Alt Goes Mainstream: The Latest on Alternative Investments, WealthTech, & Private Markets
00:10:27 · Michael Sidgmore, Yann Magnan
[00:10:27] S1: When I hear you talk about that, where my mind goes is you're taking a back office process and it actually... So post trade or post investment, it actually feeds into pre trade or pre investment because to your point, there's new investors coming into an evergreen fund at a certain point in time when they strike a NAV. There's existing investors who may want to invest more. There's existing investors who may want to redeem some. There's GPs who may need to figure out how to continue to manage that portfolio. It's almost as if that the back office is becoming part of the front office as it relates to how you understand value, market, and then ultimately distribute these evergreen funds? [00:11:11] S0: Yeah. I mean, it depends how you define the front office. In my world, typically front office is the investment team, they invest and they exit. But if you think about the GP, you would probably not contradict me, one of the key function of a GP is actually to raise capital. And if you look at it from that perspective, to raise and invest the capital, but starting with raising the capital. And you start from that perspective, you have a new constituent, a new group of stakeholders that are not the typical institutional LPs that have certain ways of looking at things and certain ways of thinking at things. You have a different group with very different ways of thinking at things and looking at things, and you have to balance both. And that's a very different exercise.
00:11:11 · Yann Magnan, Michael Sidgmore
[00:11:11] S0: Yeah. I mean, it depends how you define the front office. In my world, typically front office is the investment team, they invest and they exit. But if you think about the GP, you would probably not contradict me, one of the key function of a GP is actually to raise capital. And if you look at it from that perspective, to raise and invest the capital, but starting with raising the capital. And you start from that perspective, you have a new constituent, a new group of stakeholders that are not the typical institutional LPs that have certain ways of looking at things and certain ways of thinking at things. You have a different group with very different ways of thinking at things and looking at things, and you have to balance both. And that's a very different exercise. [00:11:49] S1: You talk about this being a different exercise. What exactly is different about it, and what skills or tools do GPs need to have to be able to do that properly? [00:11:59] S0: Until recently, capital was supposed to be private, and it is private. It's like these assets are not traded. Why would we get to a value that would mimic anything that's public? Well, the reason is that because now you have investors that expect you to do that. Otherwise, they can't really transact. And that's what's changed a lot in the past year.
00:12:17 · Michael Sidgmore
[00:12:17] S1: From a philosophical perspective, though, it brings up an interesting nuance to the point that you just made, which is it's great that there's more transparency. I think we can all agree on that. There needs to be both from regulatory perspective and from a vehicle structure perspective, particularly as you're dealing with evergreen funds. But from a philosophical perspective, if you make these funds and these investments more transparent, then there's the possibility that there's more price discovery and that there is more liquidity or potential for liquidity. I want to be very clear just to make one footnote to that, which is that I don't believe these vehicles should be called semi liquid. So when I say liquidity or potential liquidity, what I mean is in the sense that there's a possibility as you create transparency in this market with illiquid assets, you create the possibility for a more functioning secondary market and more frequent changing of hands of assets. Just from a philosophical perspective, how do you think about that? Is that a good thing for private markets? Is it a not so good thing? Because I think there has been the case where the fact that assets were illiquid meant that people had to be patient.
00:13:32 · Yann Magnan
[00:13:32] S0: There's plenty of businesses out there that need capital to continue to grow. They can tap public markets for that, but actually that's not happening that often. So the next potential pool of capital that they can tap is actually the private industry capital. And that's a very, very important function on the marketplace. There's plenty of these businesses to finance. There's plenty of very, very good businesses. If you want to get more capital to finance these very, very good businesses, you have to find ways to do it. And the reality is that retail investors have capital that they can and sometimes they want to invest into this industry. Basically the flip side of that is that you have to accept that to get this capital in there, there is to be some kind of liquidity. So I don't know. I'm not answering the question, but I'm just saying it's part of the way the economy is going. If you want the economy to grow and to grow fast, and I think we all want that, at some point in time, you have to put capital to work and it can't just be public capital. It will be private capital as well. So that would create more liquidity. Yes. That would create more transparency. Yes. I do think personally, I think it's a good thing, but I understand it can be debatable.
00:14:48 · Michael Sidgmore
[00:14:48] S1: There's people on both sides, some who would say illiquidity is a feature, some who would say illiquidity is a bug, and there's merits to both of those arguments and both of those points. I think on the point about transparency, I think we can probably all agree that particularly for evergreen funds, should be more transparency as there's more frequent reporting, as there has to be more frequent What is different about the way in which the valuation process works with evergreen funds than with closed end funds. Because the industry has to make a change, particularly for those firms that run and manage these evergreen funds. They may have to do things differently as it relates to what they need from an operational perspective. What is different about how these firms are going about creating the resources and infrastructure to do these valuations properly?
00:15:42 · Yann Magnan
[00:15:42] S0: Sure, we were talking about the evergreen funds and the non evergreen funds, but at the end of the day, it's the same portfolio companies in the background. Exactly the same. And that's very important because what that means is that anyway, again, we're getting back to how portfolio companies are financed, might be financed by a pool of what you call private private capital, institutional LPs, but they might be financed as well by evergreen type of structure, I. E. Retail investors. You have to balance both. What's different is that, again, back to the evergreen structure, you have to have more transparency. You have to have higher frequency in terms of the reporting process in general and valuation as well as a matter of fact. You have to have higher transparency. You have to have better business and higher effectiveness of the evaluation process. So all of that has to happen. And here is the thing is that at the end of the day, from my standpoint, everything that's happening on the evergreen side of things is transpiring to the private side of things. Because like I said, there's a same portfolio company at the end of the day. And what I think we'll be seeing is that the industry will align to best practices or the highest denominator, I would say, which is likely going to be the evergreen type of process. Evergreen also is going to require probably a higher set of regulation. Again, because we are back to the fact that retail investors... I was reading yesterday on my way from London to New York that the four zero one ks plans are quite likely going to be open to retail investors. All of that means that at the end of the day, there will be more regulation that applies to the industry. Could the