24 7 & 360 How to Fix the Capital Markets

[Music] right welcome everybody um follow that we haven't got a 10 million pound comic to show you I'm afraid we just have the challenge of fixing Capital markets uh some my guests on the panel um perhaps you introduce again uh CI this morning you have seen CI launch uh fin Street here in this room um Michael is the co- Global head of private Equity at Goldman Sachs uh in the asset management Division and G Richie is a partner at centricus which uh manages 45 billion is it um it's probably gone up while we're talking U the old Paradigm of markets when I was a young person was Banks lent to small businesses and capital markets lent to big businesses and that's changed private markets have become a major feature of the market so Michael that's your domain why have private markets change the way these the Paradigm Works what's what's the underlying driver of that a a couple of things um first of all you're right I think the markets uh both issuers and investors have voted with their feet there there's definitely a need for a large private Market um since 2010 the broader private Equity landscape be it buyout growth secondaries venture has grown from some somewhere around $2 trillion to close to9 trillion this year and so obviously if people are voting with their feed there must be something about this Market which is very very attractive both for the investor and the issuer and you're seeing a similar Trend in private Credit One of the prior panelists spoke about that where you know just a few years ago that was probably less than a trillion dollars and has has doubl over the last uh four or five years um a couple of things so why why do we see this Dynamic um first of all there is a need for a different source of capital than public markets um many issuers want more time to make strategic decisions they don't want the hassle of quarterly reporting where they need to be accountable for very short-term decisions and very short-term interventions they basically want more time to implement more strategic uh goals secondly there's definitely a need for much deeper value creation resources and especially if you dive into smaller companies you'll often find a situation where the talent that they can attract in the public market is at a discount to what somebody that they're partnered up with like a private Equity Fund could allow them to attract and you can look at that in a couple of different ways if you are say a$1 billion uh Enterprise company you are unlikely to have access to the resources of a 10 or 20 or $ 30 billion company but what about if you team up with a large multi-asset platform that has maybe hundreds of billions of dollars of assets and can attract talent and it's one of their core competences all of a sudden you can inject that Talent into the equation and you can get m a much nicer opportunity to create value in the market and so all of a sudden you start having the benefit of timing plus the benefit of talent which overall should lead to better uh value creation yeah the talent thing here in Abu Dhabi we should probably go out the Manchester City School of building a team yeah invest heavily in good people and you might win something we we we definitely agree with that we basically believe that the best team will ultimately generate the best results and especially in a market like the one we're in right now where if you decompose returns into its core building blocks ebda growth cash flow generation and multiple expansion or contraction we're not betting on a lot of multiple expansion from here so it all needs to come in that ever important ebda growth and cash flow generation and to drive that you need very very deep value creation resources so for that reason private markets have a huge role to pay and that is just on the private Equity side there are similar Dynamics on the on the credit side but are also leave time for our other panelist I mean GTH what are the disadvantages that come along with with the private markets well I think if um you go back in time um the Genesis of the public market is about 400 years old um it started with the Dutch India Company issuing bonds um and really what are the benefits have been the benefits why is uh why do people want to go into the public markets is ideally it should lower the cost of capital so there are a couple of things that public markets typically try try and conform to one is lower cost of capital it's a transition mechanism for risk versus Capital um you get price Discovery and uh with that maybe you get some liquidity and that's what we've seen in evolution over time so what we have seen then is we've seen um certainly over the last 20 years we've seen a proliferation of companies no longer seeking to go to the public market and being comfortable staying in the private Market why potentially because the cost of capital is not lower in the public markets one two is this Genesis that because something is public means that it's liquid Andor safe is a misnomer so let me give you an example I'll take three big names household names in the capital markets if you take Barkley Deutsche Bank and City Group barley has a market cap of40 billion it trades1 1220 million a day 30 basis points Deutsche Bank has a market cap of 30 billion it trades 10000 million a day um City group has a $135 billion market cap it trades a billion do a day which is 75 basis points so by that you see that there's more liquidity in the United States which is uh true across the board but by definition you see a public uh you see a price on a screen but there's no real liquidity so it's not necessarily safe so if the cost of capital is actually um not demonstrably lower for a number of different companies and there isn't the liquidity that you that you perceive to be on the screen what you've seen is many companies choose to remain private for much longer well there seems to me there's two types of liquidity there's the real