Watch: A Decade of Private Equity — Video Interview

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Nathan Hunt

Hi. This is the Seek & Prosper Interview Series from S&P Global. My name is Nathan Hunt. Today, I'm going to be talking to Andrew Eisen, Senior Vice President, Head of Software Solutions for S&P Global Market Intelligence. Our topic is going to be private markets. Private markets have had a decade of explosive growth. So Andrew, let's dive right in.

Andrew Eisen

Looking forward to that, Nathan, and thank you for having me here today.

Nathan Hunt

The venture capitalist, Marc Andreessen, once wrote: "Software is eating the world." With apologies to Mr. Andreessen, it feels more like private markets are eating the world right now. Have private markets really gotten bigger? Or is this just an illusion brought on by the industry press?

Andrew Eisen

I think it's a combination of larger assets and more capital being put to work as well as less opacity and more transparency in what's happening in the markets. Traditionally, you look at the total asset base and how people put money to work. And you'll see that private markets represent almost 2x the size of the investable universe as the public markets we're more familiar with. There's been a long history where there's a lot more money at work in private businesses.

What you'll see today is with the -- with more information available and the search from the professional and individual investors for yield, that it's opened up opportunities for people who couldn't normally participate in those markets to invest. So you have a combination of access to capital because of low interest rates and the search for yield and a more awareness from the public and the professionals about where to put money to work. So it's really a combination. But if you look at the overall asset values and capital, there's a lot more money in private markets.

Nathan Hunt

I want to follow up on something you just said because you talked about private markets and how there's an expanding investor set and new opportunities for people to invest. Where are these new opportunities coming from? Where are you seeing that?

Andrew Eisen

So if you look at the access to capital, more people have information and capital put to work. In the industry, they call it dry powder. And you're seeing the interest from the professional investors, they're raising more and more capital. They're sharing the information about outsized returns, and it's captured the interest of regulators, of the media and of, I'll call it, the smaller investors.

And there's been a conversation in the background about what it takes to be an accredited investor to be able to invest in these markets. And suddenly, now that there's a mass affluent or a larger middle class who is interested in exposure to these assets, you're seeing innovation and fund structures in what they call products, in feeder funds, in fund of funds, to grant more ubiquitous access to those products.

Think of it as new distribution channels that are targeted to a much larger group of people with capital and the whole industry kind of working through what it means on a data, workflow services level about how to manage that because you have a wider investor base that may not have the same tolerance for risk. So it really comes down to broader distribution and broader interest.

And of course, what that also creates is a whole lot of opportunities for new funds to be put to work and for ecosystem providers, whether it's technologists, data providers or service providers to kind of grab on to that trend and create new economic value.

Nathan Hunt

So you talk about the search for yield. This is a phrase I hear a lot. Weren't investors always looking for yield? Why is this new? Why is this being talked about?

Andrew Eisen

Well, when you talk about traditional investment or the efficient portfolio theory, there is always a risk-adjusted return. And some of the risk-adjusted returns involved people investing in different asset classes that would trade independent of each other or counter to one another so you could balance correlations.

There was a shift, call it, 10, 12 years ago as the interest policies, interest rates came really low, capital became very cheap and the access to capital through technology, through education, suddenly, there was a lot more money to put to work and people just started buying up assets.

And as you buy up the assets and you can't make the same returns because rates are low on fixed income, you have certain obligations to provide income or returns back to your investors. So the search for yield is almost like a relative search, but certain institutions like pension plans, benefit programs, they have to pay a certain amount of their capital out on a periodic basis, which means they have to generate cash.

And if you can't make that cash on your traditional fixed-income portfolio because yields or rates are so low, and you have to generate 3% to 5% of cash going out for your people who are retired for those pension payments, then suddenly, you have to look at other types of assets that can generate that cash flow.

And whether that's derivatives or options and all -- and some of the more over-the-counter services, which have a different risk profile, there's also private markets where there's private debt or private equity that can generate some sustained yield so that you can meet those obligations. And that's one of those big drivers of why people have shifted into those asset classes.

Nathan Hunt

What's the appeal of private markets versus what we might consider traditional public markets? For example, why would an Elon Musk want to take Twitter private?

Andrew Eisen

Well, the first is oversight regulation and transparency. As you go public, you have an obligation from a Board, from a public investor, as a management team, to provide regular updates to the universe of shareholders with very strict oversight. And there's a whole lot of risk and transparency in doing so.

