Private Equity is Coming For Your 401(k) (w/ PitchBook's Nizar Tarhuni)

Speaker A: Not every strategy needs more money.

Speaker B: Yeah.

Speaker A: Like I look at you look at the venture industry, who are the best risk takers there? It's not the folks with the most money, it's sometimes the folks with the least.

Speaker C: It's not venture capital, it's private equity. It's the private equity fund. Cast, pour yourself a drink and have a seat.

Speaker B: This one is ripped straight from the headlines. We have three of the biggest IPOs ever in the history of the world coming up in. And everybody wants to know, why can't retail investors get into private assets? I have a great guest and a good friend who's going to walk us through the upside, the downside, the challenges of allowing for one case to invest in private assets. These are Tarhuni, who's the head of research at PitchBook. So longtime listener, a multi time guest. He has all the data and we're going to dive deep into the topic over the next 45 minutes.

Speaker A: First of all, thank you for having me. Uh, longtime listener, good friend, a good time last night too. Well, we're also our event.

Speaker B: You're also second time because we did a, uh, an uh, episode, ah, several years ago about first time CEOs and the data you had about how first time CEOs perform, which was an absolute banger and one of our most download, literally one of the most downloaded episodes because everybody thinks they can be a CEO. And uh, you had the data to prove it that they actually could.

Speaker A: Yeah. Um, so here we are.

Speaker B: All right, so PitchBook, Port of Morningstar, one of the great Chicago institutions, you guys are based in Seattle.

Speaker C: Yeah.

Speaker B: And yeah, I mean we use your data. Most people in the privates use your data. You guys have the data. I, I describe people, I uh, describe PitchBook as like the Bloomberg for privates.

Speaker A: Yep.

Speaker B: Right.

Speaker A: I say that all the time.

Speaker B: Okay, so that's the shorthand. But tell us what it actually is.

Speaker A: And so you think about PitchBook. It is a provider of research, data and technology for private equity, venture capital firms and investment banks. And, and really effectively the entire private capital markets ecosystem. So the advisors, the legal teams, et cetera. And, and our data sets can then also extend outside of that. And so we have a big business with corporates, whether you're doing corporate development, whether it's for business development, trying to find contacts or identify the companies you should be selling into. Um, and so you kind of have this ability to not only serve direct like deal teams in the front office, but also the ability to then serve general corporations with our data sets. Now I've been at pitchbook about 12 years. I look after the research organizations, um, our credit businesses. So I look after a company called, or a group called LCD Leverage, Commentary and data that we acquired, uh, from S and P. And then a group called Lumonic, which is a private credit portfolio monitoring solution. Both of those were transactions so came to us via M and A. And then, you know, I was fortunate enough to, after we did those acquisitions to stay close and continue managing them. And so it's kind of research. I spent a lot of time in credit.

Speaker B: Amazing. All right, so we have the right person to have this conversation because you have all the data. So let's kick it off. Like what are we talking about it? Why are we talking about it now? Like should private equity, private credit, other private assets be invested in your 401k or the retail channel, kind of retail coming for private equity? What's, what's your view on it? What do you see in the data? What are you guys talking about? You've written a lot about it too, so let's talk.

Speaker A: Yeah, I mean when you think about today, there's this big push to effectively democratize private markets. And that's the term you kind of hear. And the push from that is to effectively say, how do we take private assets and then put them in the everyday investor's portfolio? Today it's primarily reserved for institutions, endowments, pensions, et cetera. There's this big push that people feel like they're missing out. So where have you seen that manifest? You've seen it manifest in a couple places. You've seen the large private equity firms, the Blackstones, the uh, Aries, the Cliff Waters of the world, where they've raised these what you call semi liquid vehicles, um, and they kind of have a perpetual tone to them, which means basically there's some level of liquidity that's structured on a, call it, quarterly basis. And there's a specific percentage of the fundamental that can be redeemed, usually somewhere around 5%. And the funds can get really big and they can invest perpetually. So they're constantly deploying that capital versus kind of a traditional drawdown fund where you might be, you know, you've got a certain investment timeline, a fundraising timeline and an investment timeline, then kind of a winding down timeline.

Speaker B: And there's no uh, in a traditional private equity fund, there's no redemption.

Speaker A: Yes.

Speaker B: Built into, into the structure.

Speaker A: Yes.

Speaker C: Right.

Speaker A: Yep. And so there's been this big push and it really, when you think about retail, it's coming via uh, the wealth and the advisor channels. And so you're going into high net worth individuals and their advisors and saying hey, we think private markets make sense in your total portfolio and we think the way to do that is with this new vehicle called a semi liquid vehicle which gives you some level of liquidity. The other component where this manifesting is, you know, you're looking today, we should probably take a look and see where it's at at some point. But you've got the SpaceX going public, you've got anthropic and OpenAI and I think for a long time there's this long narrative of how do you get the everyday investor invested in these late stage private venture backed companies where all the growth is happening in the private markets and they should be able to participate in that. Now um, we can get into like I think there's a lot of nuance that gets missed because I think some of this, you know, being in a late stage venture backed company is very different than being in a semi liquid private credit fund or a private equity fund. But the general push is effectively how do you get more inclusion from the everyday retail investor and private markets. And I think we can get into kind of what are the dynamics, what are the incentives for both the advisor but also for the asset managers that are, that are raising these funds.

Speaker B: Yeah. And this call for democratization isn't new.

Speaker A: Yeah.

Speaker B: Right. We can go back to the 1920s of like you know, regular people should be able to own stocks. Yes. So you've written a little bit about that uh, as well. So this is the next thing, ah, when there's 4,000 public uh, companies effectively and there's say 40,000 private equity owned companies, maybe even more companies with some sort of private credit. Yeah, um, yeah. And you can't get access to it like you said is that doesn't, just doesn't seem fair. So we've had this executive order that says hey, let's allow this to happen. So there's like now a regulatory kind of legal scheme trying to make this more available. Um and then uh, you've got this general push of people have been able to access privates in various ways. SPVs or direct investments in venture. You hear the like the dentists get the phone call, hey, do you want to buy in on this? You've got employees of large venture backed private companies selling their, their employee shares um, through secondary transactions and other things. Um, uh, large institutions, wealthy families and pension funds. I've always been able to get in. So you know, for Us, we have pension fund investors. So if you're a teacher in a state, uh, with a pension fund that invests in privates, part of your, you have exposure. Yeah. Part of your retirement is in privates. But if you're just a regular schmo without a pension fund, you can invest in privates. So this is kind of this push, um, and we're going to get into kind of the upside and downside of all that. But, but like talk a little bit about the history and kind of the momentum and what's actually happening and uh, whether it's in equity or credit and all that.

