Latest / Merryn Talks Money / More Ways for Investors to Crack the World of Private Equity

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More Ways for Investors to Crack the World of Private Equity · Merryn Talks Money

0:00
Speaker 1: John Melton.
0:02
Speaker 2: I'm going to quote you something from the Twitter account
0:06
Speaker 2: of someone we both know very well.
0:10
Speaker 1: Thoughts on the UK.
0:12
Speaker 2: This is a spinning wheel of death. Eighty five percent
0:15
Speaker 2: of the UK mortgage market is fixed rate. Forty percent
0:18
Speaker 2: of that is going to reset in the next eighteen months.
0:21
Speaker 2: This is two thousand and seven all over. Now. You
0:27
Speaker 2: wouldn't want to buy a house builder in that environment,
0:29
Speaker 2: would you.
0:30
Speaker 1: You wouldn't know a lot. I'm a lad to ask
0:33
Speaker 1: who that was?
0:34
Speaker 2: Is that?
0:35
Speaker 1: Because I didn't see that tweet? Otherwise I would have
0:38
Speaker 1: protested strongly. I think it's just wrong.
0:41
Speaker 2: Oh, come on, that's Hugh Henry Well.
0:43
Speaker 1: I didn't choose a very clever guy. And obviously.
0:47
Speaker 2: That's the capitalist.
0:50
Speaker 1: These days, more houses and tropical aliens than I do.
0:54
Speaker 1: But but it's nevertheless, I would challenge that, especially about
0:58
Speaker 1: the UK, because if mortgage MARSK is completely different now
1:01
Speaker 1: from what it was in two thousand and seven in
1:04
Speaker 1: a kind of a pretty dramatic way. And we've been
1:08
Speaker 1: through these stats all before. It's like, was it twenty
1:10
Speaker 1: eight percent households have a mortgage? Now? The restrictions since
1:15
Speaker 1: two thousand and eight was such that you know, people
1:17
Speaker 1: who have mortgages are in the you know, the upper
1:20
Speaker 1: end of the spectrum money wise, hardly anyone like literally,
1:26
Speaker 1: I mean, the number of interest only and like ninety
1:30
Speaker 1: five percent plus deposit mortgages written the last ten years
1:33
Speaker 1: is absolutely minuscule. So no, I mean, I mean, I
1:37
Speaker 1: agree that obviously the interest rates going up and fixed
1:39
Speaker 1: strate's coming off, as a lot of people are going
1:41
Speaker 1: to feel a lot of pain over the next eighteen months,
1:43
Speaker 1: But it's nothing like two thousand and similar two thousand
1:47
Speaker 1: and eight. And never mind the banks not being as overextended.
1:51
Speaker 2: Yeah okay, but still okay, but still nonetheless, well, we
1:56
Speaker 2: don't expect that kind of activity in the market. There
2:00
Speaker 2: is a conversation to be had about whether one should
2:04
Speaker 2: sell all the house building stocks in one's portfolio. Now
2:07
Speaker 2: you know how I feel about house builders. They build
2:10
Speaker 2: such appalling, horrible, nasty houses that people should not be
2:14
Speaker 2: forced to live in for horrible amounts of money, that
2:16
Speaker 2: one shouldn't hold them for moral reasons. There's a lot
2:19
Speaker 2: I'll hold without hitting my sort of moral red line,
2:22
Speaker 2: but the housebuilders is.
2:24
Speaker 1: This esg According to Meriden, someone said, where yes, I
2:27
Speaker 1: think I think we should pitch that as opposite ETF.
2:32
Speaker 2: Maren's personal ESG red lines. Right, well, the house builders
2:36
Speaker 2: fail for me on every single level of the S S,
2:39
Speaker 2: and that's before we even start on the E. Nonetheless, nonetheless,
2:44
Speaker 2: I know you feel differently about that, and I also
2:47
Speaker 2: know that you are begin to value investing just like
2:50
Speaker 2: I am. And I suspect that you think that right now,
2:53
Speaker 2: it's perfectly reasonable to my housebuilders, even though they're most
2:56
Speaker 2: lunerable companies, and even though the housing market is in collapse,
2:59
Speaker 2: and even though we can say already that I am
3:02
Speaker 2: always right to have triggered something of a plunge in
3:04
Speaker 2: the actual construction of houses.
3:06
Speaker 1: Well, I mean to say that I'm enthusiastic would be
3:11
Speaker 1: kind of a something of an exaggeration, and I would
3:14
Speaker 1: thoroughly kind of point out to readers that you should
3:17
Speaker 1: go out and do your own research on this. But
3:19
Speaker 1: I think that there was Actually I went to the
3:21
Speaker 1: morning Star conference the other day, or at least the
3:23
Speaker 1: last half of it, and there was a presentation by
3:26
Speaker 1: Henry Dixon from Man Group, and he is like a
3:30
Speaker 1: UK equity fund manager and obviously came on stage there
3:36
Speaker 1: being a UK equity fund manager, let alone someone who's
3:39
Speaker 1: anty value invested at the moment is kind of like
3:43
Speaker 1: the closest thing to a pariah that you can get
3:45
Speaker 1: in fund management. But he was looking back at the
3:49
Speaker 1: nineteen nineties house price crash, which was obviously a kind
3:52
Speaker 1: of a recession, massive crash, but also not against a
3:57
Speaker 1: deflationary backdrop like two thousand and eight, because we have
4:00
Speaker 1: this massive recency bias where despite the fact that the
4:04
Speaker 1: two thousand and eight environment was almost unique, we hadn't
4:07
Speaker 1: seen it since at least the nineteen thirties, and the
4:10
Speaker 1: interest rate kind of result from that since then has
4:13
Speaker 1: been completely unique. You noticed the first time in like
4:16
Speaker 1: five thousand years the interest rates have been that low,
4:19
Speaker 1: and yet we keep expecting they go back to it,
4:21
Speaker 1: as if it wasn't a weird anomaly. Son in the
4:24
Speaker 1: nineties crash probably makes a lot more sense. And one
4:27
Speaker 1: thing that he pointed out was that even though there
4:29
Speaker 1: was like loads of reprocesessions, house prices did fall, there
4:33
Speaker 1: was a proper recession. There was lots of unemployment as well.
4:37
Speaker 1: Share prices of hospital has actually went up consistently from
4:40
Speaker 1: nineteen eighty nine till nineteen ninety three. Actually share prices
4:44
Speaker 1: are banks went up as well, and basically his point was,
4:48
Speaker 1: but they started off cheap because they had priced in
4:50
Speaker 1: the crash beforehand. And just I mean, another amazing bit
4:54
Speaker 1: of perspective was that in nineteen eighty nine, I've told
4:57
Speaker 1: you this already, otherwise I would say, take a guess,
4:59
Speaker 1: but the proportion of first time buy our mortgages, a
5:04
Speaker 1: third of first time buy our mortgages were written at
5:07
Speaker 1: one hundred percent loan to value.
5:10
Speaker 2: Yeah that's amazing. Yeah, you told me this the other day,
5:14
Speaker 2: and I was completely sagged by it. I mean, you'd
5:17
Speaker 2: think that, yeah, yeah, that that statistic should be out
5:20
Speaker 2: there everywhere. Whatever in understands why this time it's not
5:23
Speaker 2: the same as it was then.
5:24
Speaker 1: I know wondered negative equity was such a big deal.
