Kurt Bjorkland (2:52)

Marian, thank you for having me. It's a great pleasure.

Maren Somerset Web (2:56)

We'll find out.

Kurt Bjorkland (2:57)

I'm looking forward to this conversation Right.

Maren Somerset Web (3:00)

Now we've talked a lot about private equity on this podcast over the last few years and we've watched it go from a sector that has regular reported outperformance to regular reported underperformance. And we've seen three years of difficulties in the sector pretty much since interest rates started rising. So why don't we start by talking about the sector as a whole, set the scene for us. Are we near the end of this difficult period? What happens next?

Kurt Bjorkland (3:27)

Yeah, so I think that's a profound question which needs to be looked at through a long period of time. Right. So I joined what became premier 29 years ago and this is the third mega cycle, if I use that expression, that I see now. And they actually have turned out to be relatively predictable in how they roll out. So you have a period of performance, then some exuberance, you have a lot of capital coming in and then some sort of heart attack typically in markets or Mac. And in the end of the dot com period it was excessive capex investment into telecom stuff. And then in the financial crisis it was excessive leverage in some corners of the financial markets coupled with valuations driving too high in some areas. And what we are seeing now is this period through Covid then the great inflation bump leading to rates resetting from kind of zero to kind of 4% and the industry having in some corners lost discipline in that period of time and then a very significant reset in valuations. And that has then led to an exit digestion problem which you've seen in the industry not driving enough exits in 22, 23, going into 24. And then at the same time you've had this remarkable period of public markets performance where over the last three years, I don't know how many people would have guessed in 2022 that were set up for three years of continu bull market. But that's what's happened in, in the public markets. You know, whether whether that's, we can talk about whether there's bubbles, whether there's not bubbles, but, but that's, that's a fact. So you look at the private equity industry which over the very long term has done, I would argue a really good job for the right investors in that asset class. We'll talk about why. But over the last three years or so has not looked good enough comparatively in terms of the liquidity lockup that, that it does compared to what the public markets has delivered.

Maren Somerset Web (5:32)

Yeah, I mean I think it's worth, it's worth saying that the major underperformance has come in the last three years and particularly with this extraordinary outperformance from the US equity markets. But we now see there was lots of reporting earlier in the year about the State Street Private Equity Index, which now has been outperformed by the S and P over pretty much every time period out to 10 years. And so that was a bit of a shock for the private equity industry. Those performance numbers. I know that's listed private equity funds.

Kurt Bjorkland (5:58)

But nonetheless, well, it's listed private equity funds. I think there's a lot of stuff that masquerades as private equity in the markets today and we should talk about what private equity actually means. Private equity is a governance model with a very significant competitive advantage compared to, in my opinion. I may be biased, but I've seen that play through for a long period of time over in many cases the public governance model. And that advantage governance model leads, when applied properly in the right situations, to an alpha that is really undeniable over time.

Maren Somerset Web (6:34)

Why don't we stop there then just to talk rather than let's lose the flow that we had of talking about where we are in the cycle and stop briefly to talk about what that governance model is in your view? Because as you say, there's an awful lot of stuff out there calling itself private equity. The spectrum is huge. What does it mean to you?

Kurt Bjorkland (6:52)

Yeah, what private equity means to me is controlled by out governance. So private equity gp.

Maren Somerset Web (6:57)

So Kurt, just before we go any further, because not all of our listeners are completely expert in this area, GP stands for general partner, which in the world of private equity refers to the active manager of the private equity investment fund.

Kurt Bjorkland (7:10)

