Private Market Value Creation & the Road to Exit with Sanjay Patel, Chairman International & Senior Partner of Private Equity, Apollo. David Lebovitz, Executive Director, J.P. Morgan Asset Management.
Moderated by Bailey Mccann, Senior News Editor, Opalesque.
PRESENTED BY
SPEAKERS
Sanjay Patel
Chairman International & Senior Partner of Private Equity
Apollo Management
David Lebovitz
Executive Director
J.P. Morgan Asset Management
MODERATOR
Bailey McCann
Senior News Editor
Opalesque
TIMESTAMPS
EPISODE TRANSCRIPT
Bailey McCann: (00:07)
Okay. I think we can get started. My name's Bailey McCann. I'm the senior editor at Opalesque, and we are here to talk about private market value creation, and the road to exit. We've got Sanjay and David here, and you guys can introduce yourselves, and then we'll get into the questions.
Sanjay Patel: (00:24)
Sure. Thanks, Bailey. Great to be here. So I'm Sanjay Patel. I'm a senior partner and chairman of our international business at Apollo Management, thirty-fourth here in the private equity credit old space of my career in London, half my career, and probably in New York, pretty much invested across every asset class in the industry. So, excited to be here.
David Lebovitz: (00:47)
David Lebovitz. I don't have 34, 35 years of experience, clearly. But I work at JP Morgan, within the asset management business, and I do macroeconomic and asset allocation research. So very much focused on the way the world looks from 20,000 feet, and increasingly, alternatives are becoming part of the solution set that our clients are embracing, to try to realize their portfolio outcomes. Glad to be here, and looking forward to the conversation.
Bailey McCann: (01:13)
Great. Thanks, guys. Let's just get started with kind of a broad question, in terms of how you're thinking around value creation right now. What are the interesting themes or opportunities that you're seeing out there?
Sanjay Patel: (01:27)
Maybe I'll kick it off? Obviously, it's a broad, broad question, maybe addressed ... Obviously at Apollo, we do private equity, credit, and real assets, but on the private equity side, some observations.
Sanjay Patel: (01:41)
I mean, you think about when we think about value creation in our business, you talk about, can you create value on the buy? How do you create value when you own an asset, and how do you create value on the exit?
Sanjay Patel: (01:54)
That's the life cycle of private equity. It's interesting, I would say, having lived in the industry for decades. Valuation's at an all time high.
Sanjay Patel: (02:06)
However, I think we still, at Apollo, from our vantage point, there are lots of ways, roads to success, in private equity. We still think creating value at the buy is an incredibly important component of private equity investing. We're not a traditional growth capital investor.
Sanjay Patel: (02:26)
Today, there's tons of companies that you can still do that. We just announced a very big deal with Yahoo, buying from Verizon. So here was, what, a classic Apollo deal, a corporate carveout. Verizon wanted to get rid of assets, a complex set of assets.
Sanjay Patel: (02:45)
We were the buyer for the whole package. There's some good assets and there's some complicated assets, and assets that lose money, assets that make money, but it's figuring it all out, and creating a holistic solution. So we think that can be a very interesting opportunity.
Sanjay Patel: (02:59)
On the creation during the life cycle, I would say, just listening to Dan Loeb this morning, he mentioned this concept of, 30 years ago, we were creating value in a certain way.
Sanjay Patel: (03:10)
30 years into the industry's development, I'd say the institutionalization of value creation has become phenomenal, so our ability to take a company, and drive value in every aspect of it. We have at Apollo, a team now called the Apollo Portfolio Performance Solutions Group, which is a group ... We have data scientists, HR, ESG, purchasing, everything to drive costs down, ride revenue up, think about technology.
Sanjay Patel: (03:46)
Getting the data from our portfolio companies, which we own a lot of throughout the world, every week, is enormously valuable to us as an investor, for both those companies and all the companies. So there's a constant life cycle, and everyone has done it. All the other big firms do it.
