Morningstar - Q2 2022 - 59

director of alternatives ratings on the global
manager research team. Our conversation
took place March 9 and has been edited for length
and clarity.
John Rekenthaler: The convergence of private and
public equity is a phrase that is often used, but what
does the term mean to each of you?
Hilary Wiek: There are a lot of things going on
with that phrase. Investors who haven't had
access to private equity are trying to figure out
how they can get in. Private-market players
also are using public markets to implement their
strategies or, in the case of some privatemarket
fund managers, going public themselves.
So, you've got the KKRs, Apollos, and Areses
of the world that are publicly traded but offer
private strategies.
Simon Scott: I think of it like a Venn diagram.
You've got two kinds of distinct capital pools. Each
has very different industry relationships,
and they're coming together. Technological and
financial innovation has allowed them to
converge and play on each other's turf. That
means they're trying to gain access to
the informational advantages of one side or the
capital duration advantages of the other.
For the companies that are the targets of these
groups-great, you've now got double the
market to play with. You can partner up with a
hedge fund, which traditionally is much more
hands-off; hedge fund managers don't require
board seats, and they can be more of a
longer-term, lifecycle investor. Or, if you need
operational expertise, you've got the choice of
partnering with the wider private equity market.
Wiek: You've also got public-market managers
putting private assets into their public-market
portfolios. Up to 15% of a U.S. mutual fund can be
in illiquid investments. We're finding small-cap
managers who have been recently shut out
from investing in companies they used to be able
to buy because they're staying private longer,
going into pre-IPO companies and having a less
liquid profile overall.
Scott: We've seen that in debt as well. The first
interval funds-which are at the more liquid
end of the private-market spectrum-are in credit.
In commodities, accessing Chinese futures
for years has been done via a swap. Whether you
count it as a derivative or as a private asset, either
way, it's not publicly traded.
Laying the Groundwork
Rekenthaler: There's a lot of activity going on, but
these are things that haven't much affected the typical
financial advisor and the typical client yet.
Wiek: In 2020, the Trump administration's
Department of Labor said it was OK to put
private equity into 401(k) plans. When I looked six
months after the announcement, I couldn't find
any actual products hitting that market yet,
but I saw a lot of articles from money managers
saying why it was a good idea. So, I think the
industry is laying the groundwork to get
regular people thinking about private equity.
We're already seeing wealth-management firms
aggregating smaller commitments to help
individual investors get into a fund.
Scott: With the growth in data, courtesy of
companies like PitchBook, we will see more
third-party companies-call them aggregators or
platforms-coming to the fore to provide
liquidity to these markets. That's the missing layer
that will take these investments from a purely
institutional space to one that is more mainstream.
Rekenthaler: That's a strong point. Morningstar's
growth was tied to the mutual fund industry growth in
the 1980s. As the industry grew, more people
became interested. The Wall Street Journal started
covering mutual funds daily. Now there was a wealth of
information to make people feel comfortable about
investing. With private equity, we may see the same
dynamic as more information becomes available.
Wiek: That might be true, but sitting here
at PitchBook, where we aggregate private-market
data that is, based on the title, private, I can
say that the data is hard to come by. Yes, we make
a lot of our research pieces freely available,
but our data is behind a paywall. And it's pretty
expensive, especially for an individual investor.
So, I think there's still going to be an informational
advantage for people who can afford to
access private-market information. PitchBook
exists because this is hard-to-find data. This isn't
information investors can get on Yahoo Finance.
Rekenthaler: Simon, as I understand it, some countries
are further along on the convergence than the U.S.
Scott: Americans are used to having very efficient,
sophisticated capital markets. Historically in
other parts of the world, that hasn't been the case.
It's only in the last 20 to 30 years when many
international markets have started catching up. So,
outside of the U.S., there is a greater acceptance
for nonfinancial assets; they're perceived as
being more normal. Physical, tangible assets have
always had a strong appeal because you've
had low trust in government regimes. You've had
less urbanization. Therefore, things like bullion,
real estate, other kinds of nonfinancial assets have
always been front of mind in these other markets.
In Asia and India, for example, more than half of
the largest companies are still family-owned.
Within Europe, in France and Germany, between
35% and 40% of the companies above a billion
dollars in revenue are family companies. So,
investors in these regions have a greater familiarity
with the operation of private companies.
Australia sits in the middle. We're a regulated
market. We've got a universal compulsory savings
approach for retirement: 10.5% of our salary is
automatically paid into a pension fund each
month by our employer. Consequently, for a nation
of just under 30 million people, we've got a
$3.5 trillion pension industry. Within that, private
assets-I'm talking equity, debt, infrastructure,
agriculture-are about 20% of people's portfolios.
We wrote a couple of reports at the start of
the year about the record inflows into liquid
alternatives in 2021, and it was quite interesting.
Flows into liquid alts in the U.S. was all
about diversifying away from equity exposure into
hedged equity products. In Australia, two
of the three largest products based on retail flows
were open-ended private equity vehicles.
In other words, there was a demand to retain
equity exposure, but to modify it.
For me, sitting in Sydney, I can invest in a
single-manager private equity fund on the Sydney
stock exchange. We've got funds that combine
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