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AGM Alts Weekly | 8.13.23
AGM Alts Weekly #14: 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.
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Good morning from Washington, D.C., where I just came back from another midweek trip to New York to meet with a number of asset and wealth managers.
Spending time with various asset allocators has had my mind turning on different ways to approach investing in private markets. Additionally, this week’s podcast on AGM with Nimble Partners’ John Burbank and Ken Wallace had so many words of wisdom about investing that has given me much to think about.
John, who was a prolific global macro hedge fund manager since the early 2000s from founding Passport Capital, and Ken, who has backed some of the best-performing emerging manager VCs, including Chris Sacca’s famed Lowercase Capital fund that returned over 200x, in his time at Industry Ventures, provide unique perspectives and investing lessons.
I’ve distilled their podcast down into four W’s of investing.
🌎 World (macro matters): A macro framework of investing can be helpful when thinking about big trends. Investing in technology is, in some respects, about investing in big, transformative shifts. Those shifts often have a major impact on many of the world’s largest industries. John’s explanation on the podcast about making sure he and Nimble had exposure to the world’s biggest industries by GDP has enabled them to drive returns. He cited fintech in the 2010s and government tech now as industries so massive in size and scale that investing in them is critical. This is something that I think about often as a fintech investor. Sure, there’s been plenty of innovation in fintech over the past decade, but is there still more to come? Absolutely. The global financial services industry represents over $12.5T in revenue and financial services represents 20% of US GDP. There will absolutely be big revenue pools, large market sizes, new financial services trends that will provide for massive outcomes. Same with defense, government tech, and healthcare, all very large industries by GDP in their own right.
🏆 Winners (winners will win big): Yes, venture is going through a period where it’s harder to raise capital and harder to exit. The marginal companies won’t work, as John said. But the winners will win — and they will win big, according to John. The key is finding trends and industries that can support big winners.
Picking the right people also matters. Ken backed Chris Sacca’s first Lowercase Capital fund when he was at Industry Ventures. Ken took a risk. Chris was a first-time fund manager. He had a small fund ($8M). But that fund turned out to be one of the best performing funds of all time at over 200x+, in part because Chris knew how to find, pick, and get into winners that would win big. Some of those companies? Uber, Stripe, Twitter, Twilio, Docker. When winners win, they win big. And both Chris and Ken found their winners.
⏳ Waiting (going long duration is a superpower): Waiting can be hard, but patience is a virtue. Duration can end up being a superpower in investing. The ability to hold an investment through cycles can drive returns. John and Ken both talked about the importance of duration and patience in investing.
The interesting nuance that John added is that many early-stage managers will shy away from investing in what he called “dull objects” because the investors may believe they can’t get the company to the next round if it’s “so unfamiliar.”
But a VC having a long term perspective in John’s view can be a big advantage:
“Whereas if you have a long term perspective and you think the founder is the one to do it, it's actually incredibly compelling because they can build a multi-year lead over waiting for it to become a shiny object.” He then went on to say that managers should be “backing things that right now may not be shiny, but later will be.”
There’s another important point here that relates to the evolution of private markets more broadly. Yes, knowing when to exit matters. And understanding market cycles to know when to exit is critical for a fund manager to manage risk and find the right exit to return capital to investors, because it’s distributions to paid in capital that matter above all else. But the ability to take duration risk and hold an asset can be a huge advantage for an investor. This is particularly relevant as private markets looks to create ways to enable liquidity. Yes, I understand that there should be liquidity mechanisms in private markets, particularly for the individual investor, for a number of reasons. But it’s often the ability to go long duration, particularly when an investor is holding quality (see below for more on investing in the best), that enables investors to generate outsized returns over time.
🏀 Warriors (invest in the best): John’s investment into the Golden State Warriors is a lesson on investing in quality. John talked about how, at the time, his investment in the Warriors was considered expensive since it was the highest price ever paid for a NBA team. But he went on to share how he knew that the opportunity set was so large — he looked at it as a question of: “what can go right?” He listed a few key levers that he and the ownership team could pull … they could manage the team much better, they could move it to San Francisco, and the world, particularly China, loves basketball, which mattered since the Warriors are on the West Coast.
