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What's the Alternative? | Episode 30| Chasing Liquidity: Cracking the Code of Private Equity with John Lidington
7 Plays23 minutes ago
In this episode, host Shana Orczyk Sissel sits down with John Lidington, Portfolio Manager at Man Numeric, to explore the evolving world of liquid private equity—an innovative way that seeks to capture private equity–style returns through public markets.
John shares how Man Numeric’s liquid private equity strategy bridges the gap between public and private markets, offering investors access to private equity–like exposure without the high fees, illiquidity, or lock-up periods of traditional PE funds.
Key Takeaways:
- How liquid private equity works—and how public equities can be used to seek exposure to certain private equity characteristics.
- The quantitative and fundamental factors that drive Man Numeric’s approach to identifying companies with private equity–like characteristics.
- Why more companies are choosing to stay private longer, and what that means for public market investors.
- How investors can gain private equity exposure without high fees, illiquidity, or long lock-up periods.
- Practical insights into building diversified portfolios that capture the benefits of both public and private market dynamics.
Watch now to learn how the boundaries between public and private markets are blurring—and what that means for the future of investing.
Connect with us!
- John Lidington, CFA on LinkedIn
- KraneShares Man Buyout Beta Index ETF
- Man Group Alternatives Website
- Shana Orczyk Sissel on LinkedIn
- Banríon Capital Management
Investing involves risk of loss. Past performance does not guarantee future results.
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Transcript
Volatility in Public vs. Private Markets
00:00:00
Speaker
could make the case that public markets are a little too twitchy too jumpy too volatile and not long term enough but i would say the truth is probably somewhere in the middle and i think where the rubber really meets the road for traditional private equities what you've seen over the last few years especially from 2022 and beyond where exit environments have really let's say decelerated dried up at different points in time you become quite dried up there's kind of that question of, okay, you've been holding this company at at a certain valuation on your books.
00:00:29
Speaker
You can still say that you have multiple years time horizon left to hold it. But if you don't have any buyers willing to pay the price that you're holding that company at, is it really actually worth that?
00:00:41
Speaker
That is worth it two years.
00:00:51
Speaker
Hello
Introduction of John Lidington
00:00:52
Speaker
everyone. this is Shana Orzek Sissel, founder and CEO of Boundary and Capital Management. And I am here today with another episode of What's the Alternative?
00:01:02
Speaker
We have a guest today that I have known a very long time. John Lidington, who is a portfolio manager at Mann Numeric, and he manages the liquid private equity strategy there.
00:01:15
Speaker
He's been with Mann Numeric since 2017 and has g led the liquid PE effort there since 2019. Prior to that, John spent the majority of his investment career at Russell Investments, ah which is how I know him, and then took on operating roles at multiple private companies before joining Numeric.
00:01:33
Speaker
He has a bachelor's degree from Harvard University. I've
The Emergence of Liquid Private Equity
00:01:37
Speaker
got to make sure I ah give you full credit for that. And and it's it's great to have you on the show and to kind of dive into private equity, liquid private equity. It's a very timely topic, a lot of product coming to market to help investors access private markets, very hot topic on CNBC.
00:01:58
Speaker
And so I'd love to kind of hear you know how you ended up in this space and your background as it helped prepare you for what you're doing now at Manumeric.
00:02:09
Speaker
Sure. Yeah,
John's Career and Strategy Development
00:02:10
Speaker
happy to. yeah I can touch on the liquid private equity concept. Maybe I'll give you a little bit of that know path on on the way there. As you mentioned, I'd worked at Russell Investments for a number of years, really focusing on public equities throughout my time there, which is roughly eight years or so.
00:02:23
Speaker
um When I joined Man Numeric, we were basically just a public equity focused shop, whether that's long short, long only, active extension strategies, um but really spent my whole career in equities.
00:02:35
Speaker
um Come 2018, we actually launched a strategy here at Numeric that we refer to as liquid private equity. And the idea here was we're going to use public equities, very nuanced um set of public equities to kind of mimic private equities return ah profile and do that with very similar return drivers that you have within a traditional private equity portfolio.
00:02:58
Speaker
Very focused on buyout specifically within the private equity landscape. At the time we launched, that was by far the largest segment of private equity, still is the largest now. Given my experience in public equities, I think we can bring a lot of those kind of lessons ah to life within this this mimicking strategy.
00:03:16
Speaker
So I can go into a lot more detail on on the genesis of the strategy. The
Creating a Liquid PE Strategy with Public Equities
00:03:20
Speaker
truth is I actually came in in 2019, about a you know little after a year after we launched the strategy. um It was originally conceived by our then director of research, Craig Bond, who had done a lot of work basically thinking about what what was it that drove private equity? What was the secret sauce of private equity?
00:03:39
Speaker
And how can we be maybe deliver that to investors that either don't have access to to the best of the best within traditional private equity, or perhaps don't they have a different fee sensitivity, they can't pay full traditional PE fee, or perhaps they have greater liquidity needs and obviously can't be locked up for a number of years and be exposed to kind of the cyclicality and distributions in a traditional PE fund. So knowing that there's a large number of investors who check one of those boxes, if not more of more than one of those boxes, think he set about kind of researching what is it that drives PE
Return Drivers in Private vs. Public Equity
00:04:12
Speaker
returns? How many of those characteristics can be found in public equity, public companies as well?
