Letter from LA

Representatives of some of the private equity industry's most influential organisations, including CalSTRS, OTPP, Blackstone and the Carlyle Group, discussed the state of the asset class, with five main themes emerging from the Milken Institute Global Conference.

Last week influential politicians like Secretary of Commerce Wilbur Ross and former president George Bush rubbed shoulders with the crème de la crème of the private equity world at the 2017 Milken Institute Global Conference in Los Angeles.

High-profile investors on the GP side such as Carlyle Group's David Rubenstein and Blackstone's Steve Schwarzman as well as some of the largest global limited partners, such as US and Canadian pension plans, discussed the trends currently playing out in the private world and what to expect in the decade to come. 

Here are five main takeaways from the conference:

Alternative asset managers are some of the biggest employers in the US.
Private equity has become an essential part of the economy and therefore has gained a position of considerable responsibility, as Michael Milken, the former “junk-bond king” who is now running the conference through the Milken Institute, explained.

“The second to ninth largest employers in America are now private equity firms,” he said during the conference. “There's been a dramatic change in terms of who people are working for.” 

Schwarzman concurred, noting that his firm employs about 600,000 employees.

LPs 'going it alone' cannot do so without help.
At a time when large US public pension plans and sovereign wealth funds around the world want to invest directly in private equity, Ron Mock, chief executive officer of the Ontario Teachers' Pension Plan, warned that some specific ingredients are needed to go direct. OTPP is one of several Canadian pension plans that has successfully built a system to invest directly in the asset class, a task far from easy to achieve for large LPs.

Mock explained that having global partners is important in succeeding as a direct investor. “We have to build the ecosystem on a global basis with GPs, with infrastructure investors,” he said. “That partnership system has become key for us.”

He also noted that the manager of the pension's investments needs to be independent from its board and the politics attached to it. “We have to have independence,” he said. “We also have to have the staff on board that's specialised. For us, the core is investing in talent.”

Some have said it could take up to a decade for some investors to put such a system in place.

US infrastructure is the new frontier market.
One discussion that seemed to transcend many panels was the trove of opportunities in the infrastructure space as the Trump administration has promised it will create a regulatory framework to invest in the space.

“I think if anything passes through Congress this year of significance that the president really wants, it's something related to infrastructure,” Rubenstein said during the conference. He added that the big question is whether the rate of return will be in the single digit or double digits for private investors. Either way, he thinks that “it will be one of the great areas to invest in the next five, 10 and 15 years in the United States”. 

More capital will come to the asset class.
With asset managers increasingly tapping retail investors and with the growth of the family office space, the amount of money available to invest in private markets is only going to grow, especially as private equity continues to be one of the highest returning asset classes.

“You haven't even seen the high-net-worth individual money invest outside of China,” said Christopher Ailman, chief investment officer at the California State Teachers' Retirement System. 

Rubenstein noted during a different panel that “in the old days, people wanted their kids to grow up and be president of the United States. Now they want their child to grow up to have a family office”. 

In both cases-HNWI and family offices-their intention to invest in a more direct manner in addition to invest through funds will create increasing competition. “The ability to generate alpha is going to be harder and harder,” Ailman said.

LPs need to invest in their competitive advantage
University endowments like the University of California can take advantage of the innovation taking place on campuses to increase returns. The University of California for example has, in addition to committing to venture capital funds, created its own VC fund with about $250 million. It has also created incubators and engines of seed capital on its campuses.

“We wanted to make sure that we do this internally,” said Jagdeep Singh Bachher, CIO at the University of California. “In essence, it's our engine of innovation but it's done VC style. This is not a five-year plan. For us it's a 100-year plan, so I hope it will change the model to create hopefully tens of billions of dollars.”