The Long View

Adley Bowden: Key Trends and Developments in Private Markets

Episode Summary

The PitchBook vice president of market analysis discusses private equity investing, private market interest and performance, and the impacts of the pandemic on the industry.

Episode Notes

Our guest this week is Adley Bowden. Adley is the vice president of market analysis at PitchBook, which is a Morningstar affiliate. In his role, Adley oversees PitchBook's voluminous research and editorial content on private markets, including private equity, private debt, venture capital, real estate, as well as the vehicles that invest in these areas. In addition, Adley is also a regular host at PitchBook's "In Visible Capital" podcast, which just kicked off its second season and is available on most popular podcast players. Adley first joined PitchBook in 2008 and has served in a number of roles prior to assuming this current post. He's a graduate of the University of Washington from which he earned his bachelor's degree in economics and international studies.




In Visible Capital Blog

Private Equity Investing

PitchBook Private Markets Guide

What Are the Private Markets?” PitchBook Blog,, July 8, 2020.

Digging Into the Fine Print of LP Agreements,”, Sept. 11, 2020.

What Is GP Stakes Investing?” PitchBook Blog,, July 31, 2020.

What Factors Drive Risk and Return in GP Stakes Investing?”, Sept. 29, 2020.

Private Markets

Fran Kinniry: Applying the Vanguard Approach to Private Equity,” The Long View Podcast,, April 1, 2020.

The Cons (and Pros) of Vanguard’s Decision to Offer Private Equity,” by John Rekenthaler,, Feb. 25, 2020.

Private Equity’s Potential for Strategic Portfolios,” by Roger Aliaga-Díaz, Giulio Renzi-Ricci, Harshdeep Ahluwalia, Douglas M. Grim, and Chris Tidmore,, Nov. 5, 2020.

The ‘Private for Longer’ Effect: Step-Up Valuations at IPO Declining for US VC-Backed Companies,” by Dana Olsen,, Dec. 1, 2017.

Private vs. Public Market Investors: Who’s Reaping the Gains From the Rise of Unicorns?” by Adley Bowden and Andy White,, June 19, 2018.

Private Market Interest and Performance

What Is Dry Powder?” PitchBook Blog,, March 2, 2020.

Private Markets See All-Time Highs in Dry Powder,”, Feb. 19, 2019.

How’d Active Funds Do in 2019? So-So,” by Jeffrey Ptak,, Jan. 20, 2020.

Private Equity-Backed Bankruptcies Surged in May, But Future Might Not Be So Bleak,” by Adam Lewis,, June 5, 2020.

Venture Capital Exit Values Achieved Second Highest Total Ever in Q3 Despite Continued Uncertainty,”, Oct. 13, 2020.

Private Equity Risk and Public Equity Opportunity,” Dan Rasmussen and Ted Seides, Capital Allocators Podcast, Feb. 16, 2020.

Special Purpose Acquisition Companies

Private Equity Plays a Starring Role in 2020’s SPAC Boom,” by Adam Lewis,, Oct. 17, 2020.

9 Big Things: 2020’s SPAC-tacular Keeps Getting Crazier,” by Kevin Dowd,, Oct. 11, 2020.

Impact of the Pandemic

Live Coronavirus Updates: Coronavirus Effects on Private Markets,”, Nov. 18, 2020.

Investors Are Cautious on Private Markets During Shutdowns, PitchBook Survey Shows,” by Alexander Davis,, April 9, 2020.

Coronavirus Forces Venture Capitalists to Adopt New Script on Fundraising,” by James Thorne and Priyamvada Mathur,, June 2, 2020.

Venture Capital Fundraising and Investment Dollars Remained Healthy Through 1H 2020 Amid Slowdown in Exits and Deal Count Due to Impacts of COVID-19,”, July 14, 2020.

PitchBook Analyst Note: COVID-19’s Influence on Private Market Strategies and Allocators,” by James Gelfer, Dylan Cox, Hilary Wiek, and Wylie Fernyhough,,  

PitchBook Analyst Note: The Great Unlocationing,” by Paul Condra,, April 30, 2020.

Episode Transcription

Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, global director of manager research for Morningstar Research Services.

Christine Benz: And I'm Christine Benz, director of personal finance for Morningstar.

Ptak: Our guest this week is Adley Bowden. Adley is the vice president of market analysis at PitchBook, which is a Morningstar affiliate. In his role, Adley oversees PitchBook's voluminous research and editorial content on private markets, including private equity, private debt, venture capital, real estate, as well as the vehicles that invest in these areas. In addition, Adley is also a regular host at PitchBook's "In Visible Capital" podcast, which just kicked off its second season and is available on most popular podcast players. Adley first joined PitchBook in 2008 and has served in a number of roles prior to assuming this current post. He's a graduate of the University of Washington from which he earned his bachelor's degree in economics and international studies.

Adley, welcome to The Long View.

Adley Bowden: Hi, Jeff. Hi, Christine. Thanks so much for having me, a longtime listener. So, I'm excited to join the podcast with you all.