John went on to say something quite profound when talking about his investment in the Warriors:
“The best things and newest things are often priced in a way that discourage you from approaching it. But the best things have a habit of doing extremely well over time. And, generally the best things are what the world quests for and lusts for.”
Price matters, but so too does quality. And quality generally endures.
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
📝 Endowments and Foundations Are Fueling OCIO Growth | Hannah Zhang, Institutional Investor
💡 According to asset and wealth management research firm Cerulli, 14% of asset owners plan to start using an outsourced chief investment officer (OCIO) in the next two years for the first time. Endowments and foundations — which constitute a combined 40% of the client base for OCIOs — will likely continue to use OCIOs because of factors including pressures from decreasing operational revenue and rising inflation. Furthermore, 11% of asset owners plan to increase their use of OCIOs by moving to a complete portfolio mandate or giving their OCIOs final investment decision responsibility. Cerulli predicts that assets managed by OCIO providers will grow at an annual rate of 5.6%, increasing to $3T in 2026 from $2.4T at the end of 2021. Historically, OCIOs have provided asset owners with information on general asset allocation, existing portfolio-specific questions, capital markets expectations, and risk analysis. Laura Levesque, director of Cerulli’s institutional division, believes that, “OCIOs can gain access to [a variety of asset classes, including alternatives and private assets] through economies of scale and commingled vehicles, another reason nonprofits are moving to the model.” The pandemic has led to decreasing operational revenues for certain groups, such as colleges and hospitals, who may now look to OCIO providers as they reconsider their approach to risk management.
AGM’s 2/20: OCIOs provide critical services to a number of institutions, particularly with advice on private markets investments and asset allocation. The increased usage of OCIOs brings up a few interesting questions about how this could impact private markets. I think we’ll see either increased private equity investment into or M&A consolidation in the OCIO world as these firms grow their market share. OCIOs may also find other parts of the LP community as a growing customer base. As the wealth channel continues to shift its focus to alts, it will be interesting to see if wealth managers decide to work with OCIOs. While the “Super RIAs” and wealth management platforms like Focus, Hightower, and Dynasty have or will likely build out their own, in-house teams focused on alts (see last week’s AGM newsletter for more on this), there are still many few hundred million to multi-billion dollar RIAs who may have bandwidth constrained small teams focused in-house on private markets. They may look to outsource some of their work to an OCIO or investment consultant, if they don’t already, so they can gain some operating leverage and broader coverage of the private markets universe. This begs an interesting question: how will the use of OCIOs change the way alts are distributed and sold?
📝 Private equity firms offer sweeteners to lure reluctant investors | Will Louch and Josephine Cumbo, Financial Times
💡A tough fundraising environment is causing private equity firms to offer lower fees or sweeteners such as free or lower fee co-invests in a bid to secure backing from institutional investors. The FT reports that even blue-chip firms, including CVC Capital Partners, Ardian, TPG, and Cinven have all offered LPs either discounted management fees or fee-free or low-fee co-investments to incentivize LPs to commit to their new funds. This trend has been confirmed by Raymond James’ Head of Private Capital Sunaina Sinha: “Almost every firm in our suite of clients is contemplating or has employed some form of incentive for investors to put capital in as quickly as possible and in as large a size as possible.” The proof that the current environment is a tough one for fundraising is in the data. A recent Bain & Co. report from July finds that PE firms raised $517B, 35% less new capital this year than over the same period a year ago. PE firms, particularly those raising large funds, have had to resort to fee concessions to hit their targets. Ardian, which raised over $20B for its flagship secondaries fund, received a $6B commitment from the Abu Dhabi Investment Authority, but this included $2B for co-investment. Cinven recently hit its €12B target, but did so by offering new, large investors co-investment. CVC offered large investors a management fee discount on its recent record-breaking €26B flagship fund. According to fund marketing documents, some investors were able to pay a management fee of 1.375%, less than the 1.5% charged to other investors. CVC has offered larger investors fee discounts on prior funds, but it appears to be a more common practice in a tougher fundraising environment like today.
