On-Demand: Economic Outlook | What To Expect Under the Biden/Harris Administration

Eugene Tetlow:Thanks Jennifer, and thank you for joining us. Before Andrew introduces himself. Just a quick note of thanks to Rupa Jack and Craig Franklin of Morgan Stanley Wealth Management Group for connecting us with Andrew. Andrew, over to you.

Andrew Slimmon:Great. Hi, thank you for having me. Andrew Slimmon, Managing Director, Senior Portfolio Manager of Applied Equity Advisors. We are one of the boutique investment arms of Morgan Stanley Investment Management. I run a team that manages about six billion of global unconstrained long only equities out of Chicago. I also serve as one of the seven voting members of our Global Investment Committee that sets asset allocation for all our three trillion of Global Wealth Management assets.

Eugene Tetlow:Thank you and welcome. Simcha over to you.

Simcha David:Thank you. Again, thank you for having me, Simcha David. I am the partner in charge of the Financial Services Tax group within EisnerAmper. Our clients range from emerging managers all the way through multi-billion dollar funds, in the private equity, the hedge, and the venture capital fund space. We are a national practice so our clients are on the East and West coast and throughout wherever financial services hubs are located.

Eugene Tetlow:Thank you and Zack over to you to finish the introductions.

Zack Ellison:Hi everybody. My name is Zack Ellison. I'm the Managing General Partner of Applied Real Intelligence A.R.I. We are a venture debt investment manager located in Los Angeles. And the last 15 years or so, I've been in the investment markets, predominantly in fixed income. I was a banker at Scotiabank, focused on six billion in TMT loans, pre-crisis through the duration of the credit crisis. Went back to business school, University Chicago to get my MBA.

Then moved to sell side trading at Deutsche Bank in New York where I traded corporate bonds and credit default swaps. And then was recruited from there to Sun Life Financial, which is the 100 billion dollar asset manager and helped to manage their 130 billion dollar. General account focused on a 25 billion dollars sleeve of fixed income and along the way did the MBA at Chicago, Master's in Risk at NYU Stern. The CFA charter, the CAIA charter and now sit on the board of both CFA, Los Angeles and CAIA in Southern California as well. So thanks for having me, Eugene. It's always fun to collaborate with you. And thanks to EisnerAmper as well.

Eugene Tetlow:All right, welcome, and thanks again for joining. So we have a lot to cover, today. I'm starting with the public markets, an end of 2020 CNBC poll of over a hundred CIOs and portfolio managers had two thirds of respondents predicting the Dow would hit 35,000 in 2021. Within venture capital, Chuck Schumer's control of the chamber will likely see the reversal of Trump's stringent immigration policies. And with the private equity industries hopes for a divided government dashed, what will the Biden and Harris team have in store there? Let's start on the tax side of things. In December 2017, The Tax Cuts and Jobs Act lowered the corporate tax rate from 35% to 21%. Simcha, can we expect to see an increase in the corporate tax rate in 2021? And if so, to what level would you kind of anticipate?

Simcha David:So Eugene, instead of just putting on my dividing head and saying, I just want to give a little bit of context around the answer that I am going to give. We all know that with the Biden campaign, was a campaign that put out a very robust tax plan from the campaign standpoint. And we had discussions with our clients about, okay, should we do things in 2020 based on some of the stuff that's coming out in their tax plan? And of course, our answer to them was, you could but, we don't know who's going to control the Senate, right? And at that point, through January 5th, we didn't know who controlled the Senate. Well, now we know. So now we've got President Biden, a democrat. The Congress is democratic, and the Senate is democratic.

So some people feel right away that he's going to try to force through his entire tax plan. I don't think that's the right answer, for a number of reasons. Number one, the majority in Congress is slim, and certainly in the Senate. And so tax policy, people like, even in the Democratic Party, you have some of your moderates, who are more progressive. So he's going to have to be able to put together a package that everybody can agree on.

On top of that you have the economy being as it is, with the pandemic, et cetera. On top of that, we're still absorbing to The Tax Cuts and Jobs Act. There's still regulations coming out on a regular basis, just explaining the new laws as they came out under The Tax Cuts and Jobs Act. So how quickly he'll be able to push through certain parts of this tax plan, is really anybody's guess. I think he's going to be more focused perhaps on other types of loan programs, PPPs, things like that, other legislation that might not include tax right away because of the situation we find ourselves in.

That being said, one of the things that I think everybody, both chambers probably agree on is to get rid of the SALT cap, the State Local Tax cap of $10,000, which nobody seemed to like. Definitely not those in the high tech states on the East or West Coast. And so I think he would get probably have an easy time pushing that part of his tax plan through. And historically, whenever he's spoken about that it's been, well, I'm going to do that, I'm going to pay with it. I'm going to pay for that, getting rid of that reduction, by increasing the tax rate for corporations.

