Episode #482: Meketa’s Steve McCourt & Primark’s Michael Bell – Democratizing Private Equity
Guest: Steve McCourt is the co-CEO of Meketa Investment Group, an investment consulting and advisory firm serving institutional investors.
Michael Bell is the Founder and Managing Director of Primark Capital, an investment management firm providing retail investors with access to private equity investment opportunities.
Date Recorded: 4/26/2023 | Run-Time: 1:07:31
Summary: In today’s episode, Steve and Michael discuss their new partnership aimed at expanding access to private equity investments. They walk through the nuts and bolts of the interval fund structure, touching on fees, sourcing institutional quality deals, diversification through vintage and industry, and the benefits of doing this through co-investments. Then we spend some time talking about the current state of private equity and what they’re seeing with both existing investments and new opportunities.
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Links from the Episode:
- 0:39 – Intro
- 1:36 – Welcome Steve and Michael to the show
- 5:08 – Background on their companies; Meketa; Primark Capital
- 9:30 – How Meketa and Primark are democratizing private equity
- 15:53 – Obstacles faced when breaking into the privateequity marketplace
- 20:20 – The mechanics of co-investing
- 24:18 – A day in the life of a privateequity consultant
- 25:34 – The due-diligence process for choosing a privateequity investment
- 28:03 – Their approach to portfolio construction
- 31:52 – Their process for selecting an investment
- 37:25 – Some notable private companies:Cole Haan; Toblerone; Culligan Water; Breitling Watches
- 37:57 – The evolution of privatemarket investing
- 40:01 – Exit strategies and liquidity
- 45:02 – Transaction-level dynamics related to debt financing in a post-GFC world
- 47:09 – How is the average advisor fitting privateequity into their models?
- 52:38 – The future of privatemarket investing
- 56:55 – Michael’s most memorable investment
- 59:45 – Steve’s most memorable investment
- 1:02:20 – Learn more about Meketa & Primark Capital
Investors should carefully consider the Fund’s investment objectives, risks, charges, and expenses before investing. This and other information is included in the Fund Prospectus and is available through the Prospectus link on the Primark website: https://primarkcapital.com – Primark Prospectus. Please read the Prospectus carefully.
An investment in the Fund is subject to, among others, the following risks:
- The Fund is not intended as a complete investment program but rather the Fund is designed to help investors diversify into private equity investments.
- The Fund is a “non‑diversified” management investment company registered under the Investment Company Act of 1940.
- An investment in the Fund involves risk. The Fund is new with no significant operating history by which to evaluate its potential performance. There can be no assurance that the Fund’s strategy will be successful. Shares of the Fund are not listed on any securities exchange, and it is not anticipated that a secondary market for shares will develop.
- Shares are appropriate only for those investors who can tolerate a high degree of risk, and do not require a liquid investment.
- There is no assurance that you will be able to tender your shares when or in the amount that you desire. Although the Fund will offer quarterly liquidity through a quarterly repurchase process, an investor may not be able to sell or otherwise liquidate all their shares tendered during a quarterly repurchase offer. The Fund’s investment in private equity companies is speculative and involve a high degree of risk, including the risk associated with leverage.
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Meb Faber’s the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will now discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
What is up everybody? We got an interesting episode for you today. Our guests are Steve McCourt, co-CEO of Meketa Investment Group, an investment consulting advisory firm serving institutional investors, and Michael Bell, founder of Primark Capital, an investment management firm providing retail investors with access to private equity investment opportunities. Today’s episode, Steve and Michael discussed their new partnership aimed at expanding access to private equity investments.
They walk through the nuts and bolts of the interval fund structure, touching on fees, sourcing, institutional quality deals, diversification through vintage and industry, and the benefits of doing this through co-investments. Then, we spend some time talking about the current state of private equity, what they’re seeing both with existing investments and new opportunities. If you’re an advisor that’s thinking about getting your clients some exposure to private equity, this is an episode you don’t want to miss. Please enjoy this episode with Steve McCourt and Michael Bell.
Steve and Michael, welcome to the show.
Good to be here.
Great to be here, Meb.
Yeah, so first, tell everyone, where do we find you today? Steve, you first.
I am normally in San Diego today. I happen to be in Washington, D.C.
I’m coming from bright and sunny Denver today.
I’m recording this also from Denver, waving at you from the train station and Union Station. We’re going to talk about a lot of fun stuff today, but first, the main sort of umbrella is the private world, particularly private equity. First of all, I’m hearing the origin story how you guys met. Is there like a Tinder for private equity? What’s the original meeting? How long have you guys known each other? What was the connection?
We had had a fund that was up and running, Primark Capital. It’s the Primark Private Equity Investments Fund. Private equity-focused, obviously, and we always tried to look at and solve challenges or hurdles that are in front of us. We built this fund for financial advisors for easy access to middle market private equity. One of the focuses of the fund is investments in direct co-investments, private equity co-investments. For those of you that know the market, that is a fairly difficult investment to come by. It is in a club environment and it’s pretty important to be part of the club to get access to that type of investment.
We had launched the Primark Fund and we were in the market and found it very difficult to get access, to get the right access to private direct co-investments for the fund. That’s when we sought out Meketa. We have some commonalities in terms of an introduction. Some folks in my background and Meketa’s background, we’d worked with some of the same individuals, family offices, institutional investors. They had made the introduction initially, and when we met Steve for the first time, we were in the need of seeking co-investments. It was fortuitous from our perspective that they have an incredible pipeline of deal flow of direct co-investments.
