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- [00:00]
A
Sonali, it is great to see you. I want to get right into the leading indicator of private markets for public markets. I'm not really sure what to look at when this comes up as a topic. But what are you seeing right now?
- [00:11]
B
No, private markets are really important to watch, especially when you think about what's happening in technology. So I think a lot of people talk about the negatives, software, what have you. But let's talk about everything that happened 2022 onwards. Post chat GPT post that moment when we saw that precipitous rise in interest rates following inflation, you saw private markets react pretty heav. So what are we seeing now? I think that the discipline you're seeing in private markets when you're seeing dollars put into the ground for new technology investments, it's a really important thing to watch. I'll give you one example. Vista. Vista is talking about this thing called Rule of 70. Why does that matter? Rule of 70 is your profit growth and your revenue growth. Adding up to 40 is used to be rule of 40, right? Have you ever heard of this before?
- [00:59]
A
Very vaguely.
- [01:00]
B
Oh well, you know, if you're a CFO of a company, a lot of CFOs will want to operate by that rule of 40 standard as it pertains to their revenue growth and their profit growth. But if you have one big money manager and now more and more of them saying actually it's rule of 70, then one of two things have to happen within the companies that new investors are putting dollars into. Either your revenue grows faster or your profit grows faster to the tune of that rule of 70. Now if you think about what that means is what for public markets, can you imagine if more and more investors start to demand a rule of 70? You are putting a lot more pressure on public market companies to deliver either faster revenue growth or faster profit growth. And we're already seeing that in private markets today.
- [01:46]
A
So are we getting to the point where we're going to start seeing that in public markets then?
- [01:50]
B
I do think so. And I think that the way you look at broader public markets today. Today is you see how concentrated the equity market is. You talk about it a lot. I talk about it a lot. But outside of that you do see investors being far more discerning if you're seeing it in, you know, simple beat rates, right? Just companies that are not able to meet expectations. What we're saying is that bar is just going to get higher and higher. Especially as you're seeing earnings growth rise so enormously within the broader markets across so many sectors.
- [02:21]
A
I think it's definitely something that most people are not paying attention to, especially let's say public market investors. I want to ask you about valuations in private markets. We're seeing a lot of these AI companies raise absurd amounts of capital and their valuations are getting into massive eye watering trillion dollar levels. But then at the same time you are seeing sort of older software companies getting marked down. What do you make of this?
- [02:46]
B
Well, this is totally what I was talking about with that 2022 line in the sand when we came into this year, we this era, that 2021, 2022 time frame as a vintage risk. That means that if you were underwritten in that time frame, you were underwritten in sky high valuation territory and in a completely different interest rate environment. Whereas if you fast forward to today that a lot of those truths are no longer the same. Right. So you're looking at an entirely different environment. So what becomes of those companies? There's going to be a shakeout. There simply has to be. You're sitting with a lot of fund managers who had underwritten at those levels and have to exit those investments. It's not that all of them will go sour per se, but they might take a hit on valuation as they try to get out the door with them. Now something that is super underappreciated when it comes to software is that we were talking to Morgan Stanley about this. They see a maturity wall in the private credit world, that software that is around 2027, whereas a lot of the public companies are closer to 2028. So why are we hearing about software and private credit today? Some of the managers behind the scenes, Phil, this is truth that I'm seeing happening. Those managers that a lot of people are talking about are sitting behind the scenes renegotiating their loans to software companies. So what does that look like? If you're a software company that was, you know, taking out debt in that kind of more benign period, you might have gotten pretty favorable interest rates. Now Fast forward to 2026. Those same lenders are saying, no, we want to charge you a lot more for that debt. We need double digit rates of return, we need high teens interest rates on that debt. And by the way, the private credit firm is underwriting to that loan. They're trying to do so at a shorter duration. So say you're a software company and say, you know, worst case scenario you might go bust in five years, but your private credit is only three years long. Your private credit provider here is taking on that three Years worth of risk. So what are we seeing happening in the market? We're seeing higher interest rates because the risk is higher. And we are also seeing a lot of firms trying to tighten duration to limit how much time they're expanding, exposed to what is clearly a really uncertain environment in software.
