Panelists include, from left, Leon Black of Apollo Advisors LP, Gregory Fuss of The Capital Group Companies and Michael Keough of Stark Investments.
According to moderator Robert Lessin of Jefferies & Company, the investment environment used to be simple. If it was a leveraged deal with capital, you sent it to a private equity firm like Apollo. If you needed instant liquidity, you sent it to an investment management firm like Capital. If you required downside protection, you sent it to a diversified financial services firm like Guggenheim.
These divisions are becoming less distinct, he said, and some feel that the business is becoming commoditized. Customer preferences have changed, and firms are reacting accordingly. This panel explored if, how and why these changes are taking place.
Gregory Fuss of The Capital Group Companies explained that consumer stock preferences have changed. He argued that investors wanted stability after the 2000-2002 crash and shifted to more conservative management. Clients now want increased liquidity, both to pay bills and to ensure a quick exit strategy. In essence, according to Fuss, people now want a stability that they did not previously prioritize.
Andrew Rosenfield of Guggenheim Partners agreed, noting that "the provision of liquidity is a great source of return" and that "people really treat losses different than gains. They treat a dollar of loss as twice as bad as a dollar of gain." This means you need to use assets imaginatively to get higher returns that are less loss-prone. Returns are then more "psychologically appropriate" for current clients.
Perhaps partly as a reaction to these changing preferences, Lessin said, some hedge funds appear to be getting more into the private equity business with longer lockup periods. Michael Keough of Stark Investments agreed that this might be the case, but only with a global mindset. He added that "you should be indifferent to the business model because it is in the investor's best interest to think that way."
Rosenfield argued that firms should stick to their core competencies and that the convergence question should be looked at as a talent problem. "You don′t get paid for creating diversification when your customers can create it themselves," he said. This movement toward conversion is really a movement driven by human capital and expertise. He concluded, "There′s a lot of money searching for a very small amount of talent."
Leon Black of Apollo Advisors added that private equity covers a lot of different areas today and has been expanding to an array of products for the past five years. "From the get-go, (Apollo's) view always was to look at a balance sheet and decide where was the best risk/reward" he said. Sometimes it was controlling the company, sometimes it was higher up in the capital structure. "Private equity today, and what we try to do, is to have this integrated platform -- we have no Chinese walls in our private equity business." But he added, Apollo tends to stick to industries with which it feels comfortable. "We do it around industry verticals where we think we have real expertise."
Fuss added a different perspective. Capital Group is not in the hedge fund business and does not want to be. Fuss said that this is for three primary reasons: First, the firm couldn′t figure out the conflicts of interest. Second, it is a fundamentally different skill set to short stocks. Capital has a distinct culture and would have had to look outside the firm for the relevant talent. Third and possibly most important, Capital has typically been voted the best buy-side firm by the executives of the companies they follow. They want to preserve this relationship, and the dynamic introduced by possibly shorting stocks could harm this.
Another industry trend that is often talked about in the media is the possibility of many private equity firms going public. Fuss answered the question "why Capital Group will never go public" by saying that the firm prefers to have the freedom to do what it thinks is right, and to "spend their own money doing it." Sometimes, this means doing things that are very out of the mainstream at the time, and thus could be against the market.
According to Black, whose Apollo Associates is often rumored to be going public, "The real issue is looking at it as you look at everything. Is there really a strategic reason to do it? There are real positives, and there are some real negatives." He added that "certainly, having an outlet to eventually monetize for the founders and senior partners is a plus." Going public gives you a currency that can be helpful for industry investment and attracting top talent to your firm. On the other hand, the minuses are also compelling. Being public, you are under the microscope of compliance, you are in the fishbowl, and you have "shareholders coming out of the woodwork that can sue you."
Black thinks that "right now a lot of firms are certainly considering it (going public) seriously, and one question is, 'Is this a window, or is it something that will become the norm over time?' I go back and forth. He added that "once you really have diversified streams of cash flow that are stable and constant and of size, they ought to be able to be monetized," and this is a trend that will continue. On the other hand, if liquidity dries up, maybe this will prove to be a window.
Other topics covered included carbon footprints and "charitable footprints." Most panelists felt that carbon emissions and offsets will become an issue in valuing companies, but that there is not yet much activity on this front.
Charitable footprints generally take the form of individual asset managers investing in social ventures or making charitable contributions form their earnings. The question of whether contributions on a private scale make sense or whether investment firms should begin to cultivate a charitable presence as part of their branding was debated. Fuss said that Capital Group's partners are quite active on this front "behind the scenes," but that the company is unlikely to ever be public about these efforts (especially considering the firm′s preference for privacy).
Black said he encourages his partners to get involved and contribute to things they are interested in, and follows this advice himself. But, he argued, charitable giving is most appropriately done by the individual asset managers and the LPs, rather than by aggregating some portion of the firms fees or returns and donating that. Rosenfield agreed but added that there is an important element of leadership in charitable giving that managing partners should demonstrate.
The panel concluded with an issue of concern for all managers of investment firms. "The most dangerous words I've ever heard in the financial community," said Lessin, "are, 'It's different this time.' Is it different this time?"
Black suggested that "every time is different, but clearly we go through cycles. The question is, how long will these cycles be?" Returns will come down eventually, but right now, he said, "Interest rates are pretty comfortable, inflation seems to be pretty much under control, employment numbers are great, the economy is still chugging along. There is a lot of debt, but as percentage of GDP, it is not alarming. There is an astounding amount of global liquidity that is real." If something causes this cycle to downturn, Black said, it would be due to an unpredictable geopolitical event. He concluded that "it doesn′t feel to me that it's about to fall off a cliff, subject to the geopolitical risks."
Keough added that "as a global multi-asset manager, I agree with Leon, it looks great." He said that "the global liquidity is forcing asset managers to think about their business differently" and that "there is distress out there -- it's just maybe not as widespread as it was in 2003."
Rosenfield pointed out that the disparity between wealthy and poorer nations is 37-1 and can't persist. He predicted poorer countries will see much more rapid growth. This means that, in some sense, the United States will not do as well, in terms of growth rates, as some other countries. But, according to Rosenfield, this is a good thing.
Global Conference 2013
Former Prime Minister Tony Blair, philanthropist Bill Gates and Strive Masiyiwa of Econet Wireless discuss advancing prosperity in Africa.
