Transcription
Thank you all. And thank you to my panelists here today.
The numbers keep stacking up. You know, just a few days ago, I read a report that assets, private capital assets will be at more than 30 trillion over the next five years. We are now at 13 trillion. Give or take. And the superlatives do keep coming. One of the largest leveraged buyouts on record happened just a couple of days ago with equity financing checks also reaching record numbers. And and all of this we are seeing against a backdrop of rising amounts of private capital companies staying out of the public market, staying private for longer. And and here I have three executives who've had front row seats to this phenomenon from very different vantage points. And I wanted to start with, Liz.
You've been in the banking. You've been you've been seeing and observing this from the vantage point of being in the syndication desk at Morgan Stanley. And your role recently sort of changed. And that's in part a reflection of how the market is changing and how finance has evolved to keep up with what the post financial crisis regulations and the evolution of the market. So maybe we can start with how your businesses have changed and are continuing to change against the backdrop of private capital. And Liz, maybe we can start with you.
Absolutely. Sure. Thank you so much for having me. And to Bloomberg. It's an honor. Morgan Stanley is celebrating our 90 year history this year. And our DNA was really an investment bank and underwriting firm. And our growth story has been our wealth management business. And I did start on the debt syndicate desk doing investment grade bond offerings. And I moved to wealth management and was running most recently our private wealth division. And my new role is thinking about clients holistically. How do we bring together our wealth business and our investment banking and institutional securities business? And the reason we're so bullish on that is in part because of the evolution of the markets. As you said, we are seeing this growth and expansion of the private capital that's really allowing companies to stay private for longer. You may know some of these stats, but in the US, 85% of companies of 100 million or more in revenues are private. So it's really the economy is private. And how are we getting access for our individual clients, for our institutional clients to those private markets?
Something that has changed for Morgan Stanley is that we've invested in something we call our workplace business. And we bought a company in Canada that no one had ever heard of that has a product called Share Works, and they manage the cap table for thousands of private companies. And we've most recently partnered with Cada, who is the largest equity administration software company for private companies. They cover 50,000 high growth companies in the private space. And the reason I think that's relevant and what it means for the marketplace is that our ability to service those clients, both from a B2B perspective, but also for those employees and those executives is really important. You think about private companies where their executives are very have a high net worth on paper, but they need to help in bridging and they need liquidity solutions. Or we can provide tender offers for their entire employee base. And then we're using our ultra high net worth wealth management demand that we're seeing to invest in those private companies. And that's a trend that we believe is going to continue. And we've invested for over a decade in that space.
So talking a bit about the relationship between banks and private capital firms. You know, Alisa, Natalia, you know, not a long time ago there was a fairly competitive dynamic that it was it was fairly cutthroat. And now we are seeing a lot of partnerships between banks and firms like Apollo KKR. How is that from your vantage point? Can you tell us a bit about what sort of prompted this and and how that's developing?
Sure. I mean, listen, I think at the end of the day, we've got to take a step back and think about why are there more private companies today? Right. If you if you look at the other stat that I think is super interesting is there are 40% fewer public companies today than there were 20 years ago. So what's driving that? Why do firms why do companies want to stay private for longer and how do they need different financing to support their growth? Right. For us, it's all about a growth story, and I think that's really important. As a private company, what you're really focusing on is the velocity of change within the company to really focus on the profitability, the the bottom line operational growth of the business. How do you reassure management? All of those things really, really matter. And I think what's happened, if you look at the last ten, 20, 30 years, is that when you're managing two quarterly earnings, that's very different than reinvesting in the business, right? How you use your CapEx, how you think about your free cash flow, all of that really changes.
So when you think in the context of what's happening, right, I mean, if you look at in the private landscape today, there are more public to privates being done. In the last two years. We've done 25 in the last two years, just to put it into context around the world. Right. And it's because you can do some of that change as not in the public face every day. And there's nothing wrong with that. You may be public one day in the future again, but some of that change you could do in a very different way. Now, where do the banks play a role in that? You need the financing to support it, right? You're not going to do it all in equity and having that type of partnership, having that type of relationship where you can have the sources of capital to support that long term growth. By the way, that's a good thing for everyone. It's a good thing for investors, it's a good thing for public companies in the future when some of these companies go public and it's good for the employees of these businesses. Right. I mean, it's one of the reasons why we spend so much of our time making sure that in in the businesses we buy, we've universal ownership. Right. It's not just c-suites the same as in our company, right? KKR, we all share in everything we do. Why can't you do that in a private company as well? Right. So I think a lot of those best practices we're really able to push through and that partnership with the banks, especially on the financing side, has been very important.
