Animal Spirits Podcast: Detailed Summary of "Talk Your Book: Moneyball Meets Private Equity"

Release Date: January 13, 2025
Host: The Compound (Michael Batnik and Ben Carlson)
Guest: Greg Bond, CEO of Man Numeric and Head of America's at Man Group

Introduction

In this enlightening episode of the Animal Spirits Podcast, hosts Michael Batnik and Ben Carlson delve into the intricacies of private equity through the lens of the Kraneshares Man Buyout Beta Index ETF (ticker: BUYO). They are joined by Greg Bond, CEO of Man Numeric and Head of America's at Man Group, who provides expert insights into how this ETF serves as a liquid proxy for private equity investments.

1. Overview of the Kraneshares Man Buyout Beta Index ETF

Ben Carlson opens the discussion by introducing the ETF, which aims to provide investors with exposure to companies typically targeted by private equity firms but within a public market framework.

Ben Carlson [00:46]: "On today's show, we speak about an ETF that tries to give exposure to companies that private equity companies target..."

Greg Bond elaborates on the ETF's objective to replicate the characteristics of private equity portfolios using public market instruments. The goal is to offer liquidity and scalability that traditional private equity lacks.

Greg Bond [03:39]: "Can we look in the public markets and try to find proxies for what the private equity folks are doing?... building a more liquid version of that..."

2. The Concept of Public Equity as a Proxy for Private Equity

The ETF seeks to mirror private equity investments by selecting public companies that share similar attributes with those private equity firms typically acquire. This approach allows investors to tap into the secular growth and profitability trends favored by private equity without the associated illiquidity.

Michael Batnik [01:13]: "So you want there to be a liquidity premium, not an illiquidity premium."

3. Evolution of Private Equity Characteristics

Greg Bond discusses how private equity has evolved over the past two decades. Initially focused on deep value and manufacturing sectors, the industry has shifted towards more profitable and growth-oriented sectors like software and services. This evolution necessitates a corresponding shift in the ETF's strategy.

Greg Bond [09:06]: "The multiples that are in private equity have definitely gone up... Now it's more kind of software and services type companies that would require a higher multiple."

4. Screening Process for Public Companies

The ETF employs a rigorous screening process to identify public companies that align with private equity's investment criteria. This includes:

• Valuation Metrics: Focusing on companies with attractive valuations using metrics like EBITDA to EV and free cash flow yields.

  Greg Bond [16:46]: "We do screen on valuation, so we are knocking out the most expensive part of the universe..."

• Profitability: Selecting companies that demonstrate strong profitability and efficient cash management.

  Greg Bond [13:18]: "We think we take the broader, the Russell 25... and screen things out that we think would be in a private equity portfolio."

• Growth Opportunities: Ensuring that selected companies have potential for growth to balance value with expansion prospects.

  Greg Bond [18:00]: "We also want to have growth opportunities, some private equity ideas, the sources of alpha."

5. Sector Composition and Diversification

The ETF mirrors private equity's sector allocation by focusing more on software and services and industrials, while underweighting sectors like financials and REITs. This strategic alignment aims to capture the macroeconomic exposures prevalent in private equity portfolios.

Greg Bond [14:21]: "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..."

6. Valuation and Growth Considerations

A balanced approach between valuation and growth is pivotal. The ETF avoids purely deep value strategies by incorporating growth potential, ensuring that the selected companies are not only undervalued but also positioned for future expansion.

Ben Carlson [14:44]: "As businesses have been gobbled up or transformed into technology companies... multipliers for businesses... are going up as well."

Greg Bond [15:01]: "We want to have some growth tilt in the portfolio, meaning that we will knock out the lowest growers."

7. Systematic Approach vs. Traditional Private Equity

The ETF employs a systematic, rules-based approach to replicate private equity characteristics, distinguishing it from the discretionary nature of traditional private equity investments. This method enhances repeatability and scalability while mitigating behavioral biases inherent in active management.

Greg Bond [20:02]: "This is a very systematically implemented approach... It's a repeatable process."

8. Challenges and Opportunities in Small and Mid Caps

Greg Bond highlights the significant opportunities within the Russell 2500 (SMID-cap) segment, despite higher volatility. The systematic approach allows for effective management of a broad universe, identifying underfollowed stocks with alpha potential.

Greg Bond [26:47]: "There is an opportunity to add alpha in those in the smaller cap names if you can trade it effectively and get that all lined up."

9. Impact of Leverage and Cost of Capital

The discussion delves into how rising interest rates affect private equity's leverage strategies. While higher borrowing costs pose challenges, the ETF's public market structure offers flexibility and mitigates some of these headwinds by avoiding direct reliance on debt.

Michael Batnik [28:00]: "Does that take longer to filter into private equity where it makes it more of a challenging environment in that space?"

Greg Bond [29:29]: "There's a premium to being less liquid in the market, but it also comes at a cost... that's why there's a complementarity thing between liquid and illiquid."

10. Conclusion and Future Outlook

The episode concludes with Greg Bond emphasizing the ETF's role as a complement to traditional private equity, offering a more liquid and cost-effective alternative without entirely replacing the nuanced strategies of private equity firms.

Greg Bond [24:35]: "It's not saying that we're out there to necessarily replace private equity... it's a nice complement."

Hosts Michael Batnik and Ben Carlson thank Greg Bond for his invaluable contributions, encouraging listeners to explore more about the ETF through craneshares.com.

Michael Batnik [30:24]: "Remember, check out craneshares.com bio to learn more about this fund."

Notable Quotes with Timestamps

• Ben Carlson [00:46]: "On today's show, we speak about an ETF that tries to give exposure to companies that private equity companies target..."

• Greg Bond [03:39]: "Can we look in the public markets and try to find proxies for what the private equity folks are doing?... building a more liquid version of that..."

• Greg Bond [09:06]: "The multiples that are in private equity have definitely gone up... Now it's more kind of software and services type companies that would require a higher multiple."

• Greg Bond [16:46]: "We do screen on valuation, so we are knocking out the most expensive part of the universe..."

• Greg Bond [20:02]: "This is a very systematically implemented approach... It's a repeatable process."

• Greg Bond [24:35]: "It's not saying that we're out there to necessarily replace private equity... it's a nice complement."

Key Takeaways

• Kraneshares Man Buyout Beta Index ETF provides a liquid alternative to traditional private equity by systematically selecting public companies with similar investment characteristics.

• The ETF emphasizes valuation, profitability, and growth, aligning closely with the evolving focus of private equity towards more profitable and growth-oriented sectors.

• A systematic, rules-based approach ensures scalability and repeatability, mitigating behavioral biases and enhancing portfolio management efficiency.

• SMID-cap opportunities present significant alpha potential, despite inherent volatility, making them a valuable component of the ETF's strategy.

• The ETF serves as a complement to traditional private equity, offering diversification and liquidity benefits without attempting to replace the nuanced strategies of private equity firms.

For more information about the Kraneshares Man Buyout Beta Index ETF (BUYO), visit craneshares.com. To stay updated with future episodes, email animalspirits@compoundnews.com.