Whether it'll go from 21% to 25%, or 21% to 28%. I think the easiest part of his plan would be to push for this, the repeal of the SALT cap. And if he feels the need to pay with that with an increase in the corporate tax, I think those might come through as a package so I think there's a good possibility that we'll go up. They've said 28%, probably not higher than that. Maybe a little less based on how the economy continues to do within the first 10 days of the presidency.

Eugene Tetlow:Thank you. And Andrew, in terms of the public markets, how would you anticipate an increase in the corporate tax rate to impact the public markets?

Andrew Slimmon:Yeah, I really think it depends on what year. If it's this year, I don't think it's as important. And that's primarily because as you come out of a recession PEs tend to be expensive, people focus too much on PE. And classically, Wall Street tends to be too bearish. And earnings estimates are too low and that's exactly what we've seen. So companies are beating, so the rate of change is positive. And so I think that there's a likelihood that the offset to higher corporate tax rate could be, companies are actually doing better.

I happen to believe and we can get into this at some point, the economy is going to come on much stronger than anticipated. However, having said that, PEs become more important later into an economic cycle. And if in fact, the corporate tax rate were to go up next year, 2022, I think that will be an issue for the market given the valuation it currently sells at.

Eugene Tetlow:Okay, Thank you. Jennifer moving towards the private markets, what kinds of proposed or anticipated regulatory initiatives can be expected to have an impact on PE deals.

Jennifer Bellah Maguire:The fact is that aside from the tax discussion that has really permeated the campaigns and consciousness. There really haven't been major proposed financial or investment regulations. What we've seen is that despite a lot of talk of deregulation, the Dodd-Frank Act is really the cornerstone of sort of the recent era. And it survived the last administration essentially intact, and has simply then been being implemented with very few revisions.

So generally speaking, despite all the media and turmoil, the regulatory front for private funds has been fairly stable throughout the past few years. The key drivers of oversight for this industry in terms of governmental oversight, really still are the SEC, through the process of articulating policy and then enforcing it through exams and eventually, in some cases enforcement actions. And while some of the headlines have abated, and a large number of cases have not been brought under the Trump administration. I think that's also attributable in part to the fact that in the early years of the rollout of Dodd-Frank, quite a few policies were established, quite a few precedents were set. And it wasn't necessarily required that the SEC continue articulating its view on things, because it had done so.

It's tempting to suggest that things are fairly stable in that regard. And that the SEC is going to be clearly focusing on investor protection. And it's going to have its eyes widely on various developments in the market that may overlap with private equity. Such as, and I think we'll speak about this a little bit later, the SPAC phenomenon. But from a transactional perspective, my sense is that the regulatory developments that are going to impact private equity, aside from tax are going to be more tangential. One area that I think is interesting, although I don't know that its paradigm changing is antitrust.

Eugene Tetlow:There Jennifer I thought we might have just lost you.

Jennifer Bellah Maguire:I think that's relevant, as it is clear that there's a fairly strong, interest in the Democratic Senate, and so by both Warren and Klobuchar  there's a number of new answers nuances in these proposals that would certainly toughen antitrust intimate. And while private-equity funds rarely worry about antitrust issues on the buy side. They certainly can be concerned with them on the sell side when doing a trade sale. And from that perspective, if strategic M&A is more constrained by antitrust scrutiny, it's going to free up some assets for acquisition by private equity firms.

I think there's tangential impact, but I'm not sure that it's going to make such a change. Perhaps in some industries, it'll have a large impact. But I would say as, generally speaking, I don't expect it to be a paradigm change. But the other areas that I think are going to be interesting is there's clearly going to be a focus on consumer protection, equitable access to financial resources. Such that I think there's going to be and I know we're going to be talking more about innovation in the course of this discussion. I think there's going to be innovation, I think there's going to be investment opportunities that are caused or effectuated by those movements, and of course, the infrastructure development proposals and the huge amount of funding that should be available.

I think most of the impacts, if you will, are indirect, rather than trying to change the way funds are structured or what they're allowed to do. I think it's more in the nature of the opportunity set. And potentially in some areas, I think it could be expanded. But clearly, it's hard to foresee how these things are going to play out and I'm sure that there'll be some areas where it's contracted. Obviously, any contraction in the credit market is going to have an adverse effect.

Jennifer Bellah Maguire:So the only other area that I think is going to be impacted, if you will, is that there's a convergence between what the private sector has been focusing on with ESG. And I think it's fair to say governmental support for a great deal of these initiatives, including the environmental concerns and climate change as well as diversity in hiring promotion and just about every aspect of how businesses operate and are run. I think those two strong lines are going to be converging under this administration in a way that we haven't really seen before.

