Bob Long, Conversus StepStone

#24 Bob Long, Conversus, on making private equity accessible

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#24 Bob Long, Conversus, on making private equity accessible
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You can watch the video version of this private chat with Bob Long (with speed controls here.)

 

[Transcript]

Today I’m speaking with Bob Long CEO of Conversus. Bob originally listed Conversus Capital in Europe in 2007, and it was the largest listed private equity vehicle of its day. He recently relaunched the Conversus brand within the private markets, giant StepStone, and together they’ve recently launched the new liquid evergreen private equity vehicle that appears to solve the discount problem that plagues listed private equity, and that’s a tough problem to solve. So here we go….

It’s some years since I first came across, Conversus. And since then it’s had something of a rebirth and you’ve launched a novel vehicle, which is opening up access to private equity for a large potential investor base. I was wondering if you could start by giving us the little potted history of the Conversus brand.

Bob Long:

Sure. Happy to do that and good to see you again. So Conversus as you may know, comes from the Latin for conversion, and we think of Conversus as converting the advantages in private markets historically enjoyed by institutions into opportunities for individual investors. And that was the theme of converses capital. The publicly traded trust that we launched in 2007 on the European stock exchange and what led you and I to get connected back in those days. So we ran that business for five years and we learned that that publicly listed investment trust. And I should say we weren’t actually a trust, but that’s, that’s the term used for those vehicles, the listed private equity vehicles, that structure really didn’t work very well. And there are great names and great firms who’ve run listed trusts on the London stock exchange for decades. Those trusts have generated net asset value wildly in excess of the footsie index over that period of time.

Bob Long:

But nonetheless, the stocks trade at a deep discount to net asset value. And so as, as one of my investors said versus capital, you come to work every day trying to generate growth net asset value. And we did frankly, a job we’re very proud of in that regard, but I eat stock price. And so the stock price of Conversus Capital did not keep up with the net asset value performance. So we did the right thing for investors and we sold the portfolio at a premium to the stock price and a result in a transaction that worked out very well for investors. Now, today, those other names that I mentioned again, great names run by great people. They continue to trade at a material discount in most cases to net asset value. And so we simply think Tim Smith, my partner in Conversus Capital, my partner in Conversus, StepStone, we simply think we have a better mouse trap in the form of a tender fund.

Bob Long:

So that’s sort of the deep background on how we got there. Maybe I’ll move from there into how we all came together as a team. So we sold Conversus capital Tim Smith and I did in 2012, and then I went to run a listed business development company in the United States. That’s the closest thing to a listed alternatives vehicle available in the us markets. I did that and Tim started a distribution business in the UK, and we learned various things along that way, but we’ve been dreaming this dream that there was a better way to provide for individual investors in smaller institutions access to top tier private markets. Fortunately, I reconnected with Tom cinema. Who’d been a colleague at bank of America, along with Tim for 15 years, Tom had left BoA to go run a business called CNL, which was one of the leaders and the retail alternative space in the United States and Tom and his number two Neil Menard head of distribution were in the process and had left CNL.

Bob Long:

And we’re also sort of dreaming the same dream we had. And Tom and I had old friends reconnected and the four of us banded together. I happen to own the Conversus brand. So we came together as converse us, and we knew we had expertise in structuring. We knew we understood what retail investors really needed and wanted. But we also knew that in this day and age, the investment management capabilities necessary to create a world class best in breed, truly institutional caliber investment team process sourcing execution well is a really high bar, a really high bar. I grew up in a small town and they have a saying, don’t bring a knife to a gunfight and for us to go and build our own investment team seemed like bringing a knife to a gunfight. So we came together under the Conversus brand and then went through a process of meeting and interviewing numerous firms who were prominent and successful in the private markets and had a goal of expanding their capabilities into retail, to offering individual investors in small institutions. And we were thrilled to a form of partnership with StepStone who is has been a great partner for us. And we are a wholly owned subsidiaries converse. This is simply a brand that is used to convey the institutional capabilities of StepStone to the retail audience. We stop there and see what questions that raises for you.