Speaker A: So if you think about even Pitchbooks, you know, founded in 2007, by about 2014 you had net new funds with net new fund managers. Right. So the pace of which those new manager, newly minted managers, I guess of running their own gps, spinning out of other funds or first time fund managers, I guess better way to put it. Yep. The pace of that growth was growing at a 60% CAGR and that means they were spinning out and obviously there was capital available and there was a big push to effectively have more assets flow from a lot of the endowments, pensions and LPs. Now if you think about at that time though, you're still in an environment where debt was super cheap. In a leveraged buyout industry, for example, where the leverage is a big component of it. When debt is cheap, you can do a lot also in debt's that cheap, it can absolve you of a lot of perhaps maybe not great management of companies. You can kind of ride the wave. There's a lot of beta during that

Speaker B: time and post gfc, uh, people are looking for different ways to drive returns.

Speaker A: Exactly.

Speaker B: Maybe wanted some illiquidity and some uh, volatility long during the cliff asses. Actually don't want to be in these things that go up and down all the time. I want to pretend.

Speaker A: Yes.

Speaker B: And maybe things are a little more steady than they.

Speaker A: And honestly for a long time it was pretty good. Yeah, money was flowing in, money was also flowing out.

Speaker B: Yes.

Speaker A: There was a lot of liquidity, exits were happening, assets were trading hands. Um, you even had, you know, venture backed companies where whether they went public, whether they sold to private equity, um, you know, and credit. The private credit industry was also starting to build quite a bit at that point. And so you had this ma. If you look at a fundraising chart, it, I mean it was up and to the right. So fast forward to call it. You get through Covid and then we get to what, 2022, 2023, rates start to climb. Um, it's like clockwork. All of a sudden, the fundraising starts to dry up. Because if you're an allocator and you're thinking about what are my future expected returns going to look like, one of the largest inputs into that is obviously the cost of capital. And so when the cost of capital increases, that changes the calculation of where should I allocate on a risk adjusted basis. And so you actually start to see things start to slow down at the same time when the cost of capital increases. One of the things I think people miss sometimes is the credit and the debt that sits on these companies. The price can fluctuate and it can start to eat into a lot more of the cash flows. And if you've got a company that was effectively, you know, you're going to multiple expansion with kind of beta with the market, all of a sudden you're under a lot of pressure and you can't trade the assets. And so fundraising dried up quite a bit. I think part of the nuance we're talking about is there's a lot of reasons why a private, private should sit in an individual's portfolio. But I think you have to take a look and say at that time when fundraising dried up is all of a sudden when you started to get this massive push from large asset managers to diversify the base of where they were raising capital. And I think that's kind of a lot of, in our research, kind of where we sit at is it doesn't mean all those incentives are. That all these are nefarious actors, but it does mean, you know, you've got to have an honest conversation around why are we looking for money in other places? And you talked about some of the stuff we wrote earlier. You know, we've spent time, if you look at 1929, honestly, the investment trusts, it's not that different of a narrative. If you just like put them side by side, it was, everybody should have the ability to buy stocks. They don't. So how do we create some sort of trust to allow them to do it? Okay, not everybody can afford to do it. How do we give them leverage in order for them to go buy stuff? And the knock on effect is when you're buying something and things get illiquid and things start to decline and you get worried. As the average individual investor, you have real life costs, you have real life obligations. And so when things get tough and all of a sudden you need to make your mortgage payment or you need to Pay for a, uh, kid's tuition or something. And things come under pressure. You sell a lot of other things that you can, and if you can't sell the illiquid asset that you hold, it creates pressure elsewhere. And so I think we're just, uh, as the rates went up, you started to see fundraising dry up. And all of a sudden you started to see this push to raise capital in other places and also to raise capital in a more, you know, a less volatile way where as you could attest to, fundraising is hard. So if you can build a flywheel of a lot more folks who can continuously deploy capital in a perpetual semi liquid vehicle, it's, it creates, it takes a lot of stress off the manager as well.

Speaker B: Well, and the math is astounding.

Speaker A: Yeah.

Speaker B: So you think of traditional private equity investors, endowments, foundations, pension funds, obviously lots of money out there.

Speaker A: Yep.

Speaker B: Um, but the wealth sitting inside, um, you know, 401k assets and other kind of, um, you know, retirement. Totally, it's about $12 trillion. So put a 1, 2, 5, 10%, you know, uh, uh, a lot of fees, allocation to private equity on there. It's a massive amount of, of potential that could go in.

Speaker A: Yeah.

Speaker B: And as these, uh, as the asset gatherers get bigger and bigger, um, uh, they obviously have pressure for, to deploy capital and to raise capital. Uh, this is a great place to do it. And the democratization story, I could, we could sit here and take both sides of it for the next two hours and convince each other that we're wrong on either side of it.

Speaker A: Right.

Speaker B: And we could swap along the way and probably make really convincing arguments. So, um, I do think the 1929, forget what happened in the crash. But the push of like, hey, we need to democratize this as unfair is ringing true big time in private equity. As interest rates went up, um, uh, the equity private equity side of fundraising got hard because you could find yields somewhere else. And if you're looking at like, oh, these assets seem to be overpriced on the equity side, I can get 8, 9, 10% on, ah, the credit side.

Speaker A: Yeah.

Speaker B: And I've got a lot of downside protection here. Again, the balloon got squeezed during the gfc. Banks shouldn't be lending this money to private companies. That's too risky. Um, so went to the shadow bank, private credit side of the world that went from hundreds of billions to now trillions under management. Um, and to the retail investor saying like coming out of the gfc, being told by their advisor, hey, there's, I can get you. 7%, right.

Speaker A: Yeah.

Speaker B: Uh, uh, in a, in a, in a first out credit product with great brand name private equity fund sitting below you.

Speaker A: Yep.

Speaker B: The equity scene below you. That was very attractive.

Speaker A: Yep.

Speaker B: Um, and coinciding with private equity firms buying up RIAs.

Speaker A: Yep.