00:04:19
Speaker
And then how can we construct a portfolio very carefully to to kind of match that the risk exposures, the return drivers of PE and ultimately generate a PE like return.
00:04:29
Speaker
So it started off as kind of a thought exercise for him, for Greg. And i think step one for for Greg was really to go out and research, you know, basically looked through a number of academic papers that had focused on this exact question um and used an HBS study, ah for example, as one of the foundations of of our liquid private equity strategy with the the key findings that there are a number of very common fundamental characteristics of businesses that are targeted by buyout funds.
00:05:03
Speaker
this This paper, this specific paper, the HBS one that I referenced, is actually one that went out straight to the GPs themselves to 85, the leading GPs, but basically said, how do you guys generate returns? How do you like, how do you add value?
00:05:17
Speaker
And so straight from the GPs mouths, they basically, you filtered down the common kind of the more common return drivers. And, and then we set about ah replicating as many of those as as possible in our strategy.
00:05:30
Speaker
So let's talk about what those drivers you identified were. Because when we think about what's going on in markets today, had more than a decade more than a decade where more companies are converting to private than coming to market as IPO.
00:05:47
Speaker
And so it's really changed the dynamic of um equity markets in general. And it's also been one of the key drivers to providing access to private markets for retail investors.
00:06:02
Speaker
So when you think about the key drivers of what makes private equity managers, the GP, successful, what were the key drivers that you guys identified? Sure, yeah, there's theres there's certainly a number of of drivers for the top tier PE managers out there.
PE Manager Decision-Making Process
00:06:19
Speaker
I think it's going to be a combination of both top-down decisions that they make and then bottom-up decisions that they make as well. And what I mean by top-down is they're going to do a lot of due diligence on the industries they're investing in,
00:06:32
Speaker
ah make sure that they're comfortable kind of locking up capital or investing in a company that's in that industry for a number of years. It could be 10 plus a years in some cases. So they need to really be attracted to the to the trends within that industry.
00:06:45
Speaker
And then on the bottom up side, it's basically going out and finding the best companies with within an industry that's attractive to them. So there are a number of fundamental characteristics ah that that they're looking for in in their businesses.
00:06:58
Speaker
And a lot of those can be fundamental um fundamental characteristics of the business. So super simple thing to think about when you think about buyouts is they're obviously looking for undervalued companies where they can go in, make some improvements, whether it's operational, whether it's financial, engineering, um to basically unlock some kind of value that they've identified.
00:07:19
Speaker
in in that in that company. So right out of the gate, you're looking for undervalued companies, but clearly because you're going to be loading these companies up with fairly significant debt burden at the outset of ah of a buyout deal, there's certain fundamental characteristics they need to have to be able to pay down that debt over time, basically what makes them credit worthy.
00:07:37
Speaker
So you're looking for baseline levels of profitability in the business, positive trends as far as the the growth of the business um and a number of other fundamental characteristics And it turns out a lot of those fundamental characteristics are certainly very present in in public companies as well.
00:07:56
Speaker
So in the public markets, I'm assuming, and correct me if I'm wrong, you're probably playing down in market cap, right? Because that's where you're likely to find undervalued companies that have inefficient management, inefficient operations.
00:08:11
Speaker
When I think about buyout and I think about private equity, I remember sitting in a room with Steve Schwartzman million years ago over at Blackstone and him talking about one of their key ah strengths is the ability to take a bunch of companies that they're taking private and create synergies, but also unlock opportunities by being able to manage benefits, manage payroll and get those costs down because they are consolidating everything under the Blackstone header.
00:08:44
Speaker
And so um when you think about that in terms of selecting names, are you looking at you know At Ariel, we used to do this intrinsic value exercise where some of the parts, are you looking at some of the parts?
00:08:56
Speaker
Are you looking at you know management inefficiencies? How are you able to unlock or identify and unlock ah value when you are not going in there as an operator?
00:09:09
Speaker
It's a great question. I think we're not necessarily trying to do that. i think you can look at at the operational efficiencies a good management team brings to bear within their companies. PE, e if if they're if they're doing an effective job managing company,
Operational Efficiencies in Public Companies
00:09:23
Speaker
then obviously there are synergies they're going to realize, to to your example.
00:09:27
Speaker
um But I'd say that there isn't there certainly isn't a monopoly on good management teams that exist only in private ah private equity owned companies. there's There are some very strong management teams at public companies as well.
00:09:39
Speaker
um we're We're looking to identify those. So there is an aspect of our process that looking is looking at current operational efficiency of these businesses, again, in the spirit of looking for companies that are efficient enough that they can pay off these these debt loads over time.
00:09:53
Speaker
Yeah, but but it is going to be a fundamental difference between this and and what traditional private equity does. I would point out you know good traditional private equity managers certainly will be able to unlock those operational efficiencies. I'd say there probably are a number of PE firms that aren't as effective.
00:10:09
Speaker
when it comes to the operational improvement side of things. So in a way, you know i don't want to oversimplify it, but in a way we're trying to actually create more of the the the the beta, like what are the underlying return drivers, kind of looking more at the fundamental characteristics of the businesses, the industries they're investing in, and less about um you know company strategy and and active management of that company um that that is more PE's domain. I should have given the background right up front.