Ross Butler:

Well, that’s a great introduction. Thank you, Bob. I mean, the first question is StepStone, I understand is a very large asset manager, but actually I don’t think it’s that all that well known. So could you just give us a little bit of insight into, into them?

Bob Long:

I will. And I have to say Ross you’re in the majority. The StepStone is, is the largest asset manager. Well, not well-known even among financial services professionals. It’s just, it is what it is. And they recognize that, or the firm recently went public on the United States stock exchange. So it’s it’s, it’s changing, but StepStone is a fascinating firm. They were formed in 2007 by a group of people who believe that the fund to funds model was not the way forward. And I believe they were right about that. And they believed that more customized solutions built around a highly data driven investment process was the way forward. Now they started in 2007 and I’ve heard some of the stories tough time to start. Heck I, IPO to listed investment vehicle on the Amsterdam stock exchange in 2007. So I know what it’s like to start a business in 2007, but they started in 2007.

Bob Long:

They built a tremendous firm that today has $330 billion of assets. They are one of the five largest allocators of capital to the private markets globally. Our firm allocated $53 billion to the private markets last year. And so that, that breadth and scale has been extremely helpful to Conversus, but I’ll come back to that. So that StepStone bothered 50 people, 13 countries, 19 offices, primarily serving a hundred of the world’s largest and most sophisticated institutions, primarily doing that through bespoke separate account or fund of fund type structures where they meet the needs of those large institutions.

Ross Butler:

So an organization of that size can do whatever it wants. So what did Bob long and Conversus 2.0, bring to their party?

Bob Long:

Yeah, that’s a good question. And here’s the candid answer we met with a lot of people and had had frankly, a fair amount of interest in our team. Stepstone in some ways needed us less and wanted us more StepStone had been around the retail business. They had a few relationships they’d studied it carefully and they recognized unlike some other larger organizations that do a great job with w with liquid structuring, investing, distributing, liquid securities, mutual funds and whatnot. Stepstone understood that there were unique structuring and distribution capabilities necessary. They wanted a team focused on it. They knew enough to know that there’s frankly not been a lot of success in I won’t name names, but many very large liquid asset managers. That the names that you all know have dabbled in offering private markets or alternative assets to individual investors using the same sales teams in the same concepts, the same messages they use for mutual funds and liquid security stocks and bonds. And frankly, there aren’t many good examples of that working out. And there are numerous of examples of large well-known firms, great firms, not succeeding and steps on saw that and share the same perspective we have, which is you need a dedicated team. You need to sell this differently and you need to structure it in a way that’s genuinely investor centric for individuals. So that’s why we came together with them and they have been fantastic partners.

Ross Butler:

Yeah, the retail that the kind of the mass market has proven a really tough nut to crack for, for private markets. It’s a real shame in my view that they all the listed vehicles trade on a discount, but have you, do you think you have cracked it? And if you have cracked it, you know, what have you got? Tell us what you got.

Bob Long:

What we’re trying to do is in our first fund, Conversus, StepStone, private markets, which we call CPRIM. Our goal is to deliver the illiquidity premium and diversification benefits of private markets, private assets in a form with quarterly liquidity at a hundred percent of nav for 5% of the fund, not 5% of your investment, but 5% of the fund. So the idea is that most investors should be able to get liquid in their investment. Most quarters, not every quarter, if we have another March, 2020 you may not, we may not be able to honor all investor requests. And we’re very upfront about that in a given quarter, we may have to so-called gate in a given quarter, but most investors should be able to get their money out most of the time and experience private market asset returns. And so that’s frankly hard to do, because to do it, you have to minimize cash drag. You can’t just have a bunch of liquid securities or cash on the balance sheet. You have to be able to predict capital calls and distributions. If you’re gonna have a diversified portfolio that includes funds and is open architecture, and you have to be able to source off those investments.

