Capital at a Crossroads Why Private Markets Matter More Than Ever

David Harvey,

good to see you both. Um, Carlile obviously is a giant global asset manager raising money from investing money all around the world. I want to start with the macro environment, particularly the geopolitical outlook. Carla's roots have always been in Washington. Um, you I believe David spent some time in the federal government.

Let's start with Washington. What is your read right now?

Well, Washington is always interesting and uh right now I'd say that uh many people in Washington are focused on the potential change in government if there's a midterm election that doesn't go in favor of the Republicans. We don't know what's going to happen. Generally, presidents in their first midterm election uh after they're elected lose on average about 25 seats in the House. If that were to happen, then the Republicans would lose control of the House. Uh in the first midterm under President Trump's first term, he lost 41 House seats.

So people are focused a bit on what's going to happen in the midterms and how that will will shape the uh the government. Right now, the president has pretty much all the legislative authority he wants and the legislation. So he's not looking to pass a lot more. So it's not going to make that much difference if the Democrats do win control of the House. I think the president's focused on implementing the agenda he already has.

And right now I think the economy in the United States is in reasonable shape to grow at 2% or so. Inflation will probably be around 3% or so. There's a president will announce his new selection for the Fed chairmanship relatively soon. I think it's generally thought that the current head of the National Economic Council will take that position. Um could be wrong, but that's what it seems like the case, Kevin Hasset, who's very qualified if he were to get the job.

And um you know people in Washington are also always focused on the next presidential election but it's a little bit down the road so probably too early to speculate about that.

And when you look geopolitically to the Gulf to Asia to Europe what's the sort of macro environment like

right now I'd say that uh the president is I can't speak for him but my sense is that he's trying to get the war in Russia Ukraine over and I have a think all wars eventually end. And I think that we're in the latter stages of resolving that one way or the other. And I suspect one year from the day that war will be over one way or the other. And I, you know, I'm not sure that either side will be happy of the results. But I suspect one year from the day I suspect that war will be over.

Tension may turn to what's going on in the Middle East and hopefully their resolution in Gaza can hold and other uh things in the Middle East can have the stability that people want. Um, the Middle East is not just the Middle East, but it's really become the middle of the world because the attention of the world has increasingly focused on what's going on in the Middle East. In part because of the economic power of the Middle East and in part because of the willingness of many people in the Middle East and particularly people in Abu Dhabi to focus on how to create greater wealth for people uh in their country and in the region. And I think Abu Dhabi's done a spectacular job of uh creating a capitalist system that I think works for virtually everybody. and it's a real model for uh the rest of the world and for the Middle East.

So I applaud the people in Abu Dhabi for having uh kind of developed a form of capitalism that seems to do quite well and I I suspect uh the president of United States is not going to have to spend that much time dealing on issues in the Middle East because I think they're going to largely work out themselves. With respect to China, Taiwan, too early to say what would happen, but I suspect that uh nothing dramatic will happen in the near future there. So that's the backdrop. Harvey, your job as CEO is to figure out how to make money in that. So when you look across the landscape, what's maybe perhaps the most exciting opportunity and a and a place where maybe you're a bit more skittish?

Well, let me first say uh congratulations to your highnesses and your excellencies. What an extraordinary event. Uh it's a real honor for David, myself, and all of our colleagues at Carl to be part of this week. It really is a remarkable venue and congratulations on your success. So in terms of the investing environment, I would I would make uh you know sort of a high level comment about where we are in the markets globally.

Obviously there's been an incredible run in equity markets credit spreads are at all-time tights. I would say when we look through Liz our portfolio companies so you know David created the firm back in 1987 today in our portfolio companies around the world we employ about 700,000 people which makes us one of the largest employers in the world and we roll up all that data and actually the employment picture the ebid growth picture I would say operating performance picture looks quite strong across the entire platform so that gives us confidence Liz in the economic environment now when we think about deploying capital Liz onh behalf of our investors and people we partner with around the world. We think about it in many years. So we're in the private capital business. We manage about 475 billion of private capital which makes us one of the largest in the world across private equity, real estate, credit, insurance, secondaries and co-investment solutions.

And so when we look at that, we look for very very meaningful trends. And I would say based on what David just described, we are at some inflection point in history in terms of how capital is being deployed, if you think about the last 30 years of trends, they really have shifted. And the primary trends today, I think, are obvious to many people in the room, but they're things like national security, um, which leads to aerospace and defense. There's really global competition for economic growth now and creating affordability around the world and this is really a western hemisphere challenge but the demand for private capital in reindustrialization aerospace defense energy demand to support all the energy needs around the world and then of course other trends Liz which maybe we'll talk about is just you know we're inherently optimistic in what we do. Um I believe as David just described the world will continue to get better.