liquidity and then there's the structured liquidity we've seen and one of the features of the last decade has been the creation of liquidity by governments and now increasingly in private funds we're seeing structured liquidity to create opportunities for LPS to take cash out of businesses now those two different types of liquidity are very different in their consequences for the economy and where does Finn Street fit into the solution to that particular dyema so I think what fin street is doing by providing the infrastructure for private markets which allow for companies that are listed on the private exchange remain priate so there's a classification of group of investors who can participate in that um listing and therefore it's not necessarily that heavy in terms of Regulation disclosures Etc now what about liquidity so there's of course competing needs from issuers and from asset managers versus from investors who do require liquidity and the market as um Michael said it's grown enormously and so we know about the old Paradigm we know about the existing Paradigm is is this the time to question how the infrastructure should actually come about for a market which is where trillions of dollars so what fin Street does is really reimagine that landscape reimagine and question why are these assets called a liquid they're private assets that's okay but why do they need to be called liquid so liquidity therefore is that um there's disparate group of investors in uh the private Market some of whom who wish to trade so fin Street provides exactly that you can come and you can trade and you can find your pricing but there are others of whom who do not wish to trade so let's say you are a founder of your company and you founded this and you believe it's worth billion dollars but that's not up to you to decide so if you put your asset on fin Street you customize it what happens is because there's some others who are trading it you get realtime pricing and therefore it allows you to go and get pledging solutions from the bank cuz we are a recognized CSD so essentially what we've done is really thought through what this private Market currently lacks of course everybody can get along with doing what they really want to do investers fund manages and uh issues so much we just heard about tokenizing com Comics we can tokenize businesses as well and all assets can ultimately have a market and whether the screen has behind it some liquidity or not it's a different question but Michael this this Structured Products in private Equity Funds do you think that's a trend that will continue or do you think it's it it's running its SC I I first of all I I think that you know the the private Equity Market as as remember it 20 years ago with a closed end fund and you know no real liquidity is is is just a part of the evolution we're going to into a much more plural setting now where we have you know Evergreen vehicles or open-ended vehicles coexisting with closed end funds I think I think um the beauty about having those two coexisting is that there's a not much better match to what investors are actually looking for you might be very comfortable as a sophisticated investor you know benefiting from ultimately probably the higher return generation and the longer uh time to you know um if mature those assets in a closed end structure whilst other people value the liquidity um to an extent where they are probably willing to forgo uh some return in order to get that liquidity and I think it's very nice to see how we we we are observing in the market that we both structures are having great success and we're also now starting to see that Adventure into the retail world to give or to democratize the market in order to give even more people access however I do think again that it's important that these products are being marketed in a in a in a way where people understand the the S like the cost benefits of the two it's very hard for an open-ended structure to replicate the return of a closed-ended fund because you need those liquidity buffers especially in the more illiquid asset classes like uh private equity in order to facilitate the liquidity you need to hold a certain amount of cash or you know higher ranking Securities and that will be a drag on your return whereas in a close end the fund you can obviously perfectly time your draw downs and maximize the IR but as long as people understand the trade-offs between those two it's a very very healthy and interesting Dynamic that you can then also take into new investor classes like retail goth you raised the largest proog Equity Fund in history I think the one Vision fund was one of yours yeah uh what's your view on on how this will play out look I I think that one of the things that need to be addressed is if you think about um asset managers Public Market asset managers is typically 25 years ago the street was writing a lot of research on small and midcap companies and through the Spitzer sement um settlement and a lot of um unbundling discussions that have happened is you no longer have the cell side writing the same amount of research on small and midcap companies which is meant that for an asset manager any one of the big mutual funds whether it be Fidelity or um Massi or um Capital it just makes it harder for them to want to invest in small and midcap companies so liquidity dries up um cost of capital effectively um goes up so you don't get as good IPO price because you're not going to get coverage across the street so to the point that um Michael was saying there's no real attraction for them to go to the public markets so I think what you need to do is we that balance just move too far with regulation um which effectively drove that investment in the capital markets out my view is that you will see that come back into over time because the capital markets are efficient so that cost of capital will need to come down the or what we have seen is we've seen you know much