managers. And to some extent, that's been a mixed picture over the last three or four years. And so I think in a high level, things look normal. On the other hand, just beneath the surface, there's a lot of stress that's happening at the manager level, and so I think it's gonna cause a lot of disruption. Cases Or mitigate them in the coming couple of years. Excuse me. You know, I have two microphones. So I only have a a lot more to say. Here. So maybe some technical issue. But but but my business continuing on that thought. So, I mean, are you we'll see but the inflation risk or someone to deal with, you know, the supply chain shock or whatever you wanna I'll call it here. Since do they get pregnanted like that? Or is it a little bit barber? I think it depends a little bit on on wet a an allocation is serving. Obviously, if you're talking about in a hedge fund space, you're looking for portfolio convexity, correlation, volatility, and control, and different factors like that that might with the macro factors more. You're gonna look through to the managers and see what are the different levels of exposure giving you across some of these different macro factors. So I'm think of the mic the the managers as really the micro part of the analysis You need to make sure that they build up into something that you're managing effectively toward these goals. And, I mean, I'd like to hear you, given that, you know, it's relatively newer platform here, and what's the difference? I I think from our perspective, was the biggest question that we probably did. In certain parts of the world. So how do you think about some that particular shrimp might persist. I think we address up with a lot of humility. You come It supplies that in Work. About scenario testing. And so we'll we have a number of scenarios, and the one that we are from within is slightly higher properly. And the previous correlations just will not work in this new world. And so you have to rethink that. And so we've added commodities inflation we we need that to realize our our intent objective. Well, it depends, obviously, by asset class, we spend a lot of time in private markets bringing money down to the individual principles. That the firm is saying, okay. Can we go and do the diligence, find out if I pocket people on the boards with these individuals, who's really adding the value in our approach in kind of market manager selection, and this this cuts across whether buying a GP stake or we're we're we're doing a secondary and the different things that we do. Is it's really about the the individuals, and we are very focused on value add as the company develops. So we're looking for holds that can show on a recurring basis they know not only which asset and why would they know what to do with it. After they bought that asset, And, you know, one of the things I I might just add is it is it relates to the disruptive environment. One of the things that we've seen, and I've been doing this for thirty years, so I've seen a lot of different cycles. Is I think it's easy to say there's a lot of disruption right now. One of the things you you will see is a lot of people come through this really really well, and they're gonna emerge much stronger. So we're in this period. We see this again to our Peterson strategy where my cheapest stakes in private market firms. We have this creative and uncertainty in going into that period. Of course, everybody's The same financial engineering company value add, and it's heard of the difference. And then as you push through this cycle, it's getting become really clear. Who is differentiated out there? And that is where the money is going to to fall into the people who are really delivering to to to manage what they're supposed to deliver, which is the active management of the assets that purest form of of of active active management to do right now. It is like the last forty years have been downhill scheme in many ways since the nine year call policy and that's the to be the chase of David. And financial engineering, those things you know, a lot of values. They've extracted, created with cabinet. Now we're in this world of this cross country skiing and that for us to generation and is all about execution. It's all about execution right now. And in that world, I think there there's gonna be a big sort of managers to the points they're on stage already. And I think, you know, someone described it as a k shaped economy. I I can think about it as like a barbell economy. Where you've got the middle that's gonna get a squeeze, and you're gonna have to either scale go edge. You're gonna choose which side of history you wanna be on. But the ring in the middle is not gonna be a real choice. And what's interesting about this chase for alpha is this discussion on AI and data and how on the scale side, how those managers at our scale are gonna be able to bring some differentiated value above and beyond what we've always been able to do, which is with these new tools that are coming to take it to the next level. And that's, again, why the mill is gonna get squeezed because we're having access to the technology in those tools. Obviously, when times are bad or you have big of macro shocks, I mean, we see correlations just, boom, just completely go to one. I don't know. And the question is how do you guard against that? Or, more importantly, how do you make sure that you're constructing something? And even if those correlations do then it will be the effect will be temporary. So I think the key key difference we look at is what is really the mark to market impact in the short run. What is above the loss? My permanent loss, I mean, permanent discounted cash flow loss of the business. Because you could have volatility in a lower mark But if the business can submite that, and true hit to cash flows is more resilient. Then then that doesn't matter to us because So so that's the approach. And then the other thing is it took as Sheikah said, we look at scenarios and look at different scenarios of the burn, How much this portfolio is in risk in a high inflation environment? Is a recessionary environment? And if you look at the growth inflation matrix, you have a relative balance across