Ross Butler:

So in normal times, investors can take out they can redeem their offering, but at any one time only 5% of the whole fund can be redeemed. Correct?

Bob Long:

Correct.

Ross Butler:

And so let’s take an extreme situation, say there’s another, credit crisis, but whatever reason everyone wants out, it’s going to take many quarters to start winding it down, and everyone will be locked in to some degree.

Bob Long:

This is an evergreen vehicle. So we take money in monthly and we offer the liquidity quarterly. So the idea is when you invest in CPRIM, your money’s actually invested. It’s not just committed the way it would be to a regular draw-down fund. So it’s similar to the listed investment trusts in that way. And there’s your money is invested. So getting to your liquidity question, it’s a very good question. Here’s why I think we think that’s extremely unlikely to happen. First of all, we will have thousands and thousands of individual investors globally. So the probability that all the investors want out at a given point in time seems to me are frankly, basically impossible. You’ll have investors who learned the lessons of the financial crisis and, and frankly, the lessons of 2020. And that if there is a market dislocation, when, when there’s a market dislocation, because they will happen again, yes, there will be investors who seek liquidity, but they’ll also be investors who think this is a great time to invest more capital. So, and you may have, we have a significant investment coming in from Latin America right now, for example 15, 20% of the capital over the last couple of months, but that will grow over time and we’ll have capital coming in from Europe. We have some coming in from Europe, we’ll have some information. You can imagine a regional crisis where those investors decided that they need their money out, but the probability global dislocations in all markets that calls all of our investors to want to liquidate at one time, it seems almost impossible to me that said the same phenomenon would occurred at the same pressures would occur if we had another global finance. And in that event, we certainly have the ability to redeem more than 5% in a given quarter.

Bob Long:

And if you look at the backgrounds and history of the four principles of Conversus and what we’ve done during times of stress and pressure with investment vehicles, I think we’ve shown a track record of being willing to do the right thing, including selling Conversus capital, which was a permanent capital vehicle, the largest in the world with $2 billion of assets generating quite a bit of revenue, frankly, but we sold the portfolio because that was the right thing for investors. So I don’t think that will happen here, but we do have the ability to sell assets if we need to. And importantly, we’re ultimately governed by an independent board. This vehicle is structured like that mutual it’s listed under the 40 act, which is sort of technical, but it’s, it’s, it’s governed like a mutual fund in the United States. We have a majority independent board proud to say that independent board has invested about a million and a half dollars of their own money in this fund. You don’t see that very often, that that is real, that’s a substantial commitment. So they are reputationally and financially and ethically bound to do and that could of course take all kinds of actions as as controlling the, as controlling the board to make sure we did the right thing in an circumstance. So we feel like we have the governance in place to protect investors in a deep downside case.

Ross Butler:

I can get access to private markets and I can get out on a quarterly basis in normal times asset value. And that’s the key difference, isn’t it, to the investment trust world

Bob Long:

I ran a publicly traded business development company in the US and I ran one of these listed investment trusts in Europe. So I’m think I, maybe the only person that’s ever been CEO of two of those things, plus the, a Tinder fund here in the U S which is the structure, what we call the list of trust in the public paid of business development companies in the U S you can sell those every day, but you may not like the price because they historically traded less than now with CPRIM. You cannot sell it every day. We require 90 days notice, and it’s quarterly, but you will like the price. It is a hybrid, and we are very proud to be very upfront about that. We are not alchemists, you know, we can’t instantly turn it liquid assets into liquidity, but we think we’ve got the right balance of monthly subscriptions, evergreen capital, quarterly liquidity with notice. It is interesting and useful to arrange the people in them. I’m happy to say that today we’ve gotten really strong market reception. People see that. I mean, people say investors and, and portfolio managers see, I have a place in my portfolio for private market returns, with a high likelihood of quarterly liquidity and a real strong likelihood that over a couple of quarters, I’ll be able to get my investment out there. There’s a place in my portfolio for private market returns without sort of liquidity profile. And that’s that’s what we’re offering.

