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https://www.businesslive.co.za/bd/world/europe/2018-04-10-no...

Norway is unwilling to invest in private equity. They are willing to consider renewable infrastructure projects. I'm not sure how the renewable infrastructure would work - I would think those would be private projects - i.e., private equity.

Maybe Norway will change their mind at some future time when stock market returns disappoint.

GnV
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this is the best part:

The government went against both the wishes of the fund and the recommendation of a government-appointed expert group.

knowing nothing about this, perhaps they are going to form a new expert group composed of folks who will give them what they want to hear; of course, i'm not implying 'experts' get it right necessarily
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Seems smart to me to not give PE their money. And it doesn't preclude them from owning stock of the PE firms does it? Why be the sucker paying the fees?
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Norway is unwilling to invest in private equity. They are willing to consider renewable infrastructure projects. I'm not sure how the renewable infrastructure would work - I would think those would be private projects - i.e., private equity.

When you're a $1 trillion fund with ZERO allocation to private equity the decision is probably partially political/ideological as opposed to economically determined. Given the stigma still surrounding PE it doesn't surprise me that Norway is lagging. As an aside, Norway has some tiny private real estate exposure.

In contest, Japan's Government Pension Fund (GPIF) which rivals Norway's sovereign fund is moving modestly into alternatives. Of course, even a tiny move involves substantial sums.

The GPIF is the world's largest pension fund, with $1.2 trillion in assets, according to the latest ranking from Pension & Investments and Willis Towers Watson. That had risen to $1.3 trillion the last time the GPIF reported its figures.

Its allocations are often viewed as a guideline that other pension funds in Japan follow. As a result, its decision to move into alternatives promises to encourage many more managers to allocate to the asset class. The GPIF has a negligible 0.05% exposure to alternatives now.


***

David Rubenstein of Carlyle Group eloquently detailed the dilemma in a recent presentation at a Credit Suisse forum. It's a good read.

http://files.shareholder.com/downloads/AMDA-UYH8V/6193498573...

The problem is acute in the USA: As the number of listed public companies continues to shrink, how do very large funds and investors manage their exposure to the American economy? Not a problem for a tiny fellow but consider the issue for a fund with 5 or 10 or many more billions.

Low cost ETFs and active managers who require a CUSIP cannot address the challenge of American growth shifting on the margin from public to private vehicles - both equity and debt. Multiple expansion and the strength of an older generation of tech firms (Apple and Amazon) may be masking the problem temporarily.

One solution is to add some combination of private equity and venture capital. This is expensive although the cost can be mitigated by combining internal and external managers (a la Ontario Teachers). Another solution is to move to other 'real' assets like real estate (again, some combination of internal and external managers for private real estate.)

Indeed, one of the ironies of the ETF-area is that true portfolio diversification may require an oversight bill as large or even larger than earlier eras as the CUSIP era continues to fade.

ET
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Link for GPIF article from 2017, mistakenly left out of previous post:

https://realmoney.thestreet.com/articles/04/11/2017/worlds-l...

ET

P.S. One of the behavioral fallacies of vanilla financial advisors imho is that the 'man with a hammer' syndrome affects their diversification proposals. The solution to the problem is limited to the selection of tools in their small toolbox.

Maybe the tool required for the job is not in the toolbox.

And that's both the challenge and opportunity for PE firms in the near-term (and venture capital firms to a lesser extent). Both high net worth investors (HMWs) and sovereign funds (SWFs) have historically relied on advisors who did not have an "illiquidity tool" in their toolbox.

Now that is changing for HMWs and SWFs (it's changed from many pension funds and Ultra HMWs already).

In hindsight Vanguard's rise seems obvious and I expect the shift of assets to BX and CG and APO will seem obvious too. Meanwhile poor BEN which is also 'cheap' BEN languishes because it's stuck in a 'pay me for liquid beta' world.
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In hindsight Vanguard's rise seems obvious and I expect the shift of assets to BX and CG and APO will seem obvious too. Meanwhile poor BEN which is also 'cheap' BEN languishes because it's stuck in a 'pay me for liquid beta' world.

curious - do you actually KNOW the performance w/these guys and gals R better? I own a few but prob spent the most time with OAK, but I can't make heads or tails about their actual performance.