We met about a year or so ago, maybe a little bit more than a year or so ago, and started the conversation about, how can we get access to co-investments? At the same time, the Meketa Investment Group, they were, in fact, looking at bringing their expertise into the financial advisory marketplace, and so it was a bit of a, from my perspective, and I think Meketa’s perspective as well, a bit of a match made in Heaven. They had exactly what we were looking for and what needs we had in the business, and we satisfied a need of theirs as well to get into the market. As we’ve continued to step through this relationship and this partnership, we’ve continued to deepen it and we’ve found more and more and more opportunities to bring really the expertise of Meketa, which Steve will describe the background of Meketa, really bring that expertise down into the intermediated financial advisor marketplace.
Yeah, and Meketa, for the readers of The Idea Farm, which is our research service that’s been… we’ve been publishing for about a decade, are probably familiar with Meketa because we circulate and curate some of y’all’s research you put out every once in a while, which we think has been fantastic. Steve, tell us a little bit about what you guys… what you do.
Nikita is an institutional consulting firm. We’ve been around since 1978, though we’ve grown a lot in size and prominence in the last 20 years or so. Today, we work with about 250 institutional investors with $1.7 trillion of assets that we advise. Our services are quite broad, and as you’ve seen from our research, it’s quite broad as well. We help clients deal with complex challenges regarding asset allocation and risk management to selection of investment strategies and managers across every conceivable asset class that’s out there. We’ve always had amongst our peers in the institutional investment industry a strong competitive advantage in the private markets.
Meketa for well over 20 years has been very active in the private equity, private credit infrastructure, real estate, and private natural resource categories. Ultimately, that’s what connected us to Primark. A lot of the great work that we had been doing in the private equity asset class for institutional clients. As Michael said, now having the opportunity to provide that institutional quality access to the intermediated space.
I feel like let’s start a little broad, Michael, maybe you can kind of speak to this, but we’re going to talk mainly about the Venn diagram overlap where you guys are working together. When you say particularly privates or private equity that you guys are focused mainly on, what does that mean to you? You have these conversations with different people. When you say private equity, some person’s talking about LBOs and buyouts, other person’s talking about venture capital. You’re in different parts of the world, you’re in Europe, it might mean something slightly different. What does it mean to you guys? What’s the sort of range of opportunities that you guys and breadth of what you guys are looking for?
We focus in on middle market private companies. Why do we focus there? Okay, so well, why do we focus in private equity to begin with? Private equity has a return stream that has historically outstripped the public markets and private equity overall provides access to a larger investment universe that’s out there. Almost 90% of the companies in the U.S. that have revenues in excess of a hundred million dollars are private. What that means is only a 10% sliver, a little bit more than a 10% sliver, are publicly registered. If you look at the public markets over the last 20 years, 20 years or so ago we had about 8,000, a little less than 8,000 public companies. Today, we have less than 4,000 public companies, and at the same time that we’ve decreased by 50% from 8,000 to 4,000, the market cap of those companies that are public has gone from an average of about a billion dollars to almost $9 billion.
What’s remaining in the public markets is trending on large cap arena. What’s happened to all those small-cap and mid-cap companies? They haven’t gone away. They’ve just been funded by private equity. What you’ve traditionally seen in those small companies, those small and middle-market companies, is fairly significant. Those companies are being backed by private equity now. They’re not available in the public markets, and all of that growth is now to the benefit of the big institutional investors, that Steve’s firm and Meketa Services. What we really wanted to do is, I think it’s a bit of an overused word, but we were democratizing private equity.
Private equity has been previously reserved only for the clients that Meketa services, the institutions, the endowments, the foundations, the pension plans. Those big investors that are in the club that can write a very healthy check to invest in this market, these small mid-cap companies, that have significant growth profiles. We’re bringing that to the intermediated space, to retail investors, high net worth investors through advisors. Steve can give a little bit better profile on the specific types of firms with the specific investment profiles that we target, but that’s what we’re trying to accomplish. That’s what we’re trying to do, and that’s what in terms of institutionalizing and democratizing this institutional asset class, there’s no better partner to do that with than one of the biggest institutional investors and allocators in the market like Meketa.
Just to be clear on kind of when you say middle market, what does that mean to you? It means different things to different people, but what does that range? Is it a revenue range? Is it a market cap range? What’s the kind of sweet spot?
The definition’s a little fluid over time, but I’d say generally in today’s world, trying to focus on companies that have enterprise values less than a billion dollars, certainly less than 2 or $3 billion in size from general partners who raise funds in the neighborhood of no more than 3 or $4 billion in size. That’s generally considered middle market today, and I would echo, of course, Michael’s commentary on the middle market. This is from our perspective really the heart and soul of private equity where businesses aren’t in today’s world large enough to be public and some that are choose not to go public because of the advantages of being private. Investment in middle market private equity provides investors with much more diversification into types of businesses and industries that you may not be as exposed to in the public markets.
Yeah, it’s as Steve mentions that this is the heart and soul of private equity, but it’s also the heart and soul of the U.S. economy, these middle market companies. The breadth and depth that private capital, private equity has to invest in is almost 10 times the size of the public markets, so we’re tapping into that growth market in the U.S. economy and offering that in a vehicle made available to advisors.