So private equity GP buys first of all does great asset selection, so picks out of 100 companies that you could buy, you pick the one or the five that really fits your capabilities. The markets become super specialized these days. So, you know, some firms are phenomenal at pharma investing and other firms are phenomenal at B2B services investing and third ones at, let's say, real estate development. But you pick the one, three or five assets out of a hundred that you think are a great fit with what you do. And then after that you set out to transform the businesses strategically, tactically, operationally, organizationally over the next five years. And the thing that really matters is that you have enough time to drive through long term evolution in businesses. But it's not like a black. It's not an open checkbook where you can own a business for 10, 15 years. So there's a sense of urgency by the Time year four, year five, year six, maybe ticks by, you're starting to run out of time. So it creates this sense of patience, but at the same time urgency in all the stakeholders. And the third element is very strong alignment. So you have a management team that tends to have a significant ownership in the companies. You have a private equity GP that is incentivized by the outcomes through carried interest. And then you have the investors that provided that this formula works well and the right assets are selected and the patient capital does its governance job, you will get very strong outcomes. So that's private equity. Now, the moment you then start blending into that, buying small stakes in companies in the same way as the public markets can do, you buy a 1% stake, a 5% stake in a company. The moment you start going into places in the capital structure where you don't have that governance control, you might get attractive returns, but you typically take risk that is commensurate with that. You don't transform the companies and you're not in charge. So that for me starts shifting away from real private equity, if you will, towards the broader alternatives basket in all of these assets. I mean, the real question is we ask our investors to forego their liquidity. So instead of investing in Nvidia stock or you know, in a uk, any publicly listed company, we ask investors to lock up their capital in substance for a period of years. And for us to make that ask, we then need to deliver outperformance in return for that. For some investors, they can take the trade, for others, other investors, they can't take that trade.

Maren Somerset Web (9:47)

Okay, so let's just pick up, I think what is your main point there, which is that for you, owning stakes in private companies is not the same as being a private equity investor.

Kurt Bjorkland (9:58)

No, you can be a private equity investor owning stakes in private companies, but control private equity is an asset class which is designed to be accountable and in charge for driving transformation in businesses in addition to picking great companies to invest in. And that's where you then get the outperformance.

Maren Somerset Web (10:19)

Okay, and the role of debt in all this, because when we talked about the three things that are important to you when it comes to defining private equity, financial engineering isn't mentioned, but it's usually a big part of this, isn't it?

Kurt Bjorkland (10:32)

I think that it's a part that can modestly amplify the outcomes, but it should never be an existential reason for making an investment. So that's really important, I think. So on average, when we buy companies, our LTV is like 40%, 40, 50%. And that helps, especially with the current environment where the cost of debt might be all in 6, 8%, even that helps amplify your performance a bit. But fundamentally what matters is that your EBITDA or your operating cash flow in the portfolio is growing. So we have around 60 companies in our buyout portfolio. The EBITDA is growing 16% per year organically. And it's that compounding of those profit pools that is actually driving the performance. And then you put a bit of debt financing on that and it amplifies the 16% somewhere into the 20s with other things going on as well. And that's where the private equity returns then come from.

Maren Somerset Web (11:32)

Okay, so again, this is, I'm actually going to say an old fashioned method of private equity in that when we. There's quite a few academic studies knocking around at the moment suggesting that the majority of the returns across private equity as a whole over the last 15, 20 years or so have come from debt.

Kurt Bjorkland (11:48)

I don't necessarily agree with those studies because I don't know all the cooking that goes into them. But what I do see and do know is that those private equity firms that consistently deliver real alpha to their investors, they are phenomenal at identifying great businesses and driving through patient long term transformation of those businesses. I think the time, you know, when I joined the industry in the mid-1990s, you're absolutely right, that financial engineering at the time would allow you to drive and create good returns. And that was kind of the decade that led up to the financial crisis. I think all of that has been commoditized out of the industry practically 20 years ago. So for the last 15, 20 years in the industry, what has driven differentiated returns is firms that have picked great long term structurally growing themes to back and have then either backed or created number one market leaders that have benefited from this long term profitable compounding. And that's what in my view, great control private equity is about.

Maren Somerset Web (12:56)

Okay, all right, we've got our definition straight now. I think we're okay, so let's go back to where we were. You were in wonderful flow about where the industry is at the moment after a difficult period and I interrupted you for which I apologize, but can I get that flow back?

Kurt Bjorkland (13:12)