fwiw, just a personal opinion, but i think BEN languishes cause performance does so, and performance does so because we are in a new area where cash flow is more important than earnings, where treating share based compensation as an expense is optional (most so than usual perhaps) in some industries , and where widespread annuity based models get tremendous respect regardless of the results they produce, and where traditional industries are under assault but that there is no clear consensus at least in the financials that replacements will do anything other than increase price transparency and therefore lower historical return on investments. Or...maybe they aren't flexible enough.*

Nygren bot Netflix.
That dude mentioned here shorted it.
Both are 'value' investors
My opinion favors the 2nd guy but not to the extent of shorting (plus, original Netflix content is like a badge for 'this sucks', at least so far)

Just make money baby!
:-)


(*off the cuff - not well researched impression opinion)
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curious - do you actually KNOW the performance w/these guys and gals R better? I own a few but prob spent the most time with OAK, but I can't make heads or tails about their actual performance.

https://www.cambridgeassociates.com/benchmark/us-pe-vc-bench...

Cambridge Associates offers a benchmark to compare PE performance with the S&P 500. It's an attempt to do a fair apples-to-apples since PE often advertises IRR and usually S&P 500 investing is a "love-it-and-leave-it" alternative.

Of course alternative alt managers like Apollo will crow that their returns are top tier.

Overall PE returns have been quite good over longer period of time but mediocre in comparison to the S&P 500 in the 3 and 5 year comparisons. Of course, S&P 500 has really shone brightly in those periods and there has been very little market distress for PE firms to feast on.

***

Ultimately the test of asset management success is AUM growth. I think it's reasonable to conclude that the public alt firms have grown their customer base because of a combination of a reasonable shot at out-performance and diversification away from public markets.

ET
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Performance of PE stocks or the underlying funds, GM?
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underlying funds themselves
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KayKayAre:
Mill fund - 16% irr
2006 - 8.9
NAXI - 23.5 -- likely drop

SunGod:
Six - 10
Seven - 26 [good to have '08 vintage and did amazing job repurchasing debt cheap!]
Eight - 19 [2014 vintage, could easily drop also]

Stone Point 4 - 16.3 [very good for 07 vintage]
5 11

AgLake 3 - 19 [also 07 vintage]
4 - 27


I'd say you're better off investing with top quartile managers than in an index. Apples-to-oranges due to illiquidity but still.
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The problem is acute in the USA: As the number of listed public companies continues to shrink, how do very large funds and investors manage their exposure to the American economy? Not a problem for a tiny fellow but consider the issue for a fund with 5 or 10 or many more billions.

I think this can be an issue for small investors as well. Big differences between when companies are coming to the market today versus a couple decades ago. SNAP IPO'd at a $24B valuation, with a terrible share structure and voting rights for investors. Seems like the only ones who will profit from that are the VCs

20 years ago, they may have come to market at 1/10th or 1/100th of that valuation, and public market investors would have had a chance at part of the return.

GnV
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In hindsight Vanguard's rise seems obvious and I expect the shift of assets to BX and CG and APO will seem obvious too.

While not quite the value they were a little while back, I think BX and APO at $30 and CG at $20, remain very reasonable buys.
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The problem is acute in the USA: As the number of listed public companies continues to shrink, how do very large funds and investors manage their exposure to the American economy? Not a problem for a tiny fellow but consider the issue for a fund with 5 or 10 or many more billions.


I think 5-10B is easier to manage today than ever if you have realistic expectations. The number of companies might be shrinking but the public market is LARGER and probably more diverse than ever today. The majority of those companies didn't disappear as much as they were tucked in -- mostly into other public companies, I would guess. And, as investors in aggregate, we are probably better off having them tucked in and more monopolistic.

Berkshire has $100B in 4 public companies. And $~90B more in 21 additional public companies.
Dodge and Cox $69B in 68 companies.
Mandel: $19B in 30 companies
Tepper: $9B in 41 companies

And none of them own BX, APO or CG -- though some do their own PE I realize.
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As the number of listed public companies continues to shrink, how do very large funds and investors manage their exposure to the American economy? Not a problem for a tiny fellow but consider the issue for a fund with 5 or 10 or many more billion

To clarify, I was referring to pension funds and SWFs and the like. Their decision-making is quite different than a Buffett or a Tepper.

And none of them own BX, APO or CG -- though some do their own PE I realize.

True. But I couldn't care less if they own it or not. What Buffett can do will his billions is different than you or me and he owned IBM which I didn't and I owned MA before Berkshire did. Buffett can buy whole railroads and I cannot. Different sandbox.