Eugene Tetlow:Okay, perfect. Thank you. And maybe we can just stay on the ESG side of things for now and then we can touch on innovation in a second, especially within VC. But I think one of the big macro switches we've seen in the last five years, which accelerated significantly in 2020, was the focus in ESG. Since 09, PE has fueled the growth in oil and gas. I mean, the shale and fracking boom alone has seen 125 billion dollars of investment since '09. Can we expect the private equity industry to be at the forefront of this change to clean energy do you think?

Jennifer Bellah Maguire:I wouldn't put it in the forefront because of the magnitude of some of the corporate players and their resources. I think it's going to be a strategic and tactical opportunistic force that you're going to see more renewable energy funds raised. And that you're going to see basic private-equity funds that invest in these areas, climb the risk reward ladder a bit, in terms of investing in projects that are still under development at a higher rate of return, rather than simply going into projects that are fully operational at a lower rate of return.

There's clearly LP interest, so I think more funds will be raised. But there's other major players, the utilities, the energy companies, and offshore money that is not CFS blocked because it's coming from Europe and Canada and so forth into our market. I think it's going to be a well-diversified investor market. Which will obviously make prices competitive and not necessarily leave a wide opening for just for just private equity.

Eugene Tetlow:Okay, thank you very much. Very interesting. And Andrew, on the public market side of things, staying with ESG. Do you expect the next couple of years to be, I guess, boom years for ESG combined stocks and maybe the traditional or industrial stocks to struggle a little bit?

Andrew Slimmon:Yeah. I don't believe in growth or value specific investing, because` I believe that the only consistency in investing is human behavior. Human behavior will always send prices to extremes and as I think about 2021, what I see is last year, the energy ETF was down 38%. Over the four years of the Trump administration, it was down 40%. The S&P was up 80%. Last year, the solar ETF was up 250% and it was up 500% under the four years. Single digits on energy stocks versus triple digits on many ESG stocks leads me to believe, it's more likely that we will have a convergence trade in 2021, than a continued divergence trade. Also, I'm a believer that the economy is going to accelerate this year, as I said, and I think that'll help energy. So as I look at the next five years, you might be right, but I believe that it's more likely that we'll see a convergence of performance versus continued divergence in this year.

Eugene Tetlow:Thank you. They're very interesting. And there's that, staying on the ESG side of things, both as a fund manager and somebody working in venture. Are you increasing conscious as to how your fund is perceived from an outside point of view? Would do you think this is something that managers are going to need to be more aware of, and when to speak and when communicating with LPs are going into the next couple of years?

Zack Ellison:Yeah, I think in general, ESG and CSR are very important. They're at the top of pretty much every board's wish list, and in terms of what's important or priority list, I should say. And so that in turn, makes allocators pay attention and companies attention. Within the earlier stage space, the E in the ESG is not really of relevance. Because most of the investing is going to tech companies, or life science companies.

What is really important is the S and G components, the social and governance issues. And I think we've got a long way to go in VC. To give you a couple stats, only 6% of funding, basically pitch books stats, all right, only 6% of funding goes to female founded companies, which is incredible when you think about it. That number used to be 3%, so it's gone up. But it's going up not as quickly as we like. The percentage of funding that goes to minority owned businesses is less than 1%. It's so low, it's hard to count. I probably know them. I know many of the folks at the fund manager level that are from underrepresented groups. There's only a handful, so whether it's the portfolio companies or the fund managers, there's a lack of diversity. It's been there from the beginning and it's been pretty slow to change.

So that being said, I think there's a long way we can go in that regard. But it is changing because it's a priority of the folks with the money, and that's because it's stemming from the top. I think we're going to continue to see more money going to underrepresented fund managers, and portfolio companies going forward. And we're doing that at A.R.I, we just announced our 15 person advisory board, and you're probably thinking, 15 people, holy cow! It's the biggest advisory board in the VC space, It might be. I think we have the most diverse board in all of VC right now.

And the way that I thought about that, which is the way that I think smart investors are thinking about. That diversity of perspective, and diversity of background leads to better investment results. So I'm doing well, and doing good at the same time. And that's because we've got people that come from divergent backgrounds, where they've seen things that I haven't seen, and they complement each other. They help make me and the leadership team here, aware of all the risks that are not on our radar.

In essence, diversity helps de-risk companies and it also helps them make better decisions, right? It also helps to tap into different groups that have a lot of ability to add value, but aren't being included and haven't been included historically in the way that they should. There's just massive opportunity here. When you think about what constitutes investment edge, sorry, I just got to touch on this because it really wraps into the ESG component. And quite frankly, performance that's going to drive change, right?

It's not going to be people just talking about. It's going to be people having a focus on ESG that leads to outperformance. When you think about what leads outperformance, it's great ideas, it's connectivity to different groups of people, different pockets of money, et cetera. And it's extra execution, the ability to execute on that. Diversity improved all three of those, and therefore does add tangibly to investment edge. So that's how I'm thinking about and I think that's how a lot of the more progressive fund managers are as well.