I think what we're really talking about is the is the convergence of this public and private. So from from a policy perspective, a 700 billion credit business and the whelming majority of that is is within our investment grade great business. So when we look at the business, we look at it with the lens of how can we serve the needs? And, you know, it's interesting, we talk about private capital, you know, the definition of just private credit in itself. We look at it as a little bit different. It's often referred to as the leveraged loan market, usually sponsor backed, and that's a subset of a subset for us is a 40 trillion market and predominantly an investment grade market. So, you know, to go back to your question on the banks, everything that's on a bank balance sheet is private credit. So a loan to a corporate is private credit and mortgage is private credit and loan to consumer is private credit. Credit card loan is private credit. So that's the lens by which we are looking at this market. And yes, there's no question that we have different business models. So a bank often has a very strong origination business and they have different regulatory capital requirements and they borrow short. And, you know, lending long is something that can be very punitive. And it's been a lot of regulatory changes that have changed this. And we have been talking about do banking different rates across the world. And if you pair this with private capital, from our perspective, we care about the underlying assets and, you know, making sure that we create alpha across that risk spectrum. So being able to, you know, originate something in a bespoke way means that we can maybe get access to some of that source. And the bank has they can get paid handsomely for the services they provide to their client. We get a good asset and the way we see it is a win win. And I would just add the other part of large financial firms like Morgan Stanley and banks that have a large wealth management business is they are ability to distribute the funds that they're raising the money for. And increasingly our clients are asking us to innovate with them and with our asset management partners. So the ability to raise funds means that we've done 250 billion in alternative since inception. We raised 35 billion last year, but increasingly our clients are saying, okay, we love the funds that you put on your platform. We know you're doing the right diligence both from an investment perspective and an operational due diligence side. But we also are asking you to bring us co-investment opportunities. And the asset management partners that we work with have been critical partners in bringing that that flow to our clients.
So so what are the pain points in that relationship? Well, the pain points are areas where our clients will come to us and say, historically they didn't love the reporting around some of the fun structures. So they wanted, you know, a little bit more less friction in the process from a paperwork perspective, tax perspective. And our asset management partners have responded to that really well. And they've also allowed us to think about structures within our firm where we now have a single ticket, specially managed account, separately managed account, where we put all of the private equity, private credit infrastructure funds into one single ticket and just take that friction out of the process. And we're only able to do that because of the scale that the asset managers provide and that we provide on our platform.
I mean, I also think the wealth market has fundamentally changed right, in the last even five years. Right. So when you think about how individual investors have tried to access private investing right now, why is it important? It's important for a few reasons, right? Typically because if you're investing in private in the right way, you should be have you should be receiving a premium from a return standpoint against what you would be receiving in the public markets. Right. So what is good look like in private equity? It's probably 5 to 700 basis points above the public markets. Right. So that's the attraction. But the question to date has been how do you get there? How do you get access to it? Private investing has really been in the hands of the largest institutional investors for the last 50 years, right? The way a private markets fund raises capital through a closed end fund has literally not evolved in 50 years. Right. The way you buy a house has changed, right? Like everything is true. The way you finance a deal is strange. So what we're starting to see in the last several years is this whole concept of evergreens, right? This whole concept of always on right. And I think that's taken a lot of the frictional points out of those relationships where you can decide when you want to invest, you can decide when you want to exit. And in the meantime, you optimize diversification. You have a higher velocity of compounding in your returns because of the structures. But I think to your point, you've got to be with the best in class managers, right? You've got to be with those who understand the cycle tested nature of the business, know how to drive returns. And if you can do that, I actually think it takes out a lot of the frictional pain points. And what we're doing is giving individual investors that same opportunity that a large institutional investors should have. But we're doing it in probably a more streamlined, less less frictional way. So I actually think this is an exciting moment for us, right? I think it's an exciting moment for private capital. I think it's an exciting moment to see how different firms are accessing it. But the more availability we can, I think, the better your performance, your own asset allocation will be if you do it the right way. And that's the exciting part of this.
