Time spent holding assets key to private markets investing

0:12Joan Solotar: Hello and welcome to the FT Advisor podcast where each week we bring you relevant podcasts for financial advisors. I'm Melanie Tringham, Features Editor of FT Advisor and today I'm joined by Joan Solotar, Global Head of Blackstone Private Wealth to talk about private markets and retail investing. Hi, Jane. Thanks for joining us. Thank you for having me. Now, for those of us who aren't so familiar with Blackstone, can you perhaps talk a little bit about what kind of business it is and what it invests in?

0:42Melanie Tringham: Sure. Blackstone is the largest alternative asset manager in the world managing about$1.2 trillion. And those investments span private equity, private real estate, private credit, private infrastructure, and then other sub-strategies. And what that really means is those investments are not traded on a public exchange. So if you think about even from a personal standpoint, your home is private real estate, if you will. But a publicly traded real estate investment trust would be more like a stock or a bond.

1:25Joan Solotar: Okay. So I understand there's been a big drive amongst the big asset managers to open up private markets to a retail investor. Can you explain what's going on there? Sure.

1:37Melanie Tringham: So we established our business serving private wealth advisors in 2011. And really the drive was that in the U.S., where we started, but this trend is true everywhere, individuals who had either public or private pension funds had a very large allocation to private investments, which can enhance yield or return, provide diversification. And yet most individuals did not have any access. And we decided we have institutional quality funds across these asset classes. Let's establish a business that will enable more individuals to have access. We've built a very large-scale business today, 280 billion plus U.S.

2:33Melanie Tringham: dollars. And I believe as the demand grew for products and as peers saw what we had built, they started joining in really just in the last few years. Okay.

2:46Joan Solotar: So I understand that different assets have different kind of profiles in terms of the kind of returns or how long you're meant to hold a stock. How do the different strategies suit the different kind of investor profile? I mean, is it helpful to think about how we think about it in the public markets?

3:06Melanie Tringham: Yeah, I think that's a great question, actually. So if you think about what investors are looking for, it's either yield, cash in their pocket, or appreciation, growth of the portfolio. And then you break down the individual asset classes. So private equity, think of that as most like a stock or an equity company, and that provides appreciation and the value of compounding when you hold it longer term. Private credit, you could think of that as most comparable to fixed income, and so that provides yield. And real estate and infrastructure are somewhere in between. They provide both yield and a bit of return.

3:53Joan Solotar: Okay, thanks. And what kind of place do private assets hold in a client's portfolio? Like, is it some people seem to think it's like a sort of diversify against public markets?

4:08Melanie Tringham: Yeah, so the reason that individuals add them is when the advisors and the CIOs are doing the analysis, they can see that over time, public equities have not performed as well as private equity and the same in each of the asset classes. Private credit has outperformed fixed income, even leveraged loans, and on and on. But they do also provide diversification to a stock and bond portfolio. And there are many years where the correlations don't hold. So you think, oh, it's great to have this balanced stock and bond portfolio, but sometimes they move in the same downward direction. And it would be helpful to have something that's more stable and not exactly correlated to those asset classes.

5:07Joan Solotar: And so do private assets not get affected by the same shocks in the same way as public assets?

5:14Melanie Tringham: It's interesting. I'd say one of the most important differences is that, and we'll take the stock market as a great example, it is often fueled by the emotions of the market and the investors. So when I look at how our private equity portfolio has appreciated over the last couple of years, and I look at the public markets, the public markets have moved up because their multiples of earnings have moved much higher, whereas ours have mostly moved up because we've been able to build cash flow and hold those multiples pretty steady. So what that suggests on the downside is you have much more room for multiples to fall in public markets than you do today in private markets.

6:14I think the second point is that today in many indices, and I'll use the U.S.

6:20Melanie Tringham: as an example, most of the movement in the U.S. stock market today is being driven by very few companies, you know, eight to ten companies. And I think a lot of individuals, advisors, historically relied on those benchmarks to be a proxy for the economy and real diversification. And it's just not providing that today.

6:46Joan Solotar: Fair enough. And what sort of returns are people sort of aiming for in these assets?

6:55Melanie Tringham: So they really vary. I don't think I'm allowed to be specific. But what I can say is in each of the asset classes that I mentioned, so if you look at private credit versus leveraged loans historically as an asset class, those have delivered a couple of hundred basis points in excess return with less volatility. And you can see similar results, if not greater spreads in some of the other asset classes like private equity versus public equity.