- [05:03]
A
Jeez, you're probably one of the few, if not the only person that I know is talking about this regularly. Why do you think this is an undercovered or under discussed topic? Especially because we have so many private companies that are about to hit public
- [05:19]
B
markets is the craziest dynamic from where I sit. Why? Because a lot of the headlines surround what you saw in early 2026, those higher redemptions than limit that exists on those funds. And certainly that did happen now. If you really looked under the hood of what happened there, credit quality didn't deteriorate writ large. A lot of people talk a lot about the lack of transparency, but those same people won't ask them if they've called their managers. It's insane. And on the flip side of this too is you also have large institutions that are still pouring a lot of capital into the space. So you have really quote, unquote retail investors who have stepped back to some degree, but then institutional investors who have come in and those institutional investors that have come in this year are now experiencing those double digit rates of return. And frankly, you know, frankly we do think that there's going to be dispersion, like there will be winners and losers in the space it's investing. That is how it works. But we do think that the managers that have kept powder dry, that have been very cautious and prudent, are now going to find more of an opportunity to make money off of these more attractive terms that they're getting in the market.
- [06:33]
A
What do you make of SpaceX coming to market?
- [06:35]
B
So we talked about private credit. You were talking a little bit. I think what you're asking here too is, you know, when people talk about private markets, on one hand you have this story about companies like SpaceX and Anthropic and massive fundraisers and sky high valuations. And then the other side you have that private credit story and they don't seem to match.
- [06:51]
A
Two different worlds.
- [06:52]
B
It's two different worlds. I would say if you look at our own flow of funds at iCapital, it's kind of interesting. Private equity and growth equity have really risen as a percentage relative to private credit. Now when we think about what's happening this year, those three companies, SpaceX, Anthropic, OpenAI by the way, all three of those companies are ones that our clients do have exposure to on our platform through an array of different types of funds. But those three companies are anomalies. I think most fund managers will tell you that it is very rare to see companies go public at these valuations. The SpaceX IPO is expected to be double perhaps what the last largest IPO before it was. And the last largest IPO before it was Saudi Aramco. Right. And so when we think about what has happened here, these are companies that were clear beneficiaries of this new technology, this generative AI technology. I think what we have to ask ourselves now is what do they look like in public markets and what does that mean for every company that comes after it?
- [08:04]
A
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- [09:28]
B
We have seen software take a hit, right? In public markets, we have seen software in part bounce back. Have you looked, Phil? You'll appreciate if you look at software and you start to split it up, if you start to split up AI enabled software. Goldman has a great basket on this, for example, versus igv, which has a lot of things that are not even traditional way software, right? They're crypto, linked securities and others. If you split up the ETF, IGV and the AI enabled software versus just very simply the S&P 500 sector, you see very different stories in terms of how software is performing. Not to mention this most recent earnings cycle showed you that some software companies are performing a lot better than a lot of investors expected them to. At our Monday morning meeting, every morning on Mondays every week, we come in and we give our team a picture of the world. We go from macro, public and private. And this week was particularly interesting because we compared Snowflake and Databricks. I think that this is an amazing comparison because both of these companies are in that space of software where really they should feel big tailwinds from artificial intelligence. Because if you think about artificial intelligence, what matters more than anything? Data. You know, this is a totally. I think a lot of people don't really understand how much data matters at the end of the day, not just for AI, but for some of the most important companies in the world. Hold that thought. I've got another good story for you there. But on software, Databricks vs Snowflakes is an interesting thing to watch because databricks valuation in public markets has already surpassed snowflakes in public. And if you look at what they've been able to do in private markets is they've been able to be pretty aggressive on their spend and pretty aggressive when it comes to acquisitions in order to achieve growth. Now my biggest question, because they are kind of next in line here to go public after this current wave that we're Looking at in 2026, what does their growth rate look like in public markets? Are public market investors going to be more disciplined? Are they going to give companies a harder time for trying to achieve those levels of growth? That's my question.