5:27
Speaker 1: I hadn't. I really hadn't appreciated. I kind of thought
5:30
Speaker 1: it was because well, you know, rates went up, in
5:32
Speaker 1: house prices felled twenty percent. That's that's kind of why
5:34
Speaker 1: negative equity was such a big deal. But not it's
5:36
Speaker 1: because nobody had any equity to start with. So I
5:40
Speaker 1: thought that that was amazing. So I think the point was,
5:43
Speaker 1: you know, you buy them cheap, and if you compare
5:45
Speaker 1: the book values that were, you know, that were at
5:48
Speaker 1: that point where the kind of book values at this point,
5:51
Speaker 1: then they are absolutely not dissimilar. And that's again, you know,
5:55
Speaker 1: it's one of these things where you have to kind
5:57
Speaker 1: of do your own research. And obviously, I know, I
5:59
Speaker 1: actually think they take old questions over house building and
6:02
Speaker 1: the housing market in general are quite potent, but they're
6:05
Speaker 1: certainly not expensive. Put it that way, I wouldn't be
6:09
Speaker 1: selling them now. There's no point for some what's like
6:12
Speaker 1: two thirds of its value since twenty twenty.
6:15
Speaker 2: Yeah, while most of the analysts had an overweight writing
6:18
Speaker 2: on it, presumably oh yeah.
6:19
Speaker 1: And actually one of the big stories this week was
6:21
Speaker 1: the JP Morgan turned around sort of like said, oh,
6:24
Speaker 1: you know, we're not so keen on them anymore now
6:27
Speaker 1: that they've fallen in half. You know, it's like, you know,
6:30
Speaker 1: come on, guys, I'm not it's not I mean, maybe
6:33
Speaker 1: it is kind of like one of those classic contrary
6:35
Speaker 1: and indicators. You know, the analyst has been long it
6:37
Speaker 1: all the way down, suddenly you know, gives up and
6:40
Speaker 1: flips and then suddenly it's like, well, actually it starts
6:42
Speaker 1: going up just as he's you know, saying you should
6:45
Speaker 1: sell it.
6:46
Speaker 2: Well, it is, it is an extraordinary thing. And you
6:48
Speaker 2: and I've watched there's a lot ofver ugeris saying analysts
6:51
Speaker 2: giving up on sectors, on stocks, the second thing actually
6:55
Speaker 2: become cheap.
6:56
Speaker 1: Yeah, it's just like the pain is just gets too
6:59
Speaker 1: great and the capitulate.
7:01
Speaker 2: Can they capitulate? Yeah?
7:04
Speaker 1: So yeah, I mean, if you're looking for the value investment,
7:07
Speaker 1: then I think you could probably do what then they
7:09
Speaker 1: get owned in the house built and sector.
7:10
Speaker 2: Put it that way, and remember that in times of
7:13
Speaker 2: market crisis and in times of inflation, the things that
7:16
Speaker 2: survive volatile periods are the things that were cheap to
7:20
Speaker 2: begin with, not the things that were expensive to begin with.
7:23
Speaker 1: Yeah, exactly exactly.
7:25
Speaker 2: Which leads us very neatly onto this week's conversation. Welcome
7:35
Speaker 2: to Myron Talks Money, the podcast in which the people
7:37
Speaker 2: who know the markets explain the markets. I'm Maren's Somerset Web.
7:41
Speaker 2: This week our guess is Helen Steers. She is a
7:43
Speaker 2: partner in Pantheon's European investment team and the co manager
7:47
Speaker 2: of the listed global private equity investment trust, Pantheon International Plc. Helen,
7:56
Speaker 2: thank you so much. For joining us today. We really
7:57
Speaker 2: appreciate it.
7:58
Speaker 3: Well, Maren's an abst to be here today and delighted
8:02
Speaker 3: to be chatting to you.
8:03
Speaker 2: I wonder if we could just start. I think most
8:06
Speaker 2: of our listeners are pretty familiar with your trust and
8:09
Speaker 2: with what your business does and that kind of thing.
8:11
Speaker 2: What I wonder if you could just give us a
8:12
Speaker 2: quick run through of what it is that you do
8:14
Speaker 2: so we know where we are when we get started.
8:16
Speaker 3: Absolutely so. I am an investment partner at Pantheon, which
8:20
Speaker 3: is a private market specialist. Pantheon has been around for
8:23
Speaker 3: about forty years and was founded in London in nineteen
8:27
Speaker 3: eighty two, so it's one of the one sort of
8:29
Speaker 3: the homegrown UK private equity businesses. I've been with Pantheon
8:33
Speaker 3: for nineteen years. On the investment side, I sit on
8:36
Speaker 3: our International Investment Committee, which approves all the deals across
8:39
Speaker 3: the world. I sit on our European Committee, and I
8:42
Speaker 3: sit on our co Investment Committee, which approves all the
8:45
Speaker 3: direct deals that we do alongside our favorite private equity managers.
8:49
Speaker 2: Okay, but let's talk a little bit about how your
8:52
Speaker 2: industry has changed over the last decade or so. I
8:54
Speaker 2: mean two things have happened, right, It used to be, Well,
8:57
Speaker 2: it's grown massively. That's very important. It used to be
9:00
Speaker 2: that you'd expect private equity to only be involved in
9:03
Speaker 2: relatively small companies, and you'd expect companies to be heading
9:06
Speaker 2: for a listing at some point. That used to be
9:08
Speaker 2: the aim. That's changed, so companies will stay private for
9:11
Speaker 2: significantly longer than they ever did before. And the third
9:14
Speaker 2: thing seems very obvious obvious to us that has changed
9:17
Speaker 2: is the access that the retail investi gates. So ten
9:20
Speaker 2: years ago, fifteen years ago, private equity was only for
9:23
Speaker 2: the big institutions. You'd think of it billion in terms
9:25
Speaker 2: of say, endowments, et cetera. And now, of course there
9:29
Speaker 2: are a million different ways well maybe not a million,
9:31
Speaker 2: but quite a few different ways for retail investors to
9:33
Speaker 2: get into private equity. So looking at from our side,
9:36
Speaker 2: it looks like those are are the big changes.
9:41
Speaker 3: Yeah, So the industry has grown massively over the last
9:44
Speaker 3: I would say ten to twenty years. In fact, the
9:46
Speaker 3: number of private equity back companies has been increasing year
9:49
Speaker 3: on year I think by still seven or eight percent.
9:53
Speaker 3: And actually at the same time, the number of public
9:55
Speaker 3: companies has actually been decreasing over that same period. So
9:59
Speaker 3: you're at right, mare and the companies are staying private
10:02
Speaker 3: for longer for all sorts of reasons. But I think
10:05
Speaker 3: first of all, they're able to actually access quite large
10:09
Speaker 3: amounts of private capital now they don't need to go public.
10:12
Speaker 3: And also maybe the types of projects that they're investing
10:15
Speaker 3: in their growth initiatives mean that it's actually somewhat easier
10:18
Speaker 3: for them to do that away from the gaze of
10:20
Speaker 3: public markets. So there's been quite a sea change, I
10:24
Speaker 3: would say over the last ten to twenty years. Also,
10:28
Speaker 3: the types of sectors that private equity has been investing
10:30
Speaker 3: in has changed massively. So if you looked at private
10:33
Speaker 3: equity fifteen twenty years ago, the largest industry sector would
10:37
Speaker 3: have been consumer. These days, the largest industry sector is software,
10:43
Speaker 3: actually enterprise software, followed by healthcare. So there's been a
10:46
Speaker 3: massive change in the way that the things that private
10:49
Speaker 3: equity is actually investing in.
10:50
Speaker 2: Interesting, can I go back to this fall of the
10:54
Speaker 2: number of listed companies and this rise in the number
10:56
Speaker 2: of private companies because the starters is something that quite
10:59
Speaker 2: concerns us. Goes where great believers in sholder capitalism and
11:02
Speaker 2: great believers in transparency and great believers in people feeling
11:06
Speaker 2: that they own a stake in their local and in
11:08
Speaker 2: the global economy via the equities that they hold. So
11:12
Speaker 2: when companies stay private for longer, that interferes with that dynamic,
11:16
Speaker 2: or appears to interfere with that dynamic. So why this
11:18
Speaker 2: is happening feels very important to those of us who
11:21
Speaker 2: try and be on the side of the retail investor. Now,
11:25
Speaker 2: if one of the things is that it's easy, it's
11:28
Speaker 2: been much easier for them to get capital over the
11:30
Speaker 2: last decade there have been these vast pools of capital
11:33
Speaker 2: that have appeared outside the public markets. I suppose the
11:36
Speaker 2: first question is why where has that money come from?