AGM’s 2/20: The balance of power has swung back to LPs. As the fundraising environment has become much more difficult for GPs, LPs can now be price makers rather than price takers. This means that large institutional LPs have pricing power with GPs, giving them the ability to get better deals on fees or blend down their fee load with sizable co-invests. This is not a new trend in private equity — institutional LPs, particularly the Canadian pensions, pioneered the concept of large co-invests and directs alongside GPs as a way to reduce their fees. But the current environment is certainly making it more commonplace. As GPs look to grow their AUM, they are taking the trade of lower fees for more capital in the hopes that it gives them the ability to have a continued, long-term relationship with their LPs, not too dissimilar from an enterprise software company looking to provide concessions on a long-term, multi-year contract early on in exchange for a multi-year relationship with their client. These fee concessions do bring up a few interesting points on some key industry trends. Lower fees will impact the value of the management companies, since fee-related earnings will be lower. This trend could very well be an explanation for why we are seeing so many larger private equity platforms look to diversify their investment strategies because they know they need to find other ways to increase fee-related earnings and grow overall wallet share of their LP relationships. Lower fees also surface another interesting trend — will the 2/20 fee model change? This oft-discussed topic was brought into the spotlight years ago as pensions increased co-investment relationships with private equity funds or built their own direct investment teams. While this development has certainly had an impact on the industry, the 2/20 fee model hasn’t gone away. The question going forward? As the wealth channel grows their size and scale of commitments to private equity funds (and grows in importance as a capital raising channel for GPs), will the wealth channel start to garner pricing power with GPs too? I’m interested to see how this plays out over the coming years as alts continue to become a more mainstream part of investors’ portfolios.
Reports we are reading
📝 Private Capital in European Football | Nicolas Moura, Charlie Farber, Oscar Allaway, PitchBook
💡Europe’s “Big Five” football leagues have continued to witness increased participation from institutional private equity in recent years. This trend is evident in in the booming figures in deal value over recent years as a combination of Covid-19 financial distress (which led to lower revenues due to loss of ticketing revenues) and serious interest in sports franchises as entertainment businesses. Deal value across Europe’s “Big Five” has gone from €66.7 million in 2018 to €4.9 billion in 2022. Record deals in 2022 fetched revenue multiples of 5.3x for Chelsea Football Club and 4.5x for AC Milan—the first football clubs valued in the billions. The largest deal ever recorded in football saw Chelsea sold through a leveraged buyout to a consortium of US-based PE firms in 2022 for £2.5B (€3.0B). Other recent PE deals include the purchase of AC Milan for €1.2B by RedBird Capital, Newcastle United FC for €350.6M, and Atalanta BC for €275.0M. These valuations have set the benchmark, opening the door for continued dealmaking activity, which could smash through the ceiling if venerated club Manchester United is sold. PitchBook finds that 35.7% of the Big Five clubs have PE, VC, or private debt participation at the club ownership level. Funds and their LPs view sports team ownership as an increasingly interesting asset within private markets. It can provide uncorrelated returns, diversification, and buy and build strategies (including multi-club ownership strategies geographically, like we recently saw with OL Feminin and Washington Spirit’s tie up). Interestingly, it’s US investors who are taking a keen interest in the beautiful game, with 34.7% of the Big Five clubs have US-based investor participation.
AGM’s 2/20: The dynamics of sports ownership is changing — and it brings up a number of loaded questions about the future of sports. There is no question that sports teams and leagues are being seen as valuable — and investable — entertainment assets. John’s story on this week’s AGM podcast about investing in the Golden State Warriors, at what seemed like a high price at the time, offers a window into how and why investing into sports teams can make sense. Much like other private equity investments, private equity firms see the ability to improve management teams, drive efficiencies with operations, grow sponsorship contracts, and leverage online gameplay outside of matchday through partnerships with the games like Sorare or sports gambling (listen to this AGM podcast with Sorare Co-Founder & CEO Nicolas Julia on how they are building the next entertainment giant by starting with engaging fans of the beautiful game).