Ross Butler:

So it sounds like the Holy grail of liquid access to private markets that are more or less invested in those underlying license most of the time. So let’s go back to where you were before I cut you off. How do you, how do you pull it off then?

Bob Long:

Yeah, this is this is something that I’ve been thinking about since 2006, when we were putting together converses capital. And it is difficult. It’s quite challenging. The reason we’re able to do it in Conversus StepStone is first and foremost, we designed an investment strategy. That’s not private equity only so included real estate infrastructure and private debt assets that naturally produce some liquidity, organically produce some liquid. Second. We focused primarily on secondaries and later stage secondaries. So assets that are expected and have generally do generate liquidity realizations, a relatively short period of time. And by that, I mean, sort of expected liquidity profile of a couple of years. Whereas, you know, the typical private investment fund is 15 years. And if you get an individual co-investment it’s five years, so structuring the portfolio right, having the right mix of assets is critical. Secondly, it’s about data.

Bob Long:

Stepstone is built as good a data system as is available in the world today. It’s called StepStone private intelligence, spy, cool name. It’s actually really cool to demo also. And I can give you stats tens of thousands of portfolio companies, thousands of meetings every year that are recorded with general partners, giving us an idea of when individual companies are going to be sold tens of thousands of phones tracks. So they built what we think of as the Bloomberg machine for the private markets. So they have extraordinary data that’s been collected. And then when you commit as much as anybody in the world to the private markets, these general partners have an incentive to share a lot of information with you and they are they’re also incented for you to buy their secondary assets. So the data that allows us to predict when assets, when a capital calls going to occur, when a liquidity event is going to occur is really, really important.

Bob Long:

We think StepStone has, has the best data.

Ross Butler:

So that’s your gun in the gunfight.

Bob Long:

That it is. And lastly, it’s the opportunity. It’s the, it’s the scale and breadth. So as we select individual assets and we have about 40, 40 transactions 40 funds, and co-invest in the fund today, as we select each individual asset, the portfolio manager needs to be able to choose among a variety of assets with different liquidity profiles. I think of it as a stew. And you know, when you add an onion, onions, never come in exactly the 1.2, five ounces that you were looking for, right. It’s always a little more low. Okay. So once you add something to the stew that has a certain liquidity profile, that changes what you need next. So you need a vast back to get it exactly right. You need a vast, vast array and StepStone invest in over 300 separate transactions in a year.

Bob Long:

We’re closing more than a deal every business day. So just think about that. So the variety of things that our portfolio managers have to choose from to create that just right liquidity profile, that limits cash drags, you can’t have a lot of unfunded allows you to hit your returns and also gives you visibility into liquidity for up to 5% of the fund on a quarterly basis. The ability to do that, to do that, they have to be have great insights into the cashflow dynamics of each asset plus the existing assets. So the one you’re about to choose, or that pool you’re choosing from the pool of assets you already have, and then a series of data models. Stepstone has made an extraordinary investment in data and analytics. Dr. Lisa Larson runs that team for us. We have 30 people in data science and engineering. So we’ve made an extraordinary commitment to that. Unlike some of our competitors, we’ve built proprietary tools. We built tools specifically for this that we built in house. And that allows us to predict capital calls and distributions. This is an open architecture. This is not a proprietary StepStone product. So this is private equity, private debt, real estate and infrastructure. It is across what we believe to be the best managers globally. We access that by making commitments to new funds, primaries find funds on the secondary market, and co-investing alongside leading general partners. Now in the near term, we can do all those things. So think about it as s a three by four matrix, each of the asset classes and all the ways that institutions access those asset classes.

