Episode Transcript
Mike: I think this evolution within the Evergreen and wealth management channels is really going to hinge on the importance of education.
Gerald: Hello and welcome to the FTSE Russell Convenes. I'm Gerald Toledano, I'm the group head of equity and alternative indices at FTSE Russell. And today I'm joined by Mike McCabe, who's a partner at StepStone. We're going to talk about private markets and indices. Welcome, Mike.
Mike: Thank you for having me, Gerald.
Gerald: Well, before we start going into market, why don't you take a moment to introduce us a little bit more to Stepstone. You sit at the intersection of portfolio construction, investment advisory as well as data and analytics.
Mike: Stepstone sits at the centre of a very powerful flywheel within the private markets ecosystem, globally speaking, with a total capital responsibility of just under a trillion dollars, nearly $230 billion of assets under management with 1300 plus employees spread out across 31 different offices.
Our stated purpose is really to be the trusted partner of choice to asset owners who are allocating capital to the private markets and general partners who are using this capital to make direct investments in both the equity and debt of private companies.
As such, were often described as an asset manager with a leading data and analytics platform across private equity, venture capital, private credit, real estate and infrastructure.
What that means in practice is we see the market from a number of different angles, from the GP level, from the LP level, from the asset owner, owner perspective and increasingly the wealth and Evergreen channel. And that gives us a very practical view of what investors are trying to solve, whether it's access, selection, pacing, liquidity, valuation, benchmarking and the total portfolio integration of both private and public securities.
So I would describe Stepstone's role as really being helpful to investors who are moving private markets from a bespoke allocation or commitment driven process toward a more scalable, measurable and portfolio construction capability.
Gerald: So now looking at the market and looking back at the last year, the last 12 months, what do you think has been the most different and what has not changed as much as people would believe?
Mike: It's been quite a year for all of us in the private markets and what feels meaningly different this year from a year ago is the level of scrutiny around structure.
A year ago the conversation was really framed around fundraising, exits, pacing and return outlook and, and those are still front of mind topics.
But what we're seeing today is a much broader conversation, which in part has led to the partnership between StepStone and FTSE Russell. Investors are now asking much tougher questions. What are my assets worth? How are they being valued? How do I compare them to the public markets? What does my liquidity profile really look like and how do my private market investments fit within my total portfolio now?
What has not changed is the long term investment case for the private markets.
Private markets still provide access to private companies, assets, loans and strategies that are still not available to the public markets.
And the ability to underwrite source structure and manage complex assets still is very much a priority within the private markets.
But what has changed more than anything is that the asset class is being asked to operate with more transparency, more comparability and more discipline.
Gerald: And Mike, there has been many more discussion around risk measurement. People are asking if the valuation of private market portfolio truly reflect the underneath value. People are also asking about the reported volatility and whether or not it's an accurate picture of economic reality. Do you have some more insight on this topic, and is there still an important gap to bridge?
Mike: The data that we're seeing is certainly giving us a clearer picture, but there's also a gap as you point out like the private markets were never as low Vol as the reported marks would have suggested over the years.
And some of that smoothness that we've all experienced comes in part from the underlying nature of the long term assets that the private markets buy and hold.
But also some of the gap reflects the evaluation lag and the cadence of reporting.
Now the progress here is really better data, more frequent valuation and the unsmoothing techniques that allow investors to discern from reported volatility and the true underlying economic risk - And that's healthy.
We're all going to benefit from better data. More data is better than less data here.
But we shouldn't confuse better measurement with perfect measurement and, and these are still private assets that require judgement, that require underwriting and they require and they require context. That doesn't change.
You know, said differently, Gerald, better marks don't necessarily make private assets more liquid, it just provides investors with more visibility into the risk.
And I think that's really what the nature of our partnership is trying to bring to the markets for the first time. The point isn't about perfection. The point is about better directionality.
Gerald: At the same time, we've seen some pockets of relatively interesting stress event in the market, particularly around liquidity management. We've had some gate being imposed on some semi liquid found in Evergreen structure.