Sanjay Patel: (04:04)
I think we have institutionalized it much more in the last five years than in the last 15 years before that. I think that will continue. So we're, I think, better owners of companies as an industry than we were 20 or 30 years ago, and you create value.
Sanjay Patel: (04:18)
Then finally, on the exit, and I think we'll talk a little bit more about this, you have to be, even, you're a micro investor in private equity, you're buying companies, but you have to be very cognizant today on the macro. What I mean by that is, you're managing a fund.
Sanjay Patel: (04:36)
You've got to think about exits constantly, the public markets and the private markets, and we're constantly thinking about that, because the life cycle of the public markets and the macro influences that enormously, more so than it did 20 or 30 years ago. We've become, I think, better sellers over the last decade that I've been in Apollo.
David Lebovitz: (05:01)
I would agree with a lot of that. I think the one thing you said that really struck me, and I would agree with, is the data side of things. There's so much more insight into what's happening in the day to day. You can see things with a higher frequency, you can reach out and talk, to not just clients and consumers, but also experts within the industry in which you're investing.
David Lebovitz: (05:21)
So we see it from a macro research perspective, we see it from more of a micro perspective, when we look at the portfolio companies in the funds. The ability to get a better reading of the pulse is how I would think about it. I think it is a real source of alpha, and will continue to be a source of alpha, going forward.
David Lebovitz: (05:40)
I think, something else that's very interesting, you mentioned the macro, and this is really a function of what happened during the pandemic. But in the United States, you saw applications for small businesses just shoot through the roof, right? So you saw a huge opportunity set be created.
David Lebovitz: (05:55)
What we're finding now is that those companies are getting to a point where they need funding. So I think what's also really interesting is that the pandemic, to your point, again, on the macro, created this sea change within the economy broadly, very much moving away from large corporate, the things that have worked well for the better part of the past decades, and really seeing tremendous growth in those new stage companies.
David Lebovitz: (06:19)
It's about looking at that opportunity set, understanding what you can do with data to create that operational leverage. Then, to your point on the exit, there's a chart in a publication that we produce, called The Guide to Alternatives, that overlays the share of PE deals in the software sector, with investment in software, as represented by the national accounts, right?
David Lebovitz: (06:38)
Companies are investing more in technology, and that has played a key role in one's ability to exit at a reasonable price. So I would agree with a lot of what you said on the private equity side.
David Lebovitz: (06:48)
I think the private credit side becomes a little bit ... When I think about value creation in private credit, I tend to move more towards the distressed area, and providing interesting financing solutions to businesses that have fallen on tough times.
David Lebovitz: (07:02)
I struggle to see how there's tremendous value creation in something like direct lending. But regardless of which lever you're pulling, whether it's the equity lever or the credit lever, again, I think that the data is really what's differentiating that marketplace today, relative to even where we were during the prior cycle, is very much are very much our view.
Sanjay Patel: (07:22)
Can I just comment maybe on the private credit side? I don't disagree with David.
Sanjay Patel: (07:26)
I think, obviously, there's, well, we can talk more about this. Credit, we certainly are from today, at 460 billion, we have 300-plus billion, 330 billion of yield credit on 30 billion of hybrid capital, that we call hybrid capital, and 90 billion of opportunities to capital.
Sanjay Patel: (07:48)
Mark Rowan, our new CEO, would say that our yield business is going to grow significantly, because the demand for yield, and Dave and I were talking about it, it's all about the demand for yield. So private equity is an opportunity business.
Sanjay Patel: (08:02)
There are not that many 25% return opportunities, but if you look at the five to 12% yield business, that is an engine that is going to drive ahead with the demand on the investor side. And then, the creation on the origination, for us, becomes a very, very important question, because we have to originate a lot of private credit.
Sanjay Patel: (08:24)
I think the alpha there is, for us, certainly, I think you'll see us, as the banks' interest in really underwriting risk has gone down over the last decades, we are becoming originators of that risk globally. You're going to see us originate significant scale, private credit throughout the world, and we've done it.