- [11:48]
A
Well, I think generally, and as a more public markets guy, I don't know as much about private markets, but the view I think, which a lot of people have, including myself, there is very little restraint in private markets because valuations can run up super high. And I think a lot of that discipline, you see, we don't see that much discipline in public markets these days either. But I would say there's this view generally from the outside that private markets are so opaque, there's sort of no rules. Is that. Am I wrong to take that position?
- [12:24]
B
I will say this. In the last, let's say 15 years or so, at least after 2008, when the markets began to recover, we lived in a zero interest rate environment for a very long time. Two things happened during that period. One, a lot of tourists emerged in the space. People without meaningful private markets experience, people who maybe didn't respect the process of diligence. Right. So I'm not going to sit here and say that when we look at the private markets, that there was not flyaway behavior. Of course there was in a zero interest rate environment, there was a lot of flyaway behavior, not in terms of just private markets, but in public markets. Right. Certainly during the Meme stock era, we saw a lot of exuberance right. In, you know, before we saw, I guess, the rise in interest rates that we saw now. Now I also think what matters is when I think about the qualities of the managers that we look at and that we work with, one of the most important things is track record. Just this morning I had a conversation with a large wealth manager just Talking about how 2008 was a really important moment in a lot of fund managers lives. And it taught them what real loss look like and how to navigate through that. If you haven't really done that, it's kind of tough to have a conversation with somebody around. All right. If the environment turns, how are you prepared for it? And so I do think that, yes, there were some behaviors prior to the surge in interest rates that had led to a lot of managers who didn't actually know what they were doing when the lights went out. I think that that's part of it. I also think that there are a lot of fund managers that simply haven't seen a real downturn. Remember, 2020 was very short lived. 2023 was also short lived. Now, the ones with the track records, something that a lot of people don't understand about private markets is particularly in private credit. Every time the world goes awry, private credit gets bigger. And this is because those large, large fund managers, if you really look at their backgrounds, they have experience in distress, they have made it through those cycles. They, the banking industry tends to seize up when things get rough. And so private credit dives right in. And if you go back and look, 2020, 2023, even 2025 during the tariff tantrum were some of the best investments ever made. And so the countercyclical behavior, I think, is a little hard for people to understand. But you know, I tweeted the other day, Phil, buy low, sell high. This should be obvious. The same is true for public and private markets. Markets, call me old school, but value still exists in the world. And if you go hunting for it, you'll find it in more places than you think.
- [15:12]
A
Even in today's market, I definitely agree. Shauni, let me ask you about Hyperscaler's funding this infrastructure build out here. You had this chart that your team published about quarterly capital investment as a percentage of cash flow. And you know, one of the numbers that jumps out to me, Amazon is spending 170% more on AI infrastructure than the cash that they're generating. This seems like a red flag because other companies are trending in that direction. How are you thinking about this?