Speaker B: There's been massive consolidation of the IRA industry. So again, there's no conspiracy going on here. It's just kind of water finds its own level. Yeah. And um, your people are trying to find risk adjusted returns.

Speaker A: Yes.

Speaker B: So do you.

Speaker A: I mean if you think about like here's where some of the. One of the things we talk a lot about is, let's say you open up that market and you flood the market with additional capital into gps. You've got a kind of, you've got a couple of dynamics happening. A, the pace of investment today is not what it was five years ago when capital was light.

Speaker B: Yes.

Speaker A: And so from a sourcing and origination perspective, it's, it's, it's fairly hard and challenging to find unique assets where you've got to feel like you can make your money on the buy quite a bit and still have enough meat on the bone that you can operate it and grow it. And I think that's a really hard thing to do. So there's a lot of questions around. If you open up the market, where's the money going to go? On the flip side of that $200

Speaker B: billion coming into private equity.

Speaker A: Yeah.

Speaker B: Doesn't mean that Apollo, Blackstone, Parker, Gale all of a sudden are going to go buy assets from other private equity firms to release this constipation. We have in the market of 40,000 private equity owned businesses that can't trade for whatever reason. Well, why can't they trade? Because the price that I want to sell it at is a price that somebody doesn't want to give me. So it doesn't trade. Right. So what happens is like just because more money comes into this doesn't mean, uh, all of a sudden there are more companies to go buy.

Speaker A: Yeah.

Speaker B: Um, so I finished your thought.

Speaker A: Sorry. So if you're like an lp, one of the things you. And I'm sure you've had this in your own business at different times in your career. When capital flows in, if money is not moving and the GP is not committing it and deploying it, you get a lot of questions because that allocator also has an obligation of returns they need to generate and other bills that they've got that they've got to go pay. And if the investments aren't happening, then the question becomes, should I be deploying this capital elsewhere? And what you also don't want is a GP to feel like I have to deploy this come hell or high water. And you start to get pressure on the quality of the deals that you're doing, because that creates obviously a negative impact as well. And so I think to your point, there's a lot of questions around can the market absorb this much capital? If you take the other side of that argument, though, if you look in the US and say middle market, US companies would call it up to a billion in revenue. It's actually only 5% of them are institutionally backed. And so, you know, the other side of the coin is there's a ton of companies out there that are, are able to take institutional capital that haven't. That we think we can tap into, which means we need a lot more money to go do that. And that's kind of the. There's two sides of the coin, which is can the market absorb it? And I think the asset managers will say there's a ton of companies out there that we think we can go after. Um, but I think we haven't seen it play out. So, you know, there's two really solid talk tracks on both sides of the coin.

Speaker B: Totally. We're not sure where are waiting on dpi. We're in a DPI drought. Uh, until they get it, they're not going to redeploy it. Now SpaceX anthropic open eye are going to add a ton of DPI to a lot of large institutions are going to try and reallocate it. Um, but there's no DPI issue with your, uh, 401k because it's not invested. They have no exposure. So let's talk about like, I think you and I both agree it's happening. Yep. This is not a debate is it going to happen or not?

Speaker A: Is it good or bad?

Speaker B: Is it. That's happening. Yeah. 100% it's happening. So let's talk about that. That should, um. So it's not about should retail have access to private equity, it's access to what?

Speaker A: Yep.

Speaker B: In what wrapper?

Speaker A: Yes.

Speaker B: At what price?

Speaker A: Yeah.

Speaker B: With what fee? Yeah. Uh, structure. So maybe talk. You mentioned semi, uh, liquid. Can you help define a little like semi liquid, evergreen and other. Like, what are the structures and ways.

Speaker A: So they kind of. A lot of times they're basically, they're a very. They're the same vehicle, but the evergreen component means it's a perpetual vehicle. And so it's not going to wind down.

Speaker B: Not a ten year exact fund.

Speaker A: It's there. So you think about, you know, B Cred's a big famous one. It's from Blackstone. These funds are going to stay in the market and they're going to perpetually raise capital. And so that's the evergreen component of it. The semi liquid means that there is, there are going to be windows, usually quarterly, where you can redeem a certain portion of your investment.

Speaker B: And we heard all about this in February and March when the gates went up.

Speaker A: Yes. So typically it's about 5%. Gates are not new. If you've been in a hedge fund or anything else, gates come up many times for very good reasons, uh, which is, let's say you're a manager, you have conviction, right? In the hedge fund world, I've got conviction and idea. I need to see it through. You have the ability to raise the gates and I think when you're in these vehicles, because of the nature of the assets that they're buying, you should be okay with that. And so, you know, it's happening. To your point, I think where I and our team sometimes gets hung up and the, the work we try to unpack it is nobody has a problem. And I think most folks don't have a problem if an individual or a retail investor or an advisor wants to be in private markets. But I think trying to manufacture liquidity via, uh, leverage or a different type of creative wrapper is probably not the way to do it. Because ultimately when you own a private asset, there are things you have to do in that business to generate the return that you need, which means you need some time, which means you can't be spending all of your time trying to figure out how to place people in and out of a fund. And I think some of the large asset managers will figure out how to do that. And they've got enough scale but writ large. It's hard to do that when you jump into kind of the middle market and down below. And you know, I was doing something earlier this week and somebody was asking about, what do you think about biannual reporting for public companies?

Speaker B: So, uh, twice a year rather than

Speaker A: twice a year rather than quarterly. And what negative impact is that going to have on, on the, on returns and transparency in the market? And my response was, you know, I just got done doing our shareholder meeting with Morningstar. The amount of time and effort and thoughtful like approaches that we take to deliver for those shareholders, it's a tremendous amount of work. And it does come Many times at the expense of doing other things around operating the business. Now you could say, hey, that's our job, we've got to do that. That's great. But that being said, do I think that there's a subset of companies that might actually generate a better outcome for investors if they could focus on actually building their businesses more 100%. So I think about in the semi liquid space, the liquidity component is if you want public market level transparency, public market level liquidity, it's going to come at some level of expense because the nature of private assets and where they're at in their maturation cycle is not what a public company is at many times. Um, now some are right, the big part of the market, but the bulk of private equity isn't $10 billion deals.

Speaker B: Yeah, I would think most of our middle market management teams would say they spend a lot of their time reporting to their private equity overlords too. But I agree, it's totally different. So you've got the wrapper question, like what, what do we invest? Like what are we even investing in? When people talk about retail and private equity, they actually mean retail and private credit.

