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- [00:00]
Michael Batnik
Today's Animal Spirits Talk. Your book is brought to you by Kraneshares. Go to kraneshares.com bio that's B U Y O to check out the Kraneshares Man Buyout Beta Index ETF bio that's ticker B U Y O craneshares.com to learn more. Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Rithwell Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
- [00:47]
Ben Carlson
Welcome to Animal Spirits with Michael and Ben. On today's show, we speak about an ETF that tries to give exposure to companies that private equity companies. I'm sorry for saying companies twice in a sentence would target and Ben, I gave an analogy or I posited a question that does it actually make sense that there might be a premium to these companies that are private instead of public, which historically was the opposite? And after being shut down, I kind of thought like that scene in Billy Madison.
- [01:14]
Michael Batnik
So you want there to be a liquidity premium, not an illiquidity premium.
- [01:17]
Ben Carlson
Exactly. That is make out of mercy on your soul. You know where I'm going with that.
- [01:22]
Michael Batnik
Yes, but so in the past I think there was a much wider spread between private companies and public. And that I think has narrowed in the past 20 years as more money has gone in there and these buyout funds are now way bigger than they were in the past. Right. And you can't just. I think it was fishing in the barrel before and it's not like that anymore. So this sort of public equity or private equity in a public wrapper is something that I've seen a lot of firms try to do over the years.
- [01:52]
Ben Carlson
Without the leverage.
- [01:53]
Michael Batnik
Yes, without the leverage. And that's a big piece of it is a lot of people say, well, private equity just gives you the S and P with leverage. And I think some people are okay with that if that's what you're going to get. But it does seem to me that to your point, I don't know, maybe it maybe has reversed a little bit where it's the illiquidity premium is not what it once was.
- [02:13]
Ben Carlson
So maybe this is just a better mousetrap for exposure to smid cap companies.
- [02:17]
Greg Bond
Right.
- [02:18]
Ben Carlson
Get rid of the Most expensive, get rid of the junk, focus on profitability and things like that.
- [02:21]
Michael Batnik
Yes, I think, I think if you just look at the small caps in terms of more high quality. Yeah, we've talked forever about the 40% of them are unprofitable. And I'm sure some of that 40% group is tech stocks or biotechs that is going to have big returns someday. But a lot of it probably is just junk and I think in those smaller names. Yeah, getting rid of the bad stuff that probably half the battle.
- [02:41]
Ben Carlson
All right, so here is our conversation with Greg Bond again. Greg is the CEO of Man Numeric and head of America's for Man Group. Greg, welcome to the show.
- [02:52]
Greg Bond
Oh, great. Thanks for having me.
- [02:53]
Ben Carlson
So one of the themes that Ben and I have been discussing is the rise or the transition from public markets to private markets. We all know that there used to be a whole 5,000 stocks in Wilshire. 5,000 and now there's much less. And Torsten Slok has this great stat showing that 87% of the companies in the United States that are doing a $100 million in revenue are privately held. Private equity is becoming a bigger and bigger part of the economy. And you all, with the kraneshares man buyout beta index, ETF ticker by Sorry Bu yo Bio are taking an interesting approach to benefiting from the secular tailwind of private equity. So what was the thinking behind this idea? Where'd it come from?
- [03:40]
Greg Bond
Well, the idea is basically, can we look in the public markets and try to find proxies for what the private equity folks are doing? Again, a very valuable part of the economy, but in a way that we could build sort of a more liquid version of that, something that would fit more easily, perhaps in people's portfolios, something that would, that would have some scale and, and at the same time giving you that kind of exposure that you might find in a, in a private equity portfolio. So just taking a lot of the tools and things that we've been developing as a systematic investors for many years and trying to deploy it into this space and really thinking there's some commonality of some things that we can do and in some of the capabilities there that would be quite complementary and build a very, very interesting rethink strategy.