Yes, let's get the flow back. And you're welcome to interrupt at any point in time. So these three mega cycles that I was talking about, basically the way it happens is the industry gets a little bit over exuberant. There's a shock to the system that appears from somewhere liquidity dries up because it's harder to exit. And you probably see backwards looking performance weaker because there's been exuberance in the system at some point in time with too much capital chasing, chasing deals. And then there's a shakeout in the industry. And that's what's happening at the moment. We love shakeouts in the industry because what that, that's proper Schumpeterian destruction competition where those GPs that have not performed, they struggle in raising funds. The funds might be smaller, they might not raise any funds and the teams therefore shrink or disappear from the market. Whereas those firms that have had a good strategy and that are backing the right types of companies with a great team, a good strategy, they will raise funds bigger, smaller, same size, that doesn't matter. But they will raise funds that will allow them to continue executing on their strategy and continue thriving. And this you see every time when you get these mega cycles where we are now, I think the cycles tend to be like four to five year cycles when they happen and we are probably somewhere in year three, four. So what you're seeing now is a rapid pickup, very bifurcated but rapid pickup in the exit velocity of those firms that have built the right portfolios over the last, let's call it decades, last five to 10 years. They are now in a position where they can sell those businesses. And firms like us are having very significant liquidity performance over the last year or two. And that will then feed back into the system, it'll start creating more capital coming back, it'll demonstrate the performance of the funds and then who knows what happens with the public markets. I mean, you and I have been around for long enough to know that what today looks like phenomenal public markets performance tomorrow might look more of the same or it might look much weaker. So what you get in private equity is that sort of decade long perspective on returns, which by the way then means that as private investors. We'll get back to that topic. As private investors you need to be very patient and you need to be prepared to invest into that dynamic, the.

Maren Somerset Web (15:45)

Exits that are coming through at the moment. And one of the things that you wait for in a cycle like this in the first few years of it is an acceptance of a shift, shift in valuations. Right? And that has been quite a long wait in private equity for possibly some investors to realize that the valuations they've put on some of their holdings weren't quite right. We get that immediately in the public markets, which is of course the wonderful thing. About the public markets, but the private markets, there's a lag in valuation acceptance. Not on the upside, but certainly on the downside.

Kurt Bjorkland (16:13)

It's always very tempting to talk about averages on topics like this, but of course we know that averages are actually never what, what we experience. We experience distributions and, and what I see at our end of the industry is when your profit pools are growing at 15 to 20% per year, even if you get 15 or 20% correction in private market valuations, it's only a matter of a year until the companies have grown back into the same baseline that you might have held them at or paid for them, let's say a year ago. So the problem really emerges if you are stuck in a portfolio which is not growing, and especially if it's not growing and you have a lot of leverage on the companies and if it's faintly cyclical. So that's when private equity firms get into trouble. It's private equity firms that are, or portfolios that are too dependent on leverage. And then leverage becomes more expensive and maybe less accessible if the companies don't grow. That means that if your baseline shifts downwards, you kind of can't grow out of it. Time is not your friend. And then if a macro cycle hits, you get an adverse current and you need to swim upriver. So that's when I've seen private equity go really peer shaped in this kind of environment. The opposite side of that applies to most of a portfolio like ours, which is we own these long term compounders where revenue is growing somewhere in, in the teens, the profits are growing somewhere in the mid teens to even 20%. And the revenues are consisting mostly of recurring revenue models where the macro sensitivity is less and as I said earlier, 40, 50% loan to value only so we're less sensitive to interest rate shifts. So that kind of portfolio, yes, we might lose a year, sometimes when the market corrects, we might lose 18 months. But it'll come out of it. And in this sort of environment, I know that people are very focused on owning real assets. You can look at what's happened with the price of gold, for example. But for me what you really want to own is scarce things that everyone in the world wants to own. In fact, an increasing share of the world wants to own that are growing. And the most attractive things of that definition are scarce companies that are market leaders that make products, services that people really want to buy and that are growing from year to year. So if you own those, it's a fantastic protection against inflation. It's A great protection against what interest rates might do. And time is on your side. So over time you will be fine. You'll be even better than fine.

Maren Somerset Web (19:10)

Is that also the case? If you own a portfolio of excellent listed companies over a 10 year period, you'll be fine, yes.

Kurt Bjorkland (19:16)

So if you were 15 years ago, or even 10 years ago, if you were smart enough, which I wasn't, to pick the companies that became the Magnificent Seven today, you would have done phenomenally well. Now if you picked the 493 companies in the S&P 500 that didn't become the Magnificent Seven, then your performance will be kind of pretty lackluster. And you know this, we all know this. It's really, The S&P 500 is really driven by these 7ish companies that have performed fantastically well. And especially now over the last three years, if you have owned anything that touches AI, you've seen a great kick in your valuations. But if you're outside that scope, if you weren't good enough 10 years ago to pick that, you would actually have done better in other places of the financial market. So I think there's a survivor bias, as psychologists would call it, in looking at, if you had owned the best S&P 500 companies, you'd be, you'd be doing really well.