00:10:37
Speaker
where We at Man Numeric are are fully quantitative, fully systematic investors. So really, this is identifying the same characteristics the PE cares about and um and then putting those into our our portfolio.
00:10:49
Speaker
And as I kind of insinuated, the likelihood that that is down cap is higher, correct? Yes, absolutely. So I think that that's actually a key, that's a key characteristic here. There's some, certainly some large deals that get done, but those are fairly few and far between when you think about the overall number of deals that are done and any given year.
00:11:10
Speaker
Typically you're going to be traditional private equity is going to be in a much smaller cap range or smaller company range. I think they do find more hidden gems there where they can unlock more value.
00:11:22
Speaker
So yes, we do we do the same. We actually try to match the company size. And I think that is actually differentiator versus some of the other liquid private equity type strategies that are out there in the marketplace.
00:11:33
Speaker
um There aren't that many, but some of the ones that are out there are more focused on large cap companies. you know there's there's There's a new one that's been getting some attention in the last couple of weeks. where if you look at their largest holding, I believe it's Microsoft as of right now. You have Nvidia as one of the top holdings as well.
00:11:52
Speaker
so These are large companies that clearly aren't PE takeout candidates. They far exceed you know are far they far far exceed the size of deals getting done in the traditional private equity space.
00:12:03
Speaker
And I'd also say that to the extent that um that investors are looking to their traditional private equity as a diversifier to some of these concentrated exposures they're getting in the public equity market today, um you're not really diversifying at all if you're just delivering Microsoft and and in a different package or NVIDIA in a different package. So I'd say getting down in small cap is actually you know pretty important feature when you're talking about matching the characteristics and the return drivers of private equity.
00:12:30
Speaker
It also you know helps check the box of being a better diversifier to some of these concentrated mega cap positions that many investors have in their portfolios today. but As you're talking, I'm kind of thinking, know, one of the the ways that a private equity firm unlocks the value to its LPs is through the exit, whether that be through their company being acquired or through an IPO.
00:12:58
Speaker
So obviously the IPO is not something you think about. ah These companies are already public, but when you're evaluating opportunities, are you thinking about ah potential acquisition? Are you looking at a sum of a parts analysis where what would a buyer out there pay for this company? Are you targeting companies that you think are likely to be acquired um as part of your thesis?
00:13:24
Speaker
So it's not an explicit goal um within our model, our you know goal of our process. um But it's it's interesting that over the number of years we've been running the strategy, we've actually had a number of of takeouts And specifically, we've had public to private takeouts by PE firms of a number of our names.
00:13:43
Speaker
And I think that's just a byproduct, a natural byproduct of fishing in the right pond. um So if you expose yourself to ah so the types of firms or yeah the types of firms that PE finds attractive, I think it's natural that when you have all this dry powder out there and in traditional private equity, looking for a home, that they're going to eventually find a home for that capital and in some of these public companies that we that we own.
00:14:07
Speaker
It's always nice when that happens. There's typically a takeover premium naturally. So nice little pop typically when when those when those happen. We've certainly had a number of them. So even though it's not an explicit goal of the process, we're not building in kind of a you know takeover probability type metric.
Challenges of Replicating PE's Smoothing Effect
00:14:22
Speaker
um It does happen naturally just by buying the types of companies that the PE firms find attractive and also strategic acquirers find attractive. That I would think would be proof of concept that I'm identifying the right type of companies, right?
00:14:36
Speaker
If the vast majority of the companies that I put in the portfolio eventually end up being acquired or taken private by private equity, then I am very successfully identifying private equity attractive companies.
00:14:48
Speaker
um So I would consider that kind of proof of concept that you're doing exactly what you say you're doing. We've talked a little bit about how you replicate private equity, but I think our audience would really find it beneficial to understand how private equity, and we can start talk buyout since that's the most common, typically works. If they're going to take a company private, how does that work?
00:15:09
Speaker
You talked a lot about debt loads. You started working in the strategy in 2019 when interest rates were really low. And so private equity did quite well. But as interest rates rise and the cost of borrowing um goes up, it makes returns in private equity a little less attractive.
00:15:28
Speaker
um And we've certainly seen private equity has not in any way, shape or form provided the type of performance most people expect in the last few years. So talk a little bit about what that kind of looks like.
00:15:39
Speaker
um and why private equity as a whole and trying to replicate that exposure and that diversification benefit is even attractive to the average investor.
00:15:51
Speaker
Yeah, and I'd say but probably one of the leading things you're going to hear from from traditional private equity managers is just that you're exposing yourself to a much larger percentage you know of the whole overall economy.
00:16:02
Speaker
So you know overall economy, it's just a, yes, there's some very large, very visible mega cap type companies that everybody knows their household names in the public markets. But at the end of the day, if you look at the overall just number of companies in the country, in the world, ah you know the vast majority are going to be are are going to be private.
00:16:19
Speaker
It doesn't mean they're all investable for private equity firm and you're not going to find them all in a in a PE fund someday. um But you are exposing yourself to a number of different companies that you don't get exposure to already.
00:16:32
Speaker
So I think that's probably the number one underlying thesis when PE e talks about diversification. Now, You could talk about you know diversification more from ah mathematical or statistical standpoint, and I can poke plenty of holes in diversification benefits of traditional private equity versus public equity. I think a lot of that does come down to the smoothing effect that you get in PE, meaning you don't have to- I always like to remark that Cliff Asnes calls it volatility laundering, but go on.