11:39
Speaker 2: And in this great pivotal point where we move from
11:43
Speaker 2: insanely low interests to normal interest rates, might we see
11:47
Speaker 2: a shift in the availability of the pools of capital
11:49
Speaker 2: for private equity.
11:51
Speaker 3: No, it's a great point. I think what's happened over
11:53
Speaker 3: the last twenty years is that institutional investors have been
11:58
Speaker 3: allocating more more to private markets. They've been doing that
12:02
Speaker 3: for a couple of reasons. I think, first of all,
12:04
Speaker 3: because the returns have been very good and the outperformance
12:07
Speaker 3: over over listed markets has been good. But actually if
12:12
Speaker 3: you look at the outperformance of the very best managers,
12:15
Speaker 3: so first quarter, our managers in private equity of massively outperformed,
12:20
Speaker 3: and in fact they've outperformed even more in bear markets
12:22
Speaker 3: than in ball markets, So I think there's been that outperformance.
12:26
Speaker 3: I think also in terms of diversification and getting access
12:30
Speaker 3: to different parts of the economy. You know, private equity
12:34
Speaker 3: does tend to invest in smaller businesses, often in quite
12:37
Speaker 3: sort of niche areas of industries that actually aren't very
12:40
Speaker 3: well represented on public markets. So I think it's a
12:43
Speaker 3: way of getting to some of those those types of businesses,
12:46
Speaker 3: those types of sectors, and the companies have also been
12:49
Speaker 3: growing very fast and often faster than the larger public
12:53
Speaker 3: companies which are listed now. The way that we look
12:56
Speaker 3: at it is actually it's actually sort of a spectrum.
12:59
Speaker 3: The company can go through private ownership, they might then
13:04
Speaker 3: list sometimes then there's a public to private, so you know,
13:07
Speaker 3: within the life of a company, it can pass from
13:10
Speaker 3: public to private and back again. And Mariin you mentioned
13:15
Speaker 3: something earlier about retail, you know, retail investors, and we're
13:18
Speaker 3: very much in favor of sort of democratization of private equity,
13:23
Speaker 3: and actually PIT exists since nineteen eighty seven so as
13:26
Speaker 3: an investment trust and has therefore been available, you know,
13:30
Speaker 3: to buy for retail investors. So we think it's really
13:33
Speaker 3: important to be able to offer this opportunity to retail investors,
13:38
Speaker 3: and they have been cut out in the future because
13:40
Speaker 3: private equity funds traditionally have very high minimum investments. It's
13:45
Speaker 3: very difficult to build a diversified portfolio if you've got
13:48
Speaker 3: to have these very large minimum investments. And even these
13:51
Speaker 3: sort of feeder vehicles which have been put together by
13:53
Speaker 3: the private banks, you know, you still got to have
13:55
Speaker 3: large minimum and often they're quite expensive, whereas with listed
13:59
Speaker 3: private equity, you just buy a share in an investment trust.
14:03
Speaker 2: But then you run the risk of having to deal
14:06
Speaker 2: with very volatile discounts. And one of the problems in
14:08
Speaker 2: the private equity trust sector at the moment is these discounts. Okay,
14:12
Speaker 2: let's talk a little bit about the outperformance of private
14:15
Speaker 2: equity because, as you say, this industry has grown massively
14:18
Speaker 2: over the last ten you say to y E, ten
14:20
Speaker 2: to fifteen whatever decade plus, right, but it's grown hugely,
14:24
Speaker 2: so it's had a lot of momentum behind it, and
14:26
Speaker 2: it's also been operating in what we're going to realize
14:29
Speaker 2: when we look back on this time as an incredibly
14:33
Speaker 2: odd period historically super loow interest rates and all the
14:36
Speaker 2: dynamics that we all talk about all the time. Is
14:40
Speaker 2: that outperformance something that has been a function of a
14:44
Speaker 2: particular environment, or do you think that it's the function
14:49
Speaker 2: of the sector itself? We can talk about why and
14:53
Speaker 2: do then think that this is likely to continue long time?
14:56
Speaker 2: And I don't know you would say yes. I hope
14:58
Speaker 2: you do say yes, or you'd be in the wrong job, right,
15:00
Speaker 2: But let's see if we can look a little at
15:04
Speaker 2: that the history of the out performance and why you
15:07
Speaker 2: expect it to continue.
15:08
Speaker 3: It's a great point, and I think that so private
15:11
Speaker 3: equity has changed enormously over the last twenty years. I
15:14
Speaker 3: think you could level the criticism that it was much
15:18
Speaker 3: more into sort of financial engineering twenty years ago. What's
15:23
Speaker 3: happened over the intervening years is that it's become very
15:26
Speaker 3: much more about operational improvement in the underlying businesses. And
15:30
Speaker 3: we see this, you know, really closely with the managers
15:33
Speaker 3: that we work with. They have added enormous amounts of
15:38
Speaker 3: resources to their teams. And whereas before you know, there
15:40
Speaker 3: would be a small team of deal doers, now there
15:43
Speaker 3: are very large central resources and literally when a manager
15:48
Speaker 3: buys a company, buys control of a company, they will
15:51
Speaker 3: put a very large team of people working with that
15:54
Speaker 3: company to improve the business. And that can be on
15:58
Speaker 3: various different frants. It might be apply chain improvements, it
16:01
Speaker 3: might be marketing, it might be sort of a switch
16:05
Speaker 3: to digital marketing, for example. It might be in terms
16:08
Speaker 3: of making acquisitions. So a lot of businesses end up
16:12
Speaker 3: being platforms and they do a lot of sort of
16:14
Speaker 3: buy and build type acquisitions. So this type of highly
16:18
Speaker 3: active management has become really intensified, and I think the
16:22
Speaker 3: last ten years even more so, and the best private
16:26
Speaker 3: equity managers have really invested in those central teams. Now,
16:31
Speaker 3: as in I think every industry and probably in every
16:34
Speaker 3: financial asset class, there are better managers and less good managers.
16:39
Speaker 3: There are managers that probably still air a little bit
16:41
Speaker 3: on the financial engineering side, and there are managers that
16:44
Speaker 3: really get the bulk of their value enhancement actually through
16:49
Speaker 3: operational performance and operational enhancements. Clearly, those are the types
16:52
Speaker 3: of managers that we target and that we're trying to
16:55
Speaker 3: select for the investment trust as well.
16:57
Speaker 2: Okay, so you reckon that. The error of buying a company,
17:01
Speaker 2: loading a debt with debt and pulling out a pile
17:03
Speaker 2: of dividends. I love water companies is mostly gone.
17:07
Speaker 3: That doesn't that doesn't work anymore. I mean, you know,
17:10
Speaker 3: using using the correct capital structure. It's a tool in
17:12
Speaker 3: the toolbox, but everybody's got access to that toolbox. The
17:16
Speaker 3: really clever staff is in buying the right asset, you know,
17:20
Speaker 3: in the right sort of sub asset class or the
17:22
Speaker 3: right sort of sub sub industry sector, and then really
17:26
Speaker 3: having a concrete plan what you're going to do with
17:29
Speaker 3: that business over the next five years, how are you
17:31
Speaker 3: going to enhance the value, how you how you're going
17:33
Speaker 3: to get real growth in that business, and then how
17:36
Speaker 3: are you going to position it for the right the
17:39
Speaker 3: right next owner. Now that next owner might be the
17:41
Speaker 3: public markets or actually, most frequently for PIP, the biggest
17:46
Speaker 3: buyer of our companies are actually strategic or trade buyers,
17:49
Speaker 3: and they're buying a company that they can then plug into,
17:53
Speaker 3: you know, their bigger sort of corporate structure, which makes
17:55
Speaker 3: sense for them. So it's it's it's a much more
18:00
Speaker 3: tense process. It takes a lot more resources these days,
18:03
Speaker 3: and it's almost like night and day from sort of
18:05
Speaker 3: twenty years ago.