Bob Long:

So we can do that now today to build out the right cashflow profile. We’ve been focused mostly on private equity and mostly on secondaries because secondaries and private equity are the deepest secondary market available. COVID gave us some specific opportunities. That was probably a one-time thing, but that was helpful. And so we started building up with private equity secondaries, but over time, we’ll diversify and eventually be about 60% private equity, another third real assets combination of real estate and infrastructure and a little bit of private debt. And we expect to have little to no cash to be able to run this portfolio with little to no cash drag in it and make it essentially self-funding over long term.

Ross Butler:

And over the longterm, depending on what the profile looks like, you can then invest in a bit more primary, private equity and less secondary as time goes on.

Bob Long:

So of course the advantage of secondaries is the cashflow profile, the disadvantage is you’ve got to take what’s on offer. If you have a high conviction in a given manager and believe they’re the best and their funds may not be for sale and certainly may not be for sale at a price that you like. So primaries are an important part of the strategy. You don’t see those kicking in a material way until year three or four.

Ross Butler:

How many underlying funds do you expect to have

Bob Long:

Well, today we have about 40, but we’re building up, we’ll be well, North of a hundred and maybe well, in excess of that, although we’ll be well, North of a hundred in the near term maybe said differently, your real investment or the most important metric is at the portfolio company level manager does matter, but we seek to have no individual portfolio company greater than 1% of the portfolio. So this will be very diversified. We believe retail investors in small institutions are not primarily looking for a swing for the fences. If that analogy translates, you know, the highest octane strategy we think we can give them the beta of top tier private markets now not the beta of the whole asset class, but the beta of the top half. We believe we can do that in a package with liquidity and reasonable fees, sort of like an ETF, if you’re familiar with that, that concept. So like an ETF for private markets, a core holding low fee simple, easy to use, very diversified, unlikely to produce the extraordinary and a 25% returns you may get. And I hope you do get in an individual private markets fund, but also with considerably less risk. So that’s what we’re trying to do. It’s not a swing for the Vincent strategy. It’s a core steady, get you the diversification benefits of private markets and get you the return premium. The illiquidity premium of private markets do that in a structure with bare fees and liquidity. We think the world needs that.

Ross Butler:

What do you mean by fair fees?

Bob Long:

We’re charging 140 basis points management fee at the CPRIM level and no carried interest. We chose to make this a simple flat management fee structure. So 140 basis points is what we’re charging. If we invest in a five one on the secondary market, they’re charging fees too. So there’s no way to get diversity without some layer of double fees that doesn’t exist because StepStone has the scale that it has. And has it gets the volume discounts that it does has the ability to select those underlying fund fees or acquired fund fees to use the technical term there about, we think there were about 90 basis points in the near term, going down to 60 basis points. So if you think about it this way

Bob Long:

You get the best of StepStone. The same thing, stepsone would get the largest institutions for 200 basis points. And we think we think that’s square. I frankly think that’s very fair. And I’m also proud to say that the 140 basis points that we charge at the CPRIM level is pretty similar. Not exactly, but it’s right on top of what steps would charge your university endowment. If they were asked to put together a portfolio of all these asset classes, you know, all the broad market asset classes that includes secondaries and co-invest, which frankly typically carry a higher fee than a simple fund to funds primary, primary commitment. Now, piece of this that I may have left out that might puzzle our listeners. How do you get there? How do you do that? What, well, the answer is StepStone is doing the co-investments, which it typically gets at no fee and no carry for the 140 basis points. There’s no separate. So we’re not investing in the StepStone co-invest fund, which exists, or the StepStone secondaries fund, which also exists. Those are small compared to their, their bespoke sec separate accounts, but they, they do that. They offer that for small institutions, we are getting the same deals, but you’re 140 basis points covers that. So StepStone has made a real commitment to, to this vehicle by by giving us a very fair fee fee deal on those secondaries in Coleman.