Eugene Tetlow:Zack, thank you for sharing that. And if we could just close the polling questions and see here. If we look at the results, it looks like everybody agrees with you that first of all, that funds are going to have to do more to ensure that these two strategies are seen as not insincere attempts, at greenwashing. Just to kind of touch upon some of the things you mentioned, in  Q3, and Q4, especially of last year. We saw the venture space make a shift as a whole to supporting minority owned businesses and funds having more of a goal and set criteria to actually do that. And that's something that I think the industry as a whole is looking to support.

                                                Because I think everything that you mentioned in terms of, less than 1% minority, less than 6% goes to females. Those are things that I think, 2020 really kind of exposed. And I think that the industry as a whole is coming together to do just that which has been great. Zack, just to stay on the venture side, 79% of venture donations went to Democratic candidates. Under the previous administration, denial rates for H-1B visas alone grew by 400% under Trump's stringent immigration policy. We expect this to be reversed on the Biden and Harris and the democratic controlled Senate. Is this as important now as it would have been, say in 2019, given the fact that we've adapted to a more virtual world of communication?

Zack Ellison:It's a great question. And I just want to take a half step back and then I'm going to answer your question. From an investment perspective, what people need right now, what they always need is returns and they're having a hard time achieving that, especially in the fixed income market. And what's driving returns is innovation, right? Innovation is now an asset class. Whether it's large-cap stocks, like Microsoft, or Facebook, or startups. That's where the returns are being driven, right? VC's done quite well, it had a record year, last year. And whatever we can do as a country to support innovation, the better off we'll be, right? And so if that means figuring how to get more talented people into the country from other countries, then I think the VC industry is supportive of that. Because what they're supportive of, is innovation, right? And driving growth in the economy.

That being said, COVID has actually been great in a lot of ways. I mean, it's been terrible for many, right? And overall, it has been. But in terms of being a driver of innovation, it's been a real benefit, right? Many people use the term, necessity is the mother of invention. So I would say, necessity is the mother of innovation, right? And COVID has forced us to adapt. So now we work from anywhere, we enjoy sports remotely, we entertain remotely, there's been a boom in retail online.

There's just a huge change in terms of how we consume goods, arise and delivery services, et cetera. All of this is happening in real time and it's being driven by innovative companies, right? And so I don't think that immigration, by itself is really the driving force right there, because a lot of these ideas can be tapped into, if people never leave their homes. And that's one of the things that's changed with COVID. We're now all virtually connected globally. I can tap into Eastern Europe. I can tap into South America. I can tap to Israel. I can tap into Southeast Asia, without leaving my home. They don't need to leave their homes, I don't need to leave mine. I can harness that value, I don't need to have those folks working physically in the US to derive the benefits from innovative ideas comparative advantage, essentially.

Economics 101, people should do what they're best at. In trade, we can do that, we don't need to leave our home. I hope that kind of gets to what you're really driving at which is, how do we spur innovation and how do we get the best talent. If not into US, to be made accessible to US and the companies that are operating here.

Eugene Tetlow:Yeah, absolutely. I think you 2021 is a very different time to 2019. And I think everything you touch upon makes sense, just now by just being connected as opposed to being in the same room as somebody else. Just looking at the polling results. If we stay on bench for a second, which two issues do you expect to check numbers venture capital funding in 2021? It looks like biotech and financial services and FinTech. It's actually quite an even spread and that the highest at 21% the lowest at, the most median entertainer 3.4%. So that's actually level even than I guess we would have expected Zack.

Zack Ellison:I was just going to add on this poll really quickly in terms of what we actually saw in 2020, in VC. I think a lot of people hear things anecdotally, but because they're not in the industry, they don't actually study the numbers. 2020 was a record year, there was $156 billion deployed into VC space on the equity side, and about $20 billion more on the debt side and venture debt.

That was not only a record in terms of size. But it was also one of the best years, I think it's the second best year in history in terms of exits. The biggest year ever for capital raise by funds, and people are going to say, well, how's that possible, I thought we were shut down during COVID? I think it's because we're seeing divergent outcomes and investors realize that the real opportunity is within innovation. And so the sectors that really grew year-over-year in the VC space, software witnessed the biggest component of VC, was up 19% year-over-year in 2020. Biotech and pharma, 27 billion, that was up 58% year-over-year. And then both healthcare services and health care devices and supplies were up roughly at 60% year-over-year. And that was driven largely, of course by COVID.

However, and I think we're going to still see some continued investment in that space in 2021. FinTech was $20 billion last year, that's my area of expertise first and foremost. We're going to continue to see a lot of growth there as well. Also worth noting, in terms of regions, within the US, the fastest growing region within the VC space are the coasts. But New England was up 44% year-over-year in terms of capital deployed, which I think is just phenomenal. I'm from Boston, so I always like to see New England doing well. The Great Lakes region, up 25%. West Coast, up 21%, and the southeast up 20%. So essentially, what we're seeing here Eugene, is we're seeing innovation being spread out across the country.