Hopefully we'll have a conclusion all these words but longer term wealth will continue to accumulate around the world and retirement is now a business that our industry is focused on and how our business is now extending into different parts I would say different clients around the world that's also a global phenomenon. So those are the big trends that drive our activity and our thinking. I'd say that uh I first came here many years ago with Secretary James Baker who was in our firm then and George Herper Walker Bush who after he left the presidency was in our firm as well and uh I met with Shake Zad and I remember him as being an extremely humble person and humility is a virtue of leaders that I admire and he had a great deal of humility and he also I think did something I think really great leaders do which is listen um it's always great to tell people what to do but listening to what other people say is actually a great virtue and he did that and the form of capitalism that ultimately evolved in Abu Dhabi is is a form of capitalism that I think other countries in the world would would envy u which is to say uh spread the wealth around the country give people a chance to participate in economic development and also listen to what the people think is make sense and also have a great deal of humility even if you become a very econ powerful economic powerhouse listen to what the people say and be humble about what you've achieved and those are virtues that I think shake Zad exhibited whenever I met him and everything I read about them.

One big theme in private capital right now as Harvey you mentioned is retail and a push into retail fundraising. I think you were here this weekend for the F1. I believe you are a sponsor. Congratulations are in order I'm told I missed the race.

Yeah, I know. Uh Max uh was really extraordinary this season. We we wish we had gotten uh the championship, but it was a really amazing comeback.

Um but that's a big sponsorship and a and a push for you, I think, into the high net worth channel. Can you talk a little bit about what the and and Carl is certainly not alone in chasing that retail money? These are products that have been institutional products for most of their 50y year history. What is the opportunity in retail? What perhaps should we be looking for?

retail investors are different fundamentally and curious what you're seeing in that channel.

Yeah. So I think this is just uh a lot's been talked about is this as though is this is somewhat revolutionary. I think it's hardly that I think it's quite evolutionary. Um you know in the early days when David formed the firm they didn't even have anything called private equity. There was leverage buyout.

Of course over the past 38 years we've seen the evolution of public market capital. Um we've lost half the public companies since 2000. private capital's evolved to fill that need as an efficient form of capital around the globe and you've seen the rise of things like ETFs and as I said this is just a natural evolution of the development I mean we think about the industry of private capital it's quite young you know David created the industry as I said almost 40 years ago and so I think this is just a natural evolution as we go through this the critical factor is how do we actually deploy this capital for that constituency if it's in a retirement account if it's in wealthy person's account or as you said in a retail account and I think that the level of care here is what the industry needs to focus on because um to sort of describe these as liquid instruments like ETFs or stocks um that's a complete misunderstanding and I actually think you know the industry um in his early evolution refers to some of these instruments as as semi-liquid and I think the industry would behoove itself to call it sometimes sometimes not liquid at all and and so I just think we need to be very very clear with all of our partners and the platforms we're on globally um about actually the performance and the expectation how people should think of this in portfolio construction but it's quite natural in terms of our partnership with Oracle Red Bull um that too is uh not revolutionary it's evolutionary but we're quite thrilled about it because it really represents everything that we see in the future you know it's global it's a diverse sport uh has 800 million viewers it's growing and and Oracle Red Bull as a partner has been an incredible partner And when you talk to them, they talk about the same things that David and I talk about at the firm. Teamwork, precision, excellence, uh, data, and so it was a very natural partner for us. I would say fortunately to be an investor and a supporter of an FY team, you don't have to be a good driver.

And so I didn't have to take a driving test, uh, nor did Harvey, to in order to be a sponsor because I wouldn't have passed it.

Last time you changed a tire, like how long did it take you to change?

I changed a tire once and it took me an hour and a half. um they did it in 1.7 seconds. So

yeah, 1.8 different

that's what they call a spread on Wall Street. in terms of um alternative and and the uh retail uh kind of thing you mentioned um we have a system in the United States where if you're very wealthy you can invest in or big organization you can invest in alternative energ alternative uh investments so-called and over the last 50 years or so alternative investments in almost every single year have outperformed public equity investments and public fixed income and the wealth has accreted largely to large institutions and wealthy individuals. What we want to do in the United States now and I think the administration uh under and President Trump is beginning to do this is say what about the smaller investors that don't have access to the cariles of the world how can they participate in this higher rate of return and that system is beginning to put into place and I think it'll actually be fair uh and equitable because you don't have to you shouldn't be a wealthy person only to be able to get the benefits of the higher rates of return that you get from alternative investments like buyouts or venture capital and that system will be put in place the next year or And I think it will go around the rest of the world as a as an a good evolution of private equity and private investment to make it available in the so-called democratization of private equity.