- [04:20]
Michael Batnik
So does that entail looking at the types of companies that private equity buyout firms are buying. Does it entail looking at different valuation metrics? How do you think about making those public markets more private?
- [04:30]
Greg Bond
Like, yeah, it was a very, very, you know, a lot of time. Interesting Project for us very much focused on trying to understand what private equity looks for in particular kinds of companies, the style of companies, what size of companies, those kinds of things and features and see if we could identify similar things in the public market. So it was really about building a portfolio that looks like those, those stocks in those companies in the private equity portfolio. So looking at generally cheaper, more profitable, know operating margins are super important, but it's not just about deep value there. There also needs to be some growth opportunities. So it was key that it was a balanced approach, looking for combinations of good business models at an attractive price, but also showing some potential for growth. So that was just sort of the kind of company. The other part is where does private equity deploy its assets typically? What kind of sectors do they focus on? I think a lot of some of the natural benchmarks that people use of the in the public markets for private equity are things like the S&500, other sort of large cap universes that aren't necessarily applicable to kind of the typical private equity portfolio. So we started with thinking about the sector focus, so looking at what private equity deals are getting done and then mapping those over into kind of a public market sector definition. So rather than buying an ETF or something right off the shelf, let's get something that matches the macroeconomic exposures of private equity, which is really the sector tilt. So that was one part that was really, really important. The other part is what size of company, right? And what's the right universe to play in. And looking at that universe and doing some research, it's not necessarily that we need to get into the really small micro cap area. What we found is that if you get into something, we use the Russell 2500 as a starting point. So think the biggest 3000 stocks in the US take out the top 500. Things like that would be in the s and P500 and then what you're left over with is called the Russell 2500. So kind of a SMID type set of companies. And the reason for that is one just looking at trying to match some of the long term return characteristics. We didn't need to get as small as microcap. And also practically speaking, I think building a $200 million capacity strategy is not going to help anybody in terms of what the space is and the market opportunity.
- [06:52]
Ben Carlson
So I have a three part question and let's see, I can keep this in order. Number one, was this trying to give better exposure to SMID cap companies? Was this trying to keep up with a private equity type of investment just in a liquid wrapper with lower fees and. Or was this the type of thinking where you said these are the companies that are actually more likely to get acquired by private equity? And forgive me for the three parter.
- [07:18]
Greg Bond
No, that's good. So I think specifically it was really to proxy what is currently held by private equity. So it's really that ability to go in and see what those company characteristics were like and trying to build those at a public equity portfolio, that's different than saying, hey, I want to build a portfolio of stocks. This is generally going to outperform some broader index. So it was really about giving people the kinds of exposures that you would get in a private equity portfolio, but done in a public market way. We were also looking for opportunities for people to have some scale and liquidity to help them trade around those, you know, names and being able to go in and out in a more liquid fashion, which we think would fit very nicely in a portfolio that's already has, you know, a lot of private equity investments. And it wasn't necessarily that we're targeting companies that are going to necessarily be taken out by private equity. Those companies that are going from, from public to private, those are very different sort of than the standard private equity deal. You know, they're very large, very oriented around valuation.
- [08:17]
Michael Batnik
So.
- [08:17]
Greg Bond
So we're fishing in a similar pond here. But it was really about getting the right characteristics to match what we think and looking at the research of what would be in a private equity portfolio.
- [08:27]
Ben Carlson
So like a liquid private equity basket. Ish. But I guess without the leverage, because that's obviously a big part of the story.
- [08:37]
Michael Batnik
I'm curious in your study of private equity and trying to sort of quantitatively match a private equity portfolio, how you've seen that space evolve? Because I've seen interviews in the past with Mitt Romney where he talks about, hey, in the 90s we were buying these, these private companies at like a four times ebitda. And it was just the only. One of the reasons that we had such big returns is because the valuations were much lower. Are the valuations much? Because obviously the valuations are higher in public markets. Are they much higher or are they getting close to one another in the private markets as well?