Ptak: Well, thanks so much for joining us. We really appreciate it. So, maybe for starters, at least some of our listeners might not be familiar with PitchBook. Can you talk about what the firm does and how you fit into that?

Bowden: Certainly. So, PitchBook was founded in 2007. And really, what we focus on is the private markets. We think of ourselves as a financial information and technology provider for private equity, venture capital, institutional investors allocating to the private markets and those asset classes, as long as the ecosystem around the deals as well, so your M&A bankers, your lenders, your advisors, your consultants, your accountants, anyone servicing those industries as well. So, similar products, people might be familiar with FactSet, Capital IQ, Bloomberg, it's a lot like that. And then, my personal teams, the teams I get the opportunity to lead, are our research teams and our news teams. And so, we provide research on these asset classes for allocators as well as for participants. And then, also, we have a daily news function, covering key events, trends, topics that people in the industry need to know.

Benz: You hit on some of the primary user groups that your team serves. What are the decisions that those users are trying to make with your team's help?

Bowden: Yeah, there's a lot of different use cases that we support. The first is just “what's going on in the markets; help me be smart.” 2020 has certainly been a big focus for us with all the changes in the market. So, a lot of people are just trying to make sure they understand what's going on at kind of a macro view. And then, we support all the way down to asset allocation, timing of cash flows for investors, helping them best understand where and how tactically to place their investments across the different asset classes that we cover. We also do analyst note-type work where we're taking interesting topics within the market and really diving into them. So, SPACs is an example of a recent area where there's been a resurgence of SPAC activity. And we sit right in the middle of that between our public and our private coverages and focuses, so we can go deep on that topic and hopefully educate people, provide a bit of an opinion on where we think that trend is going.

And then, another branch of our research is on emerging tech. So, we track sectors like mobility, fintech, health-tech, IoT, where there's a large amount of new technology, new company formation and therefore, new investment opportunities, and a lot of corporate venture, corporate strategy, corporate development, as well as venture investors are trying to understand these new market landscapes. And so, we're trying to provide an independent, robust kind of research offering and service for those use cases as well.

Ptak: A lot of people don't understand the mechanics of private equity investing. We realize your research goes beyond just private equity and covers other types of private markets and investments. But let's skip direct investments in private firms for purposes of this question, focus on investing as a limited partner and LP. Talk about that process from the LP and also the general partners, the GP standpoint, how it works, changes we've seen and how it could change in the future.

Bowden: Yeah, this is the biggest difference--well, it's one of the biggest differences. There's many differences between the private and the public markets. So, limited partners, also known as institutional investors, are really your large asset owners. You've got pension funds, insurance companies, endowments, sovereign wealth funds, foundations, banks--the whole consortium of these types of investors. And what they're doing is they allocate a portion of their portfolio to listed equities, credit and increasingly alternatives and within alternatives increasingly, these private equity, venture capital, private debt, real asset, and private real estate asset classes. As they do that, they choose a portion of their allocation to go to private equity, to go to venture capital, maybe it's 10% private equity, 5% to venture. That gets them 15% overall, which is actually kind of close to industry standard right now.

And then, what they need to do is now they got to place that capital with managers in the private equity world. Those managers are usually called general partners just because of the fund structuring that happens. So, they're evaluating the managers and then the strategies those managers offer. You can think mutual funds and the strategies to the managers. But usually, there's a lot more focus and they don't offer multiple strategies, except for your largest firms, like a Blackstone and KKR. Most are single-strategy-focused firms. They raise capital on a three-year cycle typically. So, they will open a fund; they will have a target amount--this is the GPs. They are trying to raise that capital from the LPs. So, as an LP, you have this amount of money that you're trying to invest each year to maintain your allocation. And you've got all these general partners then that are fundraising that particular year. And so, you have to choose between those managers, where to place your capital. And typically, you want to spread it out across multiple managers to be able to get exposure to different strategies and different managers and geographies and all the likes.

So, from an institutional investor standpoint and LP standpoint, it's a very difficult asset class, because you can't kind of just set it and leave it within a manager and keep checking the manager. The manager is coming back for refreshed commitments every few years. And they're also returning the capital back to you as they sell assets down from a fund you might have invested in seven to 10 years ago. So, it's a very active investment style and type from an institutional investor perspective.

And when they're evaluating those managers, it's very similar to evaluating a public market manager with the caveat that your capital is generally locked up for 10-plus years now. And as long as average marriages are in the U.S. these days, so you're getting married to these managers. You can certainly sell your commitment, but most don't. Most want to hold their commitments through. And you typically are going to invest to a couple of fund cycles. So, 10 to 20 years is the time horizon as an institutional investor you're looking at these managers at. And so, your diligence is very thorough, it's very detailed. It's both rigorous in terms of what you do through the managers as well as back-channeling to trying to understand people and companies and other service providers that have worked with the firm to make sure you're really confident in the capabilities, the strategy is going to be stuck to, to the manager, there's not going to be surprises, and that you're ultimately going to get what you're investing behind.