00:16:58
Speaker
Yeah, yeah, I certainly appreciate that. and I think that's a great term that he coined. You're getting at the the same point there that you don't have if you don't have to mark all your portfolio companies on a day to day basis, you don't need to mark them to market.
Smoothing Effect and Diversification Differences
00:17:10
Speaker
Clearly, there's going to be a a smoother ride, at least on paper. It doesn't mean your companies aren't exposed to the exact same top down headwinds and tailwinds that the public that public companies are.
00:17:23
Speaker
um But it does allow you to kind of not experience that day to day volatility that you might in the public markets. Now, that's a very attractive feature to some, um I would say, and it can look like maybe there's better downside protection when the market does ah I was going to say go sideways, but when it really does kind of crash and the public market will crash, obviously from time to time, um PE is going to look like it's a better downside protector.
00:17:49
Speaker
But think one of the important points when it comes to downside protection or diversification during those types of markets is that you can actually tap into that diversification benefit when you need it. And obviously, if you're in an illiquid asset class,
00:18:02
Speaker
where you can't necessarily tap into those funds at the time the market public market might be selling off. Like, I guess, what value is that diversification? I totally agree. And I think um it's a good point. The smoothing effect is one that I spend a lot of time on.
00:18:17
Speaker
um And I always like to say that I will die on this hill, but private equity and public equity are both equity. And from a diversification benefit, it's really a liquidity conversation.
00:18:28
Speaker
It's not really a diversifier in the sense of how we talk about different kinds of alts, public equity and private equity are actually highly correlated to each other. Even if you have this moving effect directionally, they are moving in the same direction.
00:18:43
Speaker
um and And so i think that that's always really important to note. um you're You should be getting some alpha from your illiquidity and there should be something that you're gaining through the private equity vehicle um that you cannot get in the public markets.
00:19:02
Speaker
And and and I've been evaluating a lot of interval funds in this space, whether they be venture capital or private equity. And the one thing I've noticed is, you know, they all all say, yeah, we mark to market every day. Right.
00:19:16
Speaker
But they really don't. They can only reprice the security if there's new information. Right. So if it's a private company, you're not getting new information um in the regular news cycle.
00:19:28
Speaker
um And so, Yeah, maybe you are striking a nav and striking a position like value on a daily basis, but it's probably not changing. um So you still get a smoothing effect in many ways.
00:19:41
Speaker
I'm assuming when we look at your portfolio um for the index that you help manage, um you don't get as much of the smoothing effect. So when you talk about how something like this fits in a portfolio as a way to replicate private equity returns, what does that look like in terms of the experience for the investor?
00:20:00
Speaker
Yeah, so I'd say you're definitely getting different set of exposures than you would from just a traditional passive equity, certainly like an S&P 500 or pick any of the very popular of passive index tracking ETFs out there.
00:20:14
Speaker
um So you're definitely getting a different exposure. You're getting a sector profile, and industry profile that matches that of PE based on actual PE deals being done and basically what you would have in a portfolio.
00:20:25
Speaker
portfolio right now and those bottom-up characteristics. So a lot of those bottom-up characteristics are kind of known alpha drivers in in the public markets as well. So there's kind of an alpha piece, certainly on a bottom-up alpha piece that's in addition to the value-add from sector selection.
00:20:42
Speaker
um Ultimately, without the Without the ability to smooth, you are going to get, and I'm speaking about the unhedged version, there iss the index that you referenced is clearly unhedged long only.
00:20:55
Speaker
um so So that you you are going to have a bit of equity market volatility that you wouldn't necessarily see in published returns day to day for for private equity. I would say that there is a hedged version also available, as you can imagine, man grouping a large, known for the number of hedge funds we have within within the larger firm.
00:21:15
Speaker
So there is a hedge version available too, if you want to replicate some of that smoothing effect, if if there are there is kind of a loss of version consideration for for individual clients. um So that's, yeah, that's that's absolutely something that's available. But yeah, think I think at the end of the day, it's going to be tough for any purely public equity mimicking strategy to mimic the full smoothing effect that you get within traditional private equity.
00:21:40
Speaker
And it's kind of
Valuation Challenges in PE Exit Environment
00:21:41
Speaker
an interesting interesting topic that that we think a lot about. i mean, at the end of the day, is that smoothing wrong? i think probably not. If you have the appropriate time horizon, if you have a long time horizon and you have a good feeling about what your companies in your portfolio are worth as ah as a traditional private equity investor, and you know you're not planning to exit in the next six months, nine months, 12 months anyways, you can kind of hang on to these longer term expectations about valuation.
00:22:09
Speaker
and I could make the case that public markets are a little too twitchy, too jumpy, too volatile, and not long-term enough. you know But I would say the truth is probably somewhere in the middle. and think where the rubber really meets the road for traditional private equity is what you've seen over the last few years, um especially from 2022 and beyond, where exit environments have really, let's say, decelerated, dried up.
00:22:30
Speaker
At different points in time, you become you know quite dried up. there's kind of that question of, okay, you've been holding this company at at a certain valuation on your books. um You can still say that you have multiple years time horizon left to hold it.
00:22:43
Speaker
But if you don't have any buyers willing to pay the price that you're holding that company at, is it really actually worth that? does Is it worth it two years later? Well, we've certainly seen some creative ways to resolve that that have come up.
