Private Capital as the New Public Market

Good afternoon everyone. It's a pleasure to be here. U my name is Michael Reese and I'm the founder and co-president of Blue as you just heard. Um and we uh run a $300 billion public alternative asset manager. We're headquartered in New York and we have four main strategies.

The first uh is direct lending. Uh the second is a leading triple net lease real estate business. The third you may have seen is our digital infrastructure business where we are financing two of the largest data center projects in the world. One for Oracle and one for Meta. Um and then the business that I founded which is the GP stakes business.

And we'll talk a little bit about it today. I want to talk about how private capital is taking over the um the public markets. You you don't have to look too far. There's data that supports it everywhere. Um there is, you know, a as the the private markets have grown pretty dramatically a a double-digit growth rate.

They've sort of taken a a large portion of investor portfolios. Um and it's all been at a time when investing in public markets has been quite challenging. Um, you can see the number of public companies has gone down from 8,000 to 4,000 in the United States over the last 20 years. Uh, it makes it extremely difficult um to uh find new opportunities. The number of IPOs that happens annually is down 66% uh since the '9s.

So, it's becoming increasingly difficult to invest in the public markets. And the real question is where can investors find alpha? Um we think you can find it best um in certainly in in the private markets and we'll talk a little bit more about that today. Again you are also seeing tremendous concentration of return in the mag 7. The public markets in the US have generally returned about 20% a year for the last three years and of that 65% was driven by the mag 7.

This year it's even more uh dire. the uh the 16ish% return that we've seen in the S&P so far is is actually really being driven by two companies, Nvidia and Alphabet. So when you really think about what the public markets are offering from an alpha perspective, you really have the MAG 2 and you have 498 other companies that are really hard to generate alpha out of. So what does that mean? where does it show opportunity in the private markets uh for you?

I I thought when I was asked to do this TED talk kind of thing um how how to get a decent amount of information across in a very uh very short amount of time. Um I thought you know what I'm going to ask the people who have given TED talks before. Uh they said there's two things that make a TED talk interesting. One is obviously a a timely topic that people want to hear about. That makes sense.

Uh, and number two is that you wear good sneakers. Uh, so when you look at it, the top 10 TED talks of all time, uh, delivered by males, nine of the 10 had people wearing some pretty cool sneakers. So I figured, hey, if there's one thing I can at least get right, I can get the sneaker part right. Um, so what I I wanted to to do is use my favorite TED talk as an illustration of what we think we see happening in private markets. My favorite TED talk is 10 years old.

It was delivered by uh a gentleman named Mark Ronson. I don't know if you've heard of him, but he's a music producer. Um he produced and won uh tremendous awards for his work with Amy Winehouse, with Bruno Mars, etc. Um, and he gave a tremendous TED talk about the history of music and how what happened from the early 80s through today was that good artists just built little by little on top of their predecessors. He talked about a um a a a a song called uh Lada Dah that was that was written and performed uh by Slick Rick um and Douggee Fresh.

I bet you never thought you'd come to Abu Dhabi finance week and hear about Slick Rick and Douggee Fresh. U but you you probably have heard the you know the lyrics daddy and then followed by anybody gets a free drink if you can tell me what the next uh line in the song is. Lahi dy we like to party. All right. So, um, that song has been sampled and overlaid on 550 other songs since 1982 when it was, uh, written and first and first performed.

And people just try to make it slightly better. I think Mark Ronson's quote is, uh, take something you love and build around it. And I think that's what the private markets done. When you look at one of the most iconic flagship private market deals ever done, it happened at about the same time as the um a as the Douggee Fresh uh song 1984. Um it was it was a a deal done by Westray Partners.

It was called Gibson Greetings. [snorts] And the value creation story in this deal was extremely simple. They used a little bit of leverage and they cut costs. And that's all private equity, private markets were for the longest period of time. And then as we have continued to evolve and create a a a much more intricate private capital market system, you've seen different companies iterate and add more and more to their value creation story, more and more to their business model, and begin and continue to drive alpha, which you can't get, as I said earlier, as part of the public market.

So you take that West Ray deal, lever it and cut costs. And you look at what our private market partners are doing today. Um just today alone, our GP stakes business, which has an underlying $2.2 trillion dollar of managed assets. That's one out of every six dollars is managed by a firm that we Blue own a stake in.

You heard from a lot of them today. You heard Robert Smith this morning. Sodak Waba of I squared. Lawrence Gallum was just on the prior panel. And what these businesses are right now is tremendous alpha generators.

They're able to take their unique position. And it's not just about leverage uh and cutting costs. It's about driving a whole host of modern-day value creation activities. You see that coming in the in the form of AI adoption, Salesforce optimization. You see it in the form of some new financial uh creative um creative strategies like uh like certainly like the use of capital call facilities early in a fund's life.

You add to that continuation vehicles on the back end of a deal. And what you're able to get for clients is a very balanced exposure over time. If you believe this math, if you were able to stay invested in a private company for 10 years, you would get the same multiple of money from a 13% irr deal as you would a 25% IRRa fund if you had to invest over a 5-year period with a 5-year harvest model. So the goal and what we see moving towards is the breakdown of the five-year investment, five-year harvest model where private markets will become a consistent and mainstay allocation across investors portfolio. It's where you can find alpha.

It's where you can get deployed and it's where I think over time we're going to see more global investors shift their capital. You've read about all of the allocation increases uh from the wealth channel, from the insurance channel. I think one of the most interesting products launched this year was our partner Silverlake that launched a institutional Evergreen fund. So institutional clients coming in, they're allocated day one and they get a full portfolio exposure. Um that's what I alluded to.

You only need a 13% IRRa to make uh an equivalent total multiple return as you would with a 25% overall IRR fund. Boy, 8 minutes goes pretty quickly. Um I uh I do just want to to um to summarize. I do think this model of take uh you know take a private company value create through it and overall over time um you're going to be able to generate public market returns or in in excess of public market returns by staying invested is what we're likely to see as we move forward. Hope you all have a great afternoon.

Thank you very much for your time.