larger companies remain private than we have seen in history the likes of a a stripe or revolute trading at 45 billion or stripe at 80 billion or you know uh shares trading hands in bite Dan in the 400 um uh By Appointment that's something we haven't seen before and that's saying to the capital markets as a structure that what has been what has happened for the last 400 years isn't what's necessarily going to happen for the next number of years but I'm very conf ident that the Capital Market is efficient and that will evolve over time s we're in Abu Dhabi how does Abu Dhabi fit into that what is a really quite European and American Market Dynamic of 400 years how does how does Finn Street liberate assets here well I think facts are that Abu Dhabi has on its balance sheet um trillions of dollars of assets that they own not just manage and as well as in the Middle East I believe in the next few um decades uh Middle East and Abu Dhabi will emerge as the dominant Global player for financial markets um and and Finn street is at the Forefront of leading that Finn Street um is leading that Abu dhabi's Sovereign Vision um and bringing it to the Forefront and bringing it to um the world so I guess the question we're all asked to to answer for our audience and guests is what does the world look like in in 25 years time and I'm hoping I'm still here to find the answer so should we go go in order of age so that Sita get us the last one GTH where do you think the the the the capital Mark been 25 years I think that the markets will always continue to think about risk and pricing risk um so you asked about Structured Products in private Equity um that's all around tranching risk and for more risk you get more return I think that you will continue to see that the um evolvement of how risk is priced and how different pieces of is tranched up of that risk and how that risk is then syndicated um my view is that the difficulty that um retail has is accessing the private markets and I think that that is something that you'll see change over time either drive it back to the public markets such that you can tap the liquidity of retail today the most liquid Market in the world is the United States and that's because it's democratized and there's a deep deep retail bid um that isn't the case everywhere else and my expectation is that the private markets will will have to come back to the public markets or they will evolve in a way that um the Deep retail bid will find a way to get into the market and you think the internationalization of markets will happen at what rate do you think in 25 years if we were sitting here sorry Michael yeah sorry yeah okay I'll I'll try and I I'll try I'll try I'll try and answer I just uh want to just build a little bit on that so first of all I completely agree it has to be more plural um what there are dynamics even in the most liquid Market in the world the United States right now which is pointing towards concentration and the concentration is going up and up and up for all the reasons that we know and and a lot of that flow is very passive I actually think the private markets play an important role in on the demonization part of this and which again will make it more plural there will be more people who take a fiduciary interest or almost like a stewardship interest in driving value in these uh assets instead of just passively watching by as the concentration increases so I think private Market private markets play an enormous role from that perspective in terms of the capital flows especially in this region what we've seen is we've seen great success over the last you know five five five to 10 years and so we we expect more flows here which is why you know obviously the the region has sourced a lot of capital but we increasingly also see a very interesting in region investment opportunity so when we sit here uh the next time hopefully in 2025 years I hope that we will also have stood up more businesses in the region um and not but just provide the capital from the region I think that is a very very healthy Dynamic and that that flow can both go east and west from where we sit here today absolutely we sit midway between the East and West CED yes I believe that UAE is uh situated in such a great location I do believe that in the next 25 years um UAE will be the corridor for East uh and West um International Securities and commodities trade that's something that we're also building at Finn Street and there's 60 people in the office who are working every day to realize that dream uh but more generally speaking how do I see the markets in 25 years is that um the asset classes the lines will blur uh we're already uh working towards private equity and public Securities to work uh and Coexist on the infrastructure uh but also you know it's a capital it's Capital it does not matter in what in which country you have it it does not matter in which type of asset you have it it should be completely interoperable and that's something that our infrastructure provides um as well as um lastly I think The Regulators the so-called referees of the game need to recognize that um International capital is a public good so for the sake of International Financial stability there needs to be some level of regulatory coordination uh from the US from Europe from the U from the Middle East and Asia and that's how that flow will actually be perfected so my uh first dissertation was on Adam Smith in 1776 he said the division of labor is limited by the extent of the market maybe the division of capital returns is limited by the extent of the capital markets uh thank you very much for your time uh I hope we've shed some light on what the future might look like I'm sure you have many ideas yourselves thank you very much for attention [Applause] much John and your panelists for running us through what the future may look like when it comes to those Capital Market structures thank you so much ladies and gentlemen [Music]