Speaker A: Yeah.

Speaker B: Because that's where a lot of it,

Speaker A: that's where the bulk of it is.

Speaker B: Yeah. Other than high net worth, you know, qp, qualified purchasers, you know, credit investors. Sure. Wealthy families, wealthy individuals can invest directly into a, ah, traditional private equity, uh, fund. Um, but talking for 1k or talking kind of, you know, the, the, the, you know, man on the street, that's mostly happening through a pension fund in traditional private equity or happening in private credit?

Speaker A: Y.

Speaker B: The, the next push is well, can it go directly into private equity? And then it's like, well, at what fees?

Speaker A: Yes.

Speaker B: Right. So one of the challenges is like the fairness issue of like okay, well are you paying 2% and 20% carry and then you're paying an intermediary some piece of that like as if you were in a fund of funds. And like how many people have their hand in the pocket.

Speaker A: And distribution is different because you try to go to wealth. You've got wholesalers, you've got different sales, so you go to different fees.

Speaker B: You go to Robert W. Baird. Right. Great Midwestern, uh, uh, asset management investment banking firm. They have a huge retail network. Very much a mom and pop kind of, you know, that's the way they started. They manage gobs of money now. Um, but if you go to them and say, hey, you're a channel for my xyz, you know, mega buyout fund well, Baird isn't going to put them in there for free.

Speaker A: Yeah.

Speaker B: And you don't want to take them for free. So you're like, okay, Well I charge 2 and 20. Well, Baird's like, well, I need to get paid for managing these, this asset because they're doing all kinds of reporting and tax planning and strategy and distribution and research and accreditation, all those things. Um, so something's got to break. So it feels like this is on the equity side. It's headed towards the big, big guys who basically aren't, don't need to charge 2 and 20 can come up with some other vehicle and some other structure where everybody gets paid the way they think they should. And the end investor feels like they just didn't, uh, completely get nickeled and dimed away where they made 15% gross and 6% net. And they should have probably been in the S and P anyway. I mean, how do you think about kind of all the.

Speaker A: So I think I'll take this, the first part. Like, you know, I think the best place where I think there's actually a ton of positive things happening is in the semi liquid credit markets.

Speaker B: Okay, explain to people what, what's going on there.

Speaker A: Yeah, so the semi liquid market, you've got, these funds have redemptions, but in credit, you know, the capital is being diversified across a ton of different credits. So m making loans in the middle market companies and private businesses, those companies have cash flows. They've got to pay the coupon on their debt. Much of that, those coupons, it actually gets distributed out, uh, to the net debt, to the end investors in these funds. And so you actually have liquidity happening in a more natural way in credit, which I think removes some of the kind of the drag or the impact of having no liquidity in a traditional private asset. And so I think like that's, I think why you've seen a big part of that push to put retail advisors first in private credit, where you have two things. A, you've got a ton of companies that actually cannot get access to bank debt and other forms of capital based on where they're at in their investment life cycle, their maturation, the type of business they have, their size, et cetera. So private credit can actually be a very powerful tool for a lot of these companies. And so you have, you have sourcing, you have origination basically. And the second component is there's liquidity that naturally is embedded in credit investments. And so I think that's powerful for the actual net investor from a fees perspective. Yeah. To Your point? There's kind of a couple layers, right? As a private manager like you don't you charge a fee as a private equity manager because you've got to hire your team, you got to find assets, you've got to operate them, you've got to invest in them, you've got to change things. That costs money. That's very different than a passive call index fund manager that's deploying capital and sitting and waiting private market gps. Typically they're doing things and that costs money. The second wave. Now when you think about your distribution, if you are a GP with your own in house IR team, et cetera, or you're raising capital and you've got all the relationships with the LPs, that's a different fee base. Then all of a sudden you need to go through a couple intermediaries, you've got to go through broker dealers, you've got to go through the advisors, they've got to do a bunch of stuff. So there's natural fees that are stacked on top of it. And I think the jury still out is I think it's easy to say and I think there's a lot of truth to this, that the fees need to come down in order for it to not eat into the capital of more than it needs to like old school kind of front load mutual funds for the individual investor. But at the same time I think it's going to be hard to ask a semi liquid fund to charge fees like a large index or mutual fund. I think this nature of what that fund is doing has a different cost profile to operate the business. And so I feel like there's this push of, you know, if you put it in software terms, can I get the same gross margins in that product versus you know, the traditional gp? I just. Or can I get better gross margins in a semi liquid than I can in a traditional gp? I don't know if you can fully get there. I think there's always going to be a level of cost that's going to be above the average. Just from the nature of what a private markets GP is doing.

Speaker B: Totally agree with you. And there will be a point at which a GP says I actually don't want that money because the fees.

Speaker A: Yeah, I can't operate my business.

Speaker B: Let me summarize the upside. One, public markets are shrinking. So um, you should have access to privates.

Speaker C: Right.

Speaker B: The fact that SpaceX is going public at $2 trillion and nobody in privates largely could invest in that the whole time, that's the same Thing with Stripe, the same thing. Openthropic. It's not fair. So that's the push on the upside. Um, yeah, the fairness gap. Like we should have access to these things. Um, now people were making the opposite argument five years ago in the venture industry saying like, no, no, no, let us hold on to these public stocks because look at how much value was created at Facebook and all these companies that went public early. Early.

Speaker A: So I think, I think what you're saying though, there's an important distinction to make.

Speaker B: Yeah.

Speaker A: Because I, I think when a lot of folks look at the narrative of uh, I'm an individual, I'm missing out. Right. There's a scam that I cannot participate.

Speaker B: This is a rig, I should rig game.

Speaker A: M. Exactly. So I should be able to be in SpaceX, anthropic, OpenAI et cetera.

Speaker B: Yeah.

Speaker A: And. But what's happening in semi liquids is in some ways that is not the same game complete. Different types of investments, different fund structures, but it's almost like they capitalize on the same narrative. So I'll give you a stat. When you think about SpaceX's IPO right now everybody thinks, you know, we're going to get these three IPOs and it's going to absolve the venture industry of a DPI of less than 1.

Speaker B: Yes.

Speaker A: Over the last 10 years, right. You had 1.5 trillion in IPO value from like 2015 till today. SpaceX is going to do that alone. And so there's this prevailing thinking, these three IPOs, just SpaceX will do more than, yeah, the entire industry over the last 10, since 2015.