18:07
Speaker 2: Okay, I'm sorry. I'm going to harp on about interest
18:10
Speaker 2: rates only because you know, this is still an industry
18:14
Speaker 2: that sits on borrowed money. So the shift in the
18:18
Speaker 2: interest rate environment, it has to make a difference. We
18:21
Speaker 2: can't just say that this makes no difference whatsoever to
18:25
Speaker 2: the sector. Of course it does. A tripling of interest
18:27
Speaker 2: rates in a year has got to make a difference
18:30
Speaker 2: to the way this industry operates.
18:33
Speaker 3: No course, of course, you're right, Marin, and I think
18:35
Speaker 3: what has to happen, and what is happening is that
18:38
Speaker 3: the managers have to work a great deal harder to
18:41
Speaker 3: get to the same targeted rates of return that they're
18:46
Speaker 3: promising to their investors. So we see this very clearly
18:49
Speaker 3: with the co investment deals that we're underwriting alongside our managers.
18:53
Speaker 3: You know, we're looking at the way in which they're
18:55
Speaker 3: going to get to their targets, say twenty five percent
18:58
Speaker 3: irs two and a half times the money in the
19:01
Speaker 3: requisite amount of time, and they are they do have
19:05
Speaker 3: to work a great deal harder. So whether that's expanding
19:08
Speaker 3: the business faster, accelerating their buy and build program, or
19:13
Speaker 3: whether it's it's other sorts of changes they have to
19:15
Speaker 3: make with their businesses. They are going to have to
19:17
Speaker 3: work harder because the base rate has gone from you know,
19:20
Speaker 3: from almost zero to to five percent, so they have
19:24
Speaker 3: to compensate for that. I think actually what's going to
19:26
Speaker 3: happen over this period is that we will sort out
19:29
Speaker 3: the really good managers from the less good managers, because
19:32
Speaker 3: the less good managers won't be able to provide that
19:36
Speaker 3: additional phillip of additional return, whereas the best managers who
19:40
Speaker 3: are investing in the best companies will be able to
19:42
Speaker 3: do that. And it's a bit of a virtuous circle
19:44
Speaker 3: in private equity, as in I think many other industries,
19:47
Speaker 3: the best deals and the best management teams gravitate to
19:50
Speaker 3: the best private equity managers.
19:52
Speaker 2: So do you think the market will shrink? Do you
19:54
Speaker 2: think the business will shrinks over expanded?
19:57
Speaker 3: I don't think it's going to shrink because I think,
20:01
Speaker 3: you know, you can see, as I said before, the
20:03
Speaker 3: number of private companies you know, looking for backing sort
20:06
Speaker 3: of continues to expand. I think what we will see
20:10
Speaker 3: is a greater dispersion of performance between the best managers
20:14
Speaker 3: and the less good managers. And it's already very wide
20:16
Speaker 3: in private equity. I mean, typically the spread between the
20:20
Speaker 3: first quartal and the third quarteral manager on average is
20:24
Speaker 3: about two thousand basis points, so it's very large. So
20:27
Speaker 3: I think we will see even more dispersion there. We'll
20:31
Speaker 3: see the best managers really do better and the poorer
20:33
Speaker 3: managers not do so very well. They might say, why
20:36
Speaker 3: do they continue to get funded? And that's always a
20:39
Speaker 3: that's always a bit of a mystery to me.
20:40
Speaker 2: I have to say, well, where the money keeps going
20:42
Speaker 2: from the slightly my thought that maybe the money just
20:45
Speaker 2: might stop coming. Now, the big conversation in your industry
20:49
Speaker 2: at the moment, one of the many big conversations is
20:51
Speaker 2: about valuations, and it's about the company is held in
20:53
Speaker 2: the portfolios and are the prices being correctly calculated and
20:58
Speaker 2: a lot of areas as you see that the prices
21:02
Speaker 2: of comparative listed companies have fallen significantly more than the
21:06
Speaker 2: prices of private companies inside similar portfolios have been written
21:10
Speaker 2: down by their portfolio managers. So there isn't an ongoing concern,
21:14
Speaker 2: which of course is why the discounts on the private
21:16
Speaker 2: equity trusts are so high that possibly the mark say
21:19
Speaker 2: the prices of the of the companies inside the portfolios
21:23
Speaker 2: have not been correctly recalculated. Is that a concern for you?
21:28
Speaker 3: So, I think it's definitely a concern that we hear
21:31
Speaker 3: from the market. Now, you know, we've been operating in
21:36
Speaker 3: this industry for a long time. We track the valuation
21:40
Speaker 3: methodologies of our managers. When we value our own portfolio,
21:44
Speaker 3: the PIT portfolio, those valuations are based on the latest
21:47
Speaker 3: valuations that we get from our managers. Occasionally, or rather rarely, actually,
21:52
Speaker 3: we do have to adjust some of those valuations, but
21:56
Speaker 3: normally we take the latest valuations that are available from
21:58
Speaker 3: the managers and on ourridge, those managers we find are
22:02
Speaker 3: conservatively valuing their portfolio companies. And the way that we
22:06
Speaker 3: can measure that is in looking at the cash, the
22:09
Speaker 3: cold hard cash we get from every exit, and then
22:12
Speaker 3: we compare that with the last full valuation of the asset.
22:15
Speaker 3: And we've been doing this for a long period of
22:18
Speaker 3: time and just sort of tracking what we call this
22:20
Speaker 3: uplift over the last valuation, and on average for us,
22:24
Speaker 3: for PIP, that uplift has been thirty one percent, and
22:29
Speaker 3: in fact, in the last reporting period which went to
22:31
Speaker 3: the end of November, that uplift was thirty three percent,
22:35
Speaker 3: so very much in line with the long term average.
22:37
Speaker 3: And you might say, well, why is this. It's because
22:41
Speaker 3: the private equity managers tend not to write the companies
22:44
Speaker 3: up aggressively when public markets go up. There is a
22:47
Speaker 3: dampening when public markets go up, and then consequently when
22:52
Speaker 3: markets come off. When public markets come off, the managers
22:55
Speaker 3: don't need to take those sorts of write down, so
22:57
Speaker 3: there is a sort of a dampening and smooth process
23:00
Speaker 3: which happens in the market. Part of this is to
23:04
Speaker 3: do with the fact that actually private equity managers don't
23:07
Speaker 3: like to deliver bad news to their limited partners, the
23:11
Speaker 3: investors in their funds, so that they if they did
23:14
Speaker 3: sort of write things up aggressively and then had to
23:17
Speaker 3: write down in the next quarter, I think that would
23:20
Speaker 3: be that would be quite a difficult conversation to have
23:22
Speaker 3: with their limited partners. They tend to dampen dampen things down.
23:26
Speaker 3: They're not paid on according to the unrealized value in
23:30
Speaker 3: the portfolio. Is the big payoff for a private equity manager.
23:33
Speaker 3: Comes when they exit the businesses, they get the cash
23:37
Speaker 3: and if they exceed the hurdle rate on the whole fund,
23:39
Speaker 3: then they get they get their performance fee. So it's
23:43
Speaker 3: that process I think helps explain why those valuations don't
23:47
Speaker 3: get written up quite so aggressively.