So, for an institutional investor, this service is very similar to the public--you're picking a manager based on their strategy, their track record, what you think they're going to deliver, and then you invest. But the difference is more in the details--how long of an investment you're making, the nature that they're going to be coming back every couple of years looking for more capital, and then they're going to be returning capital back to you and that you've got one manager lined out, usually against a family of probably 20 to 30 managers as well. So, hopefully, that gives kind of a sense of a little bit of what that process looks like, and maybe how it differs a little bit from the public side.

Benz: It does. Most of our listeners probably invest for the most part in public markets, not private. So, given that, if you are like them and just beginning your journey investing in private-firm equity and debt, what would you say they ought to focus on in the beginning of their research process? You hit on some of the things that they should focus on, but can you talk about what the focus should be if they're just getting their feet wet in this area?

Bowden: Yeah. We recently actually produced some research on access points to the private markets. So, I would encourage people to find that note and read it and read a lot and really make sure that they understand the differences in the private markets. The illiquidity is the biggest difference. And then, what sort of comes from that: the cash flow timing. There's a lot of nuances to this that you can get surprised by. So, make sure you understand that. There's a lot of available research we've produced, as well as advisors out there that are experienced with the private markets, which is, if you've got a serious amount of capital you're looking and thinking about transitioning toward the private markets, I would find either a fund of funds or an advisor to help you build that program. And a lot of the private markets is relationship-driven still. These are not publicly traded commitments that you can usually go by. And so, in order to get access to quality fund managers, a lot of times it helps to have an advisor that has those preexisting relationships, has that knowledge base that you can leverage to gain access, get a portfolio going. And then, once you get that portfolio going, you feel confident and comfortable with the asset class, then you can either dial back your involvement with the fund of funds or the consultant, because that's an extra layer of fees, and begin to kind of take more of that in-house. Or if things are performing well and you feel good, you can stay with him. But biggest advice, do the research, understand it, talk, read, and then work with someone who is experienced in this space.

Ptak: What's the most common mistake you see private-market investors make?

Bowden: I think it's two things: one, not understanding the fee structure. And it can surprise a lot of investors. It's not measured in basis points. It's still the typical 2% and 20%, so 2% annual management fee, 20% carry, gains over a hurdle rate. And then, there's other fees in there as well. So, I think just making sure people understand that is one. Two is the cash flows on this are really tricky. And when you make a fund commitment, you promise a manager contractually, legally, that you are going to fulfill your commitment of, let's say, $1 million to that fund. Well, that fund has usually between zero and five years to draw that capital down. Day one, they could ask for all million. Now, they need to be turning around investing that million. They can't just call it down and hold it. But it needs to fund an investment. Or they could wait until the fifth year and pull that million down. So, as an investor, you've got to really manage your cash reserves, you've got to be efficient with it.

And the last thing you want to do is get caught in a situation where you're legally obligated to make these contributions into this fund but you don't have the cash on hand to do it and then that would force you to sell things or move money around in a way that you didn't want to. So, just knowing the differences between this asset class and other hedge funds or public markets, where you invest the money and then you wire that money out and off it's gone. You don't need to worry about them suddenly coming back and asking for more. So, that's one.

And I'd say the third thing we see a lot of is investing in a country club friend's fund, or a former coworker's fund and not really doing the diligence on it, not really making sure that that person knows what they're doing, that they've got a reason for raising that fund. I think there's a lot of hobby funds out there, especially in the venture world that you have to be careful of, and the likelihood of getting positive returns are probably pretty low. So, that's the third area I'd warn people on.

Benz: We interviewed Fran Kinniry of Vanguard earlier this year. As you know, Vanguard is now offering a private equity strategy to certain client segments that it serves. Fran talked about one of the main benefits of private equity investing being the diversification benefits it can confer. The question is, at what point do the fees and the illiquidity swamp that diversification potential and benefit? And how has your team approached that question?

Bowden: I really applaud Vanguard for what they're doing and the care that they've taken in building that program. I think they're trying to service family offices and a form of institutional investors where private market access is a need. And if they wanted to build a business there, they needed on ramps into the private markets. Industry standard is now 15%, 20% of portfolios are in these types of funds. So, I think they did it very thoughtfully with the partner HarbourVest in building these annual fund programs. I think it's going to be really interesting and fascinating to see how that builds and grows as I think a lot of people are thinking when does retail get access.

To the question on illiquidity and fees swamp, the diversification benefit, it's something we're trying to understand and study. We track net-of-fees returns and they're still--the median return for the industry is depending on how you measure it, very close to the public markets. So, that means that half of all managers net of fees are outperforming the public markets. And a quarter of those managers are significantly outperforming the public markets if you were just to measure the S&P 500 or the total market, different benchmarks that are out there. So, the fees are high, but the performance is high, too, for a lot of these. There are a lot of funds. If you're just getting the market returns and you're paying 2% and 20%, it's only that 2% management fee, because they're probably not catching too much of that 20% carry. So, that 2% management fee can be a big drag. So, the fees depend on how well the manager is performing, essentially. Hopefully, this gets back to the manager selection, working with a partner, working with a consultant that they can steer you toward some of the better funds with better historical track records, because there is--statistically saying, at least retroactively looking, backwards-looking--persistence in managers in the private markets in a way that there isn't in public markets.

