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AGM Alts Weekly | 6.18.23
AGM Alts Weekly #6: Making private markets more public, every week.
👋 Hi, I’m Michael and welcome to my weekly newsletter, the AGM Alts Weekly. Every Sunday, I cover news, trends, and insights on the continuing evolution and innovation in private markets. I share relevant news articles, commentary, an Index of publicly traded alternative asset managers, job openings at private markets firms, and recent podcasts and thought pieces from Alt Goes Mainstream.
Join us to understand what’s going on in alts so you and your firm can stay up to date on the latest trends and navigate this rapidly changing landscape.
Join thought leaders from top private markets firms like Blackstone, Goldman Sachs, Apollo, Fidelity, iCapital, Franklin Templeton, and more.
Happy Father’s Day to all the dads out there and good morning from Washington, D.C., where I’ve just returned from a few days in NYC.
NYC is home to many venerated financial institutions, BlackRock being no exception. BlackRock held its 2023 Investor Day this week, and what was said in their presentation is notable for the continued development of private markets.
With $9.1T AUM, BlackRock is the world’s largest asset manager. Many know BlackRock for its public markets investment products. 35 million Americans have retirement assets managed by BlackRock and 40 million people use iShares ETFs. But it’s two other areas of BlackRock — Aladdin and alternative investments — that provide a window into the future of the firm. BlackRock cites three core pillars with “alpha at the heart”: (1) ETFs, (2) Aladdin, and (3) Private Markets.
Let’s break these down:
(1) ETFs have been the core of BlackRock’s business. BlackRock is a major provider of liquid markets investment products to institutional and individuals, with $5.9T of their $9.1T of AUM (and $5.7B of 2022 revenues) coming from their ability to manufacture and issue ETFs and Index products. BlackRock’s ETF business has been covered by many at length over the years, so I won’t go into detail here, other than to note that there’s a lot that alts companies can learn from BlackRock’s product marketing and educational initiatives with ETFs. 20 years ago, ETFs were a complex, little known investment product. BlackRock, along with others, made a concerted effort to educate institutional and individual investors about the merits of ETFs, growing the ETF industry to trillions of AUM in the process.
(2) Aladdin is a key driver of BlackRock’s growth. Technology revenue represented $1.4B 2022 revenues for the firm (and growing at 15% CAGR over the past 5 years) and their belief is that a platform approach should create investment product innovation, more customized client portfolios and better service, leading to high client retention, increased customer wallet share, and the ability to expand more deeply into alternatives. BlackRock cites their acquisition of eFront as a major driver of enriched private markets analytics and increased private markets fund operations through the Aladdin platform.
(3) Private markets are becoming a centerpiece of BlackRock’s growth strategy. While BlackRock is smaller in size and scale than other notable alternative asset managers like Blackstone and Apollo with only $320B AUM in client assets ($156B AUM in illiquid alternatives), they generated $2.2B in 2022 revenue (12% 3-year CAGR). With private markets revenues growing 26% CAGR over the past five years, BlackRock aims to double private markets revenues in the next five years. It’s also worth noting that BlackRock notes decarbonization and private markets investments in this space will be a major area of focus and a big driver of growth in AUM.
To some extent, BlackRock has been an index company for public markets. The growth of BlackRock’s AUM and product suite in liquid markets has enabled more people to invest into public markets. Now, they appear poised to run a similar playbook in private markets.
I’ve written about Index Companies in the past — and believe that businesses who own both the infrastructure and distribution will be defining companies in private markets. The most successful public and private alts companies will own their customers and grow their AUM through product distribution and toll-taking infrastructure / rails that enable institutional investors, wealth managers, and individuals to access alternatives.
BlackRock has owned both infrastructure (ETF / Index product manufacturing, Aladdin) and distribution in liquid markets, despite being in a highly fragmented asset management world. Now, can BlackRock do the same in private markets?
AGM has created an Index to track the leading publicly traded alternative asset managers.
Some of the industry’s largest alternative asset managers are publicly traded — and their net inflows can serve as a window into how private markets are being perceived by investors and allocators who are allocating capital into alternative investments.