Ross Butler:

How large can this vehicle get before it’s structured? He doesn’t work or, or return start to be eroded

Bob Long:

Ross. I think it can be very, very large, certainly 10 billion or more. And here’s how I get there. First of all, scale, frankly helps us on the cashflow predictions, just simple law of large numbers, right? If you have more funds you will be wrong when you project an individual fund is going to liquidate an individual portfolio company next year, it’ll happen this year, or it’ll happen the year after that. It’s absolutely. But if you have more and more funds, you will you’ll benefit from that. Also, you know, there are fixed expenses, SCC expenses, and whatnot in a vehicle like this legal fees. So a larger fund does bring those down. So you get some economies of scale. So at the margin scale benefits us. But let me answer your harder question. Like when did, when do you have to go down the risk reward profile, but I think 10 billion at a minimum for the following reason, a portfolio like this, you’ll see the assets turnover every three to four years, we need to commit to new or close on new investments of about three to 4 billion per year. Well, StepStone committed $53 billion last year. So I think it’s, it’s a question we don’t begin asking until we’re certainly North of 5 billion cutting in half the, I just used and probably North of 10 billion. And then we’d have to ask ourselves and our independent board who would make this decision by the way. And that’s critical. It was StepStone, still able to do this, you know, should we continue raising capital? So I think we can be quite large. And frankly, if you look at our fee structure, we are the cheapest, we’re the low-cost provider in our market. We designed this because we believe at that fee level, because we believe this can be very, very, very large, many, many billions of dollars.

Ross Butler:

The potential investor base is high net worth individuals, correct?

Bob Long:

And smaller institutions, according to your research, they’d say hat, what’s the appetite among let’s start with high net worth or private markets.

Ross Butler:

How do you think about high net worth and how do you access them?

Bob Long:

We’re available to the so-called accredited investor in the U S which is our individuals with a million dollars of net worth the studies we’ve seen. And there are no great perfect studies, but the studies we’ve seen the most recent one I saw was done by Morgan Stanley. The average investor has 1% or less lavish high net worth investor as 1% or less. Meanwhile, your college endowments have 20, 30%. Your pension funds have a similar percentage in a world where it’s straight to zero. Most of the leading lights believe public equities from here which have had a great run are likely to generate four, five, 6% returns on a go-forward basis. I think, I think the appetite of pro of individual investors is substantial for private assets, the hold backs. And it’s been that way by the way, it’s gotten worse or the problem for financial advisors who typically the way we enter interject directly or interact directly with individual investors.

Bob Long:

It’s gotten worse. As interest rates have gone down as prospects for global growth have flattened or, or said differently as the stock. I’m not a public market stock pro prognosticator, but certainly hard to see how the current slope of a line remains the same. Let’s put it that way. So as public markets are certainly fully priced, I won’t say over price because I’m not an expert, but fully priced bonds are yielding zero, the traditional 60 40 portfolio for individuals just, just doesn’t work. And so that but that’s been the case for a while. So why have an individual deal? This was the case in 2007, we formed converses capital because we saw this huge opportunity, right? Well, Conversus capital was listed. It was only available to qualified purchasers. it traded at a discount despite good investment performance, great investment performance may be so immodest.

Bob Long:

The challenge is you’ve got to make easy. You know, we say we’re investor centric and everybody says they’re investor central, but let me, let me break that down. We, we, our taglines are convenient, easy to do business, simple documents, short, sweet, clear, efficient. That’s a nice word for cheap. You know, we’re the lowest fee provider in our market space, and we want to be that, and then transparent. And this retail alternatives world, there’s been a history of hidden fees or less full disclosure or miss complex structures. In fact, they’re structures that have come on the market in the U S from great firms recently that have very complex carry arrangements that only those of us that are recovered lawyers like myself, not only, but, but they’re very complex carry arrangement. So we we’ve tried to avoid all that. So you’ve got to make it easy for individuals.

Bob Long:

Why do individuals not want to commit to funds? Well, first of all, the minimums are high. If you go to a typical private bank, it’s $250,000 or more, if you commit to a fund to funds to get the diversity, while you have capital calls and distribution. So you don’t know when the money’s going to be called, you don’t know when it’s going to come back. There’s typically complex tax reporting for U S investors that comes through the form of the dreaded K one partnership, a tax filing where a 10 99 vehicles. So very simple tax reporting that comes in January of every year. So it’s really about making it easy for individuals to do what they want to do, which is to have the diversification and return premium benefits of probable.