the areas. That tells you that you're a more balanced portfolio at the low leverage if the leverage can kill you, and it's highly likely that you'll be able to survive the downturn of our pay. So no one's gonna be immune if you have you know, a massive shop like the GFC, etcetera. The most important thing is if you don't run our business and don't have to sort of full sell your and most importantly right now, I think we are very close to saying we we for those is investment in your portfolio versus a hand with a health nutrition company in your portfolio. So And just a wanna get a little bit more thoughtful about just I I guess, what changes Leave it all. When you get these big shots. I mean, there's a sort of an argument you get big shots. David, then you have assets that maybe, you know, obviously, you might have some short term issues that you have to deal with on your balance sheet, but there isn't real to the mark to market that you guys have. the opportunity set, which I think these supply shocks that we're talking about is cycle that we're in, I think is gonna bring And I think that that you have to believe that that is significant enough to offset some of the pretty other things that are on the other side of that. Because you're right, in this, you know, private you know, real assets, it's it's you're you're it's a longer investment brand. I think though, you know, when I look down at the cycle and what's happening and I compare it to other It's an uncommon moment right now, and I think with the supply shock shocks is being kind of the the lack of new development, the lack of things that may be happening that aren't is that levels. And so the imagine redevelopment that that's happening around the world. Should say that's not happening around the world right now, is at a historic level. And that is gonna Level, and that is gonna drive rent growth. That's gonna drive cash flow. With China, so you have to be able to make investments today to take advantage of that. And so that's basically a buyer opportunity right now for investors. But have to have your eyes wide open on it. This is planned eyes wide open on on the duration of some things. I think there's a great benefit in that. There's great returns in that. And durable returns in that, especially a lot of some things we were talking about. But that there's a clear One of the things I might just add there quickly is obviously, talked about benefits of diversification. You need badly in this world. By going back to my comment on how liquidity interacts with the portfolio, of the things that has evolved quite a bit in the last ten or fifteen years is ZMAT. Could it be available in private markets. And so you see the traditional fund structures, which are still the best organizing principle, there's a lot of new technologies that you can solve. And so if we look at the secondary market today for private markets, there were $2,250,000,000 in transactions last year. We think over the next four or five years, that could go to 500,000,000,000. And so ability to realign their portfolios is different. And so as we interact with clients, around both because we're a big secondary liquidity provider, we're seeing really two things. Obviously, investors are taking advantage of being a liquidity provider with strength. Premium. You get to that. But also many investors are saying, hey. Just because I made these commitments, you know, it's it's a commitment inside tattoos. And so I can look at my portfolio, and I can evolve it over time. It's not just a a tank that has to go point correction. I could I can have more of fear than I had to benefit. Years ago. When, you know, there really was more and more liquidity. I think companies around our secretary's platform twenty years ago. And that you know, when I when I first started that business, 3 or $4,000,000,000 of liquidity in that market, I think we looked at a 137 transactions over a billion dollar from last year. So there is a lot more liquidity out there. Ability to adjust portfolios. And I think it brings a huge, let me just make a huge point, actually. I think that I think that they're is going to be a lot of product innovation. I think, you know, when you look at look at the statistics, I mean, 2008, there's about 8,000 public companies. Today, there's about half. Meaning, on a global wealth is still Right? So we just double the money in the past, at least in The US, half half of public markets. So I think innovation is gonna come to fill that with I think the secondary market I think, help with Europe and then also some different ways the banks are looking to help I mean, capital is like water, and we'll find it to a level. And I think that the the differential in pricing and market activity is enough where people are going to get creative. Right? The only That's what's likely dry up. What's gonna be a crisis that you really don't like? Yeah. But in some sense, you need to actively manage your portfolio and your commitments and your liquidity to do those transactions ahead of time, plan for it, because we really wait till you get the prices I think those pools of liquidity are gonna be too expensive for that. I I 100% agree with that, but one interesting just kind of footnote is that you you can't change your whole portfolio of prices. Absolutely not. Even there, there's there's portfolio finance solutions that have been evolving and some people do need some preferred solution cash flow swapping, those types of things where it's it's it's basically provides an ability to decide the moment of stress for sure, but we've seen a lot of impatience. So I think that it will continue to develop It's not gonna be your go to. Your premise is never gonna be your go to. Let's manage it in a crisis. But the technology is just moving very, very quickly here. I do wanna ask there's a question from the audience that is how I ask to do with all the talk about, you know, corporate direct lending and and some of the concerns there. And the attention shift to asset base us. Yes. Look. four, five years. You know, it's very similar to just direct blending, but you have much more diversity in underlying pool of exposures that you're getting in quite frankly, I think the reclining has become very vanilla, very beta, and so this is one way of actually accessing different different market, which can be a bit more complex, and so you can paid for that taking that risk in that complexity. Oh, yeah. Absolutely. And it requires real skill. I Changing things around when big times get tough and the idea of becoming overlaid Who wants to take notes? I can start to look on all the speculists. Think long term because there's so many shots happening every day. We start reacting to every one of them. 