7:28Joan Solotar: Fair enough. Yeah. So if our readers were standing interested from what you're saying, and they wanted to suggest to their clients they might want to look at this area. How can their clients get involved? What kind of products? What's the way in for their clients?

7:45Melanie Tringham: Yeah. So first, I think there's a lot of effort around education and we need to make sure that the advisors really understand the funds and the structures and the liquidity. But these are available at many private banks, global banks, local banks. And so their own teams do the selection based on their view of what's appropriate for their clients. And then the advisor can work within the framework. The CIO office is typically making a recommendation on allocation. And then they can choose which products work. The most important question to ask any individual when they're contemplating investing in private assets is how much illiquidity they can take.

8:40Melanie Tringham: So most individuals today have 100 % of their investments in daily liquidity. And so they're really missing the illiquidity premium. And for many individuals, whether it's 10 % or 20 % of their investable assets, they can afford to take a much longer term approach. So that's the most essential question. And once they have a sense of how much illiquidity they take, then they can figure out how to diversify the current portfolio, whether it's one of those asset classes or a mix of several of them.

9:18Joan Solotar: And so when you talk about illiquidity, how long should people be thinking about?

9:23Melanie Tringham: We typically think in five to ten year increments. So the original funds that were offered, that are still offered to institutional investors and to high net worth individuals are closed end funds. And those typically have a 10 to 12 year life. The open-ended funds do provide some liquidity, and most periods you can redeem in a single month or a single quarter, but there will be periods where you can't because we're trying to match the asset with liquidity. And so I always think of them as five to 10 years. So for example, in private equity, the way I think about it is if you can generate a net return of 12 % over 10 years, that compounds to a little bit less than three and a half times your money.

10:23Melanie Tringham: And I think it's that kind of timeframe when you're saving, whether it's for buying a home or retirement or education or whatever it is. Most individuals think about that kind of time frame, particularly for retirement. And again, I think having everything in daily liquid investments usually doesn't maximize yield and return. And there's typically room.

10:53Joan Solotar: So really, we're talking about the compounding and the fact that like holding the asset for a long time is how you get the returns.

11:00Melanie Tringham: Yes. And I should clarify, the compounding happens in private equity, private real estate, private infrastructure. Credit's a little bit different in that there's not that much appreciation there. What you're seeking is that cash in your pocket, higher yield.

11:17Joan Solotar: Okay. And so should people ever think of it as like a rainy day kind of asset?

11:24Melanie Tringham: I like that, but I think of it as all weather. There's always a place for these in the portfolio, and they shouldn't be thought of as trading assets, right? These are just core allocations in any portfolio.

11:41Joan Solotar: Got it, yeah. I mean, the other question a lot of people have who are new to this sector is transparency, because one of the big advantages of public stocks is you have all this public information. You know, you have the price, so you know exactly how much the investment is worth, and you have disclosures, regular disclosures, so you know what's going on in the company. So what do you say to that issue?

12:05Melanie Tringham: I think that's really a misperception. I think public companies disclose information pretty much once a quarter in their financial statements. And we disclose our pricing as well. We also disclose the major holdings. We host webinars. We have websites for these funds. We meet with the advisor, the clients. We provide very regular updates on what's happening. And I think that perception comes from the word private, but private just means it's not publicly traded. It doesn't mean that it's anything complex or secretive. So the investors in those funds have access to quite a lot of information. and investors are coming in and out of those funds with frequency, monthly or quarterly, depending on the fund.

13:03Melanie Tringham: And there's a set price and we've been doing that over many, many years. I think the other piece of information that is very important is we don't just buy assets, we also sell assets. And it's very rare that we're selling something below what we've been carrying it at. So when you look over our 40-year history, you could see that there's actual proof in the pudding. You buy an asset, you sell it. You could see what the return is. You could see what the last mark was and how much above that. So we are regulated like other entities, and there's quite a lot of information available to the investor.

13:48Joan Solotar: Okay. Okay. And so there's been a lot of talk about these evergreen products. We've just had a new thing, an LTAF launched in the UK just recently, which opened up to individual investors. But a lot of our readers will say, well, actually, I can get my clients into private assets via investment trusts. And there you have the daily liquidity and you have the valuations because you have the share price, even though it might operate at a discount to net asset value. So why should they recommend their clients go via a different route, via, say, the evergreen route?