We've also seen some period of stress on the non-traded BDC market. What are the lesson learned from investors from this event and do you think they constitute a structural failure?
Mike: I would call the events from this past year as a structural test, certainly not a structural failure by any means. Semi liquid vehicles are intended and designed to provide periodic liquidity, not daily liquidity. So when redemptions were on the rise earlier this year, the right question is not whether a vehicle gated.
The question, or the better question, is whether the liquidity terms, the underlying assets, the investor base, and the communication were all aligned.
So what happened this past year, I would say or characterized as sediment driven or even perhaps headline driven.
But the episode revealed something very real. At the same time, the industry has to be more precise about the difference between a liquidity feature and a liquidity guarantee. A gate is not automatically a failure.
Sometimes it's the mechanism working as it's designed. But the failure would be if investors believed they actually own something more liquid than it was. That's why education is so important here. At the same time, liquidity has to come from somewhere. It can come from cash. It can come from asset sales. It can come from secondaries. It can come from portfolio maturities. But liquidity does not come from the label ‘semi-liquid’.
Gerald: And bringing that into real life portfolio management with an environment that require much more dynamic portfolio allocation. How are data portfolio analytics real time tools truly changing the way you are exercising your expertise? And also as the market expand into new client segment, are things changing structurally from this risk analysis and framework?
Mike: Well, Gerald, this question you're asking really brings into focus the rationale behind the partnership that FTSE Russell and StepStone created about a year ago.
Historically, private markets portfolio construction was heavily commitment driven or allocation based driven.
And the question that investors would ask themselves would be, you know, how much should I commit this year? You know, to which managers, which strategies, which vintage years?
And while those questions are still a front of mind, better data is allowing investors to move away from just commitment pacing toward a broader exposure management approach. So the more important questions we're facing now are, what do I actually own and what is it worth? And what risk factors am I carrying in my portfolio?
What is my liquidity situation look like under a stressful situation?
And how does my private market portfolio interact with my public market portfolio?
Am I overexposed or underexposed in certain parts of the market?
And that changes the discipline.
It moves the private markets from a backward looking reporting discipline toward a more forward-looking portfolio management exercise.
And as you point out, Gerald, as the end users or the broader market starts to expand, the infrastructure of the private markets has to evolve.
Wealth defined contribution, Evergreen and, increasingly, model portfolios will require more standardization, will require more frequent valuation, clear liquidity, a better understanding of what is owned and a stronger, and most importantly, a stronger investor education.
I think this evolution within the Evergreen and wealth management channels is really going to hinge on the importance of education. Access alone is not democratisation.
Responsible access is democratization. Data is moving the industry from commitment pacing to exposure management.
Gerald: Mike, we're seeing the emergence of more frequent portfolio valuation methodologies. We are also seeing the emergence and the creation of daily indices,
real time portfolio analytics.
Is this tool kit now truly operationally available or do they remain still relatively theoretical?
Mike: The capabilities and tools that are being developed today are most genuinely useful in terms of both portfolio construction and governance, frequent valuation, exposure monitoring, liquidity, stress testing, and benchmark awareness. These are all tools that are increasingly practical for everyday investing in the private markets.
These tools are increasingly practical because they help investors understand directionality, they understand risk better, and they understand portfolio interaction between liquid and illiquid securities. But where I would be a little bit cautious is treating daily valuation, you know, as if it makes private markets trade like public assets. That's not the intention, at least not now.
Daily marks are useful for measurement, monitoring and model portfolios. You know, they're not a substitute for liquidity, underwriting or judgement. So, I think the practical use case is not, can I trade private markets daily like the public markets?
The practical use case for these daily valuation tools that we're creating is really helping investors ask this question: Can I understand my portfolio better, easier and with more consistency?
Gerald: Well, Mike, thank you very much for joining us today and thanks again for the continued partnership.
Mike: Thank you for having me, Gerald. It's been a pleasure.