And then, the illiquidity, I think, is actually proving out to be a feature, not a bug of the private equity asset classes. The pandemic really showed this, where I think I saw a funny tweet from Josh Brown, and it was something sort of to the effect of, the depths of early March, and stocks were down, I don't know, 30% 40%. And he put a little comment out there that was sort of something like, “stocks down blank, private equity down 0%,” and like, I get it kind of. And so, the illiquidity is saying like, you can't sell, you can't sell at those moments when the brain and the heart are wanting to get out and sell and head for the exits. Private equity is a long-term asset class. And Vanguard actually did some research on this and published it, I think, in May or June, showing how the illiquidity actually helps investors. And I know it's something that Morningstar certainly has put a lot of research into as well as how to keep investors investing, how to keep them invested through the market cycles and taking that long-term approach. And if you've got an asset class that really physically doesn't allow you to sell, that's a really nice way of keeping people invested. Now, you want them to be able to sell when they need the capital certainly, but in general--and that's why it's only 20% of portfolios--but it can be very effective. So, I actually think the illiquidity of it is maybe a feature when invested in responsibly. I think it'll be interesting to see how it plays out for Vanguard, and if it continues to become more accessible for a broader range of people.

Ptak: So, I wanted to talk about another imperative that sometimes cited for private market investing, and that's that firms are staying private for longer. I think there's debate on this subject, but we'll put that aside for a moment. If it is the case that firms are staying private for longer, why might that be? Is there reason to believe that that trend will endure? And then, a related question is, if we think firms will stay private longer, does that, in fact, mean that investors would potentially be forgoing a piece of the action in ways they didn't previously?

Bowden: It's certainly a trend that companies are staying private longer, especially coming out of the venture funding ramp. And due to the nature of the growth of private equity, you also have these institutional private investors owning more private companies than ever before. So, whether that's private longer or just private period, it's very much the case if you look at just the growth of the asset class. So, yeah, the retail investors very much are missing out on a lot of investment gains as a result of not being able to access these private company, private market investments. I think there's a lot of reasons for it. You can look at the venture side and say, it's really nice to be able to stay private and not have the public scrutiny, not have the reporting, not have the quarterly expectations. And when you're trying to grow a business, and you're trying to be growth-oriented versus income-oriented, the public markets can be an unforgiving place for that type of business now. They seem to have recently embraced money-losing businesses to some degree, but that can change very quickly. As we know, in the private growth side, you need that, and you need long-term investors who are willing to forgo income for growth. So, it makes sense there in the reporting side to the cost and transparency there.

On the private equity side, there's certainly a lot of large companies that are private that could take in private from being publicly listed by private equity firms. A lot of times there's a reason that company either isn't being valued properly by the public markets and a private equity investor sees an opportunity to change some things around, or the business needs some sort of change that is difficult to execute in the public markets with the scrutiny of the public markets. There's a really interesting example that I've used: a company called Marketo that was a marketing tech company. It was venture-backed for its first five, seven years of its life. They went public. It traded kind of sideways while it was public, ultimately got bought by Vista Equity at a bit of a premium to its IPO price. And then, Vista Equity combined a couple other businesses with it, sort of re-oriented where its focus was, and then sold it to Adobe just a couple years later for, I think, like $7 billion.

So, if you look at the total value that Marketo created over the course of about 15 years from, say, zero to that acquisition by Adobe, two thirds of the total gains accrued to private market investors--first, those venture investors and then the private equity investors and the Vista Equity fund. And for the three or so years that it was public, you run the rate of return on that, and it was some gains that accrued in the public markets, but it was a third and over a number of years. So, I think that's a dynamic that we're just going to see companies be more fluid between the private and the public markets. And I think the private markets are well-placed against the public markets to be able to capture a lot of value from holding these companies in private and being able to do things like acquire businesses, shut down divisions, make long-term operational changes to them.

Benz: We've seen a surge of interest in private markets and a huge influx of capital into those markets, which you've alluded to. Let's start by talking about what's fueling that. It sounds like the biggest factor is funding deficits amid really low interest rates that we have today. Is that right?

Bowden: That's correct. These institutional investors, pension funds, endowments--a lot of them have rates of return that they need to hit in order to fulfill their mission of funding pensions or endowments. And a lot of those right now are like 7%, 8%, maybe 5%. And then, you've got a risk-free market return rate of 1%, 2%. So, you've got a pretty big delta there that as a manager of one of these pools of capital that you have to make up, which is difficult. Ten, 15 years ago, the pretty safe credit was delivering 7%. And so, there wasn't a need to really try to chase and find alpha, if you will, from the CIO's office. Well, today, now you have to do that. And we know that pensions are woefully underfunded. So, you also have that requiring potentially even a further excess return needed by these managers. And so, they're trying to find where they can get this investment return out of and you can get it out of the private markets. There certainly is a large number of managers who are able to return in excess of 7% annual return rate if you're good and you've got the ability to place that capital.