Combined with the increasing power of social media as a way to reach and monetize sports fandom globally (see: superstar Lionel Messi’s uplift of revenues for Inter Miami / the MLS and viewership in the MLS by 2x’ing Apple TV’s MLS SeasonPass or Wrexham’s smashing success of a docuseries, which you can learn about in this AGM podcast with Wrexham’s Advisor to the Board Shaun Harvey), private capital firms see sports as a vehicle to create a portfolio of monetizable entertainment revenue streams on and off the pitch.
While sports may not seem like the most intuitive of investments for a private equity firm at first blush, there’s a lot to like, particularly in leagues where there’s no promotion / relegation (pro/rel). Leagues like the MLS can see clubs fetch 10x revenue multiples since owners don’t have to face the threat of relegation (read: loss of revenues from media rights, tickets, sponsors, kit sales). But even in pro/rel leagues like the English Premier League, clubs, particularly trophy assets like Manchester United and Chelsea or AC Milan in Italy’s Serie A, can fetch 4.5-5x+ revenue multiple. This tends to be a higher figure than the average valuation/revenue multiple for PE buyout transactions, which stands at 2.4x for Europe and North America combined according to a PitchBook report.
With the rise in multi-club ownership strategies across leagues and teams — and the rise of women’s soccer as an investable opportunity (listen to Angel City President & Co-Founder Julie Uhrman discuss how ACFC is building a durable and investable business in women’s soccer on AGM here), there are also ample opportunities for investors to grow enterprise value either organically (by investing in their women’s teams) or inorganically through M&A or multi-club ownership.
While sports is clearly a compelling investment for a number of reasons, there are nuances and challenges that make sports different from other investments. Some big questions remain:
1/ Are PE funds ready to handle the potentially volatile revenue streams of pro/rel leagues and continue to call capital and fund teams on a yearly basis to cover shortfalls due to lackluster performance or shelling out for pricy transfers to improve their team?
2/ How will PE firms think about exits given that some funds have defined fund lives and LPs may want exits? I think we’ll see more evergreen fund structures or “continuation” vehicles / secondaries funds that provide liquidity for other funds investing in the space. This dynamic also poses interesting questions for investors who have invested in clubs from lower leagues who are looking to get promoted. The Championship in the EFL is the lottery ticket league — win the league and the windfall of the Premier League is a £150M+ golden ticket. But with the threat of relegation right back down to the Championship the next year, might the year of promotion also be a great time to exit the investment?
3/ How will increased participation from returns-seeking institutional investors impact how sports teams are built and run? At the end of the day, sports is a business. But lest not forget that sports teams are also about the communities and cities where they play. This tension has always existed, but becomes more protracted in a world where the bottom line matters most. What happens if owners don’t understand the club’s history or respect the relationship with the fans in their city? Sure, they might create operational improvements that reduce costs, benefitting investors, but if they lose fans who no longer want to vote with their wallets because the club’s investors haven’t respected the club’s history or traditions, investors may ultimately lose off the pitch with their investment too.
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 investing legends John Burbank and Ken Wallace of Nimble Partners provide a masterclass on investing with a macro lens from John’s background as a leading macro hedge fund manager at Passport Capital and on micro VC from Ken’s background backing some of the top emerging VCs at Industry Ventures. Listen here.
🎙 Hear $40B AUM Cresset Co-Founder & Co-Chairman Avy Stein and Director of Private Capital Jordan Stein live from the Allocate Beyond Summit discuss how private markets are changing wealth management. Listen here.
🎙 Hear Alto CEO Eric Satz discuss how anyone can invest in alternatives through their IRA. Listen here.
📝 Read how 73 Strings CEO & Co-Founder Yann Magnan and team are leveraging AI to build a modern and holistic monitoring and valuation platform for private markets in The AGM Q&A. Read here.
🎥 Watch Lawrence Calcano, Chairman & CEO at iCapital, and I take the pulse of private markets on the second episode of our monthly show, the Monthly Alts Pulse. Watch here.
🎙 Hear $18B AUM Savant Wealth’s award-winning CIO Phil Huber talk about how LPs can build a strategy for investing in private markets. Listen here.
🎙 Hear Avlok Kohli, AngelList’s CEO, talk about how they are building the company of companies that is powering private markets. Listen 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 Robert Picard, Head of Alternatives at $117B AUM Hightower, approaches alternative investments. 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.
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