Maren Somerset Web (20:26)

But I mean, the same problem exists in private equity. You've got even more companies to choose from, presumably than a listed manager. You have to make more decisions rather than fewer.

Kurt Bjorkland (20:36)

I don't think so. If you look at the number of real persistent performance in private equity, persistent performance in private equity is more, much more than it is in public equities. First point, and second point, if you look at gps that have the scale and the capabilities to really compete and become one of the best investors in Pharma platforms or B2B services or enterprise software in the world, there's not that many of them. Firms that can write large commitments to back phenomenal market leading companies that become these long term compounders. I mean you can, in each of those themes you can pick, I don't know, amongst 10 GPS, 15 GPS. And out of those 10, 15, maybe 5 or 10 will stand out. And then you pick your themes and you build your portfolio, you pick amongst five, ten terms that you back the funds on and you see the persistence of the returns you will do and you will have done really well with that strategy. And by the way, it'll be more absolute return than relative return return and it'll be a super nice diversified portfolio. Of the sort of companies that you typically can't access in the public markets.

Maren Somerset Web (22:00)

Is this harder, Kurt, than it was at the beginning of your career? In that the sector has grown a lot, the competition has grown enormously, paying higher valuations for companies when you find them. Is it harder than it was 20 years ago?

Kurt Bjorkland (22:14)

So I'll tell you a story 30 years ago. So, yeah, when I joined the firm in 1996, I was a kid from Finland and I got a job offer to join this firm that I didn't know much about. So I called a friend who worked at Goldman in London and asked him, hey, can you find out about this firm and these people? So he went around, called a few people and called me back and said, hey, yeah, it's a really good firm, smart people. But you need to know that it's too late to join the private equity industry. The best times of private equity are past and today there's too much competition and too much capital chasing too few opportunities. This was in 1996 and then when myself, together with a gentleman called Tom Lister, we then took on the co managing partner role at Pamira in 2008, there was an article kind of announcing this and the journalist in an unknown publication said so and so Times two have been appointed to this job. The golden age of private equity is however, passed and they will have a tough time in driving the firm going forward. So I'm telling you this because nothing has been more persistent in my journey for three decades in private equity other than our returns has been people thinking that the golden years are past. And the thing that that sort of misses is that we're insanely entrepreneurial industry so we attract great talent, great young talent. And the incentive model, the governance model is really strong. We pivot the whole time. So what you think? Well, what might appear like a relatively steady state evolution is really this constant buzz under the water of in our own trying and discarding themes and ideas and a constant evolution of the talent. And this sort of collaborative but Darwinian model of the best entrepreneurial investors emerging inside our firm and inside other gps that come up with great ideas that combine capital and decisive governance and patience to drive outcomes. And kind of that's what investors are backing. They're not backing the static. Let us look backwards 5 to 10 years and assume that you're going to do the same over the next five to 10 years. What they back are platforms that are super nimble and able to adapt with great talent and depth of capabilities into an ever changing environment. And yeah, I mean, you're right that on average it's really hard. But it's kind of never felt easy. Like it really, really has never felt easy. It's always felt tough on the margin Foreign.

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Maren Somerset Web (27:42)

Here we are in what year? Four or five of the tricky bit. You think so nearly at the end from your point of view, what do you think? Three?

Kurt Bjorkland (27:50)

Four? I think I said out of kind of four. Five.

Maren Somerset Web (27:52)

Sorry? Out of four. Five. Okay. So kind of halfway there, nearly there. When you look out over the next decade and you said that you're constantly pivoting, constantly changing, what does the next decade look for you? Where are you pivoting to what is the change and what are the themes that will come out?

Kurt Bjorkland (28:11)