And when we think about what's next for this revolution. Apollos Mark Rowan, for instance, has said that trading private credit is a very good idea. It'll bring transparency to the markets. There are very visible detractors who say that, you know, it diminishes the entire appeal of private assets if you if it becomes transparent. What are the pros and cons? How do you see that evolving?
We see it as the natural evolution. So there's no question that the traditional 6040 monitor model is being challenged for the reasons we were discussed. And what we are all talking about is how do you get access to to the private market for us? You know, as as I was discussing, the private market is predominantly investment grade. So I think what's really key there is is origination. So within origination, the majority of of our time would be spending, you know, speaking to CFOs, speaking to management teams. And by the way, at the time they have an option, they can either go to a bank, they can go to the bond market, or we can go private. And, you know, many times if they just want something that's cookie cutter and vanilla, they can go to the public market. But actually, if they want something that's very specific, very bespoke, then they go to the private market. And, you know, we have been able to demonstrate that some of the largest businesses, Intel API, InBev, EDF, have been have started to tap this market. So we think it's owned. So it goes towards the theme of convergence. So we think it's only natural. Then you start bringing more transparency across this side of the market. And we think it's a very natural evolution. We've been very public around our plans there. We've been hiring aggressively in order to build our capabilities and we have already been trading and helping to trade, you know, billions of off capital in the secondary market. And the question is, once you get the infrastructure right and you are starting to see more of that trading happening in the so-called private credit, then what's the difference between public and private? And, you know, we don't think there is any because ultimately what you're creating is alpha within the private market. And if you are able to solve for, you get paid a handsome premium for that. If you are able to solve for for that illiquidity, then we don't really see much of a difference versus what's, you know, what's often referred to us as public.
But do you see that premium shrinking over time as it becomes more transparent?
I think this is really interesting discussion to be having now, because at the moment everything is priced to to perfection, especially if you look at the public markets, which is why we think, you know, within the private market, being able to structure something that's a little bit more bespoke will attract the premium. Yes, we are seeing a handsome premium versus the the public market and you can talk about how that has evolved. But ultimately, absolutely, there is a premium versus where, you know, the public market is, which, by the way, we think is over indexed and over correlated. And I would just add, you know, right now, because we have a secondary desk for our private placements, it's mostly serving insta vegetables, so executives, board members, family offices who have positions in private markets that they would like to distribute to other buyers. And it's, you know, it will grow in liquidity as that buyer base expands and that will potentially reduce that premium. But it could take a little bit of time.
I think it comes down to, though, there's always this debate, right? I've been doing this for 25 years. Right. And we've had this debate probably every year. You know, are the premiums. What good looks like is that coming down? And I think what that question doesn't necessarily factor in is that we are all evolving how we create value in driving those returns. Right. The way you drove and I'll talk about it from a private equity standpoint, we it's funny that we're sitting on a couch shoulder. We sit on both sides of this one, the equity and the debt side. Right. But when you think about the equity side of it, right. What drove private equity returns in the eighties, in the nineties is not necessarily what drives them today. Right. It's not cheap leverage. Right. It's about bottom line operational growth. You buy good companies, you make them better, right? You buy good, you make great, you buy complexity, you create simple growers. That's how you deliver returns to your clients. Right. But the way we do that is has evolved is different, right? It's more focused on the operational alpha, right? We're talking about things like Lean manufacturing and Six Sigma and Kaizen practices. I can promise you in the nineties we weren't talking about those things, right? We weren't talking about universal ownership for employees because of everyone invest and there's transparency of information at the company. Well, guess what? You can generate a better culture and have a higher velocity of change, which leads to bottom line growth happening faster. Right. All of those things are probably new in the last ten, 15, 20 years. And the way this constantly has to go, at least in private equity, is the best managers are the ones that are constantly evolving. You're not forgetting all the prior chapters in the book, right? You're just building on them. And we the thing you take care. If you don't like change, you're going to like irrelevance even less and you've got to evolve and change and you got to always start thinking about, well, what's the next thing? What's the next thing? Right? Because someone is going to learn what you just did. Now you have to have the resources to do it. We're also believers that you can't rent resources and you got to own it, right? So we've grown our teams immensely to make sure we could support this in the companies that we're buying. But I think that's how you can hold the premium, right? And I think the thing that has been most remarkable in private investing is the spread between good and great and mediocre, right? So if you think about I always talk about this, this crazy stat, this is a U.S. stat, so pardon it for a minute, but there are 19,000 private equity funds in the US. Okay. They're 14,000 McDonald's in the US. How are there more private equity funds than McDonald's? That's actually crazy, right? And by the way, they're all not created equal, right? So the spread between the best managers and the kind of mediocre third quartile managers are over 1400 basis points of dispersion. If you look in public equities for that same spread, it's 2 to 300 basis points. So what does that tell you? It tells you the who matters more than the what the people and the managers that you're choose. This goes back to your point on manager selection. It's the most important thing. Yes. The allocation world is changing, right? The 6040 is a thing of the past, right? Like you need more privates. We would I think would all agree on that. But it's how do you execute on it. That's what makes this hard.