're gonna get whiplash. And given the fact that So I do think it's very important in this environment to environment to have the proper down perspective And but portfolio construction becomes a most critical way to sort of navigate through these environments. To make sure, conforme a construction adequately low leverage, Esses dois ancestrais em reward your preferred even in the Samaras. I would add to that. I I what is important is absolutely not giving a whiplash, but managing wind interest You don't wanna be know, you're getting the necessary to tweak interim asset allocation versus reacting to the market. I think that's something we are very cautious about. One thing I am curious about when we talk about just risk budgeting overall, I mean, I kinda know what the tools are in the public market to a certain extent. We kinda know what the tools are. The private markets. Is there are there tools out there that sort of span those markets sort of straddle between public and private? Do you need something unique? Are you using something you need? So, I mean, I think we we we customize sometimes products that hold students. So we did a project recently that I was involved in to add real estate credit. Actually, through the work, it became really clear that sometimes that's a practice, sometimes it's ADS, sometimes it's liquid credit, sometimes it's something else. And so that's what we created A product that can actually span cost the liquidity space across the capital stack and be able to move around because, actually, this varies changing environment, that's actually really valuable and this, again, this actually bit of a doubt in that channel as point on shifting asset allocation. So I probably disagree with a few of the things that they say that we agree with asset allocation. We can But will we probably move less But we credit is an attractive legal seller, they're no obligation for us to But we will be very, very specific on what level of risk we're taking, what is the expression we're taking. So we're public equities and public markets, not just to follow a benchmark, but usually and it's a question deciding where it's better to play in the public arena versus the private arena. Now, well, Completely changed by the mission And, clearly, like, it's something I got a man in my life. AI. I would rather be more rather than, you know, in other areas where you just the range of outcomes is very wide. They are rather, you know, the public So I see that as a lot of portfolio construction meet different objectives in our portfolio beyond just the liquidity issue. But on the AI front, Duration, if you will, the duration of this technology, which is, like, you know, the short Of versus whatever the investment horizon might be. When we think of investing in AI, we we look at PPI value chain. Starting from energy. Available, and and that's where you'd be investing in our in our hyperscalers. But beyond that, there's very little you know, we live So we think, you know, across that, think of investing in AI And and we think that is something that is gaining momentum. Particularly on the BC and the growth side. But I think you're gonna see also Side We probably did it so that's something that we're those durations? Or That there is a mismatch when there's so much capital going into the the hyperscalers that the magazine think there's a little bit of a question about the first surprise here. As well. And it's not And private and the tools developing. I mean, I find that a lot of the impediments are behavioral and cultural. And in in looking at the question like this in a specific, can we And really, it's how do you marshal your intellectual capital? How do you How do you look at the How do you think about pacing and liquidity in context of investing behind a thematic like this? And a lot of organizations, I think, are scattered. I'm with this. Are struggling with this question right now. But I I think it's I I say it's a problem of duration. I think, in my mind, it's a little bit of a problem of we're at this moment where the uncertainty is high, and there's a lot of different outcomes. It's been happening fast anytime right now. Yeah. But there's a lot of capital being, you know, put on very circumstance. I mean, part of the the issue also is also that they've And when you look down at, you know, all the of capital, you've got this pool of capital that's about twice as large as the traditional institution of the sovereign law pension fund. And at least in real life that's broadly very underallocated compared to you know, traditional soccer ball pitching ones. Mhmm. And and so you look at that as twice as big or twice as fast and underallocated. That means that there's gonna be a lot of money coming into the system from this world and it's gonna need home places to go. And I think that lot of the your in the sense that, you know, the world that we are was a world where where we had different product types, asset classes, and things kinda had a place. We all allocated capital accordingly to the Bishop Frontiers, and things we learned in school I think that a lot of these this new of investors that are coming look at it a little bit differently and, you know, a little bit less focused on on maybe maximizing the the, you know, the resiliency of portfolio versus maximizing accurate aim that they're gonna be at. And so they're gonna look at the world in a much more just a fungible way and think they're gonna think about what it is. They're gonna think about all these different product types, classic classes they can go to they're gonna work for high high returns. And even some of these questions of liquidity, are probably gonna be