First of all, I think what's going to happen over the next two to three years, this creative destruction or pain that the industry will in some corners suffer because fundraising is harder and performance comes to the fourth, it will lead to a healthier competitive environment. I don't say easy, but healthier competitive environment. So you'll have a few firms, fewer firms with greater clarity and more concentration of capital that will continue developing and executing on their strategy. And I of course think that we will be in our chosen themes one of those firms that are strongly benefiting from this. So that's the first thing then. The second thing that we must talk about is the impact of technology, AI and this rapid acceleration of the pace of change driven by technology. So again, we are sort of tech first, but not tech only. We've been investment in that space for the whole firm's existence over 40 years and have backed, we were early capital into many of the great tech stories over the last decades. And there was a dot com revolution and then there was a mobile telephonic revolution, and there was a cloud compute and software transitioning into the cloud revolution. And now we are seeing this AR revolution. And each of these create amazing opportunities for driving rapid positive shift and growth. And they of course also create amazing opportunities to get it very wrong if you're on the wrong side of that transformative watershed. And what is so exciting about this shift is that in very much the same way as let's say in the.comrevolution25, even 30 years ago, we saw complete transitioning of many industries, whether it was consumer facing businesses or enterprise facing businesses. Here we are seeing an even broader and more rapid impact. So the pharma industry is going to get completely transformed driven by AI over the next 3, 4, 5 years, 3 to 10 years, I should say the B2B services space, you will be able to drive better services, more growth, better customer outcomes and better therefore customer loyalty and do so with better productivity. And of course the impact directly on the kind of tech space and the consumer Internet space and so forth is very significant. Now there are aspects of this which are clearly in bubble territory. So I mean, I'm sure you will have discussed with many others much every week.

Maren Somerset Web (30:55)

Every week.

Kurt Bjorkland (30:56)

There we go. So the sort of, you know, just like adding up the big numbers is very clearly hard in some of these aspects. But what we see in our portfolio in terms of what we can do in real life, in terms of driving additional revenues and better outcomes for customers and so forth. And so forth is transformational. And it actually helps that you have intense competition at the foundation model end and at the data center end and so forth because that drives rapidly down the cost for the users being us in the application end that can then use that to drive change in our businesses and offer that to the customers in our portfolio companies. So that's a really big deal. And getting that right is existential. It's not only attractive, it's existential. And then I think the third one that is going to, I think the industry is going to do a little bit full circle back to what we started our conversation with, back to kind of the roots. So when you start calling everything that's not publicly listed alternatives and equating that to private equity, I think we are maybe in a, in a sort of obfuscation zone Sometimes for fun with my hedge fund friends, I, I, I will call hedge funds a fee model masquerading as an asset class.

Maren Somerset Web (32:24)

And what will they call you, Kurt?

Kurt Bjorkland (32:25)

They will, they will come up with lots of appropriate insults in return.

Maren Somerset Web (32:30)

I mean they could say the same about a lot of private equity firms.

Kurt Bjorkland (32:33)

Where I was going with this is so no, when you talk about what private equity really is in terms of the governance model and the patient capital and all that, all of that stuff that we talked about. But then when you, when you start buying into the same companies that you might have bought in with a public portfolio with small non governance stakes in a very diversified portfolio, then I think it's a very fair criticism. Like what's the right way of buying this and how much should investors pay for that and how. So that's where I was going with this. And so I think you're going to see a bit of a circling back to the roots and to the core essence of what should private equity really be. Why has it over the long, long term delivered consistent both absolute and relative returns with accepting the critique that at the moment with where public markets are and with black effects and other things, the performance on sometime series doesn't look good enough. I do think strongly that that'll self correct especially when you look at private equity that's doing what kind of private equity was created to do which is to asset select and govern rate companies for long term better outco and creating better businesses. By doing that I think you're going to see a circle back to this and some fluff is going to go out of the industry and the true performers are going to attract the capital and Take more share.

Maren Somerset Web (34:03)

And in that model is the expectation that the improved companies, that the exit is onto a listed market, that the exit is an ipo. Because that's what seems to make sense. You get the company, you improve it, you build it, you set it on the correct path and then you effectively gift it to the retail investor via an ipo.

Kurt Bjorkland (34:22)

But what says that the ultimate destiny of a company must be in the public markets. Right. So I won't get this number exactly right, but approximately right. So the number of public companies in the United States has fallen from let's call it 8 and a half thousand, 9,000 to let's call it 4,500, 4,800 or something like that last when I saw the number. So you've had a very significant deep public market defecation. I know that that's not the wor. Use it as a word now.

Maren Somerset Web (34:54)

Yes, but it's still not quite.