So, I think it's ultimately returns, that's what's driving the flow of capital into these strategies. There are things too like we mentioned with the diversification benefit, the longevity of the asset class, if you're trying to be an endowment, and you're trying to have very long time horizons, it's nice to be able to match a long time horizon with your managers as well. So, I think there's a couple reasons, supporting reasons there. But ultimately, the dollar is going to flow where there's performance.

Ptak: So, one contra is, it seems like there's a lot of dry powder out there. I think by PitchBook's own estimates, private equity funds closed 2019 with more than $2 trillion in dry powder, down a bit from 2018, but still pretty high. And I think your team expects this tally to rise by the end of this year for various reasons. And so, is this evidence that private equity is frothy by some measures with too much money chasing too few deals?

Bowden: We all are sort of waiting for that to have happened to prove that it's frothy. But if you zoom out and you look at it over a 15- to 20-year time horizon, it's been a very steady, measurable, reasonable growth year over year in the AUM of the private assets. It's essentially doubled over the last seven to 10 years, which is, I think, a very long time horizon for that excess capital to come in and get invested without this sort of oversaturation bubble effect. And it certainly feels frothy looking at the numbers, but you change that time horizon, you zoom out and you look at it, you're like, no, this has not been a sudden wave of capital in it and it's been clear march this way.

Ultimately, a lot of capital will change the industry, the terms are coming under pressure. We don't see what we used to see in terms of returns, but it's still very positive. You look at the number of companies that are out there. And there's still a lot of companies that are not private, or not institutionally owned. You look at the global landscape. In the U.S., it's super far out ahead of every other country in terms of its institutional investors on the private side. So, there's a lot of, I think, capacity still for private investment. But it is a big question. We've asked it. We haven't been able to answer it in any sort of way about, what is the capacity truly for private market investment?

The other thing I'll say is, you're seeing a lot of innovation in the private market investment. It's still nascent and impressive to see with secondaries and sales of funds. You're seeing long-dated BlackRock and others have launched into perpetuity fund strategies now. So, it's not a 10-year time horizon. It's a 20, 30-plus kind of permanent hold almost Berkshire-type model. I think there's a lot of capacity still. Yes, things are frothy. Yes, there's competition for the high-quality assets that does lead us to question the potential returns on those. But overall, at a macro level, I think, it's still probably early days, maybe teenage years, for the private asset classes.

Benz: We found that it's gotten a lot tougher to make hay with public firm investments like mutual funds, an increasingly larger percentage of which aren't beating their indexes. Have you seen the same phenomenon among private funds?

Bowden: We have. I think what we've seen is maybe what the mutual fund industry went through 10-plus years ago where there's been a lot of launches of new firms and new funds, not all of which are really able to successfully produce strong returns over the course of multiple funds. So, the firms that have been doing it, doing it well, continue to do that and have continued to grow and pick up assets, the Blackstone's, the KKRs, the Carlyle's, EQTs--you can go on in private equity and venture capitals, Sequoias, Andreessen Horowitz. There's a long list to it. So, I think it's more that we're seeing a lot more firms try to join, get a piece, launch funds, and they land in the middle or in the bottom, and that's where the saving and returns is coming from. But it's not that there isn't the potential for a lot of strong performance still, if that make sense.

Ptak: We tend to see in public markets, as you know, is managers that are enjoying success, they were getting a boost from a stylistic tailwind, which reverses denting performance, or they get loved to death by investors. So, there's a glut of assets, and it compromises their ability to add value. And so, why among some of the firms that you mentioned, are they impervious to forces like those? Is it because private markets is such a relationship business and those are benefits that continue to accrue and compound to those firms?

Bowden: That's one aspect, certainly, especially in venture. Venture is very unique in that brand of the manager really is a strong part of it. And it's probably one of the few asset classes where the asset picks the manager. It really is often founders of these companies choosing which investors they want to work with. And they want to work with investors who are going to add value, who are knowledgeable in a space, who have track records of helping companies, have connections with key people that help hire or build relationships. So, there's a lot of reason why in venture specifically you see that persistence play out and almost that flywheel of make good investment, prove that you can be helpful to that company, other companies like that wanting your capital, and off you go. So, in venture, you have a lot of persistence.

Private equity, a little bit less so, but it is still so relationship driven as you brought up that that does really drive some level of deal flow. But most real deals now are going through auction processes, so it's pretty competitive. So, you need the brand to get into the auction. But once you're through there, it tends to be who's paying the best price. Not always, especially in middle market, which is where the bulk of private equity activity actually happens. A lot of times you might be dealing with a family business that they want to take some money off the table but not send the business away and would like to continue to operate and participate in future upside. And private equity can structure that and having good track record of doing that and being good stewards of companies can help you get differential pricing. So, that can be part of it.

And then, a lot of what you see now is a push toward more specialization within private equity, and just really knowing types of businesses well up and down the size so that if you're investing in certain types of manufacturing companies, you've got a team of people, of industry experts, former CEOs, COOs, you've got investment people, you know all the advisors, the banks, within that sector, and you're able to make really smart decisions in terms of what to do with these companies and where to expand and what the opportunities are, and really interesting ways which I can go into. There's a number of companies and investors that have done just really phenomenal things and know how to build and grow these businesses well and can execute on it. So, we do see that persistence play out. That's backward-looking, what--at this moment in time, 10 years from now we'll be able to say is happening--I don't know, but I think we'll continue to see that persistence for a while yet.