Now, it used to be concentrated in Silicon Valley, it's not anymore. You don't have to go to Stanford to get things done. In fact, the bigger opportunity set here is in cities outside of the bay area, outside of New York City, and outside of the coast. Because these areas have been capital deprived, essentially. And there's a lot of fragmentation in the VC market and information asymmetries, it's a very inefficient market. So from an investment perspective, we love it, right? That's what you want, inefficient market. That means you can achieve high returns and pull out of that market much more easily than you could in a competitive market, like in the public markets where I used to trade.

So that being said, we can talk a little bit more about forecast going forward. But VC is very well positioned right now. And so whatever headlines you've read, the numbers show, we just had a record year, and it's only going to keep growing. Because we've got fundamental drivers in place. Which is namely, companies being formed more easily, more cheaply than ever before, really talented founders coming out of the top universities that are going the startup route, as opposed to going the banking route, or the consulting route. So there's a need for capital. And there's returns that are achievable in the early stage space. And so I don't really see anything slowing that down in 2021.

Eugene Tetlow:Okay and I think you're completely right. We have seen, I guess, venture activity move away from Silicon Valley. I know there's been a growth in Austin, Seattle on the West Coast I know you mentioned but the non-coastal cities, Seattle and Boston have been the three big areas where we've seen venture growth. Jennifer, moving back towards private equity, 2020 saw a decrease in fund formation activity. I know that there is an expectation of profit evaluations and robust transaction volume, but will some GPs pull in their horns a bit in order to husband the dry powder? And could that in turn make the market less competitive and pricey?

Jennifer Bellah Maguire:Well, it's difficult to forecast. I mean, there's one perspective that says that 2019, which is the year to which we're comparing 2020. And compared to which 2020 was down materially was an outlier year. And that 2020 wasn't just pandemic impact, but it was perhaps a normalized year in the aggregate. With a more diverse mix of fund raising, which is what we were just hearing about, especially in venture. But I think the other statistic that's hard to deny in terms of, first of all, how capital got raised in private equity, is that the haves, the well known, the brand names, especially in buyout, and more. If you were mainstream private equity grew and were able to raise their next flagship with a fair amount of ease and other sectors had more challenges, particularly although they did reasonably well, emerging managers and first time managers.

It simply is very difficult to have people put their faith in you. They did a number of surveys. Would you invest money with a manager that you've never met in person, not even once? That's tough. And so I think that that imbalance, if you will, does potentially stand to improve in 2021 as to whether the aggregate, sort of total market size will go back towards 2019, or stay more stable is unclear. But as people are deferring raising their next fund, that's where their dry powder may be a little attenuated.

It doesn't seem to have manifested itself, however, in lower valuations. Valuations are still very high and very competitive in the marketplace. So a number of funds with a decent inventory have been sellers, rather than investors or will be perhaps in 2021. That's kind of the big picture. But I think that the more interesting part is, this notion of innovation, not just across investing targets, but really across those who invest. And having a more diverse and more emergent group of asset managers is going to also fuel I think, innovation and diversify what's available for consumers.

And then just going back to the kind of regulatory front, there has been a sort of soft, if you will, letter type ruling as far as 401(k) potentially investing. So broadening to more of a retail environment, and potentially broadening the availability of private equity to consumers or to investors. Because it has after all, been outperforming a number of other asset classes, especially in this low interest rate environment and that's attractive.

And after all, it's what the state pension funds who pay defined benefit pensions have been investing and very successfully for a number of years. So to suggest that it's wild and wooly, and highly risky is a little bit peculiar, when you really think about who has driven the growth in this investment sector all along. But so I think there's going to be some pushback because it is considered nonetheless, to be risky. I think there's perhaps some further thought that will go into this issue in the Biden administration, as far as the kind of 401(k) availability.

Eugene Tetlow:Thank you very much. And before we move across to the public side of things. Zack, any thoughts on the confirmation activity within the benches?

Zack Ellison:Yeah, and Jennifer made some great points. In general, there's been a massive push to alternative investments over the last couple of years in a search for yield. Within the VC space, but I think it's really interesting, and this is going to surprise a lot of people listening. More funds were raised last year than in the prior year. In other words, even during COVID, funds were raising more capital.

Now. Here's what happened, though. Total funds raised, the amount of capital raised was up 30%, year-over-year was 74 billion. This is in the VC space. However, the number of funds that raise that capital was 321, which was down 36% from 505 in the previous year. What you're seeing, so the numbers tell us, what the data demonstrates, is that there's fewer funds coming to market, or at least last year, there were fewer funds. However, they're raising a lot of capital.