23:49
Speaker 2: Yeah. I suppose it is slightly difficult at the moment, though,
23:52
Speaker 2: isn't it, Because there have been many fewer exits via
23:55
Speaker 2: the various routes over the last eighteen months or so,
23:57
Speaker 2: so absolutely nothing in the way of IPOs and less
24:01
Speaker 2: activity in the secondary market. So it's harder to be
24:04
Speaker 2: sure that valuations are correct. And you might have felt
24:08
Speaker 2: a few years ago and that you need that activity
24:12
Speaker 2: to tell you where the prices are in the portfolio.
24:15
Speaker 3: Yeah, no, I think that's right. I mean there are
24:18
Speaker 3: fewer exits, I mean a fewer new deals. There's less
24:20
Speaker 3: investment activity in general, on both sort of the new
24:24
Speaker 3: investment side and on the exit side, and that's because
24:27
Speaker 3: the level of M and A in general is down.
24:29
Speaker 3: But the exits that we are getting, I mean, when
24:31
Speaker 3: we reported in November, we were already reporting on a
24:34
Speaker 3: lower distribution rate, and we still saw that average thirty
24:38
Speaker 3: three percent uplift on the exits and what we're seeing
24:40
Speaker 3: a lot. I mentioned earlier that actually more than fifty
24:43
Speaker 3: percent of our exits are actually to strategic or trade buyers,
24:48
Speaker 3: and these are companies that they're looking at to slug
24:51
Speaker 3: into the right part of their own sort of product portfolios.
24:55
Speaker 3: And we're still seeing those types of exits although the
24:58
Speaker 3: IPO market is closed. Well, I guess some green shoots
25:01
Speaker 3: arecurring in the US. At the moment, we're more dependent
25:05
Speaker 3: actually on those trade buyers and then on the bigger
25:07
Speaker 3: private equity funds that tend to come in and buy
25:10
Speaker 3: our smaller mid market businesses. So the amount of dry
25:14
Speaker 3: powder actually the top end of the private equity market
25:17
Speaker 3: is actually helping us with the exits because we're seeing
25:19
Speaker 3: salteing exits from our portfolio go to those bigger private
25:22
Speaker 3: equity funds.
25:23
Speaker 2: Interesting, So, inside your portfolio, this has been done to
25:27
Speaker 2: improve the operational quality of the company as much as possible,
25:30
Speaker 2: But there are other private equity companies you'd think they
25:32
Speaker 2: can do more. Even after your managers have done everything
25:37
Speaker 2: they possibly can to improve the business. There's a bigger
25:40
Speaker 2: guy out there who says, well, I can make it
25:42
Speaker 2: even better. It's an optimistic business, isn't it.
25:46
Speaker 3: But if you think about it again, I mentioned at
25:48
Speaker 3: the beginning that companies go through sort of different status
25:50
Speaker 3: of ownership, and different types of owners can be right
25:53
Speaker 3: at different times in a company's life. You know, often
25:56
Speaker 3: what we see and maybe I'm I'm maybe simplifying it
25:58
Speaker 3: a little bit here, but we'll see say a you know,
26:01
Speaker 3: a UK based manager buying a company, taking it to
26:04
Speaker 3: the next level, you know, creating a lot of value
26:06
Speaker 3: in the process, and then sending it to a European manager,
26:10
Speaker 3: pan European manager that can then take that company to
26:13
Speaker 3: a sort of more international level, and then they may
26:16
Speaker 3: well sell on to a global private equity manager, one
26:20
Speaker 3: of the very you know, the mega fund managers that
26:23
Speaker 3: may be able to take the company global. You know,
26:25
Speaker 3: we do see that sort of thing played out again
26:28
Speaker 3: and again. So there might be different types of owners
26:30
Speaker 3: that are right for different types of different types of
26:32
Speaker 3: businesses at different times of their life.
26:35
Speaker 2: Interesting can I ask you about this? Sticking with the
26:39
Speaker 2: listing and not listing, there's a lot of talk at
26:41
Speaker 2: the moment about how we can encourage companies to list,
26:45
Speaker 2: particularly in the UK. How can we stop them saying
26:47
Speaker 2: the same private, so long, how can we have a
26:49
Speaker 2: healthy IBO in market and a you know, properly healthy
26:52
Speaker 2: listed equity market in the UK. From your perspective and
26:56
Speaker 2: all the years you spent on the private side of it,
26:58
Speaker 2: is there anything that you can see that the regulator,
27:02
Speaker 2: that the state can do to make listing in the
27:05
Speaker 2: UK more attractive or has that ship sailed? No?
27:08
Speaker 3: I think I think there are things that could be done.
27:10
Speaker 3: And you know, healthy IPO market is good for everybody.
27:13
Speaker 3: You know that there are exits that we get, you know,
27:15
Speaker 3: that are through the IPO market. I think it's it's
27:18
Speaker 3: important for any capitalist society to have a well functioning
27:22
Speaker 3: public market. I think the thing that we hear, you know,
27:25
Speaker 3: whider companies stay private for longer, they get worried about
27:30
Speaker 3: sort of short termism. And you know, I mentioned earlier
27:33
Speaker 3: that a lot of our companies are pursuing sort of
27:35
Speaker 3: big buy and build strategies, so they may have to
27:39
Speaker 3: report rather lower levels of earnings for example, in the
27:43
Speaker 3: short term as they are pursuing certain strategies may not
27:47
Speaker 3: be just sort of buy and build. Maybe they're they're
27:49
Speaker 3: developing new products or new markets. And I think they
27:52
Speaker 3: need a little bit more patience sometimes from markets so
27:56
Speaker 3: that that we hear, Yes, the regulatory burden, you know,
28:00
Speaker 3: obviously there's more in public markets. If the regulator could
28:03
Speaker 3: do anything to ease that, I think that would that
28:06
Speaker 3: might that might help a little bit as well. And
28:09
Speaker 3: I think, you know, generally, if we could encourage more
28:12
Speaker 3: liquidity in public markets, you know, deeper public markets, you know,
28:16
Speaker 3: more participation, that would all be very positive and very
28:19
Speaker 3: helpful I think for everybody.
28:21
Speaker 2: So ideas like, for example, one of the ones that
28:23
Speaker 2: are being knocked around recently is the idea that if
28:26
Speaker 2: people have stocks and shares isers, they should perhaps be
28:30
Speaker 2: forced forced or actively encouraged to have a large part
28:34
Speaker 2: of that of that cash invested in the UK market
28:37
Speaker 2: as opposed to globally. That's the kind of thing that
28:39
Speaker 2: would deepen liquidity in the UK market.
28:41
Speaker 3: Yeah, I think I think encouraging people in general to
28:44
Speaker 3: look at equities actually, because I think we're suffering at
28:47
Speaker 3: the moment as well from a rather sort of risk
28:49
Speaker 3: risk off attitude, and I think it's important to look
28:52
Speaker 3: ahead and think about how how value is going to
28:54
Speaker 3: be created and by created by companies in the future.
28:58
Speaker 3: So participating in that through equity markets. I think it's
29:01
Speaker 3: really important.
29:02
Speaker 2: Of course, it's very exciting for everyone at the moment.
29:04
Speaker 2: You can get four and a half percent on your
29:05
Speaker 2: cash these days, which is, you know, after a decade
29:08
Speaker 2: of zero, is so exciting it's hard to persuade anybody
29:10
Speaker 2: they want to do anything else except for hav a
29:12
Speaker 2: deposit account.
29:13
Speaker 3: I think that's a real issue actually, because yes, people
29:16
Speaker 3: have got used to being having absolutely nothing in their
29:18
Speaker 3: savings account and now we're able to get that sort
29:21
Speaker 3: of level. So they have to think further ahead because
29:24
Speaker 3: it's very tempting to take that four and you know,
29:26
Speaker 3: four four and a half percent, but you've got to
29:29
Speaker 3: think further ahead and think, you know, where are you
29:32
Speaker 3: going to get those bigger sort of inflation beating returns
29:36
Speaker 3: in the future.