- [15:43]
B
So I remember when we made that particular chart and I made my team go back and fact check it three times because it looked so crazy. And if you look at the annual figures versus quarterly, it's a little less drastic. But the first quarter of 2026 alone, you can see that there was just this tremendous desire to spend. Right. Metta had increased their projections for the year for the second time. You definitely saw very different reactions in the market in terms of. Yes, both Amazon and Meta could say that they're going to spend more money, but investors really wanted to see that roi. Amazon Trainium is kind of very close to the stories of other companies as well, like Anthropic. It's complicated. This is all a way to say it's complicated. If you think about the dollars that are flowing into the space, what we're saying is, in aggregate, you'll still see a lot of it coming, but it is getting more discerning. So what does this look like under the surface? A lot of people ask about data centers. To your point, I go around talking to public and private market investors on how they're thinking about this. What deals specifically did they pass on and why. And it is true that it's becoming more competitive out there. What happens when things get more competitive? Rates of return start to come down on certain projects. You have to remember the thing about data centers that's interesting is now you have competition from public and private markets. The comparable story to this, as you might remember, a lot of people talked about private credit versus bank lending. Same story here. If you're thinking about data center financing, then you have public markets and private markets and they're competing with each other. Then the rates of return for both are going to come down a little bit. So I'm not saying that it's not attractive. I get why people are investing in it. Just people have to be very specific about what part of the food chain they're investing in. So what does that look like for us? You know, a conversation will have a client, you know, may already be in high yield indices or an investment grade indices and have exposure to some of these companies already. So then they'll come to us and say, okay, I want to invest in a data center. I'm like, okay, well where. Right. Some places the conversation naturally goes, which I think is a more exciting conversation, is in the energy play, natural gas, utilities. And you know, these are areas where there's still a lot of structural room to run.
- [18:11]
A
So I'm trying to keep up with you here. You got a lot of this context that I think I'm still catching up on. In the private market. Is there anything that's standing out to you as far as all the capital going into data centers and just the AI investment in general that you think more people should be concerned about?
- [18:31]
B
Phil, everybody is overweight. Everybody is overweight. Big tech, whether it's your equity portfolio or your bond portfolio or your private markets portfolio. One question I ask every investor investor now is what does it mean to you to diversify? I think this whole country, if not the whole planet at the moment, is a little levered to the AI trade, don't you think? I don't know what that means. I think on a societal perspective we better hope we're training people to be a part of this new reality. I don't think that AI is going to decimate the job market as badly as some of the doomsday headlines suggest. I think that there's a real chance here if we pay attention and invest in the jobs that we need to invest in, that we have a future that is just fine, that we have people who can use the AI and not the other way around. You use AI a lot too, right?
- [19:29]
A
I do.
- [19:29]
B
So you should be the first person to agree with me that it makes a lot of mistakes.
- [19:33]
A
Yes.
- [19:34]
B
Right. It's also sycophantic in its behavior. So you're not going to want your strategist next to you who agrees with everything you say you need to have in an investment process a robust set of debates. Because if you are not having that, you're not seeing, seeing a lot of a what could go wrong or what opportunities exist that are outside of your horizon. Right. And so AI is not going to fix that. Right. I do think that people need to be paying more attention into how the skills we need for tomorrow's workforce are going to be harmonious with AI. And that's not happening enough today.
- [20:16]
A
I mean, it's very, very difficult messaging wise to say, hey, we're going to. We, as in all the biggest companies in the world going to spend a trillion bucks on this technology. But the beneficiaries are also seemingly the corporations. And as individuals using AI, I think we can see immediate day to day benefits, but that's such a small slice of the population. Still, at least my view is that. So I don't know if the broader society will see any near term benefits. I'm struggling to come to that conclusion and I am very bullish and I'm very optimistic, but I think connecting the dots is still escaping me.
- [20:57]
B
I had a great message that popped into my inbox the other day after we were talking about AI somewhere and it was one of my favorite kind of hopeful things that I saw, which was, you know, I actually think that arts are going to take off in this AI era and it's because people will be able to tell the difference between what is kind of true human value. Add emotion, right? Advice, judgment, all of that. How to think about the future. I believe that. Call me naive, but at the same time, you and I both know an AI has written something and sometimes it's better, but it's not better than the people that I do rely on their writing or their analysis as sacred.
- [21:52]
A
Okay, so something that stand out to me in the AI discussion. AI seems to be almost the only thing that's working from an investment case and also in the broader economy. And you say everyone's overweight AI. If you combine all of that, to me it almost sounds like a contrarian bearish signal.