00:22:59
Speaker
I'm trying to remember that the term that's used, but there's two things that have been a recent development and to address exactly what you're talking about. The first
Innovative PE Exit Strategies
00:23:09
Speaker
is, well, we've always had secondaries, but now we have tertiaries, which is you interesting. And then there's I can't for the life of me remember what they were phrased, but it's essentially the idea of ah private equity firm selling a portfolio company to another private equity firm to put into the next vintage of their fund.
00:23:34
Speaker
So not purely a secondary per se, but like an exit from fund a yeah and then it becomes a new position in fund And the exit is through that. That is another creative way that private equity has found ah to resolve the exit problem, a tertiary market beyond secondaries. And then this idea of the purchasing portfolio companies and just selling it to the next vintage of the fund ah so that you have the exit from fund to be able to put into fund b And so those are two creative ways that they've they've dealt with it.
00:24:09
Speaker
Yeah, so I think continuation vehicles is, ah That's what it is. Continuation vehicles. I was trying to remember what it's phrase. That's definitely an interesting innovation. i think um yeah Is it innovation though or is it just sneaky ah sneaky marketing and sneaky packaging to solve a problem?
00:24:27
Speaker
Yeah, what'll we'll we'll call it a a creative way to generate some kind of distribution to LPs that are hungry for those distributions. and Yes. but in the cycle I think there's there's kind of that golden age of of private equity probably culminated in 2021 when you know everything was healthy, fundraising was strong, deals were being done, exits were being realized, cash was being distributed back to investors. and um I think 2021 was kind of the peak for that. It's definitely been a lot slower since then. I think LPs are are are definitely pretty hungry for liquidity, hungry for those distributions.
00:25:00
Speaker
And in some cases, those GPs need to get pretty creative about how to generate them. Yeah, I would also argue that most companies would prefer to stay private for as long as humanly possible. They don't necessarily want to exit through the IPO market, which was the traditional way at which a lot of these firms would um monetize the positions.
00:25:19
Speaker
but Even if you look at venture capital, which is, you know, We tend to think, or I think the audience might think of venture capital and private equity as two different things, but they're not. Venture capital is like a subset of private equity like buyout is.
00:25:32
Speaker
um and And even in those cases, we have all these companies coming to market that are providing like a um exchange for private companies, right? For individuals to come in and buy private companies and and basically a private market exchange. And this is something that's become big because firms are IPO-ing much later in their maturity, you know, before companies would come to market as soon as they possibly could, because that was an exit. That's how the founders were able to get compensated. That's how the investors were able to exit and monetize the positions.
00:26:09
Speaker
And so as soon as they were able to fundraise and gain capital through um an IPO, they would. Now, it's not that hard to raise billions of dollars from private markets and venture and firms like Uber and DoorDash. And these are companies that were fully mature when they came into the IPO market and really stayed private for a very long time.
00:26:33
Speaker
So it really has changed the dynamics of private equity and how long the lockups can be. And then again, these these creative vehicles of which to move things through the vintage so the lockup periods don't become too extended.
00:26:48
Speaker
But I think that brings us back to kind of the value of something like what you're doing. And I think I want to really hit hammer this home. You are attempting to replicate some of the characteristics of private equity that are advantageous in alpha producing.
00:27:05
Speaker
But what you're
Mimicking PE Traits in Public Equities
00:27:06
Speaker
not trying to say is that you are private equity, correct? Correct. yeah Yeah, definitely not private equity. not These are public public securities at the end of the day Yeah, and and I think a lot of people see products out there that are fully liquid and they they say private equity in the title and they immediately are like, oh, I'm going to be able to get all the benefits and characteristics and attributes of private equity for diversification.
00:27:32
Speaker
But in actuality, what you're really trying to do is identify the characteristics that private equity looks for in a company and then look for those same characteristics and the companies in the public markets and invest in them.
00:27:46
Speaker
And and so Let's talk about the unique aspects. You talked about how you're quant driven, very data driven. So are there particular factors that you screen for um to kind of start your process of finding the names that make the most sense for the portfolio?
00:28:03
Speaker
Yep,
Quantitative Methods for PE Characteristics
00:28:04
Speaker
yep, absolutely. So I know I mentioned the top-down aspect before with the industry profile matching, where we're yeah deliberately mimicking the industry profile that you're going to get in a PE fund.
00:28:14
Speaker
um So there's probably more of like this called secret sauce on the bottom-up side of things. So it's a series of a dozen different model, i sorry, dozens of different models that we employ here.
00:28:26
Speaker
um that are all targeting some nuance for for what private equity investors are looking for in their companies. I know I mentioned a couple of those earlier, just the super easy ones, the valuation characteristics you're looking for and growth characteristics, profitability, cash efficiency.
00:28:42
Speaker
um But some of the more interesting ones are sometimes more related to looking at the kind of ecosystem of interrelated companies that that every company ah has surrounding it, meaning their customers, competitors, partners. Think about that broader supply chain that a company operates within.
00:29:00
Speaker
we as quants can process a vast amount of data on all of these interrelated companies and kind of look for for trends that are percolating when they within a company's broader network um and look for that to kind of identify positive trends that that could be impacting a business on a going forward basis.