Benz: Thanks to firms like PitchBook, there's much more visibility into private markets than there was before. What we've tended to see, though, is that transparency and access beget higher prices, and therefore lower expected future returns. Do you think private investments, including venture capital, will meet the same fate?

Bowden: I think there's a natural crowding that will certainly affect returns. Your entry price into any investment is going to dictate your ultimate return. So, as we see valuations at the entry level continue to climb mainly in private equity, but also in venture, yeah, it will likely lead to an erosion of returns. But I do think that you're seeing firms figure out how still to make money in a high-value world and through uses of leverage or strategies of adding on smaller businesses that can be purchased for lower valuation multiples and averaging down your entry investment, but building a larger company that commands a higher multiple as a result of that growth to lead to multiple expansion in an interesting way. So, there's strategies around how to handle the increase in entry valuations. But there's no question that ultimately higher entry valuations are going to lower future returns.

Ptak: Yeah, I wanted to build on that a little bit. Firms like Verdad Capital, which is Dan Rasmussen's firm, they've done research that raises some questions about future private equity performance. They find that most of the outperformance in the past sprung from buying cheap firms with leverage. But their point is that valuations now appear to be stretched, which clouds the outlook. And so, maybe building on your previous answer, I guess I would ask, do you agree with that?

Bowden: Yeah. I know Dan well, that research well, another Seattle guy. It's true. The research he's done is remarkable. And his experience, I think, was at Bain Capital showing that--they only really made investments on below-multiple deals. I think it's true. But there's again a difference in the private side, where you've got the ability and other strategies and levers to pull to make investment returns through being the owners of the business. So, like I mentioned, one is the add-on strategy of being able to buy additional companies at lower multiples and put together a larger company that can then command multiple expansion. You've got the ability to change the profile of the business, to make it more of a Lean-based company. There's a lot of manufacturing investors, for example, that specialize in taking businesses and improving their operations. So, there's other levers that can be pulled by these private equity firms outside of just purely it being a valuation kind of exercise. And I think that's what makes the asset class unique in a lot of ways is that extra ability to affect the companies hopefully in a positive way--not always, not all strategies work out. Certainly, leverage is an example of one of those ways, but it’s unique because of that. So, his research is sound. There's no question on that. But I think there's kind of an “and” component when it comes to the private equity side.

Benz: There's been a mini mania in special-purpose acquisition companies lately with around $40 billion being raised through that vehicle year to date through Sept. 30. Those are the SPACs that you referenced earlier. That's fueled talk of SPACs becoming a more mainstream way of bringing firms public. SPACs have a sketchy track record, though, at best. Your team has done some work on the merits of the structure. Can you talk about that and whether they may have some utility? And to the extent that they do, how would you suggest that an investor approach evaluating a SPAC?

Bowden: Yeah, I mean, SPACs are fascinating. And it goes to that innovation, I think, that's happening with the private markets right now. And they've been around for a long time, but certainly, the wave of capital and the firms that we've been seeing launch SPACs, take advantage of SPACs, is pretty amazing. It also fits with another recent innovation with direct listings on the IPO side. So, I think this is really what SPACs are is a vehicle for companies that are private to go public. And there's advantages and disadvantages to traditional IPOs, to direct-listing IPOs, and then to SPACs. The opportunities and the reason that SPACs are attractive for certain companies is, one, the timeline. You can go from private to public fastest through a SPAC because someone's already filed for that SPAC, has gone through the various capital formation and the legal situations and whatnot to get this public vehicle through. So, your timeline is quicker. Your ability to close a deal and the certainty of a deal is much higher as well. And then, you're not susceptible to the first-day trading challenges that a traditional IPO and sometimes the direct IPOs have. So, they offer this certainty of pathway to being public that those others don't.

And you see very wide diversity of companies taking advantage of this, both as managers because they believe this gives them a new tool and new attractiveness to find companies to list. And if you look at these companies post listing, it's a hybrid between a public/private. It really sits between the two and fits a thesis that we at PitchBook have had in a long time and I think we've brought to Morningstar as well, which is the convergence of public and private. And I think SPACs are a perfect example of that.

And the reason I say that is because a lot of the attractiveness to this is that through the SPAC you typically line your company up with a small number of institutional shareholders who are typically long-term thinking as well. And so, you're not quite as susceptible in the IPOs to maybe getting activists in there sooner, getting hedge funds or whatnot that might be trading and not the type of investors you want. There's actually a company in Chicago, GCM Grosvenor, who's a big asset manager, who's going public via a SPAC that's put together by Cantor Fitzgerald. And you look at that, and I was talking with one of their executives. And the reason was that they knew this deal would close, they wouldn't be susceptible, it's a little more friendly on the roadshow and financial projections and whatnot that you as a company have versus the IPO route. And they knew that who their investors would be, and they are able to line up the type of investors they wanted for being a public company. So, there's advantages. It's got a mixed track record. It's formerly kind of a pink sheets kind of vehicle. I think the fees--you don't have to launch a successful SPAC to make millions of dollars as one of the sponsors of the SPAC, and that's a problem. And you see certain managers addressing that. Bill Ackman changed the fee structure; others are changing the fee structure. So, the incentives are more aligned. So, that's an area that I really caution investors on is being smart with those fees if you're going to try to play the SPAC game of investing in some of these managers.