29:37
Speaker 2: Well, that is the important thing. Isn't four and a
29:39
Speaker 2: half percent is even touching the sides of the inflation
29:43
Speaker 2: burden that's overlaid on it. So we have to look
29:45
Speaker 2: further afield. Right with that in mind, tell me about
29:49
Speaker 2: some of the most interesting stuff in the portfolio. I mean,
29:52
Speaker 2: obviously you hold a lot of a lot of different funds,
29:55
Speaker 2: and so there's a lot of different companies in there,
29:57
Speaker 2: so it might be a bit overwhelming to say pick
29:59
Speaker 2: out something, but one of the most exciting sectors, what's
30:02
Speaker 2: in there. You look at this portfolio and you go, well,
30:04
Speaker 2: there's the future. That's it.
30:06
Speaker 3: I think we've got some companies that are benefiting from
30:09
Speaker 3: some great sort of long term secular trends. I think
30:12
Speaker 3: the three biggest ones are probably this continued move to
30:17
Speaker 3: greater digitalization and automation, which is happening, you know, throughout
30:21
Speaker 3: the economy, and it's affecting almost every vertical in the economy.
30:25
Speaker 3: It's no longer just information technology. It's information technology applied
30:29
Speaker 3: to healthcare, to financial services, to industrials, et cetera, et cetera.
30:35
Speaker 3: So I think digitalization and automation really exciting, and I
30:39
Speaker 3: can talk about some of the areas we invest in
30:41
Speaker 3: within that. Secondly, it's exciting from an investment point of view,
30:45
Speaker 3: but maybely from a personal point of view less so exciting.
30:47
Speaker 3: And that's aging demographics. But you know, the truth of
30:50
Speaker 3: the matter is that we're sitting there with aging populations
30:53
Speaker 3: in the developed world, and those aging populations need products
30:57
Speaker 3: and services. So companies that catering to that to that
31:02
Speaker 3: long term secular trend, which is not going away anytime soon,
31:05
Speaker 3: I think is really exciting. And the third thing is
31:08
Speaker 3: probably you know, the shift to energy efficiency, you know,
31:13
Speaker 3: obviously being accelerated by by recent sort of geopolitical events,
31:18
Speaker 3: but we were already investing in that sort of ERAa
31:20
Speaker 3: of the market, often driven actually by regulatory change too,
31:23
Speaker 3: So that's that's pretty interesting. So those are the three
31:26
Speaker 3: big areas that we see. The biggest of those is
31:28
Speaker 3: probably digitalization and automation. So within that we've got you know,
31:33
Speaker 3: I think they're exciting, but sort of enterprise software firms
31:36
Speaker 3: may not be everybody's cup of to you, but you know,
31:38
Speaker 3: catering to really nuts and bolts the infrastructure of SMEs
31:42
Speaker 3: you know that can't function without accounting packages, you know,
31:46
Speaker 3: legal software, cybersecurity, all those all those sorts of absolutely
31:51
Speaker 3: essential types of services.
31:53
Speaker 2: Interesting, all the things that are supposed to have given
31:56
Speaker 2: us the great productivity boom that we just haven't had.
32:00
Speaker 3: Well, I think we're still at the beginning of it.
32:02
Speaker 3: I think they're still you know, so much to go for.
32:06
Speaker 3: You know, for example, we're investing in within the industrials area,
32:10
Speaker 3: sort of Internet of Things so more and more connected devices,
32:14
Speaker 3: which again brings with it cyber issues, but trying to
32:18
Speaker 3: bring people together and trying to bring things together and
32:21
Speaker 3: trying to make the whole parts of the economy more
32:24
Speaker 3: efficient and more effective.
32:26
Speaker 2: So looking in the industrial sectors, then are you seeing
32:29
Speaker 2: any of the great reindustrialization of the UK as a
32:32
Speaker 2: result of supply chain resilience and reshoring etc. We keep
32:36
Speaker 2: being told on this podcast, actually we keep being told
32:39
Speaker 2: that you know, the Midlands and the North, they're going
32:41
Speaker 2: to see a wonderful resurgences industry relocates to the UK
32:47
Speaker 2: any of that.
32:48
Speaker 3: So we're in a few businesses that are definitely helping
32:51
Speaker 3: to sort of accelerate digitalization and automation in the UK.
32:56
Speaker 3: So it's some of these sort of overlays into other industries.
33:00
Speaker 3: For example, we've been in the business that helps with
33:03
Speaker 3: marketing analytics UK based business very clever bit of kit,
33:07
Speaker 3: clever bit of software which helps market better. Or we
33:11
Speaker 3: were in the business actually sold last year that helps
33:13
Speaker 3: to helps the whole sort of booking process when you're
33:16
Speaker 3: booking your your cottage or your you know, your your
33:19
Speaker 3: sort of holiday rental within the UK. So a lot
33:23
Speaker 3: of this.
33:23
Speaker 2: It's not quite shipbuilding.
33:24
Speaker 3: No, it's not quite shipbuilding, but it does create it
33:27
Speaker 3: does it creates jobs, it does create value, and it
33:30
Speaker 3: creates better underlying businesses as well. So it's sort of
33:33
Speaker 3: almost like the picks and shovels rather than the you know,
33:36
Speaker 3: the big, the big, you know the big sort of
33:37
Speaker 3: industrial projects.
33:39
Speaker 2: And when you look at the the aging society theme,
33:43
Speaker 2: the second one you mentioned, what are the things in
33:45
Speaker 2: there that that you like the look.
33:46
Speaker 3: Of, Well, some some really really exciting services. Again, I
33:51
Speaker 3: think they're exciting. It may not be ruts, cleveragy, but
33:54
Speaker 3: things like investing in I care clinics that are catering
33:59
Speaker 3: to people that need to have cataracts removed and unfortunate
34:03
Speaker 3: it's a fact of life. As you get older, people
34:04
Speaker 3: develop cataracts. And although you can put that off for
34:07
Speaker 3: a while, and it was put off during COVID, eventually
34:10
Speaker 3: you have to have it done. Hip replacements, new replacements,
34:15
Speaker 3: you know, aging population, but also a lot of an
34:18
Speaker 3: active population. So for example, we're in one company that
34:22
Speaker 3: produces a ceramic coating that goes on the top of
34:26
Speaker 3: the ball joint in a hip replacement, which is an
34:30
Speaker 3: absolutely essential thing, and you know, can't be done without it.
34:36
Speaker 3: We're in a chain of radiology clinics. We're in actually
34:39
Speaker 3: remote radiology, which helps to actually helps the NHS to
34:43
Speaker 3: control costs better because you can actually interpret radiograms around
34:49
Speaker 3: the world using remote radiologists. So while people are sleeping
34:52
Speaker 3: here in the UK, you can get you can get
34:55
Speaker 3: your MRI actually actually sort of interpreted. So there's lots
34:59
Speaker 3: of things like that we're investing in. And there's also
35:01
Speaker 3: sort of you know, drugs and devices, you know, again
35:05
Speaker 3: trying to attack big you know, big and sort of
35:08
Speaker 3: pretty unpleasant diseases. So I think all of that we
35:10
Speaker 3: find we find pretty exciting.
35:12
Speaker 2: Okay, onto something something just as interesting.
35:15
Speaker 4: Now.
35:15
Speaker 2: One of the other things that we talk about a
35:17
Speaker 2: lot on this podcast, although we never resolve how we
35:20
Speaker 2: feel about it, is that is crypto. Is there anything
35:23
Speaker 2: in your vast portfolio that plays into the theme of cryptocurrencies.