Speaker B: It's a great stat. Three, the three IPOs we just talked about will raise more capital than every IPO in the 1990s.

Speaker A: It's insane.

Speaker B: Every IPO, including all the dot com stuff, all three of them will raise more capital than that. So anyway, keep going crazy. Yeah.

Speaker A: And so when you think about people are like, okay, this is going to be incredible for the venture industry and how was I not able to participate? But the same narrative is kind of floating out there and really where you're seeing big pushes of capitals in private credit and private equity and semi liquid funds, those are different ball games. When you think about the venture industry, there's 11,000, call it venture investors. There's about 4,500 of them that are actually doing deals, uh, are doing at least two deals a year. There's about 700 institutional investors, institutional VCs in SpaceX. So that's 20% of the market. So 80% of the market didn't actually participate. And this is around not just SpaceX, it includes open anthropic. So 20%, a very highly concentrated group of GPS is going to do incredibly well and it's going to mask the liquidity number for the entire industry. Yet there's still a book of 80% of VCs that actually didn't participate at all. And so I think in some ways it's, it's, it's, it signifies like, just how concentrated where this stuff flows. And I think that's part of where you get this negative narrative where folks are like, it is such a small, finite group of people that get to participate in this. And I just get stuck at a $1.7 trillion valuation and have to hope that it works.

Speaker B: I can promise you two things. One, that your 401k will be investing in privates in some way, and two, I'll promise you that it won't be investing in venture capital deals. It doesn't work that way. Um, all right, so the downside, right. Uh, we mentioned this a little bit in, uh, your 1929 analogy. It's a duration mismatch. Mismatch, Yep. This is always the problem. Yeah, Duration, Mitch. Mismatch. It's what screwed us up in the gfc, but screwed up svb. When they went out of business, they had completely mismatched their durations. And that's the downside for the retail investor in privates. And hey, I had a great run from 30 to 65. Now it's time for me to tap into this and I'm, um, in a long duration, you know, product, when I want my money out, it's the worst time to do it. So they've got maybe these time, uh. What do they call them? Like, uh, date funds.

Speaker A: Yeah, target date.

Speaker B: Target date funds. Do you subscribe to the duration Mitch mash issue as the downside here or.

Speaker A: I think it's that and I think it's a market structure. Because one of the things in public markets where you have very deep market makers, there's a. There's many ways to absorb selling pressure right now that obviously results in changing prices, but it can be absorbed. You can typically find a net buyer for assets that need to be sold. I think what we're trying to figure out right now is if you had any, any semblance of that type of selling pressure in any market environment in private markets, how will that be absorbed? And I think trying to manufacture in a way where you have a secondaries or you've got a liquidity sleeve, or you've got the same GP that's somehow going to offer to buy it back. You've got kind of an interesting circle creating where if you're supposed to be generating returns, but you're also a net buyer at effectively any price, at that point, you're not out. It's not. It's not pure market structure. It's not also healthy market structure.

Speaker B: Oh, people say, well, if you were ready to retire and cash out, uh, your 401k in 2008, 2009, like, oh, you were in trouble. But it's also like, well, I could sell it all if I wanted to. It didn't have to. Problem with privates is like, I can't.

Speaker C: Yes, Right.

Speaker B: I'm gated.

Speaker A: And so somebody starts putting. You saw some BDCs, right? Like I would. Actually, what happened with Blue Owl is they manage that. You know, when Blue Owl had a ton of redemptions and then tried to. They put up the gates and then they tried to find creative ways to get liquidity back where I think it was, you know, a third or a pretty big chunk of liquidity, they basically fast forwarded and shipped. You know, in that world, they handle that beautifully. But the BDCs and their public stock just fell off a cliff because there's also a misunderstanding. And so from a duration perspective, to your point, it's if you don't have the market structure to absorb selling at the asset level, then you're going to create big drawdowns, you're going to create a ton of volatility. And typically the individual investor doesn't like to see that. And that can create a bunch of other panic and selling other assets. And so I'm a big subscriber to. I do think that that duration mismatch and that liquidity need mismatch is real. The second component is education. I think what happened with, like, Blue Owl is folks who put a $50,000 check in don't fully understand that there could come a time where they might not be able to pull it. And nobody likes to see, you know, something they're invested in draw down 10, 15%. That spooks folks. And so now you've got this negative kind of aura that sits over some of these vehicles. And then the third thing is, I think if you want to place a larger group of individual investors, you know, I think I'm a big fan of we should place it in their retirement accounts, because at that point you can relieve some of the selling Pressure that can, that can really create negative consequences on price action. And at the same time, that's no different than you and I and our 401ks and public assets. When the market draws down kind of 10, 15, 20% for the most part, you kind of just eat it and net net, we've all been better for it. And so I think you've got to create the right place where you're expecting the illiquidity and allow folks to participate in the upside of private markets.

Speaker B: Yeah, I agree with that. You also have the issue of just, uh, I get to choose my valuation.

Speaker A: Yeah.

Speaker B: So that has to get solved. Right. If we're putting 401k Main street retail money into private equity, um, my sense is, yes, there's going to be a need for a lot more transparency. And the plumbing isn't there.

Speaker A: Yes.

Speaker B: I mean, I may be, uh, making the pitch for Pitchbook here a little bit and Morningstar, uh, because you guys, Morningstar just created a public private index. Um, you guys obviously have a lot of data and some of the plumbing, like this is the. I think the markets are money. Way ahead of the plumbing right now is the money movement and the move for this way ahead of the infrastructure.

Speaker A: I think the infrastructure is catching up. So when you think about, like, we just launched valuation estimates on 15,000 private companies, we, we build our own methodology, we build our own marks. And you get a lot of folks who say you have no idea what's happening in these companies. Well, you build a model, you try to get close, and then we create this cycle of those actual companies giving us the data to help power those marks. And I think what ends up happening is at some point you want to be represented in the right way. And so you're starting to see transparency show up. I also think when you think about the proportion of private equity firms that are even starting to value their companies on a daily, monthly, weekly basis, that continues to grow. And so I think that's a signal of there is a push for more transparency and that's going to happen. I think the mark situation where private assets don't get marked at the clip, they maybe should, or they don't move with the market the way they maybe should. You know, software stocks draw down 20% private company software marks don't really change.