The driving force behind this is that allocators are kind of doubling down on existing relationships and larger managers, right? So if you're an emerging manager, and you don't have a differentiated strategy, and you don't have a track record, you're not going to be able to raise capital. If you've got a good strategy, you've got a track record, you've got relationships, you can raise capital by going like this. I'll tell you, with our strategy, we're very lucky because it's a very differentiated strategy. Venture debt is essentially term loans provided to later stage startups that are already series B, C and beyond, that have already gone through three to five rounds of equity financing. So they've already been derisked, in other words.

And this strategy historically, has returned 20% annualized with loss rates that are less than 50 basis points per year. So the risk adjusted returns are phenomenal. It hasn't been hard for us, because there's very few funds that do this. And we're one of three right now that I know of, in the entire country that are raising capital. So we're raising $500 million in capital. I haven't had one allocator to date, turn me down for a meeting. Because they all want to at least learn about this product, because they know it's topical, right? They know that innovation is topical and they know that there's opportunities outside of traditional VC. So they love the fact that there's no J-curve effect, they love the fact that it's floating rate loans. So you don't have interest rate risk, which is a big risk that we can talk about later. So long story short, the capital raising environment is good, if you can provide value and differentiate yourself with the allocator community. Otherwise, it's going to be very difficult I think, for the next couple of months until we've gotten through COVID.

Eugene Tetlow:Yeah, I mean, that certainly gave me perfect sense in Q2 and going into Q3. Funds that hadn't been through the ODD process with the LPs are looking to attract money from and basically couldn't get through the process, because they couldn't fulfill the onsite visit, which was still in place at that time. So that was one of the reasons we saw funds go to managers if it had already been through that process. And it definitely was a struggle for emerging managers. That has evolved, LPs are now more willing to kind of do a virtual tour and obviously as the vaccine comes out, and people are able to travel again, that shouldn't  free up capital going into emerging managers as well. I want to move across back to the public markets. Andrew, can you explain why there has been so much speculation in certain sectors in the public space?

Andrew Slimmon:Yeah. Interesting. Interesting topic. So look, I think it's pretty straightforward. Obviously, as we all know, the M1 money supply has gone through the roof, because of packages the government has offered. However, that has not transmitted to the economy as much as people or officials hope, the velocity of money remains very, very low, which means basically, very little turnover. And so the question becomes, where does that money go on? Well, we know from savings rates are very high, debt numbers have come down so people then pay down debt and they're saving. Morgan Stanley Wealth Management, our client base tends to be a little bit older, and a little bit more conservative. And they have largely, a lot of investors have stayed on the sidelines during this equity rally, because understandable, COVID hit older people most acutely.

However, there's one group of investors that have been big participants in this ability to have extra cash on hand, and that's  millennials. And if you look at patterns like Robinhood, free commissions, margin debt is going up. what you're seeing is a heavy amount of participation amongst this new group of investors. Now, are those investors interested in buying consumer staples, soap detergent companies, no way. They want volatility. And so this is what has caused a perceived bubble and tech stocks is this is where the money is being speculated in the market today. So that's why you're seeing a big divergence in valuation performance between the tech sector and some of the more staid parts of the market.

Eugene Tetlow:It's very interesting you say and we've seen these millennials do momentum buying and just kind of change the way that they invest and change the way that stocks are viewed in some ways. We're increasingly hearing talk about bubbles in the public markets led by these inflated tech stocks. What could cause this public market bubble to pop?

Andrew Slimmon:Yeah, so if you think about the year 2000, what caused the NASDAQ to pop is that as you may recall, in 1990 the Fed was worried about Y2K. And they were pumping liquidity into the market. And by 2000, they had begun to reverse and that drained liquidity out of the market. So I think a first way this could pop would be simply the Fed beginning to shift their policy, not as much free cash going around to circulate in the stock, so that is always a possibility.

The second thing reason where I think is that, there is a wide gap right now between where the stock market is and where consumer confidence is. And the stock market is a leading indicator. Consumer confidence is a coincident indicator, over time they converge. And so as much as people say, well, earlier this year or in 2012, the disconnect, the stock market's going up, the economy's not, well, the economy has actually moved towards the stock market. I think the point is, is that consumer confidence is going to soar, because the stock market is hitting all time highs and it's a leading indicator.

So the other way that I think the actual bubble comes out of this. The stocks is actually I think, if the Fed drains liquidity, that will cause a crash. But the way that the kind of the burner will come off the some of these stocks is simply, people decide to spend money on things other than tech stocks, right? They tend to start to take trips, and growing in consumer confidence. The third way is simply that, if you have a company that is losing money, but has a tremendously good outlook, right? You're looking out the next 5, 10 years, saying they're going to make a lot of money down the road. And when I discount it back, I come up to a very good valuation.

