Live blog from the Milken Institute Global Conference
To see the latest updates, click here.
ESG considerations can enhance private equity returns, for now
Investing through an environmental, social and governance lens can help boost returns, for now, said speakers at a panel, “Deal or No Deal in Private Equity,” on Monday at the Milken Institute Global Conference.
In response to a question, Alicia Gregory, deputy CIO of the A$202.8 billion ($136 billion) Future Fund, Melbourne, said that ESG considerations are in alignment with generating returns.
What limited partners are asking for from ESG and what leads to creating great companies and great value for investors are completely aligned, Ms. Gregory said.
Another panelist, Scott Spielvogel, co-founder and managing partner of private equity firm One Rock Capital Partners, said making a company more ESG-friendly is a win-win because those companies fetch a premium.
In the private market world, ESG considerations are “an additional avenue” to create value for investors, Mr. Spielvogel said.
However, things may change, said Jacob Kotzubei, co-president of private equity firm Platinum Equity, speaking on the same panel.
As long as all the players in the entire private equity ecosystem are “holding hands,” investing with ESG considerations “is a good place to be, a good place to invest,” Mr. Kotzubei said.
But if the ecosystem gets decoupled or ESG is politicized, there’s a risk that investing with ESG considerations could be a disadvantage, he said.
However, when it came to the central question of the panel, whether private equity firms should invest their capital now in a high interest rate, volatile and uncertain time, the panelists appeared to agree that it is a good time to invest for those with dry powder.
“I actually think it is an interesting time” when capital is more scarce for those with capital who may be able to find great businesses at fair prices that they may not have been able to invest in when there was an abundance of capital, Future Fund’s Ms. Gregory said.
And the managers on the panel agreed that it is a difficult time to raise new capital. However, Ms. Gregory said that there is capital out there, and investors remember how they were treated by general partners when it was easy to raise new funds.
When the fundraising pendulum swings the GPs way, “GPs should treat LPs more fairly” and it will come back to managers when fundraising is tight, she said.
05.01.2023 @ 7:24 PM ET
Venture capital’s evolution to include investors as partners
Venture capital firms are going through a reset that will produce a massive change in the industry in which asset owners are valued not only as capital sources but partners, said some speakers on a panel on Monday at the Milken Institute Global Conference.
Fundraising has fallen dramatically, noted Jamie W. Montgomery, co-founder and managing partner of venture capital firm March Capital, who moderated the panel, “A New Game Plan: A Reset for Venture Capital, Innovation, and Entrepreneurship in 2023.”
PitchBook estimates that venture capital fundraising could be down 73% in 2023, the lowest since 2017.
“Capital is available,” said Ibrahim Ajami, head of ventures at Mubadala Capital, the wholly owned asset management subsidiary of Mubadala Investment Co., a $284 billion sovereign wealth fund. Mubudala is not only investing with founders to build companies but also partnering with venture capital firms.
Mubadala is leveraging the resources of a sovereign wealth fund to work with founders to build companies and has invested in over 100 companies.
”Investors are more sophisticated,” he said. The industry needs to shift the narrative from a view that capital has dried up and investors are no longer interested in the asset class. Venture capital is evolving and the big question now is where it goes from here, Mr. Ajami said.
Sovereign wealth funds are key to the next chapter of venture capital, he said.
What also has to change is venture capital firms need to focus more on being “very, very good money managers” that deliver consistent returns over longer periods of time rather than an industry that promises very high returns, Mr. Ajami said.
Those very high returns no longer exist, he said.
Asset owners are looking for consistency of strategy and consistency of return and whether they can work with the managers to make direct investments and co-investments, Mr. Ajami said.
“We’re not interested in supporting a one-fund or a two-fund manager,” he said.
Investors are not looking for paper returns but no distributions, said Lo Toney, founding managing partner of Plexo Capital, which invests in emerging managers.
When managers go back to the market they want to be able to show that they can provide investors the cash flow they are looking for, Mr. Toney said.
To do that, venture capital firms are more focused on profitability then they might have been in the past, panelists said.
“We are definitely a lot more focused on the (portfolio company’s) path for profitability,” said Anu Duggal, founding partner of Female Founders Fund, a venture capital firm. Plexo is an investor in the firm.
“We are not looking necessarily at businesses that will grow through paid acquisitions … that model was very pervasive for a long period of time,” Ms. Duggal said.
Raj Ganguly, co-founder and co-CEO of venture capital firm B Capital Group, said: “I think U.S. institutions will be a big part of the innovation ecosystem,” and a bigger part of the venture capital ecosystem.
Many venture capital firms got their capital from Ivy League university endowments and other sources and skipped past U.S. public pension plans and other public asset owners, Mr. Ganguly said.
He said that U.S. public asset owners will be the “bedrock of American innovation.”
A lot of public institutions will not only be capital providers but also partners with venture capital firms, Mr. Ganguly said.
05.01.2023 @ 3:50 PM ET
Mark to market a continuing problem for pension funds, managers
Pension funds and their underlying money managers are grappling with how to mark to market their private holdings, said panelists at the Milken Institute Global Conference 2023 panel “Inside the Growing World of Private Markets.”
Molly Murphy, chief investment officer of Orange County Employees Retirement System, said that lack of transparency surrounding private equity and other private markets funds is becoming more of an issue for investors, and they are asking tough questions of their underlying fund managers.
“As an allocator, we vote with our feet at the end of the day. We are seeing the same asset in two different portfolios. We see it marked one way in one and another way in the other. We ask questions. We see them trade from sponsor to sponsor. We ask about why they’re selling.”