00:29:18
Speaker
um I think in many ways that replicates what a good PE manager should be doing. They should they should fully understand the supply chain of a company that they're targeting for potential investment. They should understand the competitive ecosystem um and ands basically all these interrelated companies. But there is a limit to what humans can do in in like an intrude due diligence on certain number of companies. They can't go out and you know assess thousands of different companies the way a quant can. So we're able to get well beyond first order linkages for companies, go beyond know second
00:29:50
Speaker
third order linkages between companies with this type of model. So that's i mean that's just one aspect. I know I mentioned there are dozens of underlying models here. don't have to give us all the secret sauce, just a couple of high level things.
00:30:02
Speaker
yeah yep yeah so Yeah. That's one people tend to find more interesting. Yeah. So i find that interesting in a lot of ways. You know, we talked about how one of the ways that private equity is able to unlock value often is in the fact that they do take controlling interests.
00:30:19
Speaker
um Is there ever a situation where you would potentially, obviously you can't take control in public companies, but you can take an activist stance, right? You can, you know,
00:30:31
Speaker
do something in that vein. And there's there's a handful of funds out there where the manager may occasionally take an activist position. Is that something that maybe you don't do, but maybe you find yourself in a foxhole with somebody who is taking an activist role?
00:30:50
Speaker
Yeah, a very good question again. So same thing. Yeah, as quants, we're not going ones playing an activist role. um But by nature of what we do, I mean, there are going to be these opportunities in some of our portfolio holdings where an activist will get involved and basically try to unlock change the exact same way.
00:31:07
Speaker
shouldn't exactly, but in a very similar way to what PE would do. um It could be replacing management. It could be a number of other um changes they try to bring about within a company to unlock what they identify as as value.
00:31:19
Speaker
um Really not too dissimilar to what a good PE manager is going to do. Playbook might be slightly different, but but in spirit, there there's a lot of commonality there. And like I said, we we do find ourselves, we'll call it,
00:31:31
Speaker
You said in the foxhole, yeah, that's appropriate, but basically co-invested with a with an activist manager that'll come along. And to some extent, you know that that is in alignment, again, with the broader goal of trying to mimic PE's return drivers.
00:31:46
Speaker
Would you ever use in your quant models um any sort of um factor that would follow activists' involvement in companies and use that as part of um ah the drivers of for security selection?
00:32:02
Speaker
Yes, that's something we've researched over time. um i can tell you there's there's not, this isn't supposed to be a comment on the broader activist space. There clearly some very skilled activists out there, but the data we have doesn't show that as a, doesn't show activist involvement as a clear alpha signal within the public equity market. So it's not something you're gonna find a lot of exposure to here, um but it's something we've definitely considered and researched over time.
00:32:26
Speaker
Interesting. I would have thought the opposite, but I guess it's because most people only know like the three or four activist investors out there that actually are good at being activist investors.
00:32:37
Speaker
Who wants to get all the headlines. Yeah, exactly. um For better or worse. So there are some good ones out there. I think of it more as we're going to try to find those companies that are very PE like their characteristics. And if it happens to be that an activist also identifies that company as potentially a way for them to unlock shareholder value, then great.
00:32:57
Speaker
We're very happy to have them come in and do it. um Like I said, there's kind of an alignment of of thesis in a way. there Yeah, I was going to say it in a way it's kind of a quant and an active ah manager, I would think you'd find yourself identifying similar companies because you're kind of both looking for the same thing.
00:33:17
Speaker
Yeah, exactly. It's it's again, kind of it can be a natural byproduct of the process, just like having these public private takeouts of of names in our portfolio. Yeah. More byproduct the process than a clear objective of the process.
00:33:29
Speaker
Exactly. so What are some of the ways that you guys think about future trends in private equities? We joke about this all the time. I definitely send you memes from time to time of um the the Instagram PE guy, i Johnny, um where he has these funny little videos that he creates that are like every PE stereotype.
00:33:49
Speaker
But he often references PE e trends, right? In his little skits. And common PE trends that we see today are things like, pediatric dental roll-ups, primary care roll-ups where PE e comes in, buys a whole bunch.
00:34:06
Speaker
Actually, I took my son for a Halloween on Friday. And I don't know how I didn't know this, but the dad of the one of the kid's house, he was going over and I used to coach soccer together.
00:34:19
Speaker
And when we were sitting chatting, we were talking about what he does and he knew he's a dentist what i didn't know is he does that i was like oh you're like peas like technically it's just me so i'm not pe e but i it's the same idea um but you see that you see buying up primary care clinics and then on a different um ah note the sports aspect has become really big in pe e and everybody wants a piece of that as well so when you see these kind of like mega trends within PE. how How are you able to kind of identify them and find ways to gain similar exposures inside your your index?
00:34:55
Speaker
Yeah, yeah. so
Tracking PE Trends in Public Markets
00:34:56
Speaker
So we actually have um multiple different data providers that we work with who are tracking basically every single deal that's being done in PE, really across the full size spectrum. So obviously, mega deals be captured that's well known, well publicized, but a lot of small deals out there done by small funds.
00:35:12
Speaker
we We try to really have a comprehensive look at the at the deal landscape by using multiple data providers. And it's certainly easy. i mean, there're there there are ways to play ah plenty of health care related names within the public equity markets that are actually in a very similar characteristic, same um headwinds, tailwinds to their business and their industries as private equity.