So interest rates, very much drive long duration equities that are losing money like a lot of these stocks are. If rates were to move up because the economy were to just accelerate, which I think is happening, that would take the air out of it. And then last and not least is, when you sell at 200 or 300 times earnings, if you have earnings at all, you can have decelerating growth. And to the extent that there was a huge pull through of growth this past year, because we're all sitting at home using technology perhaps more than we would normally. Is there a risk that some of these companies will have decelerating growth later this year, that there is no room for decelerating growth when you self-evaluation. So those are kind of some ways I see that you get a correction, these types of thoughts.

Zack Ellison: Andrew does that answer your question. Sorry Eugene, just a quick question. What's your thesis though, are you bullish on the economy?

Andrew Slimmon:Yes, highly.

Zack Ellison:Yeah, I am too.

Andrew Slimmon: Highly bullish on the economy. The market is telling you that, the way the market is acting is telling you that the economy is going to come on stronger than expected. And I'll give you a great example, look at the cruise ship industry, okay. Those companies keep announcing delays in cruises. They can't start cruising yet, if they keep pushing up, stocks don't go down. They don't go down. They stay in there. And I think the point is the market is saying to you that we're going to spend money. It's only a question of when not if.

Zack Ellison:It's a great point, because we've got fiscal stimulus on the horizon, right? Massive fiscal stimulus, we've got monetary stimulus that's going to be with us for a long time. And to your point, I think rising rates would be crushing, and therefore it's not going to happen. And then, of course, the hope is, that we're going to have more stability under this new political regime, right? At the very least, there's going to be less volatility and you know and I know what markets like, stability, right? They don't want volatility, right? They don't like uncertainty. So now that we've got fiscal stimulus, monetary stimulus, and hopefully, more certainty, and less uncertainty, I think we're primed.

And to your point, there's so much cash sitting on the sidelines right now, across the board. Whether it's at the individual level, the VCs have $152 billion in dry powder, versus a 10 year run rate of 80 billion. So they've got double the dry powder this year than they've had over the last 10 years on average, right. That's in the VC space, but it's across the board. Public corporates raise more money in debt last year than any year in history, right? I wish I was back on the bond desk, I would have made like 10x what I was making when I was a trader, right? Just through sheer issuance alone, right?

Everybody and all my friends are on the desk is what they tell me. I made more last year just doing new issuance than I've made in entire years previously, just to my bonus from issuance essentially, it's crazy. So there's this money looking for a home, and where can you put it, you can't put in commercial real estate or you could, but you might get, you know like pull yourself up. Stocks have a lot of potential and then you've got all these emerging alternative asset classes that people are digging into as well.

So it's really tons of cash more cash than there is the opportunity to deploy that cash. And so I think we are going to see some, what I'd call a bubble, mini bubble, depending on the asset class. And so for me, that means you need to really move to a bottom-up selection methodology as opposed to top-down. If you're just going top-down, hey, I'm just going to write the indices. I think that's a recipe for disaster because we're going to see bifurcated outcomes, in my opinion. But that being said, I'm bullish on how and where we're going as an economy, and certainly in terms of market valuations as well in 2021.

Eugene Tetlow:And also, it's not a recipe for disaster. Because as Andrew mentioned, Robinhood is the only thing that's open at the moment. So when other things do get to open, the economy reopens people are going to be spending their money elsewhere. If you're just doing that top-down approach, then it is a recipe for disaster. Moving towards fund managers, Simcha, on what potential tax changes can we expect to impact hedge private equity and VC managers at the fund level?

Simcha David:Yeah, great question. I think if you look at the Biden tax, but I think the one, the biggest one for the managers, is the idea that they were thinking of repealing the preferential tax treatment of long term capital gains and qualified dividends for those earning over a million dollars. That kind of without getting rid of carried interest, we do have a carried interest rule that came into play in the Tax cuts and Jobs Act. That requires a three year holding period versus a one year holding period to get the long term capital gains preferential tax rate of 20%.

And then we just got final regulations, they were actually published on January 19th, in the hopes that the Biden administration wouldn't hold them. They probably will pull them to review them. So even without changing that any further, if you say, well, guess what the long term capital gains to be over a million dollars and now their preferential tax rate is gone. I think that would be a really big one, that would affect the fund managers. There's also whether to raise the individual tax rate from 37% to 39.6% tax rate was pre the TCJA. So the direct impact on fund managers, that's probably the biggest one.

Eugene Tetlow:Perfect. And Lexi if we could just have the results to that poll question. So Simcha, just looking at the poll results, is that something that you would agree with?

Simcha David:Yes, I think.

Eugene Tetlow:Where are your magic wands and just be able to predict the future?

Simcha David:Well, let me be clear here, okay. That the proposal was not specifically to fund managers, right? So it's really anybody earning over a million dollars with long term capital gains will now have to pay, the highest, assuming they raise it to 39.6%, would have to pay 39.6% plus the 3.8% investment income tax on their long term capital gains. Now, doesn't have a big impact on fund manager yet, but it has a big impact on all those who are earning over a million dollars in terms of their investments, their after-tax return on their investments.