Secondly, depending on your investors, there is a demand for short-term or immediate-term results. You've committed to a program of work or a set of performance targets. And every quarter on your release schedule, if you give guidance on where you are on those things, you've given an update to a wide universe of these investors, both professional and individuals about how you as a management team are driving that business forward.

That is a lot of work that doesn't actually help you build products or deliver value to your customers. As a private institution, the demands on you for your reporting come from your -- to your Board and your institutional shareholders, but there's a lot less scrutiny. So you have a lot more room to maneuver to change how the business runs and grow.

What's interesting is you get to a certain size and you achieve your investor return or your target return or your target value of that investment and you've got to find people to buy it. So what public markets really do is they provide you access to capital when you become so large that professional investors can't give you as much money as you need to grow. And I'll use the example of Snowflake, fantastic story, gone public. I think when they went public, it was somewhere between $35 billion and $40 billion in market cap or value to that business.

If you were a private VC fund and you had a position in Snowflake, it's very hard to find someone who's going to spend $40 billion to buy you out or buy the collective investors out when they need that liquidity to return it to their shareholders at the end of their investment life. So there is a certain threshold you can get to, where going to the public markets gives you the liquidity and the capital to grow beyond what you can do as a private investor.

Nathan Hunt

But that threshold seems to have moved over the last, say, 5 to 10 years.

Andrew Eisen

I think it's -- again, it's all relative.

Nathan Hunt

Okay.

Andrew Eisen

And it depends on your objective as the investor and the mandate of the fund. If you're in venture capital, the threshold for returns, the risk/reward, it's a different conversation than maybe private equity or leveraged buyout. The time line may be longer or shorter or your target returns that you've committed back to your investors on your invested capital may be different.

So there are different avenues to capital that are available with these key points in time. And as a management team or a Board, you choose. Does it make sense to do another fundraise? Is it Series D, Series E, Series F? Is there enough appetite in the public markets to achieve the valuation and the return profile that you've committed to your investors? And you make those decisions based on the most recent information.

And of course, in today's age, with everything that's going on in the world, a lot of us are looking at those multiples and those valuations and saying, "Wait a second, maybe this is one of those times where we have to be very thoughtful on whether or not we want to be in the public domain or the private domain based on the set of assets we're managing."

Nathan Hunt

You've talked about the appeal of private markets from a company perspective. What about from an investor perspective?

Andrew Eisen

Well, it's interesting. As a public investor, you get more transparency. You know exactly how you're going to be communicated to, what that structure, your financials, the returns, the multiples, even the data. As an institutional investor in public markets today, you can -- you have a certain threshold of expectation on the quality of the data, the accuracy of the data, the timeliness of the data and what I'll call the data structure.

Physically, you know you're going to get an EPS number. And that EPS number is going to be in a currency, and it's going to go from 1 to 100. When you look at a private asset or a private investment, whether it's a fund or an individual portco, suddenly, you don't know what information you're going to get.

The general partners or the fund managers demand a series of data sets to track the underlying portfolio, they get their key performance indicators, they'll get financials. And all of that, of course, is on a quarterly basis, so they can understand how the business are doing.

But what they're obligated to communicate back to you as an end investor or a limited partner is very different. So whereas you may get a quarterly update that says, "Hey, this is what's happening in the portfolio, and our NAV is now x plus 1." If you were in the public markets, you would know the value of every position and every multiple and what's changed because it's all widely available information.

And if you were a fund holder, you can look at the fund holdings, look up any of those names and get a comparable set of benchmarks of performance analytics and understand how those individual pieces of the portfolio are performing and what's attributed to that success. And that robustness of infrastructure and data doesn't really exist in the same way for the private markets.

Nathan Hunt

Opacity has, for a long time, been an important part of private markets. Do you feel like there's an increasing trend towards transparency in private markets? Like are they moving more in the direction that we've seen of public markets over time?

Andrew Eisen

Absolutely. And they have to because the investor base and the distribution is wider than it's ever been. I think the end state though may not be the same as the private markets. The difference between private markets and public markets is in public markets, there's a commitment from market makers to provide liquidity at any point in time.

And when there's a mass event, there's usually a lockup, and we all have to work out what that means. But market makers can provide liquidity to end investors, right? You have your 100 shares in IBM, and you want to sell IBM. You can go to an exchange, put in a price and someone is going to be on the other end of that, whether it's at today's level, at a discount or at a premium to what you paid for it.