Yeah, so it’s funny because, Michael, you and I were sitting in Park City talking about this and we kind of went through a number of the features of private equity and ideas and why to consider sort of privates, and this is coming from a public market guy, but I listed like five or six kind of points that I think is lost on most people. The first one that everyone seems to always get hung up on, and there’s positives and negatives to this, is the liquidity, and we’ll come back to that later. I mean, by definition they’re private, so you can’t trade them really on exchange. You mentioned breadth, which is one that I think most people don’t really contemplate a lot, but just as a quant having more choices, particularly 10 x more choices is always better than less.
We talked about power laws on investing and how kind of some of the smaller market caps, sort of enterprise value companies have the potential to scale and offer these outsized returns versus maybe a trillion-dollar company. We talked a little bit about taxes, but the one that I think you hit on that I would like to dig into more is this concept of access. Most people, whether it’s because of accreditation or knowledge gap, whatever it may be, don’t really have access to private equity at all. If they do, it may be their roommate from college private equity fund, or maybe it’s a partnership that gets pitched from the wirehouse, whatever it may be, but it’s hard to get either access to the asset class, or more specifically, the individual deals, which you guys seem to focus on.
To my knowledge, there’s no like co-investment website you can go to and sign out and say, “Hey, I’m a hundred-million-dollar family office. Send me some deal flow.” I’d say it’s a lot harder than that, so maybe talk to us a little bit about Meketa. You guys have been doing this forever, how y’all sort of access this world, but also how you then go about sifting and screening it to get to a point where you’re actually making the end investments. I know that’s a lot, but you can pick where to start and we’ll dig in.
When we started to look at this market, I ran an RIA in Sarasota, Florida, five or six years ago and we serviced 200 advisors. Underneath that umbrella, we had bottom-up demand from our clients that it was kind of the country club conversation. You know, “Hey, my friend’s getting access to private deals in real estate or private equity or private credit. How can we get those?” It was a challenge for us to be able to offer that as a platform provider, offer that to the advisors that were on our platform. This was, again, five, six, seven years ago. There were a couple of platforms that were starting to come to life in the industry. There were still some challenges with those platforms. These platforms, they reduced the investment minimum way down from millions of dollars to $250,000 or something like that, but you still had fairly significant concentration.
If you had half a million dollars to invest in private equity, your private equity sleeve, you could maybe get two managers or maybe three kind of investments in that. We looked at that as a bit of a hurdle. The other hurdle that was prevalent in the marketplace was just the time and effort that it would take to get into these private investments. Most advisors just don’t have the right access. They’re not a member of the club, and it is a very clubby, and Steve will describe this in detail, it’s a very clubby environment. If you’re not in, you’re not in. Our advisors weren’t in. As a platform provider for a $6 billion platform, we weren’t in the club, so we couldn’t get access to that. Even if we could get access to it, it was fairly difficult to understand which of the 3,000 funds that are out there that you really wanted to get access to.
The ones that are knocking on your door are probably the ones that you don’t want to put your clients’ money into. Because the dispersion of returns in private equity is massive, from the top quartile to the bottom quartile, you’re talking about 20% returns annually of selecting the top quartile manager versus getting a bottom quartile manager. Manager selection matters, and some of the other platforms, the one other thing that they did is they have subscription documents which are very difficult, time-consuming for advisors to really go through.
We wanted to put this in an easy-to-use platform, but the key to all of this, what makes it all work, is sourcing the deal. To your point, finding the access to the right manager and the right deal, and that is the partnership and the relationship that we have with Meketa. They have access that’s beyond reach of any retail investor, any intermediated financial advisor that we know of, and they provide a tremendous value. Maybe, Steve, it’d be fantastic if you could elaborate, provide some color on the access that Meketa has to this special club.
That’s great. Thanks, Michael, and it’s interesting to hear you speak because it is rather clubby, but the underpinnings of the club are really as simple as experience, confidence, trust, and ability to execute. You build up all of that over decades of working in the private equity industry. Meketa as an advisor has been sourcing and identifying and providing our clients’ capital to general partners in the private equity space for close to 25 years now. We’re a large allocator to the space and the high-quality private equity general partner sponsors that we work with know us to be a trustworthy, high-quality organization, and that relationship and trust has kind of built up over decades of experience.
The co-investment opportunities largely come to us because, particularly in today’s world of just a massive need for co-investment capital, general partners are generally quite interested in having co-investors in a lot of their deals. They offer co-investments to their limited partners often on a no-fee, no-carry basis. There’s obvious reasons why investors like the Primark vehicle or other institutional investors have a strong interest in allocating capital to co-investments because you forego the fund-level fees, the management fee and the carried interest. You don’t pay on co-investments.
If you are investing through fund vehicles, those fees over time can add up to 6, 7. 8, 9% return reduction. In order to produce a 15% net-of-fee return, an investor in a fund vehicle needs to have the manager produce a gross-of-fee return of 22, 23, 24%. It’s a really, really high hurdle. There’s obvious reasons why limited partners like Meketa and Primark have an interest in co-investment access. What may not be as obvious to your audience, Meb, is why general partners would freely give away this access to their groups that they have strong relationships with. The reason for that is they need capital to close deals, and this is particularly true in today’s market where the availability of debt capital is starting to get reduced.