Investors have become increasingly conscious, as we all know. It's not just my return from my investment in the fund. It's what my after-tax return from my investment in the fund, and if this policy gets moved to where it is, that would make a big difference. How quickly that's going to come into play, if it goes back to what I said originally, in terms of the tax plan in general, you know, what can be put into play quickly. So somebody I think asked, one of the Q&A was, were we expecting, let's even increase in capital gains tax rate and the increase in corporate tax rate to happen in 2021 or 2022. A lot of that depends on how quickly he wants to push a particular policy through. The longer you move into the year, the less likely it'll be retroactive, especially when you're dealing with individual tax rates. Because that just affects withholding for everybody that's working.

We had that a couple years back where they made a major change and we had to go back and start changing the withholding tables. So going back retroactively, depending on how quickly they come in, even in 2021, when you get too far into the year, the odds of them saying, okay, this is the cutoff date, and we're going to have one rate for this part of the one rate for that part of the year, it gets to be a little bit of a mess. Problem is, you push it out too far and then you push a major part of your tax package close to the midterm elections and they have to worry about that too. Because they have such a slim majority, I think that midterm elections is something they're going to be heavily focused on.

So how quickly that's going to happen is anyone's guess. I think there's some push for them to do it sooner rather than later if they're going to do it. But the economy being as it is, who they're going to affect, I think if they perceive it as they're not affecting the average person on the street, maybe it'll get through quicker, as opposed to some of the other proposals.

Eugene Tetlow:And it looks like looking at the poll the first two years, the first half of the first term looks most likely. I want to open this up to audience questions. We've had quite a few come in, we've been answering those questions throughout the session. But before we get there, very quick just to touch on SPACs very, very quickly. Jennifer, what was behind the trend of the growth of SPACs in 2020? And do you think we'll see more of this in 2021?

Jennifer Bellah Maguire:Well, so first, I just want to quickly revert to the tax, which is, I think, top of mind for all of us and for fund managers. And talk a little bit about the impact that the change that we were just hearing about may have on fun terms. Because I think we're already seeing particularly, Zack to your area, to venture, that there's a creep in the size of the carried interest. And obviously, one of the ways to address an increase in the tax rate is to change the size of the promote. And we are seeing a venture almost an hour on a regular basis that at some level of performance, the carry does go over 20. I don't know if you agree with that, Zack, but that's certainly become almost a norm rather quickly.

And I think it's something that we can anticipate may happen across the board if there's a major change in the tax laws. So that's something to be thinking about just from a fund manager perspective. As far as how the specs may or may not go, I do know that somebody very respected at Goldman Sachs recently published that they are not going to be a sustainable phenomenon. Which I think is as informed a statement as any that I could make. The answer is, that I don't think anybody anticipated this development. So I'm not sure we know what's going to happen.

It's certainly been a big driver, it's been a driver of transactions, it's been a driver of market explosion, if you will. And there's a number of, sort of perhaps more, I wouldn't say cynical, but pragmatic views of it from a consumers perspective or an investor's perspective. You have very little to lose by investing in these because you may or may not like the opportunity they find if they find one, but you're going to get your money back with a return. So there's not much not to like there. From a seller's perspective, it can be quite cumbersome, expensive and slow. So there's a few things not to like there, but it certainly makes for another avenue of exit.

And then from a regulatory perspective, specs are not new. The notion of a spec has been around really forever, and is a blank check company, which is something that there was, I think it's fair to say regulatory hostility to or at least strong skepticism. And so there's always been a layer of regulatory disclosure and concern about anybody asking for a blank check from the public. And so what's happened with the recent phenomenon is obviously all of that has become fairly streamlined and to regard people have incorporated and assimilated those requirements.

But the SEC did just come out with some further regulatory statements about what people really need to be thinking about when they're telling investors, who is managing their spec, how they're managing it, what conflicts they may have, and a number of other kind of thoughtful, I think. And I know already things that should be addressed in a disclosure document, but they sort of underscored it in the last couple of months or weeks. Just to ensure that those who are accessing this market are telling the market, how it's really going to work and who's going to be running their money in effect. So I think it is premature to call it a bubble or to say it's not going to stay with us maybe at the level it's at now, it's going to moderate. But, it's certainly been a driver in the current market and valuations. I think it's impossible to ignore it. And it's come, if you will into its own.

Eugene Tetlow:Thank you. And we were actually out of time, we've managed to answer quite a few of the questions through the course of this. There's a couple of other questions around inflation and the devaluing of the US dollar, which would have been interesting to get into. I think we definitely could have spoken for another half an hour to an hour, there's so much to cover here. But we are out of time, so I just want to say thank you to everybody for taking the time to attend today. And also say thank you to the speakers, Jennifer, Zack, Simcha and Andrew. And with that, I will pass it back to Lexi, to wrap up the session.

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