- [09:06]
Greg Bond
I mean, from our side and some of the data that we see, I think the multiples that are in private equity have definitely gone up. I mean, I think there's more competition in private equity space, there's more capital being deployed. I think some of the stories changed in private Equity as well. I mean back in the 90s it may have been more focused on metal bending kind of companies. Now it's more kind of software and services type companies that would require a higher multiple. So I would definitely say that private equity is not all about valuation and deep value and that's why our portfolio has characteristics that have some valuation to them, but a lot of trying to capture some of the other components. I think it's very much an evolving space and one of the things we hope in our strategy is that as it runs and private equity does change its stripes in terms of the sum of the sector focus that will pick that those kinds of changes up.
- [09:50]
Michael Batnik
Do you find though that some of these small and mid cap companies are maybe even cheaper than some of the private counterparts or is that not quite there yet?
- [09:57]
Greg Bond
That can be the case. That can definitely be the case. Particularly in the degree that private equity, if it's focusing on more of a growth story, there might be more opportunities in smaller cap public companies as well. So I think it's just generally the span of private equity is obviously quite large and what we're trying to do again is find really companies and really mainly avoiding the companies that we don't think are in private equity portfolios. So we, we want to avoid the most expensive, the least profitable, the least cash discipline. So a lot of our process is just not trying to get too cute about it, but look at what we see and what we read about in private equity and then knocking out the companies that we know have a high likelihood of not being in a private equity portfolio. So it's really about screening out companies.
- [10:40]
Ben Carlson
Greg, let me ask you a perverse question. I never thought of it this way. Does it make sense that privately held businesses would be more expensive than equivalent ones that are publicly traded? And the reason why I say this is because there's been a lot of active managers that have bemoaned the fact that if nobody's going to come in and see these valuations to fruition, yeah, these publicly traded companies can stay cheap forever because nobody really cares about them. Whereas if a company is privately held, then there's a potential for an exit to, you know, via M and A. Like is that, is that so ridiculous or is there maybe something there?
- [11:18]
Greg Bond
Well, I think there's always a catalyst and I think there are enough investors in the public market side as well that there is a unique opportunity, something that is permanently undervalued there, there are, there are, there are people that can go in and alleviate that go in and actually buy that company and bid it up. I think you're also getting one of the nice things, at least in the public markets and people forget this is that we do have, you know, audited financial statements. There's a lot of standards around that that, you know, I think the, the public markets do bring a level of clarity around some of the regulatory stuff for these companies and things like that. So that, yes, very sophisticated investors are doing private equity transactions, but there is a layer, I think, on the public markets of transparency that I think can actually be quite helpful. So there's a give and take, I think, between public and private, which explains maybe differential valuations at certain points in the cycle. But as anything, I think as opportunities are persistent in the market, you'll see more capital come in, which is why I think you've seen a lot of private equity capital go into the markets. And some of the concepts around there used to be a lot more publicly traded companies. If you go back, some of that was a bit of a bubble in the 90s around the number of companies that were publicly traded. If you go prior to that, I think it's more aligned with what we're seeing today. So I think really it's just the market coming to groups with a trade off between private and public. We think there are opportunities for both. And I think we're also seeing people, I think forgot perhaps there is a cost of illiquidity. There's a benefit and a premium that should be there. But there are cases now where rates go up and other things and kind of locks down what you can do on the private market side that having a public market sort of equivalent or something that's a proxy or similar could be quite valuable.
- [12:56]
Michael Batnik
One of the stats that Michael and I have talked about over the years is the fact that something like 40% of all companies in the Russell 2000 are not profitable.
- [13:03]
Greg Bond
Right.
- [13:03]
Michael Batnik
And that number has been increasing over the years. So when you go through your process and you talked about trying to screen out the worst companies, is that the kind of thing where you're trying to screen out like your process is the first step, getting rid of the bad apples? And a lot of it probably is those lower quality, unprofitable companies. Is that how it works in your process?