Sanjay Patel: (08:52)
That means some landmark transactions over the last ... It's over COVID actually, for Hertz, for ADNOC, for big, big corporate institutions, that weren't the purview of alternative players, but you're going to see us.
Sanjay Patel: (09:07)
What we do, and I think the idea is the creation of 300 to 500 basis points of alpha, over public credit risk, the way to do it is get, be able to deliver in scale, create structures that are, there may be complexity. It's a structural question, it's a capital solution question. So I think you're going to see all platforms over the next decade.
Sanjay Patel: (09:33)
It's just pretty exciting, actually, as I think about it, 30 years into my career. I think the growth for us as an industry is fantastic for the next decades, with rates being very low, but a big chunk of that will come in the form of the creation of these very large credit solutions to companies all over the world.
Sanjay Patel: (09:54)
It's not just the US. I think you're going to see some very interesting things in Europe and in Asia executive, so that's one other thing, I think. And on there, look, there's demand, and there's a lot of competition and I'm sure we'll find competition, but at all points, as we always add. But I think being creative and providing a capital solution is critical.
David Lebovitz: (10:14)
Exactly, right.
Bailey McCann: (10:16)
To your point about the growth origination, and you talked about institutionalization, as well, in your portfolio performance group, are those areas where you feel like are opportunities for innovation, in terms of the capital solutions that you're offering to clients, and working with maybe more complex deals, like the Yahoo deal? Or how do you see that, going forward?
Sanjay Patel: (10:37)
I think, I think it's all about, I do think innovation is a big chunk of it. So we have upped the ante on product innovation, generally.
Sanjay Patel: (10:48)
I think we have focused on really how we can create these large scale credit opportunities, and we're going to continue to think about it. We have been purchases as a firm of origination platforms.
Sanjay Patel: (11:03)
What I mean by that is, our credit franchise has now expanded dramatically. So we have all aircraft, trade, equipment, finance. Our balance sheet for credit is backed by insurance assets on insurance companies. And the demand for those companies is typically a yield.
Sanjay Patel: (11:25)
A lot of it's investment grade, actually, so it's not just private credit to private credit. But I think the way to create that is to actually own origination. So you're going to see us focused on buying, building origination, but also buying it.
Sanjay Patel: (11:43)
So buying it, buying companies that may not have scale that need balance sheet. And we can provide that balance sheet pretty effectively.
David Lebovitz: (11:51)
I mean, I would agree with a lot of that. I also think, what's interesting, taking a slightly different view of the question in terms of creating these solutions, is rethinking what the end investor in these products is actually going to look like.
David Lebovitz: (12:04)
You mentioned insurance companies. I think we all spend a lot of time with big institutional investors, which, if you show them anything that has yield and lack of equity correlation, they want to gobble it up like Thanksgiving dinner. I mean, that's the Holy Grail in the current environment.
David Lebovitz: (12:19)
What's so interesting to me is that as you build platforms like that, and as you do more and more of the origination in-house, you can then go in and tap into another client base. You think about the retail investor, who very much has the same needs as the institutional investor. The bond market offers you one of two things. It either offers you protection without income, or income without protection.
David Lebovitz: (12:39)
When you have that scale, right, the ability to deliver solutions to a client segment that has historically not been able to access these types of investment strategies, arguably create somewhat of a self-fulfilling prophecy, where then, folks like yourselves and ourselves can continue to do what we do. We can do it at an increasingly large scale, because we're able to tap into areas of the marketplace that historically have been, I don't want to say off limits, but far harder to reach.
David Lebovitz: (13:04)
This is one of the instances where yes, over time, the institutionalization of the private credit space will put downward pressure on the yields that a lot of the yields that these instruments provide. But arguably, the broadening of the access I would argue, is a good thing from an investment solution perspective.
Sanjay Patel: (13:21)
Agreed.
Bailey McCann: (13:23)
You mentioned, I mean, there's some issues in this new environment, investors are looking for yield, they're looking for return anywhere they can find it. They're not getting it in the fixed income market broadly, probably not going to get it for awhile.