Ross Butler:

And just remind me again, what your minimum is.

Bob Long:

Our minimum is $50,000 us. I think the demand is extraordinary and certainly the reception we’ve received for what we have to do is really stay focused on making it easy and frankly easier. We need to constantly be focused on making it even easier for people to do business with us and being incredibly transparent about what’s in our portfolio, how it’s performing, where are the risks are those the things we need to focus on? And I, and we are as a management team.

Ross Butler:

Yeah. Well, when I think of the size of the potential, cause this all sounds like it makes perfect sense, but when I think of the size of the opportunity, I just think, well, why hasn’t BlackRock just jumped in here and done this. And I suppose he binds to that to some degree, but it still seems surprising to me that there’s this big opportunity out there. And you’re kind of relatively small team jumping in with StepStone is managing to access that

Bob Long:

Well, I’m glad you BlackRock just made a filing for a fund that’s quite competitive with ours. I don’t know that they started raising capital. So that’s certainly the brand name in our space, but I’ll say this, whether it be BlackRock or any of the other names that people bring them on as the largest investment and asset managers in the world to create a fund that starts and stays on the upswing of the private equity J curve or the private markets J curve, which is what we’re seeking to do, right? You don’t have that dip in the beginning. People would, who would invest in that when people can come in later to do that those large firms have to be able to access secondaries and to be able to buy secondaries, you need the favor of the general partners and they are commercial.

Bob Long:

And they favor those who commit primary capital to them in 10 in billion dollar chunks. And so StepStone and being one of the few firms is committing tens of billions of dollars globally, to all types of private market funds. We feel like that’s our competitive advantage. We don’t have yet the brand advantage of the firm you mentioned, and there are other firms that I’m sure you and our listeners have in the back of their minds and the front of their minds. But what we do have is the size scale data to be able to execute on this investment strategy, which requires you to be able to do secondaries and no coat, no fee co-invest to keep your overall fee load down and match institutional pricing and be able to do it from a, the ability to picks some, so many different choices to assemble a portfolio that hits just that right balance of returns and liquidity and diversity. So that’s why StepStone is well presented, presented, and we look forward to competing with the others.

Ross Butler:

Well, it all makes perfect sense on paper, Bob, but the proof of the pudding is in the eating. I think you’ve been running for six months or so. How’s it going

Bob Long:

If only the next six months would be as good as the last six months Ross. We are up in our net asset value 31% over the first six months. So, and we’ve been positive every month. We report our net asset value every month. So we have that transparency. We’ve been up every month since inception. And we’re thrilled with that performance that performance will not continue and not do the scent in a six month period consistently. The fund was not designed to do that. It’s do diversify them. So I should, as you explain, how do we do that? Well, we call it some COVID tailwinds. We invested in funds in the fall of last year and some that were priced off of a March 31 net asset value. When you do a secondary you’re buying off the last quarter, the net asset value as reported by that general partner.

Bob Long:

And so we were able to buy some deals at very attractive prices, as limited partners in those funds needed liquidity or wanted to rebalance their portfolio. We committed to those in the middle of last year, the way secondaries work, they didn’t close. They tend to close on quarter end. So the way that works is the convention. A number of those closed as September 30 slash October one, a number of more closed at more a December 31. And you saw in January a big bump in our main asset value. So we’ve benefited from that. So we’ve benefited from discounts, but we also bought some assets that we feel really good about. We’ve already had a number of IPO’s in the portfolio, which generally come in a mark up to where the investments were held.