- [22:14]
B
No, it's not. I'm not a bear. I'm not a bear on this one. But I do think that you do have to at the margins, ask yourself what else you have to. I was talking to the founder of New Edge Capital the other day in my podcast and one of the things he made this point to me of is in a crash, correlations go to one anyways. So, you know, what does it matter on diversification? You know, that's an extreme point of view, but I do agree with it. The other part of this is, you know, if you're holding equities today, equities. The math is that equities go up over time for a lot of reasons that's the case, but certainly it is true for the foreseeable future. So if you do nothing and you're holding equities, your percentage of your holdings and equities are going up no matter what. And right now what that means is that your exposure to these themes, let's say broadly, AI, is also going up. So you could just do nothing with your current equity exposure. For many equity holders today, if you have a 401k, right. I don't know how often you look. I'm one of those people that looks to see what I'm holding in it.
- [23:25]
A
I look every day.
- [23:26]
B
You should not. That's.
- [23:27]
A
I should not. But I do.
- [23:30]
B
But if you look, I mean, I look to see where I'm diversified and where I'm not. And so I tend to ask myself, well, okay, what does this mean about the market we're living in today? What does it mean? So if you look at the sectors I had our team draw up, what PE ratios look like, we can send this over to you too. What PE ratios look like across sectors, across size of companies. And that was mostly IT sectors, companies. There was one other thing I think within sectors too. I wanted to know kind of what the worst performers versus best performers were looking like. Right. Because we are seeing dispersion now. If you look at mid cap and small cap companies within the S&P 500, they are not trading as historically as expensive as other sectors like the semis are, for example. So it's telling you that if you look outside of these really popular trades, you are still finding relative value. One of the areas for me that I think is crazy is how cheaply financials have been trading as a group relative to all the other exuberance you're seeing in the market. If you're willing to invest in all of this AI related spend, the banks are taking profit from all those deals. So it doesn't really make sense to me that you would have a market that is so slanted towards investing more and more and more in AI and not the banks that are doing the deals that are arranging the financings that are benefiting from the aggregate growth you're seeing from that continued business spend. So there are some disconnects that still exist in the market that you have to ask yourself, okay, you know, I know that by definition my technology dollars are accounting for a bigger and bigger portion of the pie. Where else can I go at the margin?
- [25:28]
A
And you're suggesting financials might be that spot of opportunity for us?
- [25:32]
B
Financials is definitely one spot. We also are encouraged right now by industrials, given the strength of PMIs that we've been seeing five consecutive months of growth that it's exciting to watch. Right. And it definitely is another thing that makes sense to us alongside all of the spend you're continuing to see is certainly at the business level. And also the trends that you're Seeing in terms of nearshoring manufacturing and these geopolitical uncertainties, remember, these are not. While they're extreme, they're not new. We have been living in a period of heightened geopolitical conflict for a while now. We've been talking about whether globalization is compromised for years. And so certainly since COVID we have seen that trend slowly and then rapidly move forward. I'd say also if you think about diversification, another area that we love to talk about with clients and really see where the opportunity is and sometimes is and is commodities. So a lot of people, when they talk about commodities, they only talk about gold. I think that that's a missed opportunity. I think if you look at copper, if you look at aluminum. Aluminum. The prices of aluminum alone during this geopolitical conflict have been soaring. And it's an input for a lot of things that you need on a regular basis. Tungsten. I don't know if you've seen how much tungsten prices have risen throughout the war. I don't know if you've seen, for example, what did I get through tungsten, aluminum, copper. Gold I think is interesting. There was a story this morning talking about gold as a reserve asset relative to the US Dollar. Gold is one of the ones I'm talking about as, as of late, maybe not as fun to be in. Right. It had been having, having a tough year. But you have to remember when we came into 2026, Gold saw this tremendous momentum driven rally. It almost traded like a meme stock. And so actually to see it come off and let people get in at a more reasonable level to experience longer term appreciation. I still like gold.