Bailey McCann: (13:36)
But you've also said you have some questions about value creation, and direct lending, and some other aspects of private credit. I mean, maybe we can just talk about where you see some of the risks right now, and maybe some of the bigger opportunistic themes for investors that are trying to thread that needle, and find opportunities.
David Lebovitz: (13:55)
Absolutely. My point wasn't that it's impossible to create value in private credit, but rather, the private equity lever is an easier one to an easier one to pull. But you mentioned transportation. I think about core real assets in general, real estate, infrastructure, shipping, aircraft, so on and so forth.
David Lebovitz: (14:12)
I mean, these are things that people are very comfortable with, because you can reach out and touch it. They provide creditlike streams of income, right on par with the high yield market, and they offer it with low to no correlation to equities.
David Lebovitz: (14:26)
Again, the vehicles that are becoming available, the closed end REITs, and various things like that, are allowing us to broaden our investor base in a way that historically has not been the case. Not only does it feel good to help people realize their investment goals by providing these types of solutions, but I actually think that there's more to it.
David Lebovitz: (14:47)
And I'll say the word that I think is on everybody's mind, I mean, inflation. We, like everybody else, think inflation's going to be transitory. We, like everybody else, are a little bit gun shy of assigning a time horizon to what transitory exactly means.
David Lebovitz: (15:02)
But if you're sitting in investment grade, if you're sitting in high yield, you're not going to have inflation protection. And arguably, if you're buying tips, you're buying a negative yielding instrument with a very long duration. To the extent that we're able to continue to access these opportunities, we think that it not only provides that income, it not only provides that diversification, but it provides that inflation protection as well.
David Lebovitz: (15:25)
The last point I'll make, because I think that this comes back to the issue of value creation, a market like commercial real estate, the old adage, "Retail is dead, retail is dead." Retail's not dead.
David Lebovitz: (15:37)
Retail has just changed, right? It's all about tenant mix. When we think about the office space, which feels like the next frontier for value creation within commercial real estate, I've been of the view for a very long time that, I mean, look, the United States, 80% of the jobs in this country are in services. And if you're a services business, the most valuable capital you have is your human capital.
David Lebovitz: (15:58)
So we need to rethink the office from a place where I go to tap away in Excel for 60 hours a week, to a place where I go to collaborate with my colleagues to generate better ideas and better outcomes for our clients. I think that again, the pandemic has affected certain parts of the economy more significantly than others.
David Lebovitz: (16:18)
Structurally, I still think this is a 2% growth story. I think that inflation is going to remain subdued over the longer term, and I'll be surprised if the Fed ever gets rates up to, to a meaningful level, but that doesn't mean that there's not opportunity. It's more about understanding where to look, and I think that that is what is so interesting about where we are today.
David Lebovitz: (16:39)
We know what worked in 2020. We had a glimpse of what could work in 2021, before things started going sideways over the summer, during the spread of Delta. So I think it's about looking through those more sickly exposed industries and sectors, and figuring out the difference between companies and assets that have seen temporary disruption, versus permanent demand destruction.
David Lebovitz: (17:03)
Obviously, we prefer the former to the latter. But it's very much an exercise of combing through the rubble in the aftermath of what's happened over the past 18 months, and trying to identify those opportunities where again, back to your first question, where we're able to create significant value.
Sanjay Patel: (17:18)
Yeah, I would say it's interesting. I mean, fixed income, it just hard to imagine, why you want to own fixed income at this point in the cycle, any institutional investor. But the opportunities in yield, I mean, real estate, to David's point, I think is very interesting.
Sanjay Patel: (17:38)
Blackstone, one of our biggest competitors, the BREIT that they've created, it's a pretty, pretty unbelievable product. It's got scale. Their underwriting is very good. They're careful, et cetera. That's a yield product return of capital.
Sanjay Patel: (17:55)
So you can kind of look at the landscape and say, "There's plenty of ways to create alpha." [inaudible 00:18:00], I think, in particular is a very, very interesting one, but I hop back.