14:28Melanie Tringham: So I'm not as familiar with the investment trust comparison. comparison, I would say holding illiquid assets in a daily traded vehicle can lead to a mismatch at various points. And the way we've structured our open-ended funds is not to be a forced seller. So the reason we have liquidity caps is that you can buy companies and you can buy real estate and you can invest in infrastructure and you don't want to be forced to sell at inopportune times. And I would say we are cycle tested because we've been managing these vehicles over an extended period of time, including downturns. So I think there should be some comfort in that.

15:20Melanie Tringham: But more important than the structure, you have to be very selective on who the asset manager is. They are not all equal. And for advisors, understanding the structure is critically important. But I think even more important or as important is understanding the quality of the asset manager and choosing wisely. So it's the assets that are within the portfolio that will ultimately drive performance. It's how that asset manager has set up liquidity, how they think about valuations, the rigor of investing the track record. And I think you want to offer institutional quality funds regardless of whether it's a sophisticated family office or a retail investor.

16:18Joan Solotar: Okay. You mentioned before the liquidity issue, the fact that it's like a long-term hold, people might want to hold to retirement and stuff, but sometimes there is a big shock to the economy. And how does Blackstone, how do private asset managers manage those shocks if there's a bit of a rush on the assets?

16:39Melanie Tringham: Yeah, it's a great question, which is why understanding the tolerance for illiquidity is so important. So in an environment like that, if you have allocated 10 or 20 or 30 percent to private assets, that means somewhere between 70 and 90 percent of your holdings are daily liquid and can be liquidated. But we have to also recognize that in such an environment, those assets will be marked down and they're often marked down below net asset value. So you're really selling at a big discount. The way we control liquidity in our funds is there's typically a cap put on each quarter what can come out, and we manage a liquidity sleeve to be able to meet that.

17:30Melanie Tringham: So if it's 5 % or 3%, in most periods, investors will be able to redeem 100%. But in a stress environment, it may take longer. It could take four months, could take five months, what have you. But you want those caps in place because otherwise you could be damaging the performance of the total portfolio. and we have been cycle tested through a period like that and the fund performance was exactly as one would have expected. But again, I think the advisor needs to be super careful up front to make sure that the asset manager really understands how to manage these vehicles.

18:21Joan Solotar: Fair enough. And so what sort of clients does Blackstone Private Wealth target?

18:26Melanie Tringham: So our clients are the financial advisors. And so it's whoever they're serving. And when we first launched the business, there really weren't great options beyond the super wealthy. But today there are with open-ended structures and the like. And I would say that the business itself, from that perspective, has gone from the most concentrated to much more fragmented. But it is still quite early. And really, anywhere in the world, doesn't matter if it's UK, Europe, Asia, US, most CIOs have an allocation of somewhere between 10 and 30 percent, 50 percent for family offices. And it's hard to find a firm where the allocation has reached even 5 percent.

19:26Melanie Tringham: So these are quite early days in terms of adoption.

19:30Joan Solotar: And when you're talking about the individual investor, what kind of minimum investment are we talking about? What kind of allocation?

19:39Melanie Tringham: It varies by asset class. It varies by jurisdiction. Some of the funds can have minimums as low as a couple of thousand pounds, if you will. But there are also regulatory restrictions for others where it might be significantly greater, 250 ,000 or something like that. So we follow whatever the regulations are for that strategy, that structure, and then that jurisdiction.

20:11Joan Solotar: And presumably financial advisors would source these kinds of products through the private banks kind of thing. Yeah.

20:20Melanie Tringham: Yeah. So typically they have a due diligence team that does the rigorous analysis up front. They will choose which of the fund managers they want to onboard. And then the education process starts. We work really hand in glove with them to bring our expertise on the structure, on the assets, on the fund, and on the asset class. So we've developed quite a robust program, call it the Essentials of Private Markets, and really teach the advisor about the asset class and how these can fit alongside stocks and bonds. So it's really not meant to replace a stock and bond portfolio, but it's meant to sit next to a stock and bond portfolio.

21:13Joan Solotar: Great. Well, I think that just about wraps it up. That's very insightful, very interesting, and hopefully our listeners will have learned quite a bit about private markets. great thank you so much for having me well thanks for thanks for joining us so that's it from me from ft advisor podcast and check out our website for future podcasts thank you

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