Going back about 15 or 20 years, many private equity deals were executed by private equity managers, cobbling together other private equity managers to come up with the equity to finance a deal. You’d have a lead sponsor and then often two or three subordinate sponsors providing the equity to a deal, and then you cobble together the debt side of the deal as well. The problem if you’re a private equity sponsor in bringing other private equity managers into the deal is they often want board seats. They want control. They want to be active in the investment. Because they’re going to be by your side during the investment, they also get to see everything you do as a lead partner.
Going back 10 or 15 years, general partners started the practice more prominently of instead of cobbling together their competitors to do deals, they instead went to their largest limited partners and told them, “If you want to provide us capital, we’re happy to give you access to deals on a no-fee, no-carry basis.” That was sort of the genesis of the co-investment industry, which has evolved and deepened ever since, and those motivations still exist in the marketplace today.
Most private equity general partners, when they’re looking at deals in the marketplace, they’re looking at deals larger than what they would be able to finance on their own because they know they have in their back pocket co-investment capital from their limited partners that they can use to execute those deals. The more deals they execute, the quicker they go on to the next fundraise and the next great thing that they’re working on. The sourcing really comes from a need from the general partner community for capital to execute deals, and the motivation for investors like us and our clients in Primark is to get access to these high-quality deals at no-fee, no-carry as opposed to getting access to them through fund vehicles.
That’s one of the highlights to the vehicle, the Primark vehicle, because 80% of the investments, our target allocation is 80% of the investments will be co-investments. It’s a co-investment focus and all of those co-investments will come, as Steve said, with no-fee, no-carry, which is a significant benefit over even a direct fund vehicle. We’re in a position to be able to pass on that benefit directly to end investors and advisors. There’s not another co-investment-focused vehicle out there in the market, and so it’s a pretty unique opportunity with a partner in Meketa that has a seat at the table.
One of the other interesting aspects of their deal sourcing is that many of the partnerships, many of the sponsors that are out there, a number of their funds are closed to new investors. Well, Meketa’s been in the space for decades, so they have a longstanding relationship and they’re not closed out because they got into the club before the doors closed. That provides another level of access that would be very, very difficult for others to find.
Help us just sort of visualize for people who just don’t have access to this world, Steve, what does the deal flow look like? Are you getting one email a day where it’s like, “Hey, Steve, we got something for you, SaaS business, here’s the metrics?” Is it like people calling you on the phone? How’s it going to work? Or it like a hundred a day? Is it like one per week?
Yeah, so the way the process works is we reach out to all the general partners that we work with and give them formal notice that if they have co-investment opportunities, we’d be happy to consider them. They ultimately put us on a list of groups that they can count on for co-investment capital when they’re executing deals. For the Primark vehicle, we’re focusing on middle market private equity, so there’s also co-investments in larger buyouts and growth equity, but for this vehicle, we’re focusing on, as I highlighted before, the heart and soul of the private equity asset class. In just that area, we’re generally looking at about the run rate right now is 10 to 15 co-investments a month roughly, and from there we end up investing in one or two or three of that 10 to 15 based on diligence that we do.
The process, and I mentioned before kind of the importance of confidence in this industry and ability to execute, being able to execute co-investments is much more challenging than simply allocating capital to a fund vehicle for many reasons, but highest amongst them is that the timeframe you have to evaluate and decide on a co-investment is fairly limited. Typically, when a general partner is working through a deal, you’ll get contacted at the appropriate stage in their due diligence. They’ll provide you with under an NDA all of the relevant material on that deal, their internal analysis and research, and also external research done by various consulting firms and others so that we can make a reasonable judgment on whether the asset, the company is a fit for the Primark vehicle.
You may only have two to three weeks to do all of that work. If you can’t do the work within two or three weeks, then over time the general partner will decide not to include you in future co-investment opportunity because they can’t count on you to kind of get back to them in a reasonable framework. The way our process works, we tend to give early indications to general partners whether there’s going to be an interest or not. If there’s a likely interest in it, we’ll complete our due diligence as quickly as possible to confirm that interest with the general partner so they can move on with their process of cobbling together equity for their transaction.
One of the key benefits to this, Meb, on a co-investment focus is this significant fee reduction that Steve mentioned. However, you have to be in a position to execute on that. Most advisors, or even large advisory shops, they may have a couple of folks that focus on alternative investments. A firm like Meketa, they have 150 investment professionals over seven offices globally. When they need to execute in a very quick timeframe, they’re in a position to do that. Whereas, most firms just don’t have the bandwidth to be able to execute on that to take advantage of the benefits that are offered.
How many names do you guys end up in the Primark fund owning? Is there like a target sort of wheelhouse as far as portfolio size? Then, also, I’m just trying to think in my head also, and this may not be relevant because it may be from the Meketa side and various things, but I wonder what percentage of the names that you do the due diligence on are you actually investing in? Is it like half? Is it like 1%? I’m trying to get to a little bit of the portfolio construction and process, too.
Yeah, yeah. Second question first. So far, and Meketa began working with Primark in September of last year, so we’re a little more than six months into this right now. I would say relative to the co-investment deals that we see, we’ve allocated to maybe 5% of them so far and we’ll see how that evolves in the future. Your first question, Meb, was about structuring?
Yeah. Well, I mean, just from Michael, like how many names are you guys targeting in the portfolio?