35:28
Speaker 3: Well, I'm sorry to disappoint you. We've got very very
35:32
Speaker 3: very little, you know, in terms of crypto. I think
35:36
Speaker 3: if if we've got anything, it wouldn't be crypto itself.
35:40
Speaker 3: In terms of sort of bit coins, it might be again,
35:42
Speaker 3: some of the picks and shovels and a sort of
35:45
Speaker 3: infrastructure that goes on behind it. But we don't, we
35:49
Speaker 3: wouldn't have. We don't. We don't invest directly into crypto.
35:54
Speaker 2: Disappointed listeners out there, Sorry, if you've got a retail
35:59
Speaker 2: of that here, we have. Most of our listeners are
36:02
Speaker 2: retail investors to ordinary people investing their own money, and
36:06
Speaker 2: they're thinking of thomselves, Well, you know, I would actually
36:09
Speaker 2: like a little private access to private equity. At this point,
36:12
Speaker 2: where do they start, I'm apart from just going out
36:14
Speaker 2: and bactures in your trust? Of course, what did they
36:17
Speaker 2: look at first? How do they approach this sector?
36:19
Speaker 3: I think private equity is a really exciting area for
36:23
Speaker 3: people to get involved in. It does give them access
36:26
Speaker 3: to investment opportunities which are probably harder to get through
36:30
Speaker 3: public markets because they tend to be smaller and growing businesses.
36:33
Speaker 3: And I think actually private equity investment trusts in general,
36:36
Speaker 3: I'm not just talking about PIP, but the whole sector
36:39
Speaker 3: is really interesting for retail investors because they can on
36:42
Speaker 3: day one get a diversified global portfolio of private equity
36:47
Speaker 3: without having to go through the pain of investing in
36:50
Speaker 3: private equity funds and developing a big diversified portfolio that way,
36:55
Speaker 3: which would probably take a very large minimum amount and
36:58
Speaker 3: be quite difficult for them to do so by buying
37:01
Speaker 3: a handful of shares in one or more investment trusts.
37:05
Speaker 3: And there's actually quite a few of us out there,
37:07
Speaker 3: It's not just PIP, there's a few of us out there,
37:10
Speaker 3: all with slightly different investment emphasis. Then a retail investor
37:15
Speaker 3: would be able to build up an interesting exposure to
37:18
Speaker 3: to private equity to complement their their public equity portfolios.
37:22
Speaker 2: Is the only thing we have spoken about which is
37:24
Speaker 2: often a problem with with private equity is the price.
37:28
Speaker 2: You know, so the if they're buying into a trustlectels,
37:31
Speaker 2: they're buying into PIP, they're paying your management fee, and
37:33
Speaker 2: then they're paying the fees of all the other managers
37:35
Speaker 2: along the way, so that the total price is quite high.
37:38
Speaker 3: Yes, although when we look at sort of the net returns,
37:40
Speaker 3: I mean, we've been able to produce, you know, returns
37:45
Speaker 3: of twelve percent paranum since inception that that's our overall
37:49
Speaker 3: return and outperforming public markets. So I think, you know,
37:53
Speaker 3: people do need to look at on a sort of
37:55
Speaker 3: a net basis, As usual with any any investment opportunity,
37:58
Speaker 3: so I think that's that's important. It is an expensive
38:01
Speaker 3: asset class though as well. I mentioned earlier that the
38:03
Speaker 3: best private equity managers have large amounts of resources. It's
38:09
Speaker 3: they have to compete to get the best people on
38:11
Speaker 3: their staff. So there's no getting away from the fact
38:14
Speaker 3: that it is one of the more expensive asset classes.
38:17
Speaker 2: Yeah, a lot of expensive people to pay along the way. Okay, well,
38:21
Speaker 2: and congratulations on that record. By the way, it's very impressive.
38:24
Speaker 4: Right.
38:24
Speaker 2: The last question, and this is when you're going to
38:26
Speaker 2: be judged on, by the way, everybody's final impressent of
38:30
Speaker 2: you'll be based on your answer to this final question.
38:35
Speaker 2: You have to hold one of the following things for
38:37
Speaker 2: ten years. Bitcoin or gold.
38:40
Speaker 3: Oh, gold.
38:45
Speaker 2: No one has ever answered bitcoin. We wait and we wait.
38:52
Speaker 2: I mean John and I would both take gold as
38:54
Speaker 2: well in our heartbeat that you know, we wait and
38:56
Speaker 2: we wait for someone to say bitcoin and then explain why.
38:59
Speaker 2: But hasn't happened.
39:02
Speaker 3: I'm sorry to disappoint again, you.
39:04
Speaker 2: Haven't disappointed at all. You've been absolutely wonderful. Thank you
39:07
Speaker 2: so much for joining us today.
39:09
Speaker 3: Thank you, Mary, it's been a delight to speak to you.
39:11
Speaker 3: Thank you so much for your questions.
39:19
Speaker 4: Right, John, back to you. So today we're making a
39:22
Speaker 4: little change in the podcast.
39:23
Speaker 2: You and I are going to discuss what we've heard
39:26
Speaker 2: from Helen very briefly. We're not going to bore you listeners,
39:28
Speaker 2: I promise, just a few little comments on what John,
39:32
Speaker 2: who didn't get to talk to Alan directly, thinks about
39:35
Speaker 2: what she's set up. Now. John, again, we talked earlier
39:38
Speaker 2: in this podcast about how you are more of a
39:40
Speaker 2: fan of housebuilders generally than me. You're also actually more
39:43
Speaker 2: of a fan than me of private equity investment.
39:45
Speaker 1: Trusts, right yeah, I mean again, Lois, it's just the
39:49
Speaker 1: cheapness aspect, you know, And I suppose the tricky thing
39:54
Speaker 1: with the private equity trusts is basically all the things
39:58
Speaker 1: that just came up in your conversation with Ellen. I mean,
40:01
Speaker 1: when you talk to I've kind of spoken to in
40:03
Speaker 1: the past, you get the sense that the kind of
40:08
Speaker 1: heavy discount that the trust is trading on is probably
40:14
Speaker 1: not justified by the skepticism about the valuations. But then
40:20
Speaker 1: there's all the complexities about the expense of these structures themselves.
40:25
Speaker 1: I mean, that's one reason they trade that discounts because
40:27
Speaker 1: there's so much of a focus on cost that any
40:31
Speaker 1: kind of anything that looks high cost is kind of
40:34
Speaker 1: rejected by wealth managers and ifs and all the rest
40:37
Speaker 1: of it. So that's one reason they trade at a discount.
40:40
Speaker 1: But then yeah, there is also the complexity because obviously
40:42
Speaker 1: one of the ways that are presumably one of the
40:45
Speaker 1: ways this is going to pan out is not so
40:47
Speaker 1: much that the kind of valuations go to a point
40:52
Speaker 1: where these companies get sold for a lot less. It's
40:55
Speaker 1: more that that process will be drawing out, and so
40:58
Speaker 1: we'll go through a longish period we are around that
41:01
Speaker 1: many seals and there's not that much activity, and everyone's
41:05
Speaker 1: just chainey what coat weeds to kind of get money
41:09
Speaker 1: back to the partners and the business. But you know,
41:14
Speaker 1: it's quite a peak. It's still quite a peak.
41:17
Speaker 4: Well it is.
41:17
Speaker 2: I mean, this is one of one of the things
41:18
Speaker 2: about it and Helen and I discussed this briefly, which
41:21
Speaker 2: is that you know this there are two things that
41:23
Speaker 2: this industry is based on. One has been a very
41:25
Speaker 2: cheap debt, right and we talked about that, But the
41:27
Speaker 2: other is a high volume of transactions of turnover. So
41:31
Speaker 2: you can see what the prices should or shouldn't be.