- [13:19]
Greg Bond
That's definitely a part of the screening. Exactly. So we think we take the broader, the Russell 25, so a little bit bigger than the Russell 2, so the next 500 largest on top of that and go through and say and screen things out that we Think again, aren't proxies or what we think would be in a private equity portfolio. And that naturally leads to a bit of a quality tilt. If you want to define it as screening out less profitable companies, companies that aren't doing good things with their cash, buying back debt, buying back shares, managing the working capital. So again, we didn't want to, as I said earlier, not get too cute about it. It was just sort of let's knock out what we see what we think is not in the portfolio and what we'll end up with is something we take that broader set of that universe and maybe we'll end up with about half of the universe left over after all the screening. Right. That we do. And then we try to match the sector exposures that we have on private equity. So that's looking at taking the Russell 25, looking at all the deal activity and private equity and then reshaping that benchmark to look like private equity capital allocations and then we run our portfolio against that.
- [14:19]
Ben Carlson
So what does the sector composition look like?
- [14:22]
Greg Bond
So we're typically relative to what you'd find in a kind of a standard cap weighted benchmark, typically more software and services, kinds of exposures, more industrials, you will be sort of underweight, you know, financials and REITs and those kinds of companies. So it's very much focused on trying to see where the deal activity's been and then reshaping that bench.
- [14:45]
Ben Carlson
As businesses have been gobbled up or transformed into technology companies have better visibility into their clients, are quicker able to adapt, therefore have higher margins and rising. Doesn't it make sense that multiples for businesses, not just publicly held but privately held are going up as well?
- [15:01]
Greg Bond
Exactly. I think if you have, you know, efficiencies in terms of operating margins, growth opportunities, I think you should be willing to pay a higher price. Right. For that kind of company. And I think that's the key, is that we don't want to build or have just a deep value strategy. This is about the combination of the trade offs between growth and profitability and the valuation. And I think that's the, the math that private equity companies are trying to, you know, do.
- [15:22]
Ben Carlson
But also to that point about rising valuations in private equity. Yeah, well guess what if historically a lot of the purchases were manufacturing companies or whatever it was back in the day and now they're software related? Well, it's an Apple, it's an apples to oranges comparison and that's very fair.
- [15:37]
Greg Bond
And I think that's the key, is that the Industry does evolve over time and you need to be aware of that and what kinds of companies are going into these portfolios.
- [15:44]
Michael Batnik
And so how far do you try to narrow things down? You get this universe of 2500 stocks. I don't know what the typical size of a PE portfolio is, but where do you stand in terms of concentration and diversification?
- [15:54]
Greg Bond
So we end up with a pretty diversified portfolio because again we're trying to knock out what we don't like. Right. So just knocking that out and then what's left over? We try to trade very kind of risk aware transactions, cost aware to give a portfolio that we think is very scalable and hopefully added value for people's portfolio. So we take that universe, we bring it down, you know, into a holding. So it's a pretty well diversified portfolio. We're not trying to build a hyper concentrated portfolio by any means. It's really trying to get a reasonable exposure that also not only matches the kinds of companies but also that the sector exposures that I was talking about.
- [16:31]
Ben Carlson
So what are private equity companies looking for as they come through their investable universe? Is it predictable cash flows? Is it potential cost savings? What do the quantitative screens look like?
