Leyla Kunimoto: Why Investors in Private Markets Need a Louder Voice

Episode Summary

Executive Summary: Layla Kunimoto argued that private markets remain attractive but structurally opaque, especially private credit and secondaries. She warned that rising defaults, heavy capital inflows, and weaker underwriting may be early stress signals, while also stressing that retail investors face liquidity, valuation, and disclosure risks that are often underappreciated.

Main Topics: Layla Kunimoto’s path into real assets and alternatives (Priority: 4/5): She described starting with single-family homes after reading Rich Dad, Poor Dad, then expanding into syndicated real estate and broader private markets during 2020 as public-market investing gave way to alternatives. Private credit: growth, underwriting quality, and stress signals (Priority: 5/5): Kunimoto said recent bankruptcies like First Brands and Tricolor may be canaries in the coal mine, reflecting a decade of cheap capital, aggressive fundraising, and possible loosening of underwriting and covenants. How to monitor private credit risk (Priority: 5/5): She emphasized that investors should focus on fund reports, especially non-accruals and payment-in-kind (PIK) balances, since private credit lacks public-market style spreads and transparency. Leverage, maturities, and fund structure in private credit (Priority: 4/5): She highlighted the importance of a fund’s own borrowing schedule, whether debt is fixed or floating, and the use of structures like CLOs, noting refinancing risk and cash-flow sensitivity. Private equity performance measurement flaws (Priority: 5/5): Kunimoto criticized PME and IRR as imperfect or easily distorted metrics, arguing investors should assess funds with a combination of IRR, DPI, and equity multiples. Liquidity bottlenecks, secondaries, and retail access (Priority: 5/5): She explained that lower exit activity has driven the growth of secondaries, but retail investors typically lack an exit button, even as brokerage firms build platforms to widen access. Valuation and disclosure concerns in private markets (Priority: 5/5): She objected to secondary funds marking assets back to NAV immediately after buying them at a discount and to cryptic footnote disclosures that obscure cost basis and comparability.

Key Arguments: Private markets are often sold by GPs and wealth channels, leaving few independent voices from the LP perspective. Recent private credit defaults may signal underwriting weakness after years of abundant capital and ultra-low rates. PIK loans are one of the clearest practical indicators of stress in private credit because rising PIK can precede distribution cuts. Private credit risk assessment should include a fund’s own leverage, maturity ladder, and whether debt is fixed or floating. PME is flawed because it does not fully capture capital-call timing and distribution timing in illiquid funds. IRR can be manipulated by returning capital early and does not necessarily show true economic value. DPI has recently been weak, reflecting the exit-liquidity backlog in private equity. Secondary markets solve liquidity for large LPs but usually not for smaller retail investors. Immediate mark-ups on secondary purchases can create unrealized gains that may overstate true economic value. Private market disclosure should be clearer, especially around cost basis and holding schedules, to enable real due diligence. Retail investors should prioritize liquidity needs before allocating to semi-liquid or illiquid private market vehicles.

Data Points: Year began public-market investing: 2001 - Kunimoto said she began investing in public markets in 2001. Year expanded into private markets: 2020 - She said she expanded into private markets during the pandemic in 2020. Year started investing in single-family housing: 2006 - She and her husband began building a small Seattle-area single-family portfolio in 2006. Likely default-stress indicator: PIK rising from 6% to 7% to 11% - Kunimoto described rising payment-in-kind exposure in a BDC as a signal that the borrower base may be becoming distressed. Private equity capital call period: Typically 2 years - She explained that drawdown funds usually deploy capital over about two years. Private credit underwriting backdrop: A decade of extraordinarily low default rates - She tied concern about underwriting quality to long-running benign credit conditions. Valuation discount example: $25 NAV vs. $15 secondary purchase price - Used to explain how secondaries can buy at a discount and immediately mark to NAV. Illustrative mark-up gain: $10 per share unrealized gain - In the $15-to-$25 example, the immediate mark-up creates paper gains without cash realization. Retail exit threshold mentioned: $1 million plus - She said smaller investors generally lack a practical secondary exit unless their stake is sizable, roughly a million dollars or more. Liquidity window type: Periodic / semi-liquid - Interval funds and tender offer funds may allow periodic redemptions but can still gate withdrawals. Public equity benchmark example: 15% interest rate - In her PIK explanation, she used a hypothetical private loan paying 15% interest. Loan examples used in PIK discussion: $15 million and $10 million - Illustrative loan sizes used to explain how PIK can be structured and toggled. Private credit fund borrowing: Billions of dollars - She noted that some large funds have billions in borrowings on their books.

Pivotal Quotes: "I think they are a canary, they’re a tell, right?" — Layla Kunimoto: Her view on whether recent private credit bankruptcies indicate broader underwriting problems. "You can’t eat IRR, right?" — Layla Kunimoto: Her critique of IRR as a performance metric that can be distorted by timing rather than true value creation. "The train of access to private markets for retail investors is coming." — Layla Kunimoto: Her view that retail access to private markets will keep expanding through brokerage-platform development.

Implications: Listeners should treat private markets as potentially useful but not automatically superior. Underwriting, PIK exposure, leverage, liquidity, and disclosure quality matter more than headline returns, and retail investors should be especially cautious about exit limitations and valuation opacity.