Sanjay Patel: (18:08)
We bought an equipment financing business in the UK a couple of years ago in our insurance business, because it was a very interesting. It was a niche-y business that needed, he just ran out of capital, the seller, and we bought his origination platform. And that's a nice, low, double-digit yield business, et cetera.
Sanjay Patel: (18:28)
I think there's plenty of opportunities at the coalface to create really interesting yield throughout the world. I think you have to find it. I think it's not obvious, in some cases, and in other cases, I think you've got to create it. To me, it's about investing with folks who you think are creative in these areas, and finding the best managers.
Bailey McCann: (18:54)
Lot's talk about another issue that seems to come up around the value creation question a lot, which is ESG. There's questions now around climate issues that we've seen spring up, sustainability, people are focused on different issues around governance and diversity. Maybe you can talk us through how you incorporate those factors into your strategy, and in a way that obviously creates value for the theme, but is meaningful for investors, too.
Sanjay Patel: (19:22)
Maybe I'll start off. ESG is obviously the topic de jure, and the way we think about it is, and we have been thinking about it, probably for the last decade, and probably how, I think, our twelfth DSG report that we did.
Sanjay Patel: (19:40)
But since we control companies, our view is that it starts at the portfolio company level for us as an investor. Because the themes that ESG reflects, whether it be the environmental footprint of your businesses, your social impact, your governance, your DEI focus, your board focus, so what we've done is incorporate that at the portfolio company level, the day we own the company. Every portfolio company, we have metrics.
Sanjay Patel: (20:16)
The teams that are doing the deals, we're thinking about ... Previously, you think about EBITDA and KPIs. So it becomes part of your KPI landscape, as an owner of the business. Because ultimately, the reason it's all important, A, it's important to do.
Sanjay Patel: (20:36)
Every company should be an impact company. So people are raising impact funds and the like, but I think the truth is, shouldn't every company have a vision of how they are impacting or changing society? So I think you're going to do it, because ultimately, on the exit, if you're exiting the public markets, and David, comment on this, people are going to focus on that as a metric.
Sanjay Patel: (20:58)
What have you done? The ones that have done better will get, command on better premium prices and valuations over time. It's self-fulfilling if you don't do it.
Sanjay Patel: (21:08)
For us, it's very much quarter, kind of at the opco level, because we can control these companies, and drive change at the front end. Some companies we buy are very good at it, and have already done some, and some companies have not done anything. So it's incumbent upon us as managers and owners of these businesses to do it.
David Lebovitz: (21:26)
I think that's the beauty of private investments and alternatives more broadly, when it comes to the ESG conversation.
Sanjay Patel: (21:33)
Yup.
David Lebovitz: (21:33)
Because for years, I would sit in rooms, and people would say "ESG," and I'd say, "What do you mean by that?" And they'd get this look on their face, like "Ooh, am I going to give them the MSEI definition? Am I going to give them the internal definition," right?
David Lebovitz: (21:44)
I think what's interesting is, and a lot of this is coming from Europe, we're finally beginning to understand a framework for thinking about ESG investing, in both a qualitative and a quantitative way. And a lot of this is a policy response to the fact that people just care more about the environment.
David Lebovitz: (22:04)
Whether it's looking at renewable energy assets, whether it's making real estate properties more environmentally friendly, I completely agree with your point, that it's so much easier to pull the lever at the portfolio company level or the individual asset level, as opposed to what we saw in 2020, when everybody wanted to go in and buy the clean energy ETF, because they felt like they were doing the right thing. Then it got way overextended, and since has come back in.
David Lebovitz: (22:29)
I think what's going to be interesting to me about ESG, going forward, is the way that the S and the G make their way into the conversation. I think that there's still an overwhelming focus on the environmental aspect of all of this, because again, it's very easy to walk outside and say, "Hey this is, the Hudson River looks pretty nice from up here. I don't really want to mess that up."