- [16:46]
Greg Bond
Yeah, so again it's a blend of different things I think one, we do screen on valuation, so we are knocking out the most expensive part of the universe and that's looking at a lot of cash flow generated metrics like EBITDA to EV gross profits to enterprise value, those kinds of free cash flow yields. So metrics that you would think would be very focused on valuation. So we start there, we knock out about 10% of our universe just from that, that valuation screen. So that's important. Again we don't need to pay deep value, but I think having some concept of value, it does align and then it's things like profitability, different versions of profitability, knocking out again about, you know, sort of 10% of the least profitable. We also want again trying to proxy says there's a bit of a trade off here between you know, kind of what we call pure alpha factors that you might find in the public markets versus trying to match up a bit on, on private equity. We do look at things like debt capacity of the company. We think again it should be something that can have some serviceable debt around it. We're also importantly, I think this is thinking about what's in private equity portfolios versus what they may go out and acquire. We are trying, we do buy companies that are cash efficient or they have good solid cash management specifically Knocking out the least efficient. So if you think about the private equity J curve, we're somewhere along that in the kinds of companies that are there. Right. We obviously are not going to go in and sit on the board of a company and force them to be cash efficient. It's more that these companies are already cash efficient. So that knocks out again some of the universe. But at the same time, we also want to have growth opportunities, some private equity ideas, the sources of alpha. You buy on a relatively cheap price, you can adjust on the operating margins, and then you can leverage the portfolio and at the same time, hopefully capitalize on some growth opportunities. So we want to make sure that we've got some growth tilt in the portfolio, meaning that we will knock out the lowest growers. So it's not just deep, the deep value type stocks that there is some growth component. So that's the, what I call fundamental screens. And that was really, you know, a lot of the process. But since we do sit in the public markets, we do have one advantage and that is we can look at other proxies for value added. So sort of mimicking hopefully some of what private equity does in terms of their value added. Some of that can be very deep. Industry analysis through some of our models and looking at the supply chain and the health of the supply chain of companies, we can look at other informed investors in the market to see how they're positioned. So, you know, if there's a company that's very heavily shorted, for example, we may want to screen that kind of thing out of the portfolio because there's something potentially going on there. And also just companies, back to one of the points about being more stable, able to support a debt load. Companies where there's not a lot of, you know, business uncertainty, at least measured by looking at the volatility of the company, how much their shares turn over in the marketplace. Given there's a lot of share turnover, a lot of volatility, there's a lot of uncertainty around that business. So trying to identify both with what we call those fundamental screens around valuation through growth and then adding in some other proxies that hopefully are trying to replicate some of the, you know, the deep due diligence, that private equity ceiling.
- [19:56]
Michael Batnik
Do you have a hard and fast set of rules that you follow here in terms of quantitative models or is this a more flexible approach?
- [20:02]
Greg Bond
Yeah, so this is a very systematically implemented approach. And I think that's where another thing that, you know, try to differentiate and bring to the table is hopefully this is a You know, a repeatable, a repeatable process. So everything that I just described is, you know, the way, you know, we run the portfolio and those screens and the models around it. So that's, you know, what we've, that's the process that we've, that we've built. And then on top of that, you know, how do we actually put the portfolio into the market and think about buying individual names? And that goes back to both kind of risk and thinking about the risk relative to this benchmark that we've talked about. But also what are the trade costs and being very focused on transactions cost awareness when we do these kinds of things.
- [20:43]
Ben Carlson
So kraneshares is the delivery for the man buyout beta index. Again, the ticker for this is B U Y O. Man Group is one of the largest asset managers in the world, especially talking about private companies. So you all have a long track record of doing deals like this. Can you talk a little bit about the history of the firm or anything you want to add there?
- [21:07]
Greg Bond
Yeah, Man Group's basically the motto there is sort of alpha at scale, right? Providing investors alpha across different types of investments. And so some of that is through discretionary, traditional equity, long, short credit, long short type portfolios, but also systematically driven investment strategies. That's partly where obviously the ethos of this strategy really much came up on the systematic side, other systematic, more macro type trading strategies as well. So it's a very well diversified, focused on delivering alpha for investors. And that is all predominantly through the, you know, the public markets. But we also have some private markets businesses as well, particularly on the, on the credit side.
- [21:54]
Ben Carlson
So Greg, you have a, I don't know your full background, but you spent some time with the Boston Red Sox doing the Moneyball thing. What was that experience like?