Kurt Bjorkland (34:56)

It's still equity. Because it's still equity. Private equity. Right. So it just is not public anymore. And what's happened is that whereas the case used to be that venture capital funds and private equity funds would own the kind of really small and small medium sized companies and maybe medium sized companies, and then the natural home would become the public markets once they're medium sized and larger. What's happening now in the markets is that the public markets in my opinion are really only takers of the like, really like 15, 20, $30 billion euro sterling companies and upwards. Because that's when these public market investment machines can really put the brain power into understanding and analyzing and creating a liquid market and so forth. So what's happening is that this space in company size is being filled by different forms of private equity and alternatives. So you know, I would never have dreamed of when I joined the industry in the 1990s that we would be owning companies that are worth 10 or 15 or whatever billion dollars. But we do, and we do so consistently and we buy and we sell them. And that's because our industry has become a longer term holder and evolver of these companies. And what that means is that for investors, be they institutional investors or ultra high net worth individuals, they get to own companies through private equity that they otherwise could not own because they're not accessible. Like you can't own that three, one or three or $5 billion company through the public markets because the public markets actually don't want to own them. So it's created a space we as an industry are filling and have filled that. And I think that's just going to continue. So therefore, to your question, coming full loop to that, I don't think the end game always is that this must be a company that goes into being a public company because, okay, do you make the four and a half thousand companies in the US that are public? Maybe you do, maybe you don't. But if you don't, if you have a fantastic company that's market leading and it's growing and all of that stuff and it's generating cash flow, you can sell it to strategics. If I look at our exits over the last 12, 18 months, it's actually the largest category of selling has been to strategics. We can sell it to all kinds of strategies.

Maren Somerset Web (37:25)

Sorry, go back, what do you mean by strategics?

Kurt Bjorkland (37:28)

I mean a large company, another enterprise buying a smaller company because it fills maybe a gap in a product portfolio or a geographic portfolio or otherwise is highly synergistic to what they do. So that's one exit route. And the other one is there's so many variants today of financial ownership that is not public markets. It's of course everything that is private equity and broader alternative assets, it's family offices, it's the semi liquid private ownership vehicles that are emerging and so forth and so forth and those become exit routes for are also great companies that sit in private equity, but it's super bifurcated. So if you own again a kind of small medium sized company that doesn't grow and doesn't generate cash and is faintly cyclical, there's like zero exit market for that. Rightly so. So you shouldn't own those companies. But if you own a fantastic market leader that's worth 1 billion and tomorrow it might be worth 2 billion, and it's compounding in a very predictable way and taking share of the world economy, if you will, then there's lots of ways of exiting that, whether it's worth a billion or three or five.

Maren Somerset Web (38:46)

Okay, I would love to spend some time talking about whether the decline of public markets is a good or a bad thing. But time's moving on, so I think we better move on to talking about who should hold private equity in the style that you're talking about. And I know that one of the things you want to talk about today was the extent to which private equity, again of the type that you're talking about, should be held inside a high net worth portfolio, a medium net worth portfolio, an ordinary retail investor portfolio. So from what you've said, someone who only participates in the listed markets is missing out on the majority of the growth companies across economies at the moment. So you might say, well, if you're only in the listed markets, you're really missing out on the exciting, innovative growth stuff.

Kurt Bjorkland (39:36)

There is that element. Yes. There's also a significant trade off which it's important that we highlight, which is that the liquidity in the public markets. Of course, you know, sometimes you sell into very strong markets, other times you sell into weak markets and it's unpredictable. But at least in most, most days of the year, you can sell if you suddenly need the liquidity in private equity or alternatives more broadly. The whole point is that these companies are not liquid and we as an industry end up selling them when we are towards the maturing end of our value creation plan. We created the company that we wanted to set up, if you will, for an exit and the exit timing is right. And that means that when you commit to private equity through a regular fund, you should absolutely expect a premium performance to what you would get in the public markets because that's the trade off. But at the same time you don't have control of when that liquidity comes in. So therefore the industry as you know, it sort of grew up from institutional investing, pension schemes, sovereign wealth funds, insurance companies with long capital duration. So the vast majority of our investors are these types of entities that have capital duration. The liability duration, if you will, can be a decade or two or three, or maybe even perpetual. When you look at some of the sovereign wealth funds and consequently they are very happy to make the trade off, they say, okay, so if you deliver for US 5 or 10% or whatever it is, returns above the public markets benchmarks, we will happily accept that our capital is locked up for a number of years with less predictability of when it comes out. And this is the key with then private individuals coming in. So for ultra high net worth individuals, I know that that's a pretty fluid definition, but people that can think of capital in a sort of really long term way and perhaps even in a generational way, I think it's a really good asset class because it's typically diversifying and it accesses companies that you otherwise couldn't access and you can keep the GP's foot to the fire and you can back the sort of strategies that, that you want to back. But then for the retail investor who has high need for liquidity and perhaps an unpredictable high need for liquidity, it may be harder. And then people create this, and I think this is really important and people create these wrappers to make illiquid products be a bit more liquid. So semi liquid products. But we just need to be realistic. There are limitations. So that's not an asset class, a semi liquid wrapper around a non liquid or lower liquidity private equity set of assets. It's a wrapper, but the underlying assets are still low liquidity. So those can help somewhat, but they always come with a trade off on the returns because those semi liquid products, they need to carry more cash and they call in the capital earlier than when it's invested. They might need to invest in some credit products that are higher liquidity, lower return. So you almost always end up with a trade off where you get a bit more liquidity until you don't. And we've seen that in the market and you get lower returns. So if we draw it as a continuum, I think there's the retail investor who probably shouldn't invest in illiquid products because they have a high need for liquidity and it's unpredictable. Then there's in between there's a set of investors who can start making some of that trade off, but they need to trade with caution and think deeply about what level of exposure and also.