Tiger Global bought APO hand over fist. Maybe that makes people feel better because they're successful and smart. Again, I couldn't care less.

****

What it comes down to whether or not critics want to admit it is that some people don't like PE. They don't like the fees. They don't like the approach which they usually mischaracterize as simply applying leverage, a characterization which if accurate applied to an earlier era of LBOs.

Perhaps they think that investors in alternative managers are going to wake up tomorrow morning and reject PE and alts.

Yeah, right.

ET
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i do wonder why, for example, somebody like a TROW doesn't have PE arm - what would stop them? If the secret sauce really is long-term holding periods, then why wouldn't TROW logically branch into these areas? Why wouldn't any of the other money managers do so? Surely they would be in front of the same customers and could attract some of the same level of assets? you remember Eaton Vance when they started getting into closed end funds and you could see how ravenous, to use another word, they were to continue with them. As an owner of the money manager, this is what I want to see....be like Amazon and dominate everything you possibly can. These guys surely have the resources to pursue these things.

Unless you believe the PE guys are actually better? They don't seem to be if the game were changed. Or am I all wrong?

just musing - no actual knowledge behind these speculations
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GMX,

I agree that long term lock-ups are a big advantage for the PEs. It is an advantage for alt unitholders, like myself. But, here, I am talking about the PE's ability to produce returns for their fund investors.

I think the "Invest Like the Best" podcast recently talked about whether there should be retail products with lock-ups. In most instances, I think lock-ups would be good for both the manager and the investor, but I don't see the idea becoming popular. There would certainly be some bad results, and bad publicity.

I also don't know if there is a lot of retail appetite for lock-ups. Curious - what would your client reaction be? Could you gather any locked-up capital? Any regs preventing it?

GnV
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i would assume the PE funds would be directed to institutional investors or high net worth; again, TROW sees the same clients

fwiw, I had one client with a multi-year lockup - but the fund sucked, and he was trapped for years on end. It doesn't work out for all...he wasn't knowledgeable about it either, and always measured everything not just by the month but the day, and he never took into account past performance (in other words, he was the very definition of the fellow who wanted you to outperform all the time during every single period, never-ending; needless to say, he fired me).
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i do wonder why, for example, somebody like a TROW doesn't have PE arm - what would stop them? If the secret sauce really is long-term holding periods, then why wouldn't TROW logically branch into these areas? Why wouldn't any of the other money managers do so?

It's a great question and I don't know if there is a single answer that unravels the mystery. I certainly don't have one. And to be fair, in some specific cases such as AllianceBernstein one sees an attempt to offer alternative products in the areas or private credit and to a lesser extent real estate. I expect to see more attempts and acquisitions. I believe Blackrock is moving more aggressively into the alts space.

But similar questions could be asked of Eaton Vance or Legg Mason or TROW, "Why didn't you move aggressively into ETFs early in the game? Why didn't you aggressively offer low cost passive products to counter Vanguard?" They just didn't.

Unless you believe the PE guys are actually better? They don't seem to be if the game were changed.

One common theme among the successful public alts is founder/owner-operator management which I think lends itself to an entrepreneurial mindset. Ultimately this powers AUM growth. I worry what will happen to alts when the owner-operator management retires.

There is a chart on page 5 of the Blackstone AR that highlights the CAGR rate of AUM from 2019-2017 separated between "Existing Strategies" and "New Strategies."

https://s1.q4cdn.com/641657634/files/doc_financials/2017/ANN...

Existing strategies grew 9% CAGR from 84B to 169B in that period. New strategies grew AUM 44% CAGR from $14B to $265B. As an aside, this has been Oaktree's problem. Its reliance on old strategies and inability or reluctance to quickly grow new products is dampening its AUM particularly in a market hostile to prolific distressed debt investing.

As an owner of the money manager, this is what I want to see....be like Amazon and dominate everything you possibly can. These guys surely have the resources to pursue these things.

Bezos is an owner-operator. I think there is something to that. Is it coincidence that Amazon, Facebook, Netflix and Google have involved owners? Maybe in some areas there is something extra added by that entrepreneurial founder culture. Of course, not a perfect correlation and there are successful businesses in all shapes, sizes, and management teams.

ET
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I have no statistical support, but I think owner-operator is a big deal. Would a non-founder run Amazon the way Bezos has? Would they be allowed/able to? In addition to drive and vision, the founders sometimes have more clout/leeway to push their vision (not to mention, voting control).