- [22:04]
Greg Bond
Oh no, it was very interesting. I've always, you know, obviously like a systematic investing and you know, using quantitative techniques and you know, through after some several years here at Man Group, I think there's an opportunity to work, take a sabbatical and do some work on Moneyball type things with the Red Sox. And a lot of that was around draft strategy. And we take fundamental scouting reports and turn that into something that's systematic, more systematically driven. And so those kinds of problems are always very interesting. I think getting into different context and seeing systematic things work in a different context and bringing that over I think has always been a, a good experience. And I think you're seeing a lot of the concept of the moneyballization of the world is really, we're Seeing that right. In different types of markets, we see a little bit here in sort of a public market application for private markets. So I think just the data intensity, data driven decision making is just, it's proliferating across the entire economy. And so while it started off maybe in sports and there was a really good movie around that, moving into broader parts of the economy and I think it's a trend that's going to continue.
- [23:12]
Michael Batnik
Was that the kind of thing where there was big time first mover advantage kind of like in the markets back in the day, Ben Graham and Warren Buffett, it was much easier for them to produce alpha. Now there's so much more competition, it's harder. Are the edges harder to find there now?
- [23:23]
Greg Bond
I think if you're thinking in sports and some of the technology and there's some data out there. So I think the movie Moneyball was obviously set around the Oakland A's and the Red Sox were an early adopter as well. But if you look at where the market is today, I think there's a guy named Zach Scott who runs, has his own podcast, but does some other analysis and used to be a general manager. I think he calculated something like there's 750 people now involved in baseball alone. Between data analysts and technologists, where, you know, the Moneyball movie, it's a couple of people. Right. So I think that you're just seeing like any other market, when there's an advantage, people go out and take advantage of it.
- [24:02]
Ben Carlson
So to, to Ben's point, I think the benefit of systematic anything certainly investing is not necessarily that it creates like a predictable outcome or even a better outcome. But I think what it clearly does is it takes out some of the predictable negative outcomes that you could have around all the sorts of behavioral biases that we know. But, and I guess it's like, it's hard to answer, but when everybody is sort of agreed that systematic rules based is better than the alternative, I don't know, it seems stands to reason it's going to be harder.
- [24:35]
Greg Bond
Yeah, I think, you know, to say that one is better or worse or different, I think it's, for me it's, they've been quite complementary and I think, you know, if you look at man group having both kinds of, you know, systematic and discretionary type businesses, there are obviously ebbs and flows, but over time, you know, there seems to be a. Having both is right. Diversifying. So that's why I'm thinking, you know, it's not just one approach is better than the other, but Having a set of each is very interesting and in fact it can be hard I think to, in one portfolio to have systematic and discretionary together. But I think if you can sort of split it out and have kind of two different investment processes, they blend quite well together. And I think some of you know, Man Group's best strategies are taking advantage of both of those kinds of approaches to investing, which is why even, you know, for this particular portfolio, we think it's an interesting approach, we think it's a repeatable approach, we think it's, you know, transactions cost aware and efficient. But it's not saying that we're out there to necessarily replace private equity. It's obviously got a very, very valuable part of the economy. But this is a nice compliment. It's a way for people to get liquidity, to get that kind of exposure with a, with a more liquid option I think also more cost effective option in some ways. And we can talk about, you know, the fees and the various things around it. But I think having something that's diversifying and interesting, you know, that that's sort of our approach and not that one is better than the other.
- [25:55]
Michael Batnik
I think to make it like private equity, you should try to get your investors to agree to only see their marks four times a year and it comes like three months after the quarter is done. That's the only time they can look at their portfolio. Right, that's fair.
- [26:06]
Greg Bond
Right. So I think there's always been the, the mark to market, you know, questions around it. I think, you know, some of that's gotten better over the years and what's required, but it's definitely a hurdle, let's say, to being in the public markets, if you want to call it that. I think it's a fair hurdle to be marked every day. But I think that's brought into kind of the design choices and thinking about the market.