41:34
Speaker 2: And the problem that we have at the moment is
41:36
Speaker 2: we have that slight confusion around how do rising interest
41:39
Speaker 2: rates really affect this sector. And also with the lack
41:42
Speaker 2: of transactions and lack of IPOs, it's very hard for
41:45
Speaker 2: us to see where valuations should be and we can say, oh, well,
41:48
Speaker 2: they should be around you know, the same as as
41:50
Speaker 2: listed valuations, et cetera, and everything must be priced off that.
41:54
Speaker 2: But in the end, historically they haven't been priced off
41:58
Speaker 2: the listed markets. They've been priced off similar transactions. And
42:02
Speaker 2: without those, the whole industry becomes, as you say, slightly
42:05
Speaker 2: more opaque than anyone would like. And that's where you
42:08
Speaker 2: get these discounts, so that there's actually conveniently for us.
42:11
Speaker 2: John out this morning is a little note from Numis
42:13
Speaker 2: on Numis on Pantheon International, and they say exactly this.
42:17
Speaker 2: You know, despite robust to Navy performance for some time,
42:20
Speaker 2: Pantheon's discount remains in an extreme level of forty four percent. Now, Numis,
42:25
Speaker 2: like your beliefs this is unwarranted. We continue to believe
42:28
Speaker 2: the sector revise access to a tried and tested route
42:30
Speaker 2: to access private as it's through a selection of high
42:33
Speaker 2: quality managers with a record about performing equity markets. Well,
42:36
Speaker 2: you know, maybe maybe not. There is a record of
42:38
Speaker 2: out performing equity markets across the sector, but we still
42:41
Speaker 2: don't know whether that's because of cheap debt or because
42:45
Speaker 2: people in private equity are absolutely brilliant at improving the
42:47
Speaker 2: operational performance or of smaller businesses and bigger businesses come
42:51
Speaker 2: to that. So there's a lot of houses going to
42:53
Speaker 2: pan out knocking around in the sector at the moment.
42:55
Speaker 2: And I agree with you, forty four percent discount to
42:58
Speaker 2: NAV seems really cheap, but then look at the cost
43:02
Speaker 2: and look at that how that cost rolls up every
43:04
Speaker 2: decade if there's if there's not much any v perform
43:07
Speaker 2: its every decade, that's going to really going to roll up.
43:12
Speaker 1: Yeah, well, I know. And the other things I thought
43:14
Speaker 1: were really interesting that came out of the conversation was
43:16
Speaker 1: the structural stuff as well about equity and also how
43:20
Speaker 1: the nature well the two things that the kind of
43:23
Speaker 1: de equitization element of listed companies and also how the
43:27
Speaker 1: nature of private equity has changed over time so that
43:31
Speaker 1: you have kind of gone from you know, the kind
43:34
Speaker 1: of asset strip inside to actually something that is more
43:39
Speaker 1: like a very active fund manager where they go into
43:44
Speaker 1: a company that's actually already half decent and just try
43:46
Speaker 1: and make it a bit more decent. And on the
43:48
Speaker 1: one hand, that's a much more palatable way of doing business.
43:52
Speaker 1: On the other hand, once all the financial engineer has
43:55
Speaker 1: been milked out of something, you have to say, well,
43:58
Speaker 1: how much was the air bits of private equity doing well?
44:03
Speaker 1: Mostly down to the financial engineering and the messing about
44:06
Speaker 1: with balance sheets and again, which was I guess part
44:09
Speaker 1: of the secular low interest rate environment. And now that
44:13
Speaker 1: you're just kind of owning good companies that could probably
44:16
Speaker 1: be listed anyway. I think that's the other thing. It's like,
44:20
Speaker 1: when you look at the companies that Helen's talking about
44:23
Speaker 1: in the portfolio, most of them like make money. They're
44:27
Speaker 1: not the sorts of unprofitable kind of dodgy kind of
44:33
Speaker 1: FTX type things or anything like that. And one of
44:36
Speaker 1: the things that the customer is like, well, how companies
44:38
Speaker 1: companies aren't choosing to be listed, and that again, that's
44:42
Speaker 1: a slightly separate issue, but it's it goes back to
44:45
Speaker 1: that thing, well, what how much of this is a
44:48
Speaker 1: kind of long term story about a change in market structure.
44:52
Speaker 1: We are more and more companies just a they can
44:54
Speaker 1: raise the money privately and they don't just don't want
44:56
Speaker 1: to hassle to be in public.
44:58
Speaker 2: Well, it's interesting now what you said about this idea
45:00
Speaker 2: of improving operational efficiency and once you get to a
45:03
Speaker 2: point and hell and I talked about this, and she was,
45:04
Speaker 2: I think really interesting and explaining how you can take
45:07
Speaker 2: companies that you've improved operationally, but then another private equity
45:11
Speaker 2: company might be able to help them expand globally, or
45:14
Speaker 2: another private company might be able to build them onto
45:16
Speaker 2: a part of their business was adds extra value. But
45:19
Speaker 2: you will get to a point when you know these companies,
45:21
Speaker 2: all that can be done will have been done to
45:23
Speaker 2: these companies, and then they're not with the end of
45:25
Speaker 2: easy money, they're not going to be just trading around
45:27
Speaker 2: private equity companies that they're going to end up having
45:31
Speaker 2: to be listed. So I wonder if this isn't one
45:34
Speaker 2: of the dynamics that might bring some of the companies
45:36
Speaker 2: back to the listed market. When you get to the
45:38
Speaker 2: point where one of the big private equity partnership says,
45:40
Speaker 2: you know, we've really done all we can do here
45:43
Speaker 2: and we want its full valuation, and the only place
45:45
Speaker 2: we can do that is by delivering it back to
45:47
Speaker 2: the public market. This is a dynamic that may begin
45:49
Speaker 2: to change over the next few years, whichally hopefully.
45:53
Speaker 1: I mean, well in case you would expect that. I
45:56
Speaker 1: mean so Tho's two facts as The one is if
45:58
Speaker 1: we are the law entest environment, and that means that
46:01
Speaker 1: debt is like more expensive and hard that we come by,
46:05
Speaker 1: and therefore equity should be relatively more attractive, so we
46:08
Speaker 1: probably should see more reequitization. And the other thing is
46:13
Speaker 1: obviously you know, governments are certain I mean the UK government,
46:17
Speaker 1: but I suspect it it will spread. There's a lot
46:20
Speaker 1: of angst about you know, de equitization and that kind
46:24
Speaker 1: of unhealthy capital markets, and so you can see that
46:28
Speaker 1: maybe you know, there'll be more structural sort of bias
46:31
Speaker 1: towards equity than there has been, especially because obviously debt
46:35
Speaker 1: has been massively subsidized over the years because of various rules.
46:41
Speaker 1: And maybe we'll see that kind of change in favorite equity.
46:43
Speaker 2: I don't know, yeh, I wo think we've managed to
46:46
Speaker 2: turn this into all good news.
46:48
Speaker 1: Thanks John, it makes a change.
46:56
Speaker 2: Thanks for listening to this week's Martin talks Money. We'll
46:58
Speaker 2: be back next week. In the meantime, I've you like
47:00
Speaker 2: our show, rate review, and subscribe wherever you listen to podcasts.
47:03
Speaker 2: This episode was hosted by me Maren sums up Web.
47:05
Speaker 2: It was produced by Sersadi, additional editing by Blake Maple's
47:09
Speaker 2: special thanks of course to Helen Steers and as usual
47:12
Speaker 2: to John Stepper, especially John Flair extra little chat at
47:14
Speaker 2: the end, and of course our weekly reminder to sign
47:17
Speaker 2: up to John's excellent daily newsletter, Money Distilled. The links
47:20
Speaker 2: for that is in the show notes.