[i3] Institutional Investment Podcast [i3] Institutional Investment Podcast

It is our 100th episode of the [i3] Podcast and we are celebrating this with an in-depth discussion on innovation in private equity, especially mid-life transactions, with David Morse, Managing Director and Global Co-Head of Private Equity Co-Investments at Neuberger Berman. Enjoy the show!  

Overview of Podcast with David Morse of Neuberger Berman

01:00 Starting in mid-market lending, but liking what the guys on the other side of the table did more
03:30 Deal flow in Private Equity has been low and portfolio companies are for more than 6 years, an eternity in PE
06:00 Prior to 2022, you had the “rocket fuel of private equity”, cheap debt and distributions exceeded capital calls. But you get to the third quarter of 2022 and all of those sources of liquidity have dried up
09:00 What we saw was that seller expectation was still quite high, but buyer expectations had come down dramatically, because the cost of capital had gone up
12:30 Today, PE transactions are not leveraged buyouts anymore, it is a very equity heavy transaction
16:30 Mid life transactions are co-investments into the private equity space. They focus on companies that have been owned for a few years, but are still performing well and needs capital to continue its value creation plan
19:00 When you are a GP, there are really only three sources of capital: private debt, secondaries (continuation funds) and co-investments (including mid life deals)
22:00 The problem in PE is not the returns, it is the distribution. And that is why there is an opportunity for private debt, secondaries and co-investments
25:00 Should we re-lever assets?
31:00 Distribution levels are at their lowest since 2010 and so LPs say: ‘I cannot commit to your next fund until I see some cash back’. If you ask me who is going to blink first, seller expectation vs buyer expectation, then I’m going to say seller expectation first.
33:00 Investment banks told us that their backlog of signed M&A agreements was higher in Q1 of 2024 compared to Q1 2021, the record exit year of all time.
35:30 The deal flow that has collapsed is one private equity firm selling to another private equity firm
37:30 In terms of the deal being done, we’ve seen a shift towards up market
38:30 We subscribe to not just interest rates ‘higher for longer’, but ‘higher forever’

In episode 99 of the [i3] Podcast, we speak with Julian McManus, who is a Portfolio Manager on the Global Alpha Equity Team at Janus Henderson Investors. We spoke about global equities, the role of the Magnificent 7, Japanese equities and hybrid cars. Enjoy the show!

Overview of Podcast with Julian McManus, Janus Henderson Investors

02:00 Getting into Japanese equities fresh out of law school
04:00 We still invest in Japan
07:00 Abe’s reforms and book value quant trades
08:00 The Japanese government has woken up to the urgence to create national champions in strategically important industries
09:50 Japan is going to be one of the most important semiconductor manufacturing hubs globally outside of Taiwan
11:00 Toyota and the demand for hybrides
14:00 There is still a notion among some investors that you invest in US stocks and international is where you go on vacation
15:30 Tech companies outside of Magnificent 7, why haven’t they increased alongside?
16:30 Many investors have trouble paying more than 25 times, one year forward earnings for any European stock
19:00 Yes, there is geopolitical risk in TSMC, but TSMC is not living in a vacuum
20:00 We are of the position that China will never be able to invade Taiwan
22:00 Because we have a large position in (defence company) BAE Systems, that allows us to have a large position in TSMC as well.
23:00 We own three of the Magnificent 7
25:00 We believed for a very long time that Apple and Tesla were overvalued and avoided those
28:30 The uncomfortable question about AI is: Are you going to reinvest the productivity gains or let them flow down to the bottom line?
30:00 On the dangers of overdiversification
36:00 Rates are typically something we don’t want to take a bet on
37:00 Defence spending will need to catch up in Europe

In episode 98 of the [i3] Podcast, we are speaking with Will Liang, who is an executive director at MA Financial Group, but is also well-known for his time with Macquarie Group, where he worked for more than a decade, including as Head of Technology for Macquarie Capital Australia and New Zealand. We discuss the application of AI in financial services and wealth management, ChatGPT and how to deal with AI hallucinations.

Overview of Podcast with Will Liang

02:30 When I was young I contemplated becoming a professional Go player
05:00 2016 was a life shattering moment for me; Lee Sedol was defeated by AlphaGo
07:00 I think generative AI will be a net positive for society
08:30 The impact of AI on industries will not be equally distributed
15:00 Brainstorming with ChatGPT or Claude
16:00 AI might help us communicate better
19:00 AI hallucinations are actually a fixable problem
22:30 Myths and misconceptions in AI
27:00 Most of the time when ChatGPT doesn’t work is because we are prompting it in the wrong way
28:30 Thinking Fast & Slow; AI is not good at thinking slow
29:00 Losing our jobs to AI? It is important to distinguish between the automation of tasks versus the automation of jobs
35:00 When implementing AI, look at where your data is and try to bring your application closer to the data
39:00 Don’t trust any third party large language model, instead deploy an open source model into your own cloud environment
43:00 You ask ChatGPT 10 times the same question and it will give you nine different answers. That is a problem.
45:00 Deep fake is a real problem
50:00 Future trends: AI agents
53:00 Generative AI will be more of a game changer for private markets than public markets

In this episode of the [i3] Podcast, we speak with Felicity Walsh, Managing Director and Head of Australia & New Zealand for Franklin Templeton about leadership, fostering a great work culture, mentorship and lab coats. Enjoy the show!