The portfolio, because we have this breadth of market, if you will, and depth of market, 90% of the businesses out there in the U.S. economy that have revenues in excess of a hundred million dollars, that’s our focus. All right, so we don’t really have a cap or a ceiling on where we can invest. When we first started discussing this concept with the Meketa team, who has obviously been doing this for decades, we asked kind of their assessment of where they saw the sizing of the overall portfolio and said this could easily grow to 2, 3, $4 billion. After they put the word out to all of their investing partners, all the sponsors and the deal flow that they received, I think, probably exceeded initial expectations, Steve. As a result, I don’t think we have seen anything that would provide any artificial ceiling on how many names we can get in the portfolio.
The sourcing opportunities that we see right now with kind of visibility into the near-term future are pretty strong, and for us as advisors ourselves, there’s a lot of power in diversification. We want to make sure that the portfolio is fully diversified. Generally, any individual co-investment in general is coming into the portfolio at less than a 5% weight in the portfolio. From our perspective, even as this grows over time, there’s not a big risk of diluting the quality of deals that are done provided that we continue to get the flow of co-investments through the high-quality general partners that we work with.
I guess the best way to explain that to your audience is it’s a big market and to us it appears like you can invest in the better half of the market with co-investments for a long, long time with a lot of capital. We see with the future of the Primark vehicle and scale being able to diversify significantly into privately held companies across industry sectors and that reflect, as Michael said, the broader exposure of the U.S. economy and to do so with only the highest quality institutional quality general partners.
A couple of questions. The main like lever I feel like when we’re talking about private equity to make it worth the while for investors instead of just plunking down some hard-earned cash into SPY is the outperformance feature or goal, like you mentioned that the spread is massive in this world. Talk to us a little bit about this special sauce, guys. How do you ensure or try to target in your process that these are the winners? Is it evaluation? Is it business model? What’s the process that really winnows down the… you mentioned of the hundred deals maybe the 5% that make it through the process?
Yeah, I’d say that the vast majority of it comes even before the winnowing process in choosing the general partners that you are sourcing co-investments through. Meketa’s been allocating capital in the private equity industry for over 20 years. We have a track record investing through fund vehicles that is very, very strong. It’s sort of in the neighborhood of 7 to 10% per year higher than global equity markets, public equity markets. The co-investments that we’re sourcing simply are sourced from the types of general partners that have created that track record over the last 20-some-odd years with the advantage that they don’t have the fee drag of the fund vehicles. The confidence in the co-investments providing a level of outperformance over public stocks comes first and foremost with the selection of general partners, which is based on Meketa’s work over the last two and a half decades and identifying and backing a lot of these managers.
The selection effect of kind of winnowing down the pipeline of co-investments that are offered to us, we’ll see sort of 10 years ago whether or not there’s additional positive outperformance from that. We certainly would hope there is because we’re taking a number of deals that we’re seeing every single month and identifying those that from a variety of perspectives including valuation and relative attractiveness, identifying those that we think have a somewhat higher probability of success in the future. I think there’s a lot of strong tailwinds to the Primark vehicle vis-a-vis public stocks, and I would… Speaking as a broader advisor myself that allocates capital to the private equity asset class would certainly agree that outperformance is a primary reason why institutional investors commit capital to the asset class. It’s become an integral piece of every large institution’s asset allocation policy over the long term, buy there are other great benefits as well.
As mentioned, you do get diversification into companies and industries that are probably more reflective of the broader economy than the public stock market is today. Everyone I’m sure is aware of the valuation process within the private markets, which really allow investors to avoid the hour-by-hour, minute-to-minute volatility that we see in the public markets. Some of the stability of returns in private equity, one could argue is sort of accounting-driven as opposed to economically-driven, but at the end of the day, so what? The returns that you’re reporting to your clients and clients care about whether marks are going up or going down. There’s strong reason to allocate to the asset class, in addition to the strong returns it’s had historically as well.
If I could just add, in the portfolio, increased diversification is a key theme, but when you break that down, Meb, you have diversification by sponsor or manager because Meketa has relationships with dozens and dozens and dozens of sponsors and managers over the decades that they’ve been in the space. There’s diversification from industry sector. We’re not industry-focused on one particular or two particular industries, so across the fabric of the U.S. economy, we have geographic diversification. Most of our assets will be in North America, a few may be in Europe, and then maybe I as important there it will be vintage year diversification. Investing in the bottom of the market in 2008 and 2009 is very different than investing in 2019 or 2020.
It’s important to get diversification across the board and just accessing middle market companies, middle market America. Many of the advisors that we interface with that the companies that they see that may be in a portfolio, maybe we don’t have the direct name, but it may be in a sponsor that we own. They don’t know if the companies are public or private, and so like Cole Haan shoes, for example. Public or private? It happens to be a private company. Toblerone Chocolate, Culligan Water, Breitling retail watches, those are all private companies. The only way you get access to those opportunities are through big institutional investors, institutional allocators, and that’s the diversification that will provide an enhancement in the return profile risk return profile for a portfolio.
Say I’m an advisor, listen to this. I’m like, “All right, you guy sound kind of smart. Listen this. I’m interested for my clients.” How does it work? I mean, is this something I got to read like a 60-page due diligence stock? Is this tradeable through the supermarkets? What’s the process look like?
The industry is in the process of evolving, and now these opportunities, these private market investment opportunities are being made available in this democratization push being made available to advisors in formats that are easy to use, but you get pure access. This is not a hybrid or a synthetic. What you’re seeing, for example, in the Primark vehicle, 80% of that are the co-investments that we spent a good bit of time talking about direct access to those co-investments. That’s what’s in the portfolio. This vehicle that we’ve developed is called an interval fund. It looks like and feels like for the most art a mutual fund. However, so it’s priced daily, for example.