David Lebovitz: (22:53)
I go back to my days, right out of undergrad, where I did manage your research and portfolio construction. To us, the G was the most important thing.
Sanjay Patel: (23:02)
Yup.
David Lebovitz: (23:02)
I mean, if you got the governance angle right, you felt a lot more comfortable with the investment, than if you were a little bit wishy-washy on them. So I think governance is really going to become increasingly important. That's where we're spending a lot of time focusing.
David Lebovitz: (23:17)
And it spans the gambit, right? It's everything from internal audit, better risk control, independent boards, things of that nature, to other things, having the right policies in place. This is where it starts to bleed into the S a little bit, but having the right policies in place.
David Lebovitz: (23:32)
I mean, something that's struck me as somebody who's worked at a big bank for more than a decade is, the renewed focus on the mental health of individuals. I think that that is going to be a tremendous theme going forward. Because what the pandemic showed us was that taking care of your people with free snacks isn't always enough, right? Some people need more help.
David Lebovitz: (23:53)
So it's about breaking down those barriers, and being comfortable having these conversations, that I think is really going to drive the evolution of how ESG is implemented at the portfolio level. Not just over the course of the next few years, but over the course of a longer term. So it's not going away, is the bottom line, as we've seen out of, out of the Eurozone.
Bailey McCann: (24:12)
Well, and to your point about the Eurozone, and they're doing a lot of different things in terms of governance, the taxonomy and different policies. There are some discussions in the US about enhanced disclosures for companies. Does that create best practices?
Bailey McCann: (24:24)
Does that help the process, in terms of at least getting everybody to start collecting the same types of data? Or what else can we be thinking about, to carry that forward?
David Lebovitz: (24:34)
I mean, my thought there is that regulation doesn't usually create best practices. I think that those tend to be more organically driven. But again, it gives us rules of the road. It gives us a more concrete framework for thinking about this than we've had historically.
David Lebovitz: (24:52)
You and I were chatting about crypto before we came up here, and the potential for regulation. And I would go as far as to say that regulation in that space could arguably be a good, a good thing, right?
David Lebovitz: (25:02)
We have a lot of institutional investors that continue to sit on the sidelines, with respect to all of these things broadly, because they just want to understand the way the game is going to be played. As soon as you can give a clear explanation of, "These are the rules of the road," I think you'll see engagement at a level that we've only really scratched the surface of, up until
Sanjay Patel: (25:22)
Yeah. Having lived in Europe for 15 years. I mean, it's interesting, because having invested there for a long time, the regulatory overlays in Europe have always been very different, and much more stringent, and you have healthy debates about it.
Sanjay Patel: (25:36)
As we all know, the capital markets never developed to the same extent as it did in the US. The Europe is a much heavier bank market. They've had regulations around private equity, et cetera, et cetera. It's a less liquid environment. That's fundamentally true. Europe is more inefficient.
Sanjay Patel: (25:58)
But I think on things like ESG, and I think, increasingly on technology, I think they're ahead of the US and there are some aspects to what they're doing, that I think the US ... I mean, so the pension funds in Europe were always ... They asked the questions earlier, and I think certainly, our institutional investors now are asking those questions at every meeting. but that was already done in Europe.
Sanjay Patel: (26:24)
So I'm not a big fan of regulation in many respects, maybe yes for crypto, but I'd say there's an element, that you have to force it to some extent. But you can debate it heavily.
Bailey McCann: (26:42)
For sure. So as we get near the interior, let's talk about the exit environment. There have been a variety of exit strategies that people have been using lately, and are more focused on SPACs, direct listings, different things around the IPO market, different things around sponsor to sponsor deals.
Bailey McCann: (26:58)
We've already seen this bag market kind of started to fade into the background. Going forward, what is the exit environment look like to you? What are some of the things that you're watching out for right now?
Sanjay Patel: (27:09)
Maybe I'll start off. I'm the global head of SPACw at Apollo. Actually, it's interesting, that was one of my new roles.