AGM News of the Week
Articles we are reading
📝 Calpers plans multibillion-dollar push into venture capital | Josephine Cumbo, Financial Times
💡CalPERS, the biggest public pension plan in the US, is planning a multi-billion dollar push into international venture capital. CalPERS, which boasts a $52B private equity portfolio, is planning to increase its exposure to venture capital, putting as much as $5B of new money into VC. Reportedly, a meaningful amount of this fresh capital will target funds in Europe and Asia. This would make CalPERS one of the single largest US investors in a sector where many funds are seeing extended or prolonged fundraises. Currently, 73% of CalPERS’ private equity portfolio is allocated to buyout funds and only 1% currently allocated to venture capital funds. Anton Orlich, CalPERS’ managing director for growth and innovation, told the FT that they are looking to make up for a “lost decade” of returns. CalPERS CIO Nicole Musicco estimates that CalPERS’ decision to put its private equity program on hold from 2009-2018 cost the institution up to $18 billion in returns. Orlich said that the private equity strategy would focus on working with high-quality managers, increasing the co-investment program, and having a “consistent” cash deployment over time. Orlich stressed that significant savings could be made by blending down fees with co-investments that don’t have fees or performance payments. Private equity has been the highest performing asset class in the CalPERS portfolio, returning 21.3% for the fiscal year ending June of last year, but the 12 months up to March of this year saw their private equity portfolio drop 4.7%.
AGM’s 2/20: CalPERS focus on venture capital, particularly Europe and Asia, signals a few interesting trends. Their international focus to generate returns is reflective of the rise and maturity in European and Asian VC markets, which has been covered before on Alt Goes Mainstream. It’s also notable that CalPERS views venture as an attractive opportunity in the current environment. As we know, venture takes 5-10 years to generate returns, and many investors view the current market and valuation environment as attractive vintages to invest into. This view coincides with an incredibly difficult fundraising environment for funds currently in market. It is taking funds longer to raise in many cases, particularly for less established and emerging managers. Hope should not be lost though — a more challenging fundraising environment doesn’t mean that these vintages will prove to be poor vintage years for managers and their LPs who are willing to take the risk. CalPERS’ comments also highlight an important feature of private markets investing — sitting out vintage years can be painful from a returns perspective over the long term. Manager selection remains a key driver of returns in private markets, particularly in venture.
📝 A16z Chooses London as Destination for First Office Outside U.S. | Jamie Crawley, Coindesk
💡Venture capital firm Andreessen Horowitz (a16z) has chosen London as the location for its first office outside the United States. The firm aims to support the growth of the crypto and startup ecosystems in the UK and Europe. By opening an office in London, a16z plans to invest in the local crypto and startup sectors. The decision was influenced by the UK government's commitment to creating policies that foster decentralization and encourage startups. The move comes as the UK's crypto regulatory framework gains clarity, with the government aiming to integrate crypto into existing financial services regulations. While a16z will continue advocating for regulatory clarity in the US, it sees the UK as on the right path to becoming a leader in crypto regulation.
AGM’s 2/20: It appears that the UK is aiming to become a leader in crypto regulation in response to a more strict response to crypto regulation by its counterparts across the pond, the US. The move by a16z to plant a flag in the UK has a few notable impacts. Perhaps the center of gravity for crypto will shift to the UK. With a heritage in being one of the world’s epicenters for FX markets, London could be poised to take over as a crypto capital. There are a number of strong crypto and blockchain startups in the UK and Europe, both in infrastructure and consumer. It would not be surprising to see Europe continue its trend as a crypto powerhouse. a16z’s move to London also signals something beyond crypto — they’ve already made a number of tech investments in Europe, but this could lead to an even larger focus on European tech more broadly. With a number of US firms opening offices in Europe in recent years, this is yet another sign that European tech is on the rise.