At the point of sale, when private equity funds sell assets, “we see realizations come under marks and ask, ‘why were you so aggressively marked?’ We’re asking all those questions. Those who aren’t intellectually honest will lose their capital base. It won’t happen instantly, but end investors will lose confidence.”
Jeff Aronson, co-founder and managing principal, Centerbridge Partners, said the method of accounting for private equity and private markets needs to be standardized to bring confidence doing mark to market for illiquid assets.
“You have to consistently apply” the methodology of marking a portfolio, he said. “Clients need to understand what they’re investing in.”
“This is not a new issue in the private equity world. Since the development of PE as a large asset class, there have been multiple instances over the past 30 years with severe downdrafts in markets, and someone could raise the same question. S&P down 30% and typical PE fund down half that. That has been through enough cycles that LPs understand. If they see the discrepancy, they’ll act with their feet.”
He suspects there will be a shakeout among managers. “The best managers, their valuation policies, comport with reality. A subset … not so great. We haven’t seen that yet. We’ve been in 15 straight years of forgiving public markets.”
05.01.2023 @ 2:13 PM ET
Milken panel explores ‘democratization’ of private equity and its impact
The days of free money are over: That’s the consensus among asset allocators, portfolio managers and bankers attending the Milken Institute Global 2023 investment conference.
Pension funds, endowments and foundations are re-examining their private equity and private market asset allocations closely, said Kim Lew, president and CEO of Columbia Investment Management Co., on a panel titled “The Future of Asset Classes.”
Now that private equity is becoming “democratized” and available to retail investors, “Institutions want to know, will this asset class provide the return and diversification? We were willing to pay for the price of illiquidity” with high fees for private equity funds, Ms. Lew said. “What happens when it’s no longer an illiquid asset class? What is the new role this plays in our portfolio? Do we have to look elsewhere?”
There were asset classes that were super inefficient at one point, she said. “Equities are now super efficient. PE is going the same way.”
At one time, she said, “we had a bond portfolio as a diversifier vs. equities. It didn’t happen last year.” In addition, foundations and endowments are struggling with the denominator effect – whereby the losses in the public have reduced investors’ ability to commit more money to private asset classes.
Also, private equity firms have yet to cut the hurdle rates from a blended rate of 5%, over which they charge a performance fee. She’d like to see those hurdle rates raised along with the predominant interest rates today.
“Hurdle rates back in the day were 8 to 9%, and the argument made (to limited partners such as her firm) was it should be dropped to 5%. That’s when rates were lower. The agreement was, how much should you beat it by to be very good at this? That’s the struggle LPs are working through. What was promised and what’s the expectation now? It stems from the idea that the pendulum never swings back. What’s the rate at which it feels worth paying for” to invest in a private equity or private asset fund.
Sometimes portfolio managers “think they’re Bo Jackson who can do two sports. And really they’re Michael Jordan and they should stick to basketball ... but they want to give us the same check” for the same strategy. “By the way, I love you, Michael Jordan,” Ms. Lew said.
Asked whether this is the best time to invest in private markets, she said, “I agree, but the equity markets are down so much. They’re also attractive.”
The panel also addressed the continued interest in environmental, social and governance investing among institutions.
John Koudounis, president and CEO of Calamos Investments, said ESG continues to be the fastest-growing asset class among his clients.
“I hate that it’s been politicized,” he said on the panel. In 2022, there was $40 trillion invested in the ESG asset class, and he said Bloomberg predicts that dollar amount will rise to $53 trillion by 2025. ESG represents almost one-third of the entire investible assets available to investors, he said.
“We have to look at that. The world’s going that way. Let me be clear: I’m not in favor of anyone mandating what we invest in.”
However, “I can perform and get returns for clients and still have a sustainable product,” he said.
05.01.2023 @ 12:07 PM ET
First Republic Bank rescue sets tone at Milken conference
The rescue of First Republic Bank this morning, Monday, May 1, hangs heavily over the Milken Institute’s Global 2023 conference, which opened with a panel of global bankers and money manager executives.
The main themes include the slowdown in the economy, the repricing of risk in the banking and real estate sectors, and the possibility that the U.S. government debt ceiling agreement might not be reached in the final hours.
Citi CEO Jane Fraser kicked off the first panel by saying, “We’re seeing stress in the prices of Treasuries, CDs and the conversations with clients are more around deep concern” about the debt ceiling.
“This could have serious consequences for consumers, and this time feels different. It’s more worrying,” se said.
Rishi Kapoor, co-CEO of Investcorp, said, “We’re using the 4-4-4 regime. Low level unemployment around 4%, inflation running higher than Fed target at 4%, and interest rates at 4%. That 4-4-4 mindset captures the macro backdrop offset by the noise.”
The closing price of the S&P 500 is at the same level as 52 weeks ago, he added.
“The intervening 52 weeks we’ve gone through three bank failures over here, one in Europe, meltdown in U.K. budget. Who could have imagined we’re exactly where we started?”
David Hunt, CEO of PGIM, pointed out that the reason many risk asset allocators have stayed on the sidelines “isn’t recession. It’s the belief that markets are good at pricing in economic market cycles. The market will reprice. What the market does poorly is price in low tail events and, non-rational actions: one is in Ukraine. Putin is cornered, does he take a radical way out?
“The second is Washington, DC. The markets love to believe Congress will be rational and at 11:59 p.m. we will reach an agreement” on the debt ceiling. “What if that’s not true? Politicians aren’t so sure the credibility of the U.S. government isn’t worth the political gain. The market doesn’t handle these well.”