Speaker B: Oh, no, I know this for a fact. I mean, Q1, you know, everybody knows Q1, uh, 20, 26. What happened to software stocks? Um, have a very large LP that has a lot of data and benchmarks and things and they said that their GPS mark down their software assets between 3 and 8% in Q1 2026. So this is what University of Chicago Ph.D. cliff Asmus, uh, who uh, runs uh, AQ would say um, call volatility laundering.

Speaker A: Well I think with that is the marks is a problem because you're not giving the right level of transparency and not signaling what level of growth or true impairment is sitting in a portfolio. But the other component is ultimately even with the marks you have to have some true liquidity mechanism. And I think you can mark the portfolio whatever you want. But if you come to market and there's not enough market structure and depth to trade something anywhere near that price, you're going to have a tremendous amount of problems with individual investors who can be some of the most volatile sellers.

Speaker C: Right.

Speaker A: I think you're even seeing LPs right now. I think, I don't think most allocators, I think you'd be surprised. I think they're going to be excited by SpaceX and open anthropic to get their returns back. But that capital, in my opinion it's not going to directly just flow back into venture. They're not necessarily happy that they had to sit for 10, 12, 13 years to try to get liquidity and have a DPI that's less than 1 in every vintage over the last 10 years. That creates a ton of pressure on the LPs. They care about liquidity quite a bit. And so at this point I also think you're seeing these LPs rethink how to allocate capital at an interesting time where we're trying to manufacture, you know, liquidity writ large for individuals. And I think what we even saw in the institutional market, we had secondaries and all sorts of other things. You couldn't manufacture enough liquidity to the level that the LPs needed. Yet we're somehow trying to figure out how to do that for individuals that you know, the 401k market can result in a, in a capital pool that's way bigger than what you're seeing, even the institutional market.

Speaker B: Yeah, I was on the phone with a large uh, university, uh, you know, legendary uh, program in privates and huge exposure to the, to SpaceX and the LMS given their venture platform. And he's like yeah, we're not adding our, adding to the venture allocation. We're taking this liquidity. I'm trying to figure out where to put it. I will take it. And I've waited 20 years for SpaceX for some of it. Um, and this is amazing but like I'm not upping my exposure to venture from 10 to 20%, I'm keeping it probably at 10%. Um, and I got to find a place where I want to put it now. Don't want to be in late stage. I want to be at seed, where even I want to be. Maybe I want to be in biotech instead of software. Right. So they're thinking through that to your point of like it's not some huge windfall to the gps.

Speaker A: Yeah, you know it's interesting. One, one quick note. I think one of the, the best value out of these semi liquid funds that are being positioned for retails has actually been with institutions who are trying to reduce their cash drag. And so if you're sitting in a buyout fund and you don't know when that capital is going to get deployed and you typically maybe are housing the capital that hasn't been deployed yet in some low risk money market or whatever other vehicle, placing that in a semi liquid fund where it actually can get deployed and it's in the market can reduce your cash drag and actually be a great positive for your returns and you can draw from that into the drawdown funds. Um, and so I think it's been an interesting, like that's like some graduate

Speaker B: level stuff we just put out there. I don't think people are thinking as deeply about that. But to your point is like the opportunity is there to do it. Yeah.

Speaker A: Like the semi liquid fund, this most

Speaker B: sophisticated people will figure out how to do it and the product will get created to do that.

Speaker A: Well, I think the semi liquid fund, it has a purpose I think interestingly, I feel like its best purpose right now outside of credit is actually for institutions.

Speaker B: Yeah. Amazing. We've got also the performance issue.

Speaker A: Yeah.

Speaker B: So as you think of private credit, the spreads between the best funds and the worst funds. Um, pretty tight private equity. Mega private equity pretty tight.

Speaker A: Yeah.

Speaker C: Right.

Speaker B: Middle market private equity not as tight.

Speaker A: Yeah.

Speaker B: Lower middle market private equity quite big. Venture quite big.

Speaker A: Yeah.

Speaker B: Meaning that um, yeah, if you're in a Blackstone private equity fund, you're make your 8 or 8 to 10% yet be my guess, somewhere in that range.

Speaker A: Pretty consistent.

Speaker B: Yeah.

Speaker A: And bank on it.

Speaker B: The best one of those, you know, the best $50 billion fund you're in versus the worst $50 billion fund you're in. Probably going to be a uh, couple hundred basis points. Right. As you go lower in the, in the size, you get wider dispersion venture being like you could make 10 times 20 times your money in a fund and you can lose all your money in the worst fund, middle market private equity. Maybe the best ones are in the mid-20s, mid, you know, get to 30% on a, on a fund. And the worst middle market funds could be you know, 1 or 2 or 3%. Yeah. Not many are losing their money but on average. Right. Um, so the spreads just get wider and then the question for uh, for that retail investor is like well what should you be in? Well what if do I get to choose? I want to be in credit. Just like you can choose the mutual funds you want to put your money in. You want the geographic exposure you want to get. Do you have a choice of where it goes? Or you just kind of get like um, a whole market know index for privates and who's even making that market. And every one of those private um, GPS is marking to market the way they think they should mark to market. And they could, you could have own the same position in the same company at uh, wildly different valuations. This came up you know with Stripe for a long time. One fund is holding it at 50 million 50 billion and one's holding it 100 billion.

Speaker A: I mean it happens today in institutions. Right. You look at the mutual funds who are in a lot of these private assets. Even them, they would mark them differently.

Speaker B: So how does that get fixed? Because I just again the money is coming and it largely, it will start at the largest pools and work its way down over time. But like how does the. Just the lack of transparency and consistency and the. There isn't one way to do it.

Speaker A: You look for a third party.

Speaker B: There's one way to do a stock price. You can look at it and that's how much it's worth. And this is the multiple and this is the valuation and these are the.

Speaker A: So think about the concept of uh, a why, why do benchmarks exist? Right. So we bought leverage commentary and data with LCD. They've got the leverage loan 100 that typically tends to be the number one and the most used benchmark that's written into LP documents to benchmark credit fund. Well the way that was built was as the industry was growing they needed a place to figure out and to report to their LPs. Are we doing better or worse than the market which allows an LP to decide should I commit more or less. And how that actually came to be was the investors, the funds and the credit managers themselves gave them the data. And over time what ends up happening is let's say you're not performing well, you would actually be one of the first to contribute your data to the benchmark because you need to weigh it down effectively. And so you've got this third party arbiter that becomes effectively a clearing mechanism and a uh, transparency kind of beacon in the market and things get built around it. When you think about public markets in general, that exists.