📝 How Goldman Sachs invests for an AI-driven world | Jessica Hamlin, PitchBook
💡PitchBook reports that AI is changing the way Goldman Sachs invests. At the Forbes Iconoclast Summit on Monday, Julian Salisbury, Chief Investment Officer of Goldman Sachs Asset and Wealth Management, noted that developments in AI are influencing how investment decisions are made at the firm. Salisbury said that Goldman is looking into how they can spend less time on “capital-intensive endeavors” in private market investments. They’ve also evaluated companies that have integrated AI into their operations to streamline workflows and processes in sectors such as healthcare, education, and financial services. Salisbury believes that AI has the potential to improve operational efficiencies of its portfolio companies. On a subsequent panel at Forbes Iconoclast Summit, Bill Cass, CIO of $539B AUM CPP Investments, said that while AI’s technology has the potential to be transformative, there’s a gap between the technology’s actual worth and what companies and investors are willing to pay for it.
AGM’s 2/20: AI has the potential to transform a number of industries, financial services and private markets included. While it’s early in AI’s development as a technology and unclear how the true impacts will shake out, it’s clear that AI has the potential to drive efficiencies in investing, whether through analyzing markets and investments in public and private markets, creating efficiencies in analysis, and turning unstructured data into structured data. We are beginning to see the AI revolution take hold in private markets, whether it’s with VC and PE funds leveraging AI and LLMs to better source, evaluate, and analyze investments or companies like 73 Strings using AI to make it easier for GPs and LPs to structure, track, and analyze private market investments on a more real-time basis.
📝 Nasdaq’s pivot | Marc Rubinstein, Net Interest
💡Net Interest’s Marc Rubinstein dives into the evolution of Nasdaq as a business in light of their $10.5B acquisition of Adenza, a risk management and software provider for financial services. Rubinstein highlights how Nasdaq, a stock exchange, doesn’t generate the majority of its revenues from stock trading.
In 2019, Jeff Sprecher, Chairman and CEO of NYSE owner Intercontinental Exchange, Inc, told it to investors straight (emphasis mine):
“I believe that execution is not particularly valuable… I think over time finding buyer and a seller in a world where we have the Internet is really the most simple thing in the world, and networks can form up overnight to find buyers and sellers… We don't break out execution, but I don't think there's any money – I mean, we may lose money on execution if we were to really allocate cost. And how do we make the money? Data, listings, connectivity, information, catering, we print banners, I mean, everything around the execution is where we make money. And so that helped inform us that execution is probably – in a digital world – is going to go to zero.”
AGM’s 2/20: Why write about an equities exchange you might ask? There are a number of interesting learnings in here as it relates to alts companies — public markets have undergone a market structure evolution across the lifecycle of a trade that has ushered in the creation of new products (i.e. ETFs, structured products), new forms of execution (i.e. electronic trading), and new ways to leverage data (i.e. Nasdaq and other exchanges’ focus on data). I anticipate that we will see a somewhat similar evolution with private markets across the lifecycle of an investment.
I’ve said for some time that private markets’ market structure evolution will mirror that of public markets’ market structure evolution. Private markets is at the stage where post-investment is undergoing significant innovation — and as ICE’s Jeff Sprecher says in the quote above, data, information, and everything around the execution is where they make money. There are parallels to alts businesses — execution focused platforms are increasingly investing heavily pre-investment in education sourcing / diligence and post-investment in portfolio analytics, valuation / monitoring, and connectivity to reporting platforms and custodians to both generate additional recurring revenue streams and create more liquidity and transparency. Private markets is still in its early innings of technology innovation, particularly for the individual and HNW investors, but there’s a lot we can learn from the development of other asset classes.
📝 Insight Partners cuts size of $20bn fund amid ‘great reset in tech’ | Tabby Kinder and George Hammond, Financial Times
💡Insight Partners, a New York-based venture capital firm with $90B of assets, mentioned in a letter to institutional investors that it was witnessing a “great reset in tech.” As a result, the firm will cut the size of its latest fund to $15B. Venture capital fundraising reached record levels during the pandemic with firms raising a total of $159B in 2021 and $171B in 2022. These numbers have fallen dramatically as US venture firms have raised just $12B in the first quarter of this year. Meanwhile, Insight is optimistic despite industry trends and said, “The sharp fall in valuations has reset the market in a very positive way. In 2021, we saw exceptional growth in technology demand but challenging valuations and lack of discipline around cost structures and rates of cash burn.” Insight has said that they believe the great reset has solved those two challenges.