Maren Somerset Web (43:33)

Understand as, understand as you say, that.

Kurt Bjorkland (43:35)

They'Re buying a wrapper and understand crucially that they're buying a wrapper where the underlying product is not that liquid and understand the constraints that comes with that. And then at the other end of the bookshelf you have investors that can afford to think about capital in kind of five, even ten year, perhaps longer increments and therefore are very happy to make those trade offs and in fact have a competitive advantage in being able to make those trade offs. So that's kind of the way I would think about it. What I don't think is right and again, we've seen this through the previous cycles in the industry where some retail focused alternative products have gone wrong when people really did need liquidity rapidly. And that's something that, I mean, time tends to clear this out, but it's just important to be aware of that.

Maren Somerset Web (44:34)

Okay, so this will make sense. Again, the highest returns over the long term will go to the already very rich.

Kurt Bjorkland (44:42)

That's a very provocative way of saying it. But if you look at most like 90 plus plus percent of our investors, they are actually pension funds where pension funds and insurance companies, where the beneficiaries are really not already very rich. They are people for whom private equity has created longer term patient accrual in a way they otherwise wouldn't have had for their pension savings.

Maren Somerset Web (45:09)

That's again, a very good comeback. Perfect. So our high net worth investor here he is, he's not a pension fund, he's not an American university endowment, he's not any of those things. But he's a rich guy, he'd like to invest in private equity. He loves what he's hearing from you. He's like, oh, marriage, you should shut up with the challenges because Kurt knows exactly what he's doing. How does this high net worth investor get access to what you do?

Kurt Bjorkland (45:35)

So this is where I cannot and do not want to talk directly about what we do because that'll be promotion.

Maren Somerset Web (45:44)

Can he go to his wealth manager and say, can you buy me a stake in one of Kurt's funds?

Kurt Bjorkland (45:49)

So the way it works is the best wealth managers will have the best GPS on their if you will shelf. And if this investor goes to their wealth manager and says, hey, I'd like to build a portfolio of two or three great GPs that achieved the following thing for my portfolio. Let's talk about how much the exposure should be and how I should think about timing it and so forth. Then that wealth manager will also have the best GPS in their offering and they will be able to commit into these products. Again, let's put the sort of semi liquid stuff aside because we talked about that, but they will absolutely be able to commit into the best GPs, provided that those are fundraising at that point in time and create a portfolio that looks and feels very similar to what the sovereign wealth fund might be doing.

Maren Somerset Web (46:42)

Okay, brilliant. Can I go back briefly? We are nearly done. I've had you for far too long and I apologize. But just.

Kurt Bjorkland (46:48)

This is fun.

Maren Somerset Web (46:48)

Can I go back? Can I go back briefly to the decline of public markets? And to the extent that is a long term problem for not just nonvery rich investors, but also for society and for economies. I mean, as you will probably know, we're all terribly upset about the endless decline of the UK market, the lack of listed companies, lack of IPOs, the company is disappearing abroad, et cetera. It's a problem and we worry that it destroys our networking effects. It's bad for our professional services, it's bad for our economy as a whole. So even though there's a very active private equity business based in London, of course there is the, the loss of the listed market. It does seem to be a problem.