Speaker C: Right.

Speaker A: And so I think what we've been trying to do across PitchBook and Morningstar is how do we create the same lo same level of transparency products that allow folks to get a sense of how is performance objectively doing. And so it starts with collecting the data sets. We have a manager research team that's starting to actually rate the semi liquid vehicles themselves, which creates an objective third party view on do these funds do what they say they do and do they create enough value for the price that they're charging? Um, we're starting to build indexes and benchmarks to be that third party barometer that can be objective from the outside benchmarking these vehicles. We're creating transparency products. You know, we have a business we acquired called Lumonic, um, you'll spend some time with them, but portfolio monitoring solution which allows our clients in and of themselves to know everything that's happening inside of their portfolio, which then feeds the reporting in some of their, to their allocators as well. Um, and so we're spending a lot of time thinking about that plumbing and that infrastructure which really serves as a third party barometer. And I think one thing that's interesting in the semi liquid in the wealth channel, the big asset managers are not blind to the fact that they need that transparency to tap it. And so we have a lot of conversations with the big wirehouses that are like, I can't put this fund in a portfolio for an advisor to use unless I have a third party stamp on it. Which is part of the reason that we started to rate them recently. So even the broker dealers who are the distribution arms for a lot of these vehicles for the asset managers need a third party barometer as part of their policies just to include these funds, which then forces the big asset managers who want to move into the space to create, to provide a lot more transparency in order for them to have the rating that they need to. Um, and so I think that's also that flywheel is just getting, it's getting faster and faster every day.

Speaker B: Yeah. And the private equity GPs who are listening to this episode, uh, they know what it, how hard it is to get on to a broker dealer platform so hey, I want to be in the high net worth channel for Goldman or Morgan Stanley or whoever. They have their own internal teams doing their own research, their own underwriting and it is a herculean task to get put on that platform.

Speaker A: Yes.

Speaker B: It's a great thing when it happens.

Speaker A: Yeah.

Speaker B: Because there's a lot of flows.

Speaker A: Yes.

Speaker B: Um, so just think of what it took to get on to the qp.

Speaker A: Yeah.

Speaker B: Like uh, mega wealth.

Speaker A: Yeah.

Speaker B: Channel through Goldman.

Speaker A: Yeah.

Speaker B: Really hard and years of work and transparency required that you don't have to do for your regular old family office or you know, pension fund.

Speaker A: But here's what ends up happening to real quickly.

Speaker B: Add four 1. Add uh, retail investors to that to get on that platform. 1. It's going to be very hard to. The transparent requirements are going to be, uh, are going to be really high. And if you want the money, you got to play the game.

Speaker A: Yeah.

Speaker B: And that's the trade off. Well, I think as more people do it, more people are going to have to do it.

Speaker A: Yes.

Speaker B: It's going to become system standard, just like compliance.

Speaker A: Yes.

Speaker B: So yeah, the compliance requirements of the big guys become the requirement, the appliance of the small guys. The small guys complain about it because like I can't afford Blackstone level compliance for a, you know, 200 million dollar private equity fund. Well, too bad. That's what you have to do. And if you want to tap into this retail money. Too bad. Yeah, you got a, it's like in a Caddyshack. Uh, you don't want to pay 50 cents, you don't get no Coke.

Speaker C: Right.

Speaker B: This is the price of entry. Well, I ain't paying no 50 cents for no Coke. You ain't getting no M. Coke.

Speaker A: What I'm talking about, I mean, one thing I'll say is I agree with all of that. We spent a lot of time obviously studying these funds. When you look at the large, you know, we keep using Blackstones, easy example. They tend to be really powerful and honestly really good risk takers and risk managers. And to deliver the returns they've delivered at the scale that they've delivered over the extended time period they've delivered is an epic feat. And to do it while continuing to scale. And so I think there's a lot of value to why those funds get the flows they get not only in the retail channel, but in the institutional channel. Right, right. Like everyone, if you look at venture or private equity flows flow to a finite number of managers. So for them, I think that also gives them the freedom to say, you know what, we will be more transparent because we can back it and we've done the work and we have the performance, we can back it. And I think to the extent that you want to tap that channel or get on these platforms, to your point, if the best risk takers are going to do it, it forces everybody else who wants to compete for those flows. And I think typically that will tend, that will typically end up being what drives the rest of the market. You know, that'll be the piece where if the best are doing it, you have no choice but to provide it.

Speaker B: Yeah. And as the uh, Apollo similarly as well. Yeah. And as the industry bifurcates and you've got this, you know, the superstores and the boutiques. Um, and that's what's happening in private equity is happening in the LP base 10 funds. Private equity fund raised half the capital in the industry last year. 10 LPs allocate a trillion dollars to the privates. Um, my prediction of this is going to happen. 401ks will be investing in private equity. Uh, what's not going to happen is me saying I want to direct this piece of my 401k into this lower middle market health care services fund.

Speaker A: Probably not.

Speaker B: That's not going to happen.

Speaker A: Yeah.

Speaker B: Um, for a very long time. But until the, until the level of transparency for that lower middle market healthcare services fund equals. Yeah. What, uh, Blackstone and the big guys.

Speaker A: It also assumes that.

Speaker B: So I think you're not investing in. When people think like, oh, I'm gonna invest in private equity and you know, private equity destroys the economy. They just suck all the fees. All this stuff is like you're gonna be in some broad market index of price.

Speaker A: Exactly. Because not every strategy needs more money. Yeah. Like I look at you look at the venture industry, who are the best risk takers there? It's not the folks with the most money. It's sometimes the folks with the least. They run very tight capital constrained strategies. They're consistent, they have a small partnership, they work well together, they've got a flow that works, that allows them to originate, source, operate and work together and they don't want more money. When you think about that lower middle market healthcare services, if it's a good fund, they're probably running a fairly tight capital constraint strategy. You know, think about yourself. You've got 12 companies focused. The, the goal there is not typically to just grow by any means. And so I think with that group they'll be forced to provide transparency. But they also are likely going to say, I don't need retail money. I think you're going to see that at a bigger part of the market. And if you're in that kind of core to upper mid market and you want to try to compete for retail dollars, you're going to have to do what the folks at the top do, which is they're going to unpack returns. And I'd say today, if you look, if I showed you a list of firms and names that have zombie funds in the market, have not been able to raise capital, call it for six or seven years, you would be shocked by names that are fairly name brand that have not been able to deliver returns. And when some of those folks try to figure out how to either diversify where they generate return or they generate net new capital from whether it's in retail, whether it's institutions, what's happening in this retail and this wealth channel, that's going to force more transparency. It's going to force more transparency to the institutions as well. And I think you're going to end up weeding out some of the underperformers that have been linked to beta and aren't actually generating, you know, operational value as well.