AGM’s 2/20: Fundraising is often a barometer for LP sentiment in private markets and how they view opportunity costs with asset allocation. Insight’s struggle to raise a $20B fund possibly signals a few things — (1) LP appetite for growth funds is waning in the current market environment, (2) LPs believe that fund sizes can be smaller to meet the current opportunity set of available high-quality private company investment opportunities, and (3) institutional LPs are still reeling from the denominator effect, rendering them unable to allocate in size and scale to large funds as they have in years past. It’s worth remembering that headwinds in fundraising doesn’t always equate to lackluster performance. Smaller fund sizes generally lead to better returns and environments with lower valuations are often the best vintages for venture and growth. So it wouldn’t be shocking to see Insight, historically a very strong performer, deliver a good vintage.
📝 There’s More M&A in BlackRock’s Future | Michael Thrasher, Institutional Investor
💡BlackRock’s strategic objectives, financial health, posturing by executives, and its recent acquisition of venture debt manager Kreos signals that the world’s largest asset manager will continue its M&A activity. Its acquisition philosophy focuses on bolstering product offerings and distribution reach. In particular, BlackRock wants to grow its alternative investments business, which is smaller than the alternatives units of KKR, Apollo, and Blackstone. The ~$300B alts unit is already one of the largest in the world — roughly the same size as Carlyle Group — but much smaller than the likes of Blackstone, KKR, and Apollo. The Kreos deal is a prime example of BlackRock’s willingness to make small acquisitions to give it a sudden presence in a market, especially a growing one like private credit. A technology company that improves existing product capabilities or distribution might also be a target. BlackRock will need to scale up by segment to be truly competitive in an alternatives market where three quarters of industry asset flows go to funds with more than $1 billion in assets.
AGM’s 2/20: BlackRock has been active in acquiring businesses to enhance it’s product experience (like the eFront acquisition for Aladdin) or expand distribution (like their investment in iCapital and acquisitions of First Reserve and Kreos). BlackRock’s quarterly earnings call made it very clear that they want to grow their alts business both in terms of AUM and product offerings. The Kreos acquisition is yet another signal that BlackRock is serious about building out their alts business — and it likely won’t be the last thing they do to continue to expand their capabilities in private markets. Interestingly, $5.6B AUM Kreos focuses on venture debt, which signals that BlackRock will become a player in the venture capital space. The next few years should be quite interesting in private markets, as BlackRock has proven to be acquisitive (acquiring eFront for over $1.3B) so I’d expect to see them continue to invest in or acquire more businesses across asset managers (different private markets strategies), distribution, and post-investment data and portfolio analytics related businesses.
📝 Carlyle CEO to Take on Banks by Supercharging Financing Unit | Dawn Lim | Yahoo Finance
💡Carlyle Group's new CEO, Harvey Schwartz, plans to supercharge the firm's financing unit to compete with banks and reduce the roughly $1 billion it pays in annual fees to financial institutions. By expanding its capital markets arm, which currently arranges and places debt for Carlyle's portfolio companies, the private equity firm aims to gain more control over financing. With increasing regulations and banks scaling back lending, private equity companies like Carlyle see an opportunity to expand their loan arrangement businesses. Carlyle's capital markets unit, led by Brian Lindley, has the potential to recoup a significant portion of fees by working alongside banks in syndicated deals. The business unit, which generated $50M in fees last year, is still significantly smaller than competitors KKR, which generated $600M in fees. However, the expansion carries risks, including exposure to market downturns and competition with investment banks. Nonetheless, Schwartz believes the capital markets arm has ample potential for growth.
AGM’s 2/20: Carlyle’s continued expansion into capital markets is a significant development for private markets. It signals that alternative asset managers like Carlyle are continuing an evolution that makes them look much more like mainstream financial institutions. Private equity firms vertically integrating loan arrangements also is a threat to banks’ fee streams. Sure, banks may be scaling back lending in the current environment due to rising rates and underwriting risks, but a financing business that used to be quite lucrative for banks will now end up in the hands of alternative asset managers like Carlyle and KKR. The big continue to get bigger — and it doesn’t seem like that’s a trend that going away.
