Talk Your Book: An Update on Private Markets

Episode Summary

Executive Summary: The episode explores whether private markets are “out of touch” with public-market weakness. Stepstone’s Bob Long argues that private marks increasingly reflect reality, realizations are matching valuations, and current dislocation is creating attractive secondary opportunities. He also explains why higher rates, illiquidity, and public-market volatility are driving more investor interest in private equity, venture, infrastructure, and real estate.

Main Topics: Private-market marks vs. public-market reality (Priority: 5/5): The hosts question whether private asset valuations lag public markets too much during a downturn. Long says marks have already begun rolling through and are being validated by actual sales and realizations. Realizations and cash proving valuations (Priority: 5/5): Long emphasizes that cash outcomes are the best test of valuation accuracy, citing 30 liquidity events where realized prices were roughly in line with prior marks. Why higher rates and volatility help private equity (Priority: 4/5): Rising rates raise financing costs and eliminate weaker deals, while dislocation also widens secondary discounts and can improve future private-equity returns. Growth in investor demand for private assets (Priority: 4/5): Stepstone says public-market volatility and the appeal of diversification into real-economy sectors are driving inflows to private funds from RIAs, private banks, and institutions. Venture/growth investing and secondary-market access (Priority: 4/5): Long explains why venture is drawing more attention, especially later-stage venture/growth, and how Stepstone packages it into an evergreen structure with limited liquidity. Infrastructure and real estate as cash-yielding diversifiers (Priority: 3/5): The discussion covers contracted cash-flow assets such as toll roads, airport concessions, and workforce housing, which can provide inflation linkage and portfolio ballast. Fund structure, fees, and accessibility (Priority: 3/5): Stepstone’s evergreen tender-fund model offers monthly subscriptions, quarterly liquidity, monthly NAVs, and 1099s, aiming to make private markets more accessible to individuals.

Key Arguments: Private-market valuations are not fully disconnected from reality; recent realizations show prices are close to prior marks. Cash outcomes matter more than model-based valuations because realizations ultimately confirm or challenge marks. Higher interest rates hurt marginal deals but can improve private-equity returns by weeding out weak transactions and creating better entry prices. Secondary-market discounts have widened materially, creating attractive buying opportunities for a large allocator like Stepstone. Investors are increasingly seeking private assets because public markets are volatile and concentrated in a few large tech names. Venture capital remains compelling because innovation is still early, companies go public later, and top-quartile outcomes are highly differentiated. Infrastructure and certain real estate strategies offer contracted or inflation-linked cash flows, which can help stabilize portfolios. Evergreen structures can make private markets more usable for individuals while preserving some illiquidity premium.

Data Points: S&P 500 performance: down around 15% - Used to frame the tough year for public-market investors Bond market performance: down almost as much, about 15% - Hosts note both stocks and bonds are weak in the same year Liquidity events: 30 - Stepstone realized 30 portfolio liquidity events in the last six months (March 30 to September 30) Realizations vs. last mark: about 2% above the last mark - Average realized cash price compared with prior valuation marks Transactions above mark: 27 of 30 - Most realized sales were above prior marks Stepstone track record fund size: about $1 billion - S Prime has grown over roughly two years S Prime performance: up 77% over two years; up 7% YTD - Bob Long cites the mature fund’s reported performance Spring first close: $110 million - New venture and growth fund launch Earlier first close (S Prime): $35 million - Contrast with the stronger fundraising environment for the newer product Stepstone platform AUM: over $600 billion - Stepstone Group’s private-assets platform Annual allocation volume: $75 billion in 400 transactions last year - Stepstone’s prior-year private-market deployment Projected next-year allocation volume: $100 billion - Expected capital deployment in the next year Global footprint: 900 professionals, 23 offices, 14 countries - Size and reach of the Stepstone platform S Prime allocation to real assets: about 25% - Infrastructure, real estate, and private debt provide ballast Spring liquidity: 2.5% per quarter - Reduced liquidity promise for the venture/growth fund Spring fee: 1.5% management fee and 15% incentive fee - Terms for the venture and growth offering S Prime fee: 1.4% management fee - Core fund pricing; no promote/carry

Pivotal Quotes: "cash has no enemies" — Bob Long: Used to argue that realized sale prices are the best validation of private-mark valuations "Valuations are confirmed by realizations" — Bob Long: Explaining how Stepstone checks its marks against actual transaction outcomes "dislocation and uncertainty tend to generate the best private equity returns" — Bob Long: His view on why higher rates and market stress can be favorable for long-term private equity investors

Implications: Private markets may be less distorted than critics think, and current volatility may create opportunities rather than just risk. For investors, the lesson is to focus on manager quality, liquidity terms, and secondary pricing rather than assuming all private marks are stale.