Overview of Podcast with Felicity Walsh, Franklin Templeton

01:00 Hanging up the chemistry lab coat and safety specs, and joining Watson Wyatt
05:00 Defined benefit post GFC and getting into client acquisition work
07:00 Differences between UK and Australian pension systems
10:00 When I came to Australia there was no depth in the inflation-linked bond market
13:00 Joining K2, not as different from an asset consultant as you might think it was
17:00 Making my own glossary of hedge fund terminology
19:00 In the early days of K2, there was a clear separation from Franklin Templeton. We even had our own fridge
22:00 On leadership style: “I’m very keen on a flat structure, which is not always how fund management firms operate”.
24:00 In a small team, you need to keep the job varied and interesting
29:00 Culture is incredibly important when you work for a global company
33:00 On the importance of keeping distractions away from your team
35:30 There are certain people whose counsel I seek from time to time, but they are not people who I initially thought were going to be mentors
40:00 Removing the distinction between retail and institutional teams
44:00 Focusing on community this year
46:00 Integrating the acquisition of Putnam investments

In episode 96 of the [i3] Podcast, we speak with Maria Elena Drew, Director of Research – Responsible Investing, at T. Rowe Price about the challenges and opportunities of transforming investments into net zero portfolios. How does it affect your objectives and engagement with companies? Enjoy the show!

Overview of Podcast with Maria Elena Drew, T. Rowe Price

01:00 When I was at school, I didn’t think this was a career path that was out there. At university I studied economics and geology.
04:00 As a young analyst I covered Enron and they had a very bullying approach to investors
06:00 I realised ESG was not about telling you what you can and can’t invest in, but to use information on governance and environment to get better investment ideas
07:00 I started to ask at least one ESG-related question in company meetings and without fail the answer was helpful to me
10:45 The ability to determine whether there is alpha generation from ESG is really difficult
15:00 What is your true net zero objective? Do you want to have no exposure to high emitting companies? Or do you want to help companies with their transition to net zero? Those are two very different portfolios
19:00 Track progress along the way: setting net zero status targets
20:45 We think the net zero status is a smart way of going about it, because it is forward-looking
23:30 If your objective is really just greenhouse gas emissions, then you really just incentives your manager to do sector selection
28:00 Divestment ultimately sits with the client direction
29:00 An exclusion list makes more sense for passive investors, than for active investors
31:00 If you don’t have a decarbonisation [plan], then you are making a very strong bet that all of this regulation is not going to come through
33:00 What if institutional investors leave it up to companies to sort this out? What risks do they face?
36:00 Do you allow companies to rely on carbon credits/offsets to achieve their net zero target?
40:30 Pushing companies to go too fast can be counterproductive

Maria Elena Drew also spoke at the [i3] Equities Forum 2024 in the Yarra Valley, Victoria, on 20 February 2024

John Bowman is President of the Chartered Alternative Investment Analyst (CAIA) Association. In this episode we look back at the growth of the alternative investment industry, in particular private equity, discuss ESG and take a look at the upcoming paper on the total portfolio approach

Overview of podcast with John Bowman, CAIA

02:00 I got involved in international equity investing through a few Boston wealth managers at SSGA.
6:45 I’m integrated by the power of capital allocation to solve some of the world’s problems
08:00 At the CFA Institute, I often found myself on the same stage as the CAIA executives
10:00 The term ‘alternatives’ is a term that CAIA wants to make extinct
16:00 On the growth of alternatives: We’ve got this ecosystem now where companies can stay private for longer or even permanently now, that investors can take advantage of
17:00 The first generation of private equity relied a lot on leverage, but that is not the case anymore. Investors won’t stand for financial engineering
23:00 Public governance models in the US tend to be pretty hands on…, even meddling if I might say
24:00 CAIA papers: 'Portfolio of the Future', 2022 (https://caia.org/portfolio-for-the-future) and 'The Next Decade of Alternative Investments', 2020 (https://caia.org/next-decade)
24:30 Most practitioners under 40, who analysis investments, have only operated in an environment where there was zero cost of capital, non-existent inflation and double digit capital market returns. But this environment was not normal
26:30 The best kept secret in investing
29:00 Knowledge management and operational alpha
32:30 AI is likely to be the next supercycle, but…
37:00 I don’t think we can outsource our fiduciary responsibilities to the machine just yet
40:00 Do we need to disentangle ESG and look closer at the underlying factors and how they affect clients, because you can’t average out ESG factors?
42:00 Upcoming paper on the total portfolio approach with input from CPPIB, Future Fund, GIC and New Zealand Super
46:00 Launch on 19 March
47:00 TPA changes the role of portfolio managers