Reports we are reading
📝 Coller Capital's 38th Global Private Equity Barometer, Summer 2023 | Coller Research Institute, Coller Capital
💡Coller Capital’s latest Global Private Equity Barometer presents a positive outlook for PE in North America and Europe in 2023 and 2024. Investors are seeking opportunities in the healthcare and pharmaceutical sectors for attractive investments as well as IT and business services. With respect to strategy, investors are said to be targeting opportunities in mid-market and special situation funds over the next two years. Moreover, LPs see an opportunity in secondaries and are using them to rebalance portfolios. Jeremy Coller, CIO of Coller Capital states that “markets have been going through a long challenging winter,” and the level of diligence investors have taken has increased over the past two years. Investors are keeping an eye on the usefulness of AI in the PE process as well as remembering the importance of ESG. According to Coller, 40% of investors plan to increase their target allocations to private credit and infrastructure over the next year. In addition, around three fifths of LPs said that families, entrepreneurs, and corporations will provide the best opportunities for PE over the next two years regarding the performance of buy-and-build portfolios.
Interviews we are watching
🎥 The State of Private Markets | Marc Lipschultz (Blue Owl Capital), Bloomberg
💡Marc Lipschultz, Blue Owl Capital Co-Founder and CEO sees favorable credit opportunities with attractive spreads in a time of economic uncertainty. Lipschultz describes market competition as mild since there are only a handful of firms with the capital, credibility and relationships necessary to provide solutions for investments as large as those that Blue Owl targets. Recent slowdowns in corporate growth, particularly in software, is not as concerning from Blue Owl’s position as a lender given their seniority in the capital structure and the health of the companies they invest in. Furthermore, Blue Owl’s debt business provides floating rate debt so their yields rise as interest rates rise. In a high interest rate environment, the key for Blue Owl to mitigate default risk is to lend to high-quality companies with strong backers and retain a long-term view on markets.
Who is hiring?
In order for alts to continue to go mainstream, we need the best talent to go into the space. Here are some openings at private markets firms. If you’d like to connect with any of these teams, let me know and I’m happy to facilitate an introduction if appropriate. If you’re a company or fund in private markets, feel free to reach out to share a job description you’d like to be listed here to highlight for the Alt Goes Mainstream community.
The latest on Alt Goes Mainstream
Recent episodes and blog posts on Alt Goes Mainstream:
🎙 Hear Avlok Kohli, AngelList’s CEO, talk about how they are building the company of companies that is powering private markets. Listen here.
🎙 Hear John Avery, VP Digital Assets, Tokenization, Web3 at fintech giant FIS talk about how evolutionary changes can lead to revolutionary changes in private markets. Listen here.
🎥 Watch Lawrence Calcano, Chairman & CEO at iCapital, and I take the pulse of private markets on the first episode of our monthly show, the Monthly Alts Pulse. Watch here.
🎙 Hear Seyonne Kang, Partner and member of the private equity team at $134B AUM StepStone, discuss how the VC industry is dealing with today’s venture market. Listen here.
🎙 Hear Chris Ailman, the CIO of $307B CalSTRS, discuss how he manages a portfolio with ~40% exposure to private markets. Listen here.
🎙 Hear 44th Vice President of the United States and Chairman of Cerberus Global Investments Dan Quayle share his insights on geopolitics and investing. Listen here.
Thank you for reading. If you like the Alts Weekly, please share it with your friends, colleagues, and anyone interested in private markets.
If you have any suggestions, would like me to feature an article, research, or would like to recommend a guest or topic for the Alt Goes Mainstream podcast, reach out! I’d love to include it in my next post or on a future podcast.
Special thanks to Riley Robinette for his contribution to the newsletter.
Join thought leaders from top private markets firms like Blackstone, Goldman Sachs, Apollo, Fidelity, iCapital, Franklin Templeton, and more.