Bob Long:

We’ve had a number of liquidity events in the portfolio. So we’ve frankly COVID was a terrible time to raise money, but was a really good time to be investing. So we benefited from that and we’re really pleased to be at about a hundred million dollars of net asset value today after six months and have a 31% now to increase or return for our initial investors so far. So that feels good. We’re continuing to invest in secondaries as we’ve grown larger, we’re buying more co-investments you don’t want to be really concentrated. So on a a hundred million dollar portfolio, you know, you, you don’t want to take on a $10 million co-invest, but you can certainly take on three, $5 million co-invest. Cause we expect to be a billion dollars within the next couple of years. So co-invest are more available to us now from a portfolio construction perspective, and we’re doing more of those and those again, they generally come with no feet and no carry we’ll continue to do some primaries. We were mostly private equity in the beginning, cause that’s what we could buy. And the pricing was good. We’ve started to add some real assets and we’ll eventually add some private debt. Although while you know, our, our five-year expectation is we’ll be five to 10% private debt given where interest rates are today. We may not do private debt over the next year, or certainly not in a material component.

Ross Butler:

Great. Well, thank you for sharing the structure of it. I just find it fascinating and it is novel. I think. So it was worth going through in, in detail. But I mean, I think you might’ve coined the term democratizing private equity and something that’s that I’m particularly interested in because I think private equity should be democratized. And this seems like an important contribution to that.

Bob Long:

I believe so, Ross, you know, we I may not have coined the term, but in Oh six and Oh eight, I was one of the more prominent people using it. I’ll, I’ll say that the we think individual investors over value liquidity in their PR and their portfolios. So we haven’t even talked about the 401k or defined retirement market here. Maybe that’s a separate conversation, but individual investors and C prime is designed to eventually be available. We want it to be available into 401k plans. It is available for the individual retirement accounts today, but individual investors tend to hold too much liquidity and not get paid for illiquidity family offices, institutions, pension funds long ago realized they needed to capitalize on the ability on it, the illiquidity premium. And I think we are seeing a secular trend of individual investors realizing that they don’t need to be able to sell everything they have today.

Bob Long:

They’re just not a reasonable set of facts where they need a hundred percent of their money today and they need to put some, it would benefit from putting some. And so this democratizing, it’s just, it’s just an expression of that. Individuals get more sophisticated information about investing about risk and returns is so much more available today, even than it was 15 years ago. When I started down this path, individuals are recognizing as our smaller institutions that they should and can afford to have some money in less liquid we’re, quarterly liquidity. But there are of course, other and I, they should have certain individuals should have some money in the longer lockup structures to the 10 and 15 year lockup structure, but individuals should have the benefit of that and get paid for it. So to the extent we have a retirement crisis, or to the extent we have an equity in we certainly have a problem with inequity and wealth creation. This is a tool, you know, the private markets are a tool and an option that shouldn’t and are available to a broader range of investors than they have been historically. And I believe that that serves both a financial goal, but also a a broader set of civic and civic goals for the certainly the developed economies.

Ross Butler:

I personally, I don’t think the word commitment is used enough. People talk a lot about liquidity or illiquidity and illiquidity somehow seems like a bad thing and you therefore need to be compensated with higher returns and you therefore need to take on more risk. And I’m not sure that that narrative is correct. I think you you are being rewarded because you are committing your capital, therefore giving the people who manage it more flexibility to make more money. I mean, it’s as simple as that. And so I think if the public narrative could change a little bit towards, this is just about commitment that could help them,

Bob Long:

You know the private equity industry in particular has not done a good job of managing PR and maybe we should have called ourselves the patient capital industry, but in, in life we often get paid for our patients and investors should get paid should get paid for their patients and typically do in the private markets.

Ross Butler:

Well, that seems like a good place to, to end Bob, thanks so much for, but it’s a pleasure.

Bob Long:

Good to see you. And thank you for the time. And thanks for those who are listening.

Ross Butler:

You’ve been listening to the fund shack podcast, make sure you subscribe and visit our website@fund-shack.com for many more video interviews. It’s the private capital channel for alternative investment professionals. Thanks for listening.

 

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