When you talk about private markets, because it's so thin, you have to find someone who's going to buy that asset to provide liquidity. That due diligence process, that transaction process just for the underlying asset in the portfolio could be months, if not years.

So it's very hard to expect that you're going to get a real-time valuation of the portfolio or an asset in that portfolio when your data points are only update at either monthly or quarterly or semiannually. If you only get an update on the revenue on a quarterly basis, how do you decide what the changes in that value of that, that you make a transaction on a private company today?

Nathan Hunt

So what role can a company like S&P Global have in private markets?

Andrew Eisen

It's multiple. If you think across data, technology and services, the data is about understanding the macroeconomic environment. It's understanding the risk in the environment. It's understanding the attributes and the performance of the companies or the private assets, as it's known publicly.

You have a series of technology solutions that help you aggregate that information, track the value of those assets and help the professional investors understand where those investments sit, how they're performing relative to their peers. You've got concepts of benchmarking and analytics to help understand relative value and ultimately, performance attribution that you can then take back to your investors or the investment managers of the end investors.

The last piece is the services. And what's really exciting about the combination of IHS Markit and S&P Global is there's also now a deep bench of professionals who can help institutional investors make better investment, not decisions, but run their businesses better, whether it's operational alpha; providing expertise or knowledge to help understand the value of the assets; understand mispriced assets so that you can make better decisions in what to invest in and help you report back to regulators and/or your investors on those performance -- on that performance.

So if you think of it, that combination of the two will help understand the universe with the information and the data, help manage the business better through technology and have people to lean into so that you can have outsized returns or a better risk/reward to your investors than you would without it.

Nathan Hunt

As you said, there continues to be dry powder in private markets. Why do you think that is?

Andrew Eisen

There's a lot of capital in the system because of the aggressive interest rate policy and aggressive, I'll say, Fed buying of the assets and supporting what has been a fanatic macroeconomic environment for a lot of the developing and first world economies for the last 10 or 12 years. And that's created a lot of wealth.

And in private markets, in particular, it's created a lot of capital to put to work to buy those assets. When you have this macro trend where rates are going up, you've got macroeconomic risk with the development or the war in -- between Russia and the Ukraine, you've got trade tensions, supply chain risk. You have a lot of macroeconomic factors that get people nervous.

And you've recently seen the sell-off in the public markets, and a lot of the private markets feel similar, right? You start to see deals slow down or valuations contract. So you get this dilemma, and this happens a few times in history, where there's a lot of capital put to work. But because you're investing that capital for 5, 7, 10 years, do you buy stuff with that capital right now at a price that may be mispriced to what it will be 6 months from now?

That's a really hard decision because as an investor, you have a mandate to put that capital to work within a certain period of time. So do you return the cash to the people that gave it to you and not get paid to invest that money to find a return? Would you be diligent and patient and wait to find things that you can see a return profile, with valuations possibly returning to a sense of normality or historical norms in the next 2 years?

And so what will happen right now is -- and I think it's great if you're not in the middle of it, is seeing where that balance is struck because it's really -- it's a challenging period because, unfortunately, my crystal ball isn't as good as some others out there. It's very hard with confidence to say you know where we're going to be 6 months from now.

Nathan Hunt

Understanding that the crystal ball is imperfect in the short term, at least. Let's look at the medium term. When you think about private markets 5 years from now, what changes do you expect to see?

Andrew Eisen

Well, I expect distribution to continue to expand. Product innovation, and by product, I mean, the types of things people can invest in, we'll expand the strategies, the combinations of assets. I think the data will become more prevalent. I think you'll have a better sense of what's happening in the markets with benchmarks or indices. 

And you'll see just a little bit more comfort and confidence in what you can learn about the markets, technology where you talk about the cloud and you talk about some of the emerging trends. The tooling in the markets is going to get much better, both from a deal and investment execution side, so I think operational alpha for professional investors, but also the technology that will help people understand what's available to invest in, the screeners, the sorting, the performance analytics, the risk assessments.

You'll suddenly have -- be able to use a lot more information to make a better investment decision if you're putting your money to work in a fund using an investment consultant. And I think you're going to see regulators continue to push for more and more transparency, standardization of reporting and feedback to help educate the investment community that aren't professionals about the risks that they're taking by investing in those assets.

Nathan Hunt

Andrew, I think we're going to have to leave it there for today. But thank you so much for joining me.

Andrew Eisen

Thank you very much for having me. It's been a lot of fun.

Nathan Hunt

And thanks to all of you for joining us in this Seek & Prosper Interview Series.