Speaker B: Yeah, the line of, uh, a lot of funds that are investing their last fund, they just don't know it.

Speaker A: Yeah, yeah.

Speaker B: Um, which is true. Is true. But uh, again, I think, uh, the big guys will force more transparency. The small guys will have to get more transparent. And that'll be good for the small guys who want trans, who are like, I want people to know it. And it's a standard way to measure it.

Speaker A: Yep.

Speaker B: Because right now I've got, you know, several LPs and all of them want to see my information in a different way. And some are putting me against the Russell 2000, some against me. S and P something, you know, this whole PME concept and things. And I was like, I'm not exactly sure how I'm being measured against whatever scale. And then it's also like, well, we don't use our fund line because we're small. Some you can really juice the IRR if you, if you don't ever call capital.

Speaker A: Yeah.

Speaker B: So kind of settling all that stuff out, making it more standardized, putting the plumbing in. All right, so we both agree this is going to happen. I think we both agree kind of how it's going to happen. What did we miss? Ah. And like what didn't we cover today that people need to know?

Speaker A: I mean we covered a lot. Okay, so we may have Gotten it. But what I would say is when you, I mean, at one point you just brought up like the leverage. Yeah. You look at a private credit fund, private credit funds can be some of the most notoriously leveraged at the fund level. And there's a lot of complexity in terms of where those loans are placed in clos. Are you getting fund level leverage from a bank? Are you getting it through a subscription line? Are you getting it via the CLO market? Like, there's a lot of complexity there, and I think you're gonna have to clean up a lot of that as well in order for a lot of the folks in the wealth channel to be, to feel comfortable.

Speaker B: All right, question, uh, I usually ask at the end when I remember too, is like, what's something you'd bet your bonus on general. In kind of just general privates and the world you live in, Something you'd bet your bonus on that happens in the next, you know, 12, 24 months?

Speaker A: I mean, I'd bet my bonus on you're going to get, not full public market, but you're going to get a pretty big push of transparency that I think is going to shock people. And I think you have some really big players in the market that, whether we agree with the push or not, they're convicted, they have a lot of control, they have a lot of flows, and they've got good returns and they've got the performance to back it. And so when you have big players, whether it's Apollo or Cliffwater or Blackstone and they're all rowing in the same direction, it's hard to push against that. And I think you're going to see a level of transparency that honestly a lot of us probably working in this industry didn't think we'd see.

Speaker B: Well, if you think about, um, the way we collected data, I mean, the whole reason PitchBook exists, the way data was collected, and literally taking it off a fax machine and typing it into a spreadsheet somewhere, democratizing, um, that data, uh, if you think of that, where we were 30 years ago, where we are today on access to data, that's just a level of transparency that didn't exist. If you think of the compliance regime that came from the publics to the privates, started with the big guys and worked its way down, like, um, that happened. Yeah, this is already happening.

Speaker A: Yes.

Speaker B: It's just a matter of how fast it goes and how low it goes.

Speaker A: Yeah.

Speaker B: Because the big guys are already doing it. All right, what about something that you believe that other people either your company or your industry that are kind of like NAS is nuts. He thinks this is true and I don't see it yet. Is there anything either contrarian or kind of uh, off center that is something you keep telling people is true or going to happen?

Speaker A: I mean look, if I'm going to make a prediction, you're usually wrong. But here our house view of these IPOs like SpaceX is that the value of that business is probably worth 53% from the IPO price. So I think our analyst price targets at 700 billion. I tend to think that is the business overvalued at current time? Yes. But I have this feeling that I think a lot of people disagree with me that there's enough market structure going into support these listings. Given the novelty and the scale they're coming at that I wouldn't be surprised to see that thing trade up over 2 trillion at 110 or 120 times revenue. Um, it's insane. But I would say my take is I'm probably, I probably think it'll keep flowing higher.

Speaker B: Yeah, I'm not in the business of uh, of trying to uh, take uh, the other side of Elon and his retail army to support you know, the, the crazy ideas and dreams he has. It's a phenomenal telecom Internet business. Phenomenal.

Speaker A: I used Starlink for the first time actually flying here. I had to take a United flight from Aspen. I was mind blown same.

Speaker B: It's free and it was super fast.

Speaker A: It's crazy.

Speaker B: It's a great product. Now I believe Ecostar is right behind him and can probably undercut him on price so that, that, that won't last but again he's, he's the first there and do it asteroid mining. I'm not sure I'm putting a pe uh multiple on the astro mining yet.

Speaker A: I'm also not one to like. I don't have a lot of interest in going to space.

Speaker B: I have zero interest.

Speaker A: I sit there, I'm like, I don't know how big that business will be.

Speaker B: I can't wait to, I can't wait to the time and you can after the week you've had of not getting on a plane again. You think I'm going to get on a spaceship.

Speaker A: Exactly right.

Speaker B: Uh, so hey nas, this will be the first of many.

Speaker A: Yes.

Speaker B: Uh, because we love having you on and uh, we have great relationship with Pitchbook. Um, thanks for coming back and I

Speaker A: appreciate the friendship and I appreciate doing it in person.

Speaker B: This is great.

Speaker A: Good to see the new digs.

Speaker B: Yeah.

Speaker A: Appreciate it, man.

Speaker C: All right.

Speaker B: Bye for now.

Speaker C: From the heart of Chicago to all over the globe, couple private equity geniuses. They share what they know. They love to mess with technology. Where the future is sink or swim. It's a private equity fund. Cast with Devin and Jim. Technology issues, middle market, PE backed companies. They bicker with each other and they don't take themselves too seriously. It's not venture capital. It's private equity. It's the private equity fun. Cast. Pour yourself a drink and have a seat.