a little bit less the concern if they have their head around what risks are getting. And I think that that gonna change the dynamics that we're talking about. Again, for the amount of data we're talking about is gonna enter the system that just has a different perspective on it. Deal with that different perspective. I mean, obviously, this this gets a liquidity issue or a perception of it, but also just transparency. Right? I mean, we're talking about assets that that put part, you know, those cars get held pretty close to your obviously where some innovations happen, but my my entire career in kind of real assets, real estate, there has been nothing but a serious of things that have have created more Transparency has created more real clear, and now liquidity has generated better returns. And it strips like Bloomberg for, you know, Transformation in the market. A lot of transformation in the market, think I think that there's gonna be a lot of answers to those questions. So, okay, see, or in the soul, if you if you look at this whole democratization trend, I think some of the focus is a little bit misplaced. And and maybe that's because we're in this education phase right now. We don't think of these things the same thing. We think we think of them as ever This huge education curves that is going on, but let's get back to why we as institutional investors like private real estate or like private credit. The reason is simple. You're talking about buying quality assets with good managers. There is a premium return in these assets. And I think in particular, credit and real estate these are assets that individuals can understand. I think, you know, those are probably be the two big big food groups. At least in the next five to ten years. Certainly, they're off to the best starter. But I think these are assets that people can understand. They've got deal oftentimes. You can see real estate around you. So I think a lot of this is about education and understanding. You certainly don't want individuals to be a structures, but they don't understand so that when things get nice, they get really nervous. That doesn't that's not a recipe for any But I think we had to kind of get back to the fundamentals in why are we as institutional investors who've been doing this for multiple decades still interested? And so I think there's a lot of reason to have these types of things in in their portfolio. And if we can develop the right car bills, the right education, at least for for an extended group of investors. Were we to say that they shouldn't be at all? So I'm curious. If we get to this idea in the middle of the kind of, like, structure of the portfolio, multi asset class structure here, and yet allocators on the other side. Alright. Are they both kinda looking for the same thing? Are they on the same page right now? What do you say? Yes or no? I I think when you look at sort of a a last cost portfolio, first try on first And that's how the structure of the portfolio comes into being. I think from our you know, returning to and risks happening like this to be different. And when and with So we get to this idea now, so then as we go forward, sort of, you know, we're embedding all of this in these multi asset portfolios. My question for a while is kind of what is kind of, like, the number one or at least, you know, maybe not number one, but one of the more important sort of aspects of or of portfolio construction capability And, you know, we can start I'm gonna start with you, Mike. It's obviously you you're you're evaluating a lot of these folks here. This circles back to the first question, but the idea is that what you're gonna be picking for now is for, obviously, a return. Five, ten, fifteen years down the road. Well, I think it goes back to some of these fundamentals that we've been talking about, but also having some flexibility in your implementation so that when these opportunities come up, you can either pick or take advantage of some of these different factors. And so that starts with a robust portfolio designing which we were talking about. And one of the things that about more recently is hedge funds or asset return strategies I think, kind of left a lot of industrial portfolios for a very client. That data centric credit centric flows aren't bringing me. But having a flexibility and having a liquidity budget take advantage of What's happening in private private equity I I think also there's that open up in the market that you wanna take advantage of. We see a lot of this in sort of mid duration special situations credit. Where they don't really fit into one of the buckets. And so how do you take advantage of of stuff that's it's achieved? I'm just gonna twist that question around here. How much is she going this? Like like, when you look at just what where we stand right now and what's embedded, this multi asset class portfolio structure. And you look ahead five years from now, what are we doing wrong? Today that you that five years from now, you'll look back on and be like, okay. That shit's not happened. I think they said gross underestimation of regime change. And so a lot of the portfolios that are being built are being built for the correlations of the past world. And so I would just say, be very deliberate in the construction mode deliberate in the risk you're taking. Economic risk you're taking in think the previous correlations apply in the new world. And so that would be take a scenarios and you wanna see how and The first one would be particularly what's the when you have performance which may not meet certain benchmarks, we do not benchmarks. We would still look at that and feel a and with most or as in con us, to agree with their thoughts on what are the long structure they have as to what is what are you trying to achieve Once you're discapitalized, are those compatible? Or if they're not allocators are looking, where the money is going, I mean, for us, what's important is having jobs in You cannot predict for sure as to whether US sexualism will end or it will not end, know what's gonna happen, but you need to have the diversification so that you're not only betting on one regime for the succeeding. Yeah. So you've got to sort