There are no investor restrictions on it. It’s not like you have to be an accredited investor or a qualified investor. There are low investment minimums, $5,000 investment minimums. There’s 1099 tax treatment of that, so it’s not like you have to deal with the headache of a K-1. Most importantly, there are no prescription documents to fill out. This is literally a point-and-click mutual fund ticker symbol, PMPEX, and it’s available on the vast majority of custodial platform, Schwab, TD, Fidelity, Axos, and a number of others. It’s just as easy for an advisor sitting at their desktop to select the fund, allocate to it, and make the trade. The day they make the trade, the next day it’s priced, it clears, and they have private equity in their portfolio. It’s just that easy.
Once I’m in, there’s always the big questions. This has certainly come to light with our friends at Blackstone and their real estate misadventures. Let’s say I want to get out, what’s the process? Obviously, this stuff isn’t daily liquid on the actual underlying holdings. How’s that work for me?
How it works is we offer quarterly liquidity, and the quarterly liquidity is 5% of the fund’s AUM every quarter. We make it easy for advisors. It’s the last trading day of the quarter. They just put their order in. Some custodial firms will warehouse that order for a week or two, but for the most part you put it in a last day of the trading period and you get access to liquidity. The fund has access to 5% of the fund’s AUM and liquidity. Everyone will get a hundred percent of their liquidity preference unless it’s above that 5% limit. Then, everybody gets cut back the same pro rata. It’s not like first in, first served type of thing, so everybody gets treated the same in the fund.
How we position this, Meb, kind of a couple of different comments I’d like to make. Number one, we only sell this product offering through advisors. That intermediated channel is incredibly important. We’re not putting this up on a Robinhood platform where you have a ton of retail investors that may want to get in and out and day trade, want to get in and out fairly often. This is a long-dated asset. We buy long-dated assets, so we position this to advisors that this is for kind of a long-term investment. This should not be for your daily liquid investments that you want to get in and get out, you have bills to pay the next quarter or the following quarter that you need that liquidity.
It should be kind of at the bottom of your capital stack in terms of liquidity needs, and so selling it through an intermediated channel helps to mitigate the whipsaw that you traditionally see in a retail channel. That’s how we satisfy liquidity and that’s the process that advisors go through for that.
Talk to me a little bit about private equity today. We are recording this in Q2 2023. It’s been a weird few years. We have had some macro shifts that we haven’t seen really in many decades with interest rates and inflation. 2022 was a rough year for listed equities and bonds as well. What does the private equity world look like today for you guys? Is it a land of opportunity? Is it business as usual? Are there some giant potholes to avoid in the road? Give us the overview.
Looking under the hood, it’s really a story of different markets, and as we look across the private market spectrum, there’s some categories like the real estate category where the mispricing is more obvious and the need to reconcile prices lower in order for transactions to happen is pretty clear. There’s a general consensus that private real estate valuations are going to decline this year. With private credit and private equity, it’s not as obvious because even though interest rates have increased, what tends to drive the value of these assets is, in the case of private equity and the Primark vehicle, EBITDA growth. So far, knock on wood, despite all the fears of a recession and slowing economy, the data that the private equity industry keeps reporting on companies that they own is fairly robust. There’s not a lot of evidence that revenues or EBITDA are declining.
In fact, they continue to go at pace despite the macro rhetoric of looming recession. It ultimately gets down to soft landing versus hard landing debates about Fed policy and the macro economy. If there’s a soft landing in the economy and we don’t have a recession or a very mild recession, it’s likely that private equity valuations will not drop significantly. If there’s a big recession, you’re likely to see a drop in both public and private market valuations as earnings go down, so that’s the big uncertainty, and likewise with credit, just to kind of complete the story. So far, not a lot of stress in the private credit markets fundamentally. I guess, bottom line, fundamentals appear still reasonably strong in the economy.
The other big dynamic that’s worth highlighting for your audience is transaction-level dynamics related to debt financing, and I sort of hinted at this before. After the GFC in 2007, 2008, there was again sort of a step function in the amount of debt that most private equity transactions involved to reduce somewhat the amount of debt in private equity transactions relative to what it had been pre-GFC. That was mostly driven by banks who were the major lenders to private equity, large private equity transactions anyway having somewhat stringent lending standards.
We’re now potentially in the midst of seeing sort of another step function with that. Banks starting last year started to rein in the amount of capital that they were willing to lend to private equity transactions. Then, of course, within the Silicon Valley Bank, First Republic dynamic over the last six weeks or so has put even more pressure on banks to sort of rein in lending. In the absence of freely available debt capital for transactions, there’s more of an incentive for general partners who are doing transactions to do it with less debt, more co-investment capital, more equity capital in some fashion. That’s still kind of an early trend that we’re seeing, but one worth keeping an eye on.
Many, many moons ago we wrote a book on endowment investing and one of the big differentiators, and continues to be with a lot of these endowments institutions, is the private equity piece. I mean, if you pull up Yale’s target allocation, I think public equity U.S. is like 3% now or something. I mean, it’s a tiny, tiny number and they’re obviously a very large part in private. How is the average advisor you talk to slotting this in? Is it a replacement for their equities? Do they throw it into like an alts bucket? Do they consider it some sort of return stacking? How do most people fit this in the narrative of kind their models and how they talk to clients about it?