- [26:28]
Michael Batnik
I'm curious your thoughts on the opportunity set in small caps because a lot of people the past five, 10 years have said, listen, a lot of these companies are ipoing later and they're bigger when they do come to ipo. So they're just skipping over the whole small cap step maybe. I'm curious to hear what you think about the opportunity set there in that broader universe of small and mid caps.
- [26:48]
Greg Bond
Yeah, I think we found it, it can be a bit more volatile, but there is an opportunity to add alpha in those in the smaller cap names again if you can trade it effectively and get that all lined up. So I think that just like Anything in particular as a systematic investor, we like broader opportunity sets and I think there's some definite opportunities from an alpha perspective in that area. And I think that's why as we look at this portfolio to degree that again it's sort of knocking out the top 500 stocks, that there's another interesting way to play the market to get exposure to names that might be more underfollowed in some sense and maybe provide a good opportunity for actually stock selection in the more traditional sense.
- [27:25]
Ben Carlson
One of the biggest inputs to private equity and the companies that they invest in is the cost of capital, especially for private equity that's taken on debt. But these companies, generally speaking, this mid cap companies that are more exposed to higher borrowing costs, this is not Apple or Google. We're talking about when rates go up, so does our cost of capital. Now that that is mostly behind us. Do you think that I know that you're not a macro economist or anything like that, but just theoretically it stands to reason that given that the hiking cycle is behind us hopefully that, that that headwind should at least if not be a tailwind, at least not be a headwind anymore.
- [28:00]
Greg Bond
Yeah. And I think it's also, it always comes down to also the valuation. Right. So some of the macroeconomic environment might be a little more straightforward now for companies. We've gone through as you say, the rate hikes and people re optimizing their balance sheets, et cetera. But I think it also comes down to valuation, what we really to pay and then also thinking about sort of the concentration effects that are going on in large cap. It might be an opportune time to think about being more diversified in the kinds of companies that people are looking at. And I think obviously in the last 10 or 15 years you should have just sort of stayed in the top 500 and you would have been quite handsomely rewarded for that. But ultimately kind of long term we think we don't want to neglect just parts of the universe because they just haven't worked in the past. I think it comes down to what the opportunity set, what you're valuing those companies at and then having a process. It's a lot harder when you're doing small cap in the sense there's just so many more to follow and focus on. And we think that's another area where systematic can be quite helpful because we can look at a bunch of stocks kind of simultaneously.
- [29:04]
Michael Batnik
We talked earlier about leverage and how that's sometimes an advantage for private equity. Just because you're adding to the beta component. How does that work when rates are rising, though? So small caps already kind of took it on the chin a little bit when rates rose in 2022. It seems like those things might take a little longer to filter through to private equity. So the other side of that leverage is the fact that they have higher hurdle rates now they're borrowing at a higher rate. So does that take longer to filter into private equity where it makes it more of a challenging environment in that space?
- [29:29]
Greg Bond
Well, it's an interesting question because I think a lot of the debt there is floating. So I think they felt that kind of immediately when rates go up and the impact there, which I think is one of the reasons you had a little bit of a lockdown in the capital there. Deals not getting done, coming up with interesting ways to return capital to investors, given that the deal environment's kind of locked up. So I think it goes back to my point that there is a premium to being less liquid in the market, but it also comes at a cost. And that is sometimes in these environments, when rates go up, you could have lockdown in the market there. So again, that's why I think there's a complementarity thing that's going on here between your optimization between liquid and illiquid. And if there's a way to get a more liquid portfolio that shares a lot of the characteristics of real liquid portfolio, that might be a good thing to help diversify your portfolio.
- [30:20]
Ben Carlson
Greg, thank you so much for joining us.
- [30:21]
Greg Bond
Great. Thank you.
- [30:24]
Michael Batnik
Okay, thanks to Greg. Remember, check out craneshares.com bio to learn more about this fund. Email us animalspiritscompoundnews.com.