Outlook for Investing in Diversified Alternative Equities

EMS:

Hi Liz. Thank you so much for being with me today.

Elizabeth Weindruch:

Hi, Elana. Thank you so much for having me. I'm excited to be here.

EMS:

Absolutely, Liz. So, to kick off the conversation, tell us a little about the firm and how you got to where you are today.

EW:

Oh gosh, that can take the whole time, but I'll tell you briefly a little bit about Barings. So, we are an asset manager that is owned by MassMutual Life Insurance Company. We've got around $380 billion in assets under management, and we do a lot of different things for a lot of different types of clients, all on the institutional side with sort of a nice balance between North America, Europe, and Asia. Specifically, the Diversified Alternative Equity team, and I tend to take a minute to just explain who we are and what we do. We are focused really on three things. We're focused on lower middle market private equity. We're focused on real assets, and we're focused on direct investments via continuation vehicles in the secondary market. Specifically, within lower middle market private equity, we focus on growth equity and buyouts, and we're sort of investing in this kind of universe via primary fund commitments equity co-investments. And then as I mentioned, there's a secondary continuation vehicle opportunities.

I've been with the firm for about eight-and-a-half years. I am a managing director. I'm a member of our investment committee. I tend to focus most of my time on origination for new private equity investment opportunities. I like to say that I'm the tip of the spear for the team in the market when it comes to new deals and new deal flow, and we do a lot around emerging managers as well. And so, we focus on the best and the brightest and the next generation of investment talent really across all the areas that we discussed. So, I spend a ton of my time on the road, making inbound calls, attending conferences, and just trying to make sure that we see the next best and brightest in private equity.

EMS:

Great. Liz, love the overview. As a follow-up, given your focus on diversified alternative equities, I would love to hear your high-level outlook for the space.

EW:

Sure. It's interesting because I feel like coming out of 2023, the outlook was a little more doom and gloom oriented to be honest. And so, if you just look at what happened in 2023 deal value and count within private equity kind of fell up a cliff. So, in 2022 and 2023, they declined by count and volume by 60% and 35%, respectively and exits were down 66% and the number of funds closing was off by 55%. So, the word people keep using to describe our business right now is stuck. But with all that said, I'm actually pretty optimistic about the current opportunity set. I would say that there are within a lot of established private equity portfolios, a lot of companies that were acquired at record high multiples using record high leverage levels just given how cheap debt was over the past few years leading up into those most recent spike in rates. But I think that that just really exacerbates a very, very attractive opportunity set for first time fund managers. So, if you are not encumbered by a legacy portfolio and you have fresh capital to deploy and you're focused on the lower end of the market, I actually think that that's a great area of opportunity still. I think it's probably one of the more durable segments within our market and that is where I think we've got the best opportunity on a go forward basis.

On the flip side, I also, I mentioned that we're focused on the continuation vehicle space, and we like that segment of the market because it's exposure to direct transactions that typically tend to be trophy assets within private equity managers’ portfolios. And it's effectively a de-risked co-investment from our perspective. So, you are able to get access to a business where the private equity sponsor knows the management team, they've got a great relationship and rapport for whatever reason it makes sense for that business to then kind of transition into a special purpose vehicle. And that's either, maybe it's a fund life issue or a fund concentration issue, but there's plenty of runway for additional growth over the medium to long-term. And we think that's also kind where the most attractive opportunities are as well. So fresh capital for new deals, but then if you're going to do an existing deal, focusing on those trophy assets where you can get a ton of alignment from both management teams and private equity sponsors.

EMS:

Liz, on the other hand, what are some of the greatest challenges you face in your space and why?

EW:

I think that fundraising is always a challenge. So, I think that the time to raise and close a fund five years ago I think was around probably 12 to 18 months. I think now it's 24, potentially even 36 months, particularly, you factor in all the kind of lead up time and doc preparation. I think that fundraising has always been challenging but continues to be more challenging. And as you look at who is able to go out and get deals done and get funds closed, there's a couple of, I'll call them unicorns out there who are able to get things done very quickly. But I do think that the time to get a fundraise is one of the biggest challenges, not just because it's hard and it takes a long time, but it's such a draw on a team and its resources and it's costly and there's all sorts of expenses associated with it. And I think that a lot of groups out there don't necessarily plan for it to take as long as it does.

And the other challenges are probably, as I mentioned earlier, there's a lot of deals out there that got done over the past few years at pretty high prices at pretty high leverage multiples. And so, the interest expense for those transactions continues to creep up and all that does is steal from the dollars that a sponsor's able to invest in growth for those businesses. So, there's sort of that stuck portion of the portfolio. And then just generally speaking, I think fundraising is a challenge and always has been a challenge.

EMS:

Absolutely. Liz, to shift gears a bit, I would love to hear your experience being a woman in the industry and what you're doing to inspire others to follow in your footsteps.

EW:

Being a woman in this industry on the LP side of things is not as rare as maybe it is on the general partner side of things. I'm very fortunate to work with and be surrounded by a lot of really smart women if it's on my team, within my organization here at Barings, a lot of my clients that I work with are women as well. And so, I don't necessarily think of my being a woman as unique, but I think maybe mathematically if you look at it, but probably is. I think that this is a business that needs more women in it. I think we need more women on my side of the table, but I specifically think that we need a lot more women on the general partner side of the table as well. And I think that we are seeing changes there. I think you saw a pretty significant number of female focus, or not female focused, but female partners who had spun out from existing private equity firms and raised funds over the past couple of years. If you think about somebody like Stephanie who raised Coalesce Fund I or Azra who raised Astira Capital Fund I, those are phenomenal stories of great women who are out there building private equity firms. So look, I couldn't say that I'm doing anything to inspire anybody, but at the same time, I think that the more that time progresses and the more that people sitting on my side of the table and even on your side of the table are asking these questions, the more apparent it's going to be that we need more women in this business.

EMS:

Liz, we've covered a lot of ground today and wanted to see if you have any final thoughts you'd like to share with us.

EW:

It's a tough market out there. It's a tough market if you're on the investment side. It's tough if you're trying to get a fund raised. I would say that look, if you're an emerging manager or if you're sitting within one of those sort of firms that has a stock portfolio and you think that you can go out and do it better on your own, take a risk, why not do it? My first piece of advice, and if it's something you're thinking about doing, certainly would love to chat with you about that. I would also just say that we're really optimistic about what we're seeing within our portfolio. We had three exits in Q4 of last year all that traded at 25% to 35% above the prior quarter's marks, which is really exciting. And so, while I think that some folks’ views of the market are pretty bleak, I think I'm very optimistic. I think we've got a fantastic portfolio mostly because it's focused on that lower end of the market, and I think that's where the best opportunities are.

EMS:

Liz, I wanted to thank you so much for sharing your perspective with our listeners.

EW:

Well, thank you so much for having me.

EMS:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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