Ptak: I wanted to switch and talk a little bit about the state of the state of the market and you've alluded to various aspects of it, which has been really helpful. Maybe we'll start with M&A and then we can turn the conversation toward the pandemic's impact on private markets. But sticking with M&A for a moment, give us the state of the state on M&A activity in North America. I think based on research your team recently published it looks as if we had to characterize things we'd say there's been more deals in the lower middle market, a lot of the action has been in healthcare services and tech, deal multiples have been creeping a little bit higher. So, talk about what's driving this, how could the M&A trend change and what might that portend for private market investors?

Bowden: Yeah, it's a great summary of the M&A. That's where it's at. And I think that's really where it typically is at in terms of where in the market M&A is happening. If you read The Wall Street Journal, Bloomberg News, different things, you might think that M&A is really just between large companies, but it's not. The bulk of M&A is actually in small midsized businesses, both large companies acquiring and tucking in these small midsized businesses and then these small midsized businesses buying each other for scale, and then also having private equity in there doing the same thing. So, that's the bulk of activity of M&A and I think we’ll continue to power the bulk of it.

What could change that certainly is if we see  more larger mergers and acquisitions. That's where the bulk of the capital happens at M&A. But we'll see, elections do have a way of shifting regulatory frameworks that might affect that. And then, with some of the antitrust reviews right now in tech, that has really kind of quelled the tech investment. If you look at just the deals that Googles and others have done, they've made some big ones--Google with Fitbit, Amazon with others. But they're getting a lot of scrutiny. So, I think, regulators are not showing a ton of love for some of these deals right now. That's something that could affect M&A outcome.

In terms of industry sectors, it tends to be pretty cyclical. Healthcare, tech, areas of growth during the pandemic, industries that have generally shown well. Not all of healthcare has shown super great because of the decline in services, but I think people are looking for those areas that will benefit from the current economy or coming out stronger as a result. As the economy improves, I think you'll see consolidation in some of the retail and restaurant sectors where there's advantages to scale, companies that unfortunately are needing to sell themselves, and it's kind of already happening. We saw the Dunkin' Donuts deal to actually a private equity firm as an example. So, I think we'll see more of that. The industries will shift as we come out of the pandemic is what we think, but that's very much subject to timing of this whole thing, which I am not even going to try to forecast.

Benz: Where has the pandemic most clearly impacted the private markets, including venture capital? It looks like one impact is that fundraising has been increasingly dominated by the biggest private equity firms. What else has your team observed?

Bowden: The fundraising side is interesting. At this time, a lot of the institutional investors are not going to be taking the risk of new managers. So, what that means is more money is flowing to the larger firms and you're really picking up a similar dynamic to what you have in the public markets with the larger firms then able to snowball downhill with that and pick up more money because they can offer more strategies, they can be one-stop, you don't have to do the same type of diligence, etc., etc. So, there's benefits to that size and you see Blackstone being a perfect example of that. So, we're seeing that.

We thought at the beginning that this could really shake the private markets, the pandemic, especially private equity, because they hold a bunch of levered companies. But what we've seen is, since the Fed stepped in to backstop the lending markets is that those quickly unfroze and have proven to--for companies that were in need of capital--to be able to access and get that capital as well. What you've seen too is the fund managers really put a pause in deal activity through 2Q and 3Q to turn focus on their portfolio companies. And again, they own these assets. So, it's not like the public markets, where you sit back and you hope the company makes good decisions. You own that asset. You can go into that company. You can make changes. You can bring additional capital. You can recap if you really believe in the company. You can combine it with others. Like, you've got full control in a lot of ways. And so, a lot of firms, that's where they turn their focus and roll up their sleeves and you've got a portfolio of 20, 30 companies, you can learn and find opportunities and make it through in different ways.

On the venture side, I think we're optimistic that this will unlock more geographies for venture capital investment. It's a very relationship-driven business. So, you saw it really centered in Silicon Valley, New York, little bit Seattle, little bit Austin, London. But everyone's gotten used to now doing Zoom meetings and doing due diligence over Zoom, doing board meetings over Zoom. So, we're really optimistic that what this is going to do is open up capital for flyover areas of the country, but the Midwest, Chicago, other parts of Texas, Colorado, different things like that. So, it'd be interesting to see if that thesis proves true or if people get back to the way that they used to do things and you see Silicon Valley and New York City is sort of dominating Boston as well, but that's a change.

And then, I think technology mix, it always shifts. But right now, it's obviously flowing toward pandemic-enabled businesses that help solve current needs, but that will flow away from that as this changes. So, I think it's probably more that geography of capital that we're most closely watching is, could be affected by the pandemic.