Kurt Bjorkland (47:34)

Yeah, so I think it is. And of course it's for us. It's, it's good for our business. It's good because it allows us to increase our share of ownership in the types of companies that we want to own. I think that it's bad because then for those perhaps retail investors who cannot or choose not to invest in private equity, they find it harder than to own the kinds of companies that would be good diversifications. And then, and then they get sort of stuck in a much narrower and actually by number shrinking basket of investment opportunities. The reason for this is you go back to the financial crisis and some of the regulation that emerged in the United States and across European. I include, by the way, having lived in London for a quarter of a century, give or take, I include the.

Maren Somerset Web (48:21)

Kurt, are you the last private equity guy living in London?

Kurt Bjorkland (48:25)

I'm actually in Abu Dhabi at the moment where I'm meeting our investors. So no, there's plenty of private equity people living in Lond. I think London is a great talent magnet for people and it will remain so going forward for the forever future. But let's not go into that topic.

Maren Somerset Web (48:41)

I was going to enjoy that one.

Kurt Bjorkland (48:43)

Say again.

Maren Somerset Web (48:44)

I was looking forward to that topic, but you're right, we'll skip that one.

Kurt Bjorkland (48:49)

You asked another very big question which is de equitization or de public equitization of the markets. And what's happening there is that after the financial crisis, regulation came in and clipped the ability for equity analysts to get paid in a way which actually paid for the sort of brain power that went in there. And this coincided with this massive growth of ETFs and automatic trading and index trading and so forth. And the fees have shrunk more and more and more and more. And that means that today, and I'm sort of caricaturing this a bit, that unless a public market investor can write a 300 or 500 million euro dollar commitment, they can't really maintain the team that gives them the brain power, the analytical depth and power to form a highly qualified, highly informed view of that investment opportunity. So if the check size needs to be 200, 300, 500, whatever it is, and they can't own more than a couple, maybe 3% of the company before things get flagged and illiquid, then by definition you back solve and the company enterprise value, sorry, equity value needs to be 10 billion, 20 billion. So this is kind of what's happening and there's very limited analytical depth and high quality institution appetite for the smaller mid sized companies. There are exceptions from this, as you know, for example, Sweden is the most active IPO market in Europe over the last year or so and it's a sort of retail equity market. There's a culture of retail investors wanting to earn equity and this is not really the case in the UK anymore. So you take all of these factors coinciding so a kind of media that's been super critical of public companies and incentive schemes and so forth in the public in the UK you take this drift towards larger and larger stakes, therefore larger and larger enterprise values. And then of course the growth of private equity as an alternative ownership or governance model that has led to a shrinking public market. Then we can debate whether it's a big problem, a medium problem or a small problem. I think it's at least a medium problem. And we would love to have thriving, well functioning public markets in the UK and across the European continent and for of course the US public markets also to happily receive kind of large mid cap companies and upwards. Because as you asked before, that is a contributing, not an exclusive, but it's a contributing way for us to exit companies in our portfolio.

Maren Somerset Web (51:49)

Okay, brilliant. That was super helpful. Thank you very much. Last question. Literally, I promise the last one. Cut. What are you reading at the moment?

Kurt Bjorkland (51:59)

I am reading at the moment the fantastic biography on Masayoshi's son by Lionel Barber. Okay. And I started that. Yes, I started that probably six, eight months ago. And then for some reason I read some things in between and then I came back to that. And it's fun. I tend to read stories about exceptional people. That's mostly what captures my imagination. I tend to read stories about exceptional people and then sort of social psychology type books, like books about how we.

Maren Somerset Web (52:34)

Think help you understand those management well.

Kurt Bjorkland (52:37)

Help me understand myself and other people. I think it's always best to start with understanding ourselves as much as possible.

Maren Somerset Web (52:45)

Absolutely. Well, that's a great pick. I love that book. Lionel's a great writer. Okay, thank you so much, Kurt. Thanks for joining us today.

Kurt Bjorkland (52:53)

Thanks. That was great fun.

Maren Somerset Web (52:59)

Thanks for listening to this week's Marin Talks Money. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also keep sending questions or comments to marinmoneyloomburg.net you can follow me and John on Twitter or x. I'm Marinettesw And John is JohnStepek. This episode was hosted by me, Marin Thumbset Web. It was produced by Sama Saadi and Moses andam Sound designed by Blake Maples. Special thanks to Kurt.

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Kurt Bjorkland (54:11)

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