Sanjay Patel: (27:21)
We had sold a number of our portfolio companies over the years as SPACs, and gotten comfortable with it. Obviously, they've been around. A good friend of mine, Martin Franklin's, [inaudible 00:27:32] SPACs 20 years ago, and been successful.
Sanjay Patel: (27:35)
So we observed it, as an owner of assets, and exiting into that market. A couple of years ago, we said, "Actually, it could be a great way for us, certainly for us as a firm, to look at the growth and disruption that's going on."
Sanjay Patel: (27:52)
We haven't talked about growth, the risks of the positive aspects of disruption, and the risks of all of the valuation, but the SPAC product was an interesting way for us to drive the business further into looking at higher growth companies. That's why we're doing it, and we have six SPACs.
Sanjay Patel: (28:12)
We always knew when we entered the market, like other markets, the BDC market, the REIT market, too many people go in. There's a period of dislocation, there's a shakeout, and then it kind of ends up in it.
Sanjay Patel: (28:25)
Unfortunately, like everything else shows how much capital there is in the world, and demand for equity risk, as well. It literally went, skyrocketed up, obviously, through to 2020, which has created this big issue. We all knew it was going to happen, and it's happened. So where do we go from here?
Sanjay Patel: (28:43)
We still think it's a product that she had to stay. We think it's going to institutionalize. When valuations are sensible, and you got real money investors at the front end, a number of the players that have been stuck, got stuck because their capital is stock in the deals.
Sanjay Patel: (29:02)
Once that all cycles through, there will be a landscape that evolves out of this where the product, I think, stays, because I think it's an interesting product. You can debate, yes, democratization of equities, and people barely own high growth companies in an earlier stage, and the pluses and minuses of that, but it will stay.
Sanjay Patel: (29:20)
We're using it as a tool. So I think on the exit, to your point is, I think the exit environment is as good as it gets. You've got low rates, strategics looking for acquisitions, cost of capital very low.
Sanjay Patel: (29:36)
You got the IPO markets, so IPO is SPAC, strategic. Look, it's a phenomenal time to sell, and that's, every day we wake up, coming back to the comment I made on MACRA. We say, "Look, we want to, obviously, we'll continue to invest our funds, but we're selling as much as we can." It's a great environment.
David Lebovitz: (29:54)
No, I mean, I would agree with you that this is arguably as good as it gets, when you find yourself in a Goldilocks environment, where the Fed still seems kind of spooked at their own shadow.
David Lebovitz: (30:03)
The amount that they've done, I mean, I certainly was caught by surprise during the back half of last year, at the ability of both deal flow and exit activity to just come roaring back. The speed with which things moved last year is really what struck me.
David Lebovitz: (30:17)
I remember sitting there back in March and April, and saying, "Eh, equity market high by the end of the year? Ooh, probably not, and where were we in the fall?"
David Lebovitz: (30:26)
So the SPAC thing has been interesting. I think it's arguably good, to your point, that some of the retail wind has come out of those sails when it was trading above. When you had SPACs trading above trust, that was a little bit of a yellow flashing light, from where we sit.
David Lebovitz: (30:40)
Obviously, the IPO market, given what the Fed did to the equity market more broadly, in terms of providing support and elevating valuations, has been the primary exit for a lot of investors. But I do think that you're seeing more on the corporate acquisition side, and you're seeing more and more add on activity, carve-out activity, which I think is a good and interesting indicator of where we are in the cycle, people moving away from true, organic CapEx-driven opportunities to, "Hey, that's a proven business model, and we think that that could be additive to our bottom line. So let's bolt it on here."
David Lebovitz: (31:16)
The interesting space to watch for me, going forward, is going to be the sponsor-to-sponsor market. I do wonder, in my heart of hearts ... You're having a market where everybody's always looking for a deal.
David Lebovitz: (31:29)
That definitely caused some problems in 2020, and into the beginning of 2021, where the buyers didn't like the price that the seller was quoting, and the seller didn't like the price that the buyer was quoting. As a share of overall exits, you saw that move well below its long run average.