But part of the reason that those returns were so good for so long in privates is that they had large parts of the economy to themselves and less capital to deploy. And I wonder whether if it gets opened up really broadly to retirement accounts, 401ks, trillions of dollars coming in, usually that means that returns will come down. So is it really about opening higher yielding investments or is it more about a convergence of these two things?

Well, for the last 50 years, every time a new set of investors came along, uh public pension funds, sovereign wealth funds, global pension funds, uh private family offices, uh high netw worth individuals, people said it's too much capital and the rates of return will come down. And almost every time they've been wrong. So the markets are expand, there are more opportunities, the population world is getting bigger. And remember, twothirds of all private equity dollars are invested in the um in in the developed markets. The so-called global south gets a very small percentage of private equity alternative dollars.

So there's still enormous opportunities and while the rates of return could come down, they'll still be I think much higher by two, three or 400 basis points than the average public equity returns will be. So I think there's still plenty of opportunity for people to participate and get good rates of return.

I think Liz, it's a it's an important question. As David said, it gets asked every time there's an evolution in the marketplace. I think the key here is what's the demand side for the capital? And the demand side everywhere in the world for private capital is only going up. You know, uh we launched our business in Japan 25 years ago.

There's a demand for private capital. There's demand for private capital in Europe. There's demand for private capital and growth here. And so I think the competition for global capital is high. And we happen to be going through a cycle where fiscal capital is too stretched.

Deficits are too high around the world. So it really can't be funded by governments to the extent to which you otherwise might want it to be in terms of infrastructure growth, economic support, and banks play a very vital role, but they can only play so much of a role. So the demand side of the capital is significant wherever I go in the world. And so I think this is actually going to be a natural give and take. Um, but there will inevitably be periods where there'll be supply versus demand issues, but in the long run, I think it fits quite naturally.

I the Formula One race, by the way, are spectacular to watch if you can understand what's going on because I finally figured it out. But if they could invent mufflers for the cars, I would like it better because, you know, otherwise you you have the earplugs. But if they could figure that out, I'd be even more enjoyable for me.

We we'll put in a word. Um, you know, another big trend to watch in in private capital particularly is consolidation. It's increasingly becoming a scale game. Um, Carlile is what about $500 billion of assets?

Yeah. Um, and I'm curious sort of maybe Harvey and then David where you think that line, the sort of minimum, not necessarily size, but breadth and ability to be able to compete versus, you know, the sort of bifurcated niche players sticking to their knitting mostly not publicly traded the way Carlile is.

So there this this question of scale I think is quite critical. I think all the things we just talked about in terms of the trends of competition for global economic capital require scale. So again, we've been in Japan for 25 years. We've had an office in Abu Dhabi for a number of years. David was one of the first, if not the first, to come to the region with Baker and Bush back in the 90s.

And so you need a global footprint, Liz, and you need a global strategy and you need ability to scale that across all of the capital solutions. And I think when you think about the evolution of data science, AI, you need to be able to make that investment so you can harness all that data and that information. Having said all that, I think uh I guess it was 1998 long-term capital. I was just a kid on a trading desk and when long-term capital happened, someone quite smart was walking behind me, been in the business a long time and he happened to say, "Okay, that's it. That's the end of hedge funds.

There'll never be any more hedge funds in the world." For those of you old enough to remember that actually kicked off the hedge fund boom and it and it grew dramatically. And so I think there'll always be a role for niche players and specialty players in all aspects of finance. But I do think scale in terms of the ability to harness the data and make the investment and actually really deliver global solutions I think is quite critical. where the cut off is I don't know but you really need geographic diversification and you need solutions because when we talk to clients today in the same conversation they might be actually looking to reposition their portfolio buy an asset uh create a fund and so the the client sophistication and scale is huge and so you have to be able to match that I think scale is important and we're very fortunate to have scale and scale can help you get into deals you wouldn't otherwise get into but the most important thing to is to have highly uh incented individuals with high degree of intelligence and work ethic and they're really to build something from scratch and so somebody tomorrow could come along and build the next Blackstone Carlile if they have a pretty good work ethic they have a pretty good idea so it's not impossible for somebody to come along and and and build a big firm of scale even today though today the larger firms do have an advantage right now but you can always you know find a new way to build a niche and build a big area of of expertise and and develop investors.

So, it's really still available to capitalists to be able to build their their expertise and build a big firm and get the advantages that we currently have.

Well, that's all the time we have. You can spend the year practicing on the tire change and we'll we'll time you next year.

Thank you.

Thank you everyone. Great to be here.

Thank you so much.