You bring up a really interesting point about the dispersion and returns. And when you think about the opportunities in private equity. Part of it is manager selection, but part of it is also. You know, the opportunities that you're seeing, where what are the mature markets? What are the emerging markets that you're looking at? Where are the best opportunities and where are you looking at Alpha? And then a two part question, if you will. I mean, you're also seeing sort of this prolonged drought in exits that's that's hurting the ability of firms to exit their exit their existing investments. How is that sort of playing out with your with LP's, with all of the big institutional investors?
I might take the exit one first because I think it's making more headlines probably than anything else in the market and for fair reason, right? I mean, capital coming back is really important. The mark to market paper gains only take you so far. We like to say you can't eat IRR, right? Like you actually need multiple investor capital capital coming back. But if you're waiting to take a company public as your sole method of an exit, you may be waiting for a while. Okay. Doesn't mean that you won't, right? There are lots of IPOs happening in the market and we were talking about this before on any given day. Right. There's a great pipeline of opportunities, but you've got to be more creative. You've got to buy companies that have multiple ways to win. So when I look at KKR for a minute, you know, less than 20% of our exits are through IPOs. Most people wouldn't guess that, right? Over 60% of our exits come from selling to a strategic buyer, whether it's a company, whether it's a family, whether it's maybe another private equity sponsor. All like that means, though, that we have businesses where we buy that complexity, public to privates, non-core divestitures that have large conglomerates, whatever it may be. We love complexity. The more complex the market is, the better we are. Right? That is something that most folks probably can't say. And then in our value creation phase, we create simplicity, right? Some simple growers, right? So that's why strategics want to go buy the assets we own. But we've done a lot of the heavy lifting already, and these assets can actually train a lot of the other teams across their own portfolios, Right. So I think at the end of the day, you've got to have multiple ways to win. You've got to be very creative and how you're trying to generate those returns. But I also think you need discipline, right? So we're big believers in when you get there, 80% of your value creation phase, you start to look to exit, right? You don't wait for that last piece to turn because some black swan event probably is going to come out that you didn't think about and you're going to be stuck trying to focus on that, right? So get in, create value, get out. And that velocity of capital is what I think is really important in the private space.
From a private credit perspective, we see it from, from and I guess the perspective of providing capital to you. So the latest figure that we saw, it was 1.3 billion of the so-called dry powder in the private equity space. What's fascinating to us is that the amount of capital of unrealized value is three times that. So that creates opportunity. That creates opportunity, whether that's secondaries equity, that's CVS, whether that's fund financing, that's hybrid capital. So I do think that you going to see more creative structures than we have been seeing some creative structures. I think you've touched on a few good points there, but I do think that you'll be seeing a bigger role of private credit in solving part of the puzzle there.
So and I would echo something that Alisa said. What we hear from our individual clients and family offices is that the landscape for investing has only grown more complex, and their passion generally is the business that they've built, the family office that they're running, the philanthropy or foundation that they care about, and they are really eager to outsource to the best in class fund managers, to the best in class financial advisors, the complexities of the financial landscape. That is just simplicity is something they are craving right now in the market.
Well, I could actually talk about this for the next 3 hours with all of you, if not all day. But that's all we have time for at the moment. But thank you so much for your thoughts and looking forward to the next time. Thank you.