00:35:35
Speaker
Another one that um I'm not sure that the meme guy has highlighted, but you know senior living, for example. like are Are demographic trends really going to impact privately held or PE held senior living facilities or dental dentistry or anything else? Are they going to impact those differently than than one that's publicly held? i would I would argue no. It's all the same demographic trends. It's all the same um kind of thematic tailwinds, headwinds.
00:36:04
Speaker
ah So it's just by working working with multiple data providers. We usually, what we do is we use a um kind of ah a rolling time window so that we're not just you know keeping this static industry profile for our for our portfolio.
00:36:17
Speaker
What we're doing though basically using a a time horizon that kind of aligns with what a PE's investment time horizon would be. And that definitely changes over time. So you've seen um over the years, you know big increase in the appetite for software companies within and specifically SaaS companies within traditional private equity, that type of evolution is is absolutely going to be reflected in our portfolio as well.
00:36:41
Speaker
So this is definitely ah a living, breathing industry profile rather than um one that's kind of set it and and forget it. So in that vein, how do you gain exposure to some of that stuff when there might not be a ton of areas in the public markets?
00:36:57
Speaker
And I'm thinking mostly in the sports realm. Like, yes, I know and MSG is an example of how you might be able to gain sports exposure through public markets. And there's other smaller kind of publicly traded conglomerates in that sense.
00:37:11
Speaker
But um when you think about those trends, something like pediatric dental clinics granted there's what 9 000 public companies out there i'm sure in the small cap industry that might be missing something that's in that uh in that area but does that really narrow your universe down in many ways when you're trying to get those exposures Yeah, there's certainly there's certainly going to be some exposures that private equity taps into that that aren't really available in a perfect apples to apples in the public markets. I mean, i think your sports example is a really good one. Obviously, there's there's been a move towards ownership of professional sports franchises on the part of PE funds.
00:37:52
Speaker
um you can't really say that they're direct public comps. um There's certainly kind of an industry that um that sports and you sports franchises would fit under, whether you want to classify it as more like a um Entertainment.
00:38:08
Speaker
Yeah, I was going say media and entertainment. You can make the case, you know consumer, you know, there there are different ways you can classify these. And there is a little bit of a manual process on our side to map ah those deals to to a public equivalent, a public equivalent in in terms of industry.
00:38:23
Speaker
um So, yes, you're not going to have a perfect apples to apples, but at the end of the day, you're going to have an exposure that's pretty correlated let's say it's a media and entertainment asset ah that is publicly traded, is it going to be ultimately correlated with um a sports franchise? It's going to, in many cases, the answer can be yes.
00:38:41
Speaker
So that's really in the spirit, you know, the spirit is really to try to match match as closely as we can, acknowledging that sometimes you're going to have to buy something that's correlated, ah even though it's not a direct apples to apples comparison.
00:38:53
Speaker
Yeah, I think that's a good way to kind of frame it, um but also might actually make it easier because the number of options is smaller. so i was going to say, the the other the other thing to point out is just, I know obviously taking stakes in professional sports franchises very popular and headline grabbing these days, but if you look at the overall PE landscape,
00:39:13
Speaker
the money deployed, the capital deployed in these deals is still you know pretty small fraction. So it's still there's a ton of money going into, obviously, i mentioned the SaaS companies before, yeah in number of other industries that do have very close public comps.
00:39:28
Speaker
Yeah, I always say that um because obviously, You and i bond over our mutual passion for Boston sports teams. but That's how we became friends.
00:39:40
Speaker
That is basically our friendship in a nutshell, was just going and watching Boston sports teams together in Seattle and living the heartbreak and the elation of seeing the Red Sox win the World Series and then watching the Patriots blow their Perfect season. The highs and the lows.
00:39:57
Speaker
um But my point being is that you know I had the privilege of talking to Mark Lazzari about how he goes about managing his sports fund. And he talks a lot about that the vast majority of the returns you get in sports rights doesn't come from the sexy stuff.
00:40:13
Speaker
It comes from more of the emerging sports and some of the opportunities that are are very, very new in their maturity, media rights, all kinds of stuff. So i I totally understand what you're saying. I think that the concept though of being able to match exposures is really important for anybody who's looking to invest in this type of product.
00:40:34
Speaker
Let's just think about from the final standpoint, for an advisor who is considering ways to gain private equity exposure in a client portfolio, um what are the key areas to consider where a product that is based off the indices that you manage might be attractive as opposed to the private equity vehicle itself?
Advice for Financial Advisors on PE Exposure
00:41:01
Speaker
yeah Yeah, I think it's um important for any advisor to think about basically all the clients they have in the client base and say, okay, they're goingnna there's certainly going to subset of of of my overall client base who is attracted to the private equity story.
00:41:15
Speaker
Options are now becoming available to actually invest directly in some of these private equity type funds or whichever way you're going to access that. and are okay with illiquidity and okay with paying higher fees and so on.
00:41:27
Speaker
But there probably is going to be a segment of their client base for a lot of advisors that isn't going to be able to check all those boxes. um Yes, they they may be hearing a lot about traditional private equity. It may sound may sound sexy. They may want to get get involved, ah but maybe they don't have the ability to lock up their capital for years and get exposed get exposed to kind of cyclicality and distributions.