Again, we had a big group in our offices just today having that exact discussion. Opening up, for example, we’re really trying to change the way advisors invest on behalf of their clients. Looking at the Yale endowment model, some really smart folks putting together asset allocation models that they believed in for 40 years and have really paid off. As a result kind of across the spectrum, you have single family offices or big endowment plans or foundations or public pension plans that have exposure to private market investments from 20 to 35% or even more. As a result, advisors are trying to look at that in their investment model and, how do they allocate to private markets?
On the private equity side, the them that has emerged for us in terms of having hundreds of conversations with advisors, advisors are traditionally looking at private equity as very similar to their public equity just in a different structure. One’s a private company, Breitling watches, one’s a public company, Apple, for example. They just come in different vehicles and there’s a different access point to that. Most advisors for the Primark vehicle, for example, are looking at their small-to-mid-cap allocation, their SMID allocation. It may be anywhere from 10 to 15 to 20-plus percent of their overall portfolio. They’re looking at this and saying, “It probably is a good idea to diversify that SMID cap allocation, call it 20%, and split some of that between public and private.”
They’re just taking an allocation, and in our fund, we mostly see allocations, an investment model that advisors put together. We’re seeing anywhere from 5, 6, 7, 8, we’ve had some advisors that have gone up to 15% of an allocation in private market investments. That’s what we’ve seen and that’s the discussion that advisors have had. They’re looking at it not as an alternative. Most advisors are not looking at it as an alternative sleeve and putting “in their alternative sleeve” real estate credit, infrastructure, private equity assets. They’re actually matching up what we do with the overall allocation that they have. That’s one of the reasons that when we developed the fund, we really wanted to be a pure play in the space so we weren’t a one-size-fits-all bucket.
As we look around the corner, and in the future, let’s say some of your investments work out and they start to moonshot, how do you guys deal with that from a portfolio management perspective? I mean, let’s say you have the very wonderful problem of one or two of your names going up a lot. A traditional public manager maybe could trim it a little bit. Is it something you just kind of let them float? Or do you say, “Hey, look, we get uncomfortable if one holding is 10, 20, 30, 50% of the portfolio and we maybe would seek secondary liquidity through transaction?” How do you guys think about that? Good problem to have.
Yeah, from your lips. The problem is sort of taken care of for us in the co-investment world because these are companies that general partners are allocating to. Our capital is just side by side with theirs. The typical life cycle of a private equity-owned business when you own it is that you go in at a certain valuation as that company reaches benchmarks and hits KPIs and might get valued up a little bit over time. You predominantly get the bulk of your value closer to exit when the thesis of creating value and the company has played out and materialized.
When the value’s created, it’s generally around the point of a liquidation event from the general partner, and so if there is a company that is 5 or 10X, it’s lively to have achieved that strong performance because it was sold at that level and revalued at sale. Once it sold, the cash comes back to the fund as cash, and so it’s liquidated for us. We don’t have the ability naturally to stay in it unless it’s in an unusual situation where it’s being sold to another private equity fund. There are… The vehicle does have a mechanism that allows us to sell in the secondary market, but it wouldn’t be… I wouldn’t see that as a realistic portfolio management tool.
As we look around the corner to the future, what else you guys got in your brain? We talk a lot about this, and to me, there… When we were sitting down in Park City, I said, “There’s just some areas where it’s damn hard as a public markets investor to get access,” and so this is clearly one. Another we talk a lot about, farmland, that’s really hard to allocate to for the public market investor. Same thing with startup investing on and on. As we look out for you guys, what other ideas are you kicking around? Is the main focus kind of growing this offering? Or you got some other stuff under your sleeve that you guys are working on or thinking on?
I think opening up the private markets, changing the way advisors can access the private markets is a theme to what we’re doing here. I think when you look at coming attractions, we tend to focus where we think the puck is going to be and not where it is today. Right now, there’s a lot of product and a lot of availability to access private market vehicles in credit, for example, or its continuing to build and continuing to proliferate. There’s a growth that you see in real estate, access to private real estate. There’s not a ton of activity or a ton of competitors in the private equity space, but they’re coming, but how cool would it be to access infrastructure?
Okay, really call it the elite of the institutional investors that really have kind of anchored those types of investments. How neat would it be to be able to offer that investment profile to retail advisors or farmland or hard assets? One of the benefits of the relationship with Meketa is they do all of that and they have the access points into all of that. Our teams are in the process of kind of putting our heads together to look at the market landscape, get advisor feedback of what the demand profile is, and then trying to put that together with a product that, again, provides us access, but puts it in an easy-to-use package. Steve, I’m not sure if you have any kind of thoughts on coming attractions or interesting asset pools that we could access.
Yeah, I mean, for me personally, this RIA space is a brand new one. I’ve been in the institutional world for 29 years, and as Michael has sort of brought us around and introduced us to a number of RIAs, I definitely see a lot of opportunity for us and Primark to bring to this marketplace the best from the institutional world, which is certainly a lot of private markets, but asset allocation, risk management kind of framework for investing that may not be as consistently applied in this marketplace. That’s exciting to me.
