Adley Bowden: Key Trends and Developments in Private Markets

Episode Summary

Executive Summary: Adley Bowden, VP of Market Analysis at PitchBook, discusses private market investing, including private equity, venture capital, and SPACs. He explains the LP/GP dynamic, the importance of illiquidity as a feature, and the impact of low interest rates driving capital to private markets. The conversation covers trends like firms staying private longer, the frothy but resilient nature of private equity, and the pandemic's acceleration of emerging tech and geographic dispersion of venture capital.

Main Topics: Private Market Mechanics and LP/GP Dynamics (Priority: 5/5): Explains how institutional investors (LPs) allocate capital to private equity and venture capital funds (GPs), including the long-term commitment, cash flow timing, and relationship-driven nature of the asset class. Illiquidity as a Feature, Not a Bug (Priority: 4/5): Argues that the illiquidity of private markets helps investors stay invested through market cycles, preventing panic selling and aligning with long-term horizons. Drivers of Private Market Growth and Froth (Priority: 5/5): Discusses how low interest rates and the need for higher returns push institutional investors toward private markets, despite high valuations and dry powder. Notes that growth has been steady over 15-20 years, not a sudden bubble. Manager Persistence and Fee Structures (Priority: 4/5): Highlights that top private market managers show persistence in outperformance, unlike public markets, due to relationship-driven deal flow and operational improvements. Warns about fee structures (2 and 20) and cash flow surprises. SPACs and the Convergence of Public and Private Markets (Priority: 4/5): Analyzes the surge in SPACs as a faster, more certain path to public markets, with mixed track records. Notes fee alignment issues but sees SPACs as part of a broader trend of public-private convergence. Pandemic Impact on Private Markets (Priority: 4/5): Describes how the pandemic led to a focus on portfolio companies, a shift in fundraising to larger firms, and potential for geographic dispersion of venture capital. Highlights bankruptcies in retail and travel sectors. Emerging Tech and the 'Great Unlocating' (Priority: 3/5): Points to pandemic-accelerated technologies like telehealth and remote work infrastructure, with lasting use cases beyond the crisis. Encourages listeners to explore PitchBook's research on these themes.

Key Arguments: Private equity's illiquidity is a feature that prevents panic selling and aligns with long-term investing. Low interest rates force institutional investors to seek higher returns in private markets, driving capital inflows. Top private market managers show persistence in outperformance due to relationship-driven deal flow and operational improvements. SPACs offer a faster, more certain path to public markets but have mixed track records and fee alignment issues. The pandemic may unlock venture capital investment in geographies beyond traditional hubs like Silicon Valley. Higher entry valuations in private markets will likely lower future returns, but firms can use strategies like add-on acquisitions to mitigate this.

Data Points: Private equity dry powder at end of 2019: Over $2 trillion - Mentioned as evidence of frothy but steady growth over 15-20 years. Typical private equity fee structure: 2% annual management fee, 20% carry over hurdle rate - Highlighted as a common mistake for new investors. Industry standard allocation to private markets: 15-20% of portfolio - Cited as the current norm for institutional investors. SPAC capital raised year-to-date through September 30: Around $40 billion - Illustrates the surge in SPAC activity. Private equity AUM growth over last 7-10 years: Doubled - Used to argue that growth has been steady, not a sudden bubble. Percentage of total gains from Marketo that accrued to private investors: Two-thirds - Example of how private investors capture more value when companies stay private longer.

Pivotal Quotes: "The illiquidity is actually proving out to be a feature, not a bug, of the private equity asset classes." — Adley Bowden: Discussing how private equity's illiquidity helps investors stay invested through market cycles. "If you look at the total value that Marketo created over the course of about 15 years... two-thirds of the total gains accrued to private market investors." — Adley Bowden: Illustrating the advantage of private market investing when companies stay private longer. "The dollars are going to flow where there's performance." — Adley Bowden: Explaining the primary driver of capital flows into private markets.

Implications: For investors, private markets offer diversification and potential outperformance but require understanding of illiquidity, fees, and cash flow timing. The convergence of public and private markets via SPACs and direct listings may create new opportunities. The pandemic is accelerating tech adoption and geographic dispersion of venture capital, which could reshape investment landscapes.