00:41:51
Speaker
And ultimately, there are people who are still fee sensitive and they're thinking about how much they're they're paying. So I think for advisors who kind of have that segment of the client base that ultimately, you know, is going to ask the question of why am I paying so much for private equity? Is it actually outperforming the public markets by a sufficient um amount?
00:42:09
Speaker
And if you don't want to be caught flat footed, mean, you want to definitely proactively kind of think about you know how can i how can I deliver a lot of the benefits, a lot of things that people like about traditional private equity without necessarily some of those drawbacks that you get in in a more traditional say drawdown structure within private equity.
00:42:26
Speaker
And I know there's been a lot of product innovation um when it comes to some of these semi-liquid vehicles. And you mentioned interval funds before. So there are there are ways that the industry is innovating now to to ah to to kind of address some of the ah historical drawbacks.
00:42:42
Speaker
But I'd say there's there's there's still a segment of the market that I would say is going to be attracted to Basically, you can think of as like the passive alternative, the passive exposure to the asset class. So in a way you can think of what we're doing is, I mean, this is overly simplified, but in a way you can think of it as kind of what is saying S&P 500 passive ETF to broader large cap exposure you're trying to get, US large cap exposure you're trying to get in your portfolio.
00:43:06
Speaker
um and you don't want to pay a lot for it. You want to be able to transact very easily in it. You want to be able to make tactical calls potentially in that exposure. It's basically, that's the analogy I think about is this is basically creating that type of vehicle, that passive exposure, the broader traditional private equity asset class buyout specifically.
00:43:25
Speaker
Yeah, I think that's a great way to think about it. And you mentioned interval funds and I mentioned interval funds. Interval funds, um They solve the problem of the accredited investor qualified purchaser hurdle and the minimum hurdle, but they don't solve the liquidity hurdle.
00:43:41
Speaker
If you are investing in an integral fund, you are locked up. I know, i know everybody will come at me and say, well, no, lo there are quarterly redemption periods. Yes, but it's never going to be for your total investment.
00:43:53
Speaker
um And there's never a guarantee that you'd be able to get all out in you know a single trade. And so you do have to consider these things. Are they more liquid than traditional private equity? Potentially, I mean, secondary markets have gone a long way to be able to offer liquidity and if somebody is in distress, but um they're still fairly illiquid and you are still somewhat locked up with those vehicles. So
Personal Anecdotes and Rapport
00:44:17
Speaker
important reminder.
00:44:18
Speaker
Thank you for joining us. Is there anything we didn't talk about that you would like to make sure that we cover um before we go?
00:44:31
Speaker
I covered a lot of ground here. I actually don't have anything off the top of my head that that we left uncovered. um Yeah, just like to thank you for having me on Shana and definitely enjoyed the conversation with you.
00:44:43
Speaker
Absolutely. And you know before we go, I would be remiss if I didn't um make a sports reference just because you know that's our friendship in a nutshell. um How you liking Raybould and Drake May?
00:44:55
Speaker
Are you as happy as I am? it's It's been a good combination so far. I was actually at the game on Sunday. i was down in Foxborough the day before yesterday. um Got to see and nice win. Pulled it out.
00:45:07
Speaker
ah Almost looked like we were going to blow it, but yeah hopefully we're a good team that finds a way to win because for too many years, well, for the last couple years at least, we weren't finding ways to win close games.
00:45:17
Speaker
Yeah, I was telling somebody the other day when they hired Gerard Mayo and Mike Rabel was a free agent at the time, like, what are they doing? And I thought they missed their chance, but thankfully it all worked out and we were able to get our guy. And I just love watching Braves on the sideline.
00:45:32
Speaker
yeah It just makes my heart happy. So much better to be a Patriots fan watching them this year versus the last couple. Yeah, absolutely. um But we are spoiled and we should probably just acknowledge that we only had five down years.
00:45:47
Speaker
And now it seems like we're on the uptick again. And, you know, there's franchises that have been bad forever. like the Jets. I will never lose a bet to Rob Balcoma ever again, um because there's no way the Jets would ever do anything that would make me have to wear. Who was it? um Whose jersey did he make me wear?
00:46:04
Speaker
So in 2007, I made a bet with one of our former colleagues, and he was a Jets fan, and he made me wear Chad Pennington's jersey to work after I lost the bet, and that was the worst.
00:46:15
Speaker
So was going to say Chad Pennington, I thought that's who it was. Yeah, it definitely was. Well, I appreciate you coming on the podcast. It's nice to have ah discussion about kind of what you're working on.
00:46:26
Speaker
i think it's really interesting and we'll include in the show notes ways in which our advisors and our investors who watch and listen can connect with you to find out more about the index that Manumeric manages and ways in which they might be able to find an investable fund for those um indices.
00:46:46
Speaker
um But with that, thank you so much for joining us. Thank you, everybody, for listening. As always, remember to like and subscribe. Leave a comment. Let us know what you want to hear about, who you might want to have on the show. And until next time, this is What's the Alternative? And I am Shana Orzik Sissel.
00:47:05
Speaker
and goni
00:47:08
Speaker
The opinions expressed on the What's the Alternative podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or in any specific security.
00:47:24
Speaker
This is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.
00:47:36
Speaker
Any past performance discussed during this podcast is no guarantee of future results. The guests featured on this program are participants on Bonrien Capital Management's platform.
00:47:48
Speaker
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Speaker
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00:48:21
Speaker
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Speaker
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Speaker
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