----------------------------
I assume that a couple reasons the traditional managers didn't move hard into passive were:
(1) there were lower fees; and (2) competition with their active strategies. Could have had a lot of internal investment managers against passive.

With PE, I am not as sure. Perhaps they are now stuck under the paradigm that PE is too high fee. Too high cost structure (talent). That is, they have shifted to focusing to compete against passive and that has led them away from PE.

Either way, missed opportunities by the traditional guys.

GnV
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What it comes down to ... is that some people don't like PE. They don't like the fees.

I think this is reasonable. I am one of those people and if I was on the BOD of a pension that controlled my and my coworker's funds it would take really strong evidence and forward conditions to get me to agree to a high fee investment of any kind by any name.

And I certainly wasn't trying to imply you shouldn't own something b/c others don't. Not in a million years would I suggest that. I was just pointing out that some institutions have very large investments in very few stocks in the US market and they aren't even invested in the alt sector. Which means they could diversify further if needed. I'd personally rather own a public alt than give a public alt my funds to invest.
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Why would you work for TRowe when you can work for the PE firms? Or at a merchant bank, or do deals at GS, et al?

Best private investors aren't going to choose to work at TRowe when they have plenty of high-paid, high-luster options.
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I am one of those people and if I was on the BOD of a pension that controlled my and my coworker's funds it would take really strong evidence and forward conditions to get me to agree to a high fee investment of any kind by any name.

But you're not on a BoD pension board and neither am I. It really doesn't matter what our criteria would be in a hypothetical situation. It doesn't matter what we like. It doesn't matter what we think is 'fair.' What matters is that for decades assets have flowed towards the alt managers.

One possibility could be that over and over and over again these BoDs are bamboozled. Or it could be that they're getting value sufficient to recommit with additional funds with each opportunity.

Consider a hypothetical steakhouse chain called Blackstone. It's a bit pricey compared to the other options. Some people don't want to spend that much for a steak when you can get one cheaper at Outback TROW Steakhouse or cooking at home. But year in and year out that Blackstone chain posts positive SSS, expands into new territories, and grows its number of repeat and new customers.

Maybe you don't appreciate a good steak. Some people can't tell the difference and rather chow down on some lowest common denominator fried tower of carbs at Outback TROW Steakhouse. "Look, it's tall! The hallmark of excellent food."

You get the point.

And I certainly wasn't trying to imply you shouldn't own something b/c others don't. Not in a million years would I suggest that.

I appreciate that, thanks.

I was just pointing out that some institutions have very large investments in very few stocks in the US market and they aren't even invested in the alt sector.

If every investor was as skilled as a Tepper and Buffett the world would be quite different for a variety of reasons.

I'd personally rather own a public alt than give a public alt my funds to invest.

"I'd personally..." costs investors so much money. It almost always bleeds into investment decision-making. Hopefully you are immune :)

And no institution, no potential investor, is weighing an investment in alt funds versus the alt stocks themselves. Notable exception include a few large funds like CALPERS or others who participated as the alts went public. No one makes this decision or similar choices (invest in AllianceBernstein bond fund or by AB shares?).

ET
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One possibility could be that over and over and over again these BoDs are bamboozled. Or it could be that they're getting value sufficient to recommit with additional funds with each opportunity.

Yes, that is obviously the key. I'd be willing to pay 2 and 20 or 5 and 90 if I was convinced I'd beat my other alternatives in the end.

And I spend a fortune on steak all the time so... I agree, every situation should be examined for merit assuming the skill set is there to assess it well.
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And I spend a fortune on steak all the time so... I agree, every situation should be examined for merit assuming the skill set is there to assess it well.

Posting on this board marks you as an individual possessing sophistication, taste, wit and a certain joie de vivre so I am not surprised you spend a fortune on steak :)

I'd be willing to pay 2 and 20 or 5 and 90 if I was convinced I'd beat my other alternatives in the end.

Fortunately you would have to spend less because most large alts charge between 100-150 bips annually and a carry rate of 8% on committed or invested capital for their flagship products; sometimes co-invest opportunities and fee holidays to larger investors further knock down the cost.

For example, Apollo average management fee rate for PE is 102 bips and for the business overall 67 bips due to its large credit business; less than half the AUM is carry-eligible.

ET
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