WSR’s CEO Larry Roth hosted Bob Long, CEO of StepStone Private Wealth, in a fireside chat to discuss why private markets are no longer “alternative,” why we have reached a tipping point, the structural nature of the changes, common misconceptions and illiquidity.
In response to Roth asking how private markets have changed in the last five years, Long explained that clients are asking advisors for private investments and choosing their advisors based in part on their firms’ private markets offerings, which has led to advisory firms competing on the basis of their offerings.
He added that a framework around growth and income has developed in recent years that leads advisors to consider private markets as part of the solution.
Long explained that public investments are driven by the media, momentum and memes, and lack diversification, in contrast with private markets. Pointing out the greater opportunities in private markets, he said, “Today in the U.S., 87% of companies with $100 million or more in revenues are private, and that trend is only going in one direction.”
Providing more information on the changes of recent years, he said evergreen funds have solved many of the issues of the past with private markets because the funds have relatively low minimums, trade on tickers rather than requiring extensive paperwork, provide 1099 tax reporting and are SEC-registered. He sees model portfolios for private investments as the latest trend in this space.
StepStone provides products based on private credit, infrastructure, private equity, real estate and venture capital.
Roth asked about the drivers behind the rapid increase of StepStone’s assets in the past year from $6 billion to $15 billion, to which Long replied that the firm emphasizes education and provides sales representatives to join advisors on calls. He added that the firm will not “push products,” instead encouraging advisors to serve their clients through private markets, and also emphasized the ease of investing with evergreen structures, which the firm uses.
Structural, Not Cyclical
In response to Roth’s question of whether private markets growth is cyclical or structural, Long affirmed it is structural. According to Long, regulatory restrictions from legislation such as Sarbanes-Oxley and the depth of capital currently but not previously available for private companies are structural components that underly the shift from public to private markets.
For example, companies in the ‘80s had to access capital through public markets, but by contrast, “Space X has raised over $10 billion in private capital.”
Long continued, explaining that the industry has developed beyond “democratization,” of private markets – the trend of recent years in which private markets are more broadly and easily available to investors.
He said that what’s happening now should be described as “institutionalization,” as the premium individual investors pay over institutions narrowed as transparency about investments, fees and performance increased. He emphasized that a private markets provider can and should offer individuals funds with the “same deal, same price and same time” as institutions.
He emphasized that a private markets provider can and should offer individuals funds with the “same deal, same price and same time” as institutions.
Mistakes And Illiquidity
When asked by Roth about mistakes advisors make, Long pointed to advisors “dabbling” in private markets rather than moving fully forward as a common mistake, especially in light of the investments they put into resources to bring private markets funds onto their platform. In a similar vein, he said advisors are asking the wrong question of which clients should be allocated private investments rather than asking which shouldn’t.
In addition, Long said many clients do not understand illiquidity adequately. “Product providers are not magicians,” he emphasized, saying the tradeoff for volatility dampening, return premium and risk premium is illiquidity.
He recommended that advisors and clients who initially perceive there is no room for illiquidity consider IRAs as a place for relatively illiquid investments. He also said some of the public liquidity issues that happened with real estate funds were possible because the funds were arbitraging between public and private real estate investing, which StepStone does not engage in. The firm also maintains a diversity not only of investments, but of investors, to make simultaneous drawdowns less likely.
Julius Buchanan, Editor in Chief at Wealth Solutions Report, can be reached at julius.buchanan@wealthsolutionsreport.com.
This article is published under WSR’s partner program. For more information on how to participate in the partner program, contact zack.drew@wealthsolutionsreport.com.