- [27:33]
A
Okay, so I have to ask you, how would you get exposure to these commodities like tungsten? I don't think I've ever checked the price of this. If I wanted to buy into that. Is there an ETF for this or what am I looking for?
- [27:45]
B
You could buy commodities through ETFs from iCapital's perspective. People also buy them through structured investments. So what they'll do is they'll come to us and we'll work with issuers and they will develop products that are around either ETFs or certain securities and then hedge the downside to them so they'll deliver over a period of time a promised return as long as the security that's underlying doesn't fall beneath a certain level. So that's one way there are ETFs tied to certain themes. And then also this is where private markets also make sense. Again, some places natural Gas has been really an area for us that people have been really excited about since last year, certainly. But this year, of course, as we know, the geopolitical conflict has made natural gas around the world a far more complicated story and perhaps a lot more underappreciated. You know, the one kind of thing that a lot of people are talking about as it pertains to the Iran conflict is that even if you saw a ceasefire, even if it lasted a long time, that you do have a lot of commodities that will continue to see either supply chain constraints moving forward, oil being one of them, but certainly natural gas being another large one, given the issues we've seen around the facilities throughout the course of this conflict, a
- [29:12]
A
lot of investors have been telling me that they are most interested in playing commodities around this Iran conflict. But before these last few months, I haven't really had too many conversations about getting exposure to commodities because I think it's a pretty niche. You have to be very sophisticated to want to even do that. Now it's become a little more commonplace, I think, with the shred of Hormuz. Shali, I have to ask you, what is your highest conviction corner of the market right now?
- [29:41]
B
I think you're asking this in a positive way. You know, what are we most excited about? But I'm going to answer this in a different way. We have the most conviction around our views around the treasury market. So we had recently updated our range, actually right before you saw the tick up in the 10 year, we updated our range on the 10 year from 4% to 4.8%. Now why does that matter? We don't watch interest rates for the sake of watching interest rates. We think that a lot of people look at interest rates only in the short term, which we think is a mistake. We think that it's really important here to look at longer term interest rates because that 10 year is very closely tied to the cost of borrowing for things like mortgages, things that matter to the real economy. I also think that when, when you look at the 10 year treasury, it's telling you a lot. It's not just about inflation. It's not just about, you know, will the Fed do this or will they do that? It's about inflation, it's about the term premium, how people feel about the fiscal strength of the United States government. It's about growth expectations. And we're living in an era where we are seeing elevated inflation, but also elevated growth. And so for us, that spells an environment where we're in a higher, for longer environment. And that premise ripples across asset classes. If you could get a solid handle on what's happening in the bond market, then you can have a much better understanding of how other risk assets will perform. And that's why it's so important to watch. And for us, it's not important just to watch in the short term, it's important to watch for the long term.
- [31:22]
A
That was not the answer I was expecting. And it is very different than what most people respond when I ask them for their highest conviction. Corner of the market. Where can people find your work online? And what are you working on these days?
- [31:36]
B
Sure, I post a lot of what I do on LinkedIn. We post all our work. Our team at iCapital, we publish across public and private. And the macro, we're focusing a lot on how AI is rippling through the economy and public and private markets. So on my LinkedIn and on our YouTube page, you could find a lot of our conversations. Conversations at the bridge by iCapital.
- [31:55]
A
And this is your new show, right?
- [31:56]
B
Yes, new show, new podcast. Because we work at iCapital with 1,200 general partners and again, across public and private markets, we work with more than 3,000 wealth managers, almost 3,500. So our goal is to get more of those CIOs who I get to speak with on a daily basis in front of each other, through this, through media, so that people can understand the different points of view that people are investing through.
- [32:22]
A
And it's so important these days because it's so hard to figure out what's going on, even for you. And I feel like we're in it every day, but it's so fast moving and confusing. Shaly, I really appreciate you coming on the show, and anytime you're in town, let me know. We'll do it again.
- [32:37]
B
Thank you, Phil. Thanks for having me. Great to be here.