Yeah, I think it’s certainly an open playing field. You’ve seen a few others try and I’m not going to mention them by name, but they came out swinging with well over 4% fees targeting individuals. I scratch my head and I say, “Man, that’s going to be a tough hill to conquer for advisors as well.” I like the hockey reference because I’m going to an Avalanche game tonight and by the time this gets published, listeners, there may be 10 more failed banks and the Avalanche may already be in the finals. We’ll see, so we’re just dating ourselves near the end of April on this one. What has been, each of y’all, get an answer, you guys’ most memorable investment? It could be personally, it could be career-related, it could be good, it could be bad, it could be in between, but something that’s seared into your brain that you can never forget, and let you guys wave your hand, whoever wants to go first, have at it.
I can go first on that. My most memorable investment has been Primark, has been this company. This has been something that I have dreamed about. I have 40 years of experience behind me, 25 years kind of in the advisory, in the wealth management, asset management space. I built a company to do something that I wanted to do. Steve had mentioned kind of some of the key points of what we try to do and what we’re trying to service. It’s been a big investment for me personally, and that has been supplemented, but by the relationship and the partnership that I’ve built with Steve and his firm to help us continue to grow and continue to take this concept forward. It’ll be something that I never forget and absolutely without question top of the list, my most memorable investment.
How similar is the vision from when you guys started? I know it wasn’t that long ago to kind of where you are today because a lot of companies you know have kind of the vision when you get going and then the creative destruction of markets and competition happen and it’s a little different. Is it pretty similar? Is it kind of the same inspiration?
You always have to respond to the market. You always have to react to your customer, and I think you have to give your customers, your clients, your investors what they need, not what you think they want, really, but what they need. Our vision and our focus has been fairly streamlined, fairly straightforward. It hasn’t taken a long and winding road, but it’s been bolstered and supplemented from the knowledge base and the expertise from the Meketa team. We started out without kind of an institutionalized foundation, if you will, and once we did that, I think the vision became much more clear. It was we knew the direction we wanted to go into, but now it’s been very much focused with the Meketa partnership.
Well, I was laughing as you were talking about that because we have a long list of current funds and strategies and more to come that probably fit under the category of things, Meb’s wants, that no one else on the planet actually would want. That resonated with me, including a few coming up that I think are the most challenged marketing ideas in investing histories. You’ll immediately know they are when we launched them, but I think that it’s always hard to know what that product market fit, in y’all’s case too, product advisor fit may be until you start to have those conversations. That meeting today is probably invaluable in meeting people face-to-face and how they’re doing it. All right, over to you, Steve.
Yeah, I’ve got an interesting one for your audience, and it goes back to when I first started at Meketa right out of college. Our company, you had to work for six months to be eligible for the 401(k) plan. For the first year, the only way I could save for retirement tax-free was through an IRA, and so 22 years old, right out of college, I did what any practical person would do. I looked at the sort of capital markets line and said, “Well, emerging market stocks have the highest expected return, highest risk. I’m 22 years old. I’ll put $2,000,” which was the limit I could put in, “into a diversified actively managed emerging market mutual fund.”
I couldn’t even tell you today who the manager was because in the past 29 years, the mutual fund has been bought and sold five or six different times, and between the management fees that have been kind of gutted out of it and the annual account fees, the $2,000 that I started out with in 1994 has grown to about $2,300 29 years later. Every year, I sort of laugh at it and I look at it and I’m going to hold it until retirement and see where it ends up. To me, it’s sort of the ultimate lesson that you can’t just be a passive allocator. It matters who your money is with. It matters how your money is being managed. It matters the fees on it. This thing still charges ridiculous… I’m shocked anyone’s in this mutual fund anymore, but they still exist. You guy in your world must see this all the time. these sort of zombie funds that just keep going and going and going. I’m going to see where my zombie ends up in another 20 years.
I mean, there’s only one way this story resolves, and that’s Meketa buying the fund complex that owns the fun and then installing new management. That’s to me would be the perfect ending to this story. You know, I thought you were going to go somewhere slightly differently with this, which is you were going to go like the Peter Thiel route, which is like, “Hey, I threw some Facebook shares in this and now my IRA is worth $5 billion,” whatever Peter’s IRA is now. That’s the barbell part of this story to Peter’s. Gentlemen, this has been a blessing, a lot of fun. Tell us, start with you, Steve, and then over to Michael. Where do people find more information on y’all’s insights, products, education, all that good stuff? Where do they go?
For Meketa, everything you need to know about Meketa is on our website. As I mentioned at the beginning, Meb, the vast majority of Meketa’s research and white papers is included on the Thought Leadership section of our website. I encourage anyone to access that. We do, I think, put together some really thoughtful, well-researched papers for our clients in the marketplace, www.meketa.com.
Same for really Primark, primarkcapital.com. It’s traditional mutual fund information that you see. We have fact sheets, our prospectus, our holdings analysis, some white papers, educational papers on our website. For any advisor, they can just really look up the ticker symbol, too, for whatever service that they may use, PMPEX, and we’re available on Schwab, TD, Fidelity, Axos, most of the Pershing, most of the custodial platforms carry our product. It only can be accessed through advisors. A retail client may see it on the Schwab platform. I know they can see it on the platform, but they can’t purchase. It has to be accessed through an advisor.
Nice little tease there. Listeners, we’ll add all these resources to the show note links on the website, mebfaber.com, and some more goodies. Gentlemen, thank you so much for joining us today.
Been a pleasure, Meb. Appreciate it.
Listeners, if you enjoyed this episode, check out the link in the show notes for our episode last year with private equity legend Dave Rubenstein to hear him discuss his career, philanthropy, and politics. Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hated, shoot us feedback at email@example.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.