David Lebovitz: (31:44)
But I would come back to something that you said earlier, which is, "This is a world of washing capital. And this is a world where people are comfortable with what the monetary authorities are doing."
David Lebovitz: (31:57)
Fiscal, I think, is what's going to define this coming cycle. When you have monetary and fiscal working in concert, I do think that it's going to create a very robust environment, from a macro economic perspective, which, by my lights, could breathe life back into that sponsor-to-sponsor market. Because again, the capital isn't the issue, right?
Sanjay Patel: (32:19)
Yeah.
David Lebovitz: (32:19)
It's valuation. As we move further away from the pandemic, and as we see things more reflective of their long term value, that to me is when that part of the exit space will really end up coming back into Vogue.
Sanjay Patel: (32:32)
Yeah, I think, the other themes ... I mean, I think the sponsor-to-sponsor business, and in Europe, it's actually a much bigger than it is in the US, and always has been, because the number of primary deals is much fewer.
Sanjay Patel: (32:42)
But we've looked at it, and obviously, we don't sponsor deals, and we made money. I think it's very focused on the individual company. So multiple owners can create value out of those companies.
Sanjay Patel: (32:59)
So, to the question of, how do you do it? The continuation market is a very interesting development, which is, we own a company. We've known it for seven, eight, nine, five to 10 years, and we still think there's value.
Sanjay Patel: (33:14)
Will LPs have kind of exceeded to say, "Yeah, maybe moving these companies on from fund to fund, or vehicle to vehicle is okay." Because ultimately, they've seen value creation at every cycle.
Sanjay Patel: (33:28)
That's a whole new theme coming back, which was, shopping will be a big theme going forward, as well. But it's all of which to say is, I think, the demand and the competition for assets continues, and will do.
Bailey McCann: (33:45)
Okay, well, we have one minute left. So I think we will leave it there, then try to ask another question in one minute, but are there any closing thoughts that you guys want to touch on, about value creation?
Sanjay Patel: (33:55)
I mean, on value creation, though, I think we've covered a lot. I think the biggest question, to me, when I think about the environment today, is not that they want opportunities. I think the question is, how do you originate credit, equity, real estate opportunities?
Sanjay Patel: (34:10)
I think there's ways to do it. To me, I think the market environment is such that there is in the growth world, there's a bubble going on, we can see it, and how that translates into, there's a lot of disruption, there's a lot of interesting stuff going on.
Sanjay Patel: (34:26)
But ultimately there, that will scale back. I mean, it won't affect the private equity world that much, the traditional core private equity world. To me, that's a big thing to watch.
David Lebovitz: (34:36)
No, I completely agree. I think that the growth in general, right, again, because of the macro environment we've been in, has begun to command a premium.
David Lebovitz: (34:45)
But I think what's interesting is that if you put yourself on the other side of the coin, and you think about the investor, right? I mean, effectively alternatives have gone from optional to essential.
David Lebovitz: (34:55)
You're not going to be able to hit your return targets unless you're investing in private credit, investing in private equity, investing in real assets, because public markets, particularly given the returns we've seen over the past 12 to 15 months, a lot of that return has been pulled forward.
David Lebovitz: (35:10)
Taking it one step further, I mean, what would you rather do, own equity passively? Or own equity where you can actually drive a better outcome at the end of the day? So I think that the combination of longer fund lives, coupled with that stickier capital, and the ability to drive operational improvement, is going to help a lot of investors realize their goals, and very much create a tailwind for the alternative investment space that hasn't really been there, up until this point.
Sanjay Patel: (35:36)
Good pitch.
David Lebovitz: (35:37)
Thank you.
Sanjay Patel: (35:38)
Okay, thanks.
Bailey McCann: (35:39)
Great. Well, I think we'll leave it there. Thanks, everyone.
Sanjay Patel: (35:41)
Thank you, thank you.
David Lebovitz: (35:43)
Thanks so much, everybody.