Ptak: Maybe we can talk for a minute about--you used the term “pandemic-enabled.” The flip side of that is pending “pandemic-disabled” or “pandemic-impaired” businesses. And the pandemic has obviously made winners and losers of certain industries. So, it stands to reason that that's still playing out in private markets. In a report you indicated you expected general partners who'd called most of their capital down before the pandemic and who had realized few of their investments to that point, were vulnerable. Where have we seen the biggest impacts and where might you expect to see other shoes drop?

Bowden: Yeah, the biggest impacts have been in managers who had focused in those areas of the economy that have been disabled by the pandemic. And we've seen a number of privately backed companies go bankrupt in the retail industry for sure. J.Crew is an example. There's a large number of them that have filed where they weren't businesses that were doing great anyways. You could argue the source of that, but they were kind of already just hanging on and then this hit and that's all it took to push them over the edge, especially since they were levered and didn't have the capital reserves to survive 12 months without sales. So, I think it's those areas.

Private equity is invested heavily across the economy, but a lot of retail, some restaurant businesses--not too many just because of the nature of that being more local-type businesses--a lot of travel, entertainment. Cirque du Soleil was backed by TPG. That business I think has since gone bankrupt as a result of just not being able to hold their shows, which is tough. So, I think we'll continue to see more drops just as we hit the second wave and hopefully the vaccine can happen. But the longer that services, entertainment-type businesses go without serious revenue, private equity or not, it's going to be hard for those businesses to hang on.

There are some PE firms that do believe in those assets and they've got the ability because they've got additional capital to recap and try to keep those assets alive. But at the end of the day, they have fiduciary duty to their institutional investors, and they've got to focus on positive investment outcomes versus trying to just throw good money after bad. So, I think you'll see certainly more waves of bankrupt companies as the pandemic seems to hold, but I think it's going to be in the sectors you would expect it to be.

Benz: Your team did some research on how allocators to private equity funds need to be mindful of how to manage the cash flow required to fund their commitments. It's a bit dense, but it seems like a dynamic that someone unfamiliar with private equity wouldn't necessarily know as a potential risk. Can you explain that?

Bowden: Yeah, it's very dense and kind of confusing and it relates to both where we started and then what we just talked about is, you've got an asset class where you make these long-term tenure commitments. You say I want to place $1 million in this fund and then those $1 million come out kind of randomly over the next three to five years as that manager finds deals, wins deals, and needs the capital to fund the deals. Then they hold those companies for a length of time and then they start to sell them. So, the current challenge for people invested--well, one is just do they have the capital to fund those capital calls? So, there's a lot of concern. We saw the pandemic drawdown suddenly was, are we going to see private equity and venture capital firms use the drawdown? There's a big buying opportunity. They're going to then call capital from the institutional investors. Are institutional investors ready with the cash to make and fund those commitments? Or are they going to have to start selling assets that maybe they didn't want to, to fund those commitments or what's going to happen? And we saw some of that during the great financial crisis, but we didn't see any of it in the pandemic, I think probably because of just how short that market drawdown was.

But the research we've done is just trying to help institutional investors leverage the PitchBook data set, which is probably the one of the largest, if not the largest, data sets on private fund returns to be able to run your Monte Carlo portfolio assumptions to understand with a 90th-percentile level of confidence how much money could go out in a worst-case scenario or what's the least amount of money in different things. But managing a private portfolio is so dynamic. I go back to that $1 million. Well, imagine if you said, “OK, I want to put $1 million in Apple stock.” Well, you could go to your brokerage firm and put $1 million in Apple stock. But if it operated like a private fund, you would go meet Tim Cook and you tell him, “Great, I want to put $1 million in your fund.” He'd say, “Great, I want you to hold on to that $1 million and I'll ask for it as I need it over the next three to five years.” And you go, OK. So, year one, he calls $100,000, year two he calls $500,000, year three he calls nothing, year four he calls the rest of the $400,000 that you own. And then, on your six, he sends you a check for $50,000 and then year seven he sends you a check for $200,000. Year eight, he sends you a check for $1 million. Year nine, he sends you a check for $300,000. And this whole time you just wanted to have $1 million invested in Apple. But he's pulling money out, he’s throwing money back. So, you as an institutional manager you've got to manage that because what you're trying to do is keep $1 million invested in the private markets. So, that's the research we've been doing is try to leverage all of our historic data to help these allocators understand, manage their cash flow timing. Because right now, it's so critical that they've got the right amount of cash on the sidelines, but also, they don't have too much. Cash flow drag can really pull on your portfolio of returns and so how to optimize that, how to be smart as investors, ultimately how do we help these investors be successful is the goal of that cash flow research, modeling and work that we're doing.

Ptak: Maybe for our closing question you could briefly touch upon some of the research you and your team have done on emergent technologies or themes. What's a piece of research that you found particularly compelling that you would want to draw our listeners' attention to?

Bowden: Yeah, I would highly encourage the listeners to look at a note that we called, I think, "The Great Unlocationing." We looked across our emerging tech and it was kind of like, right, what is the pandemic; what are these technologies that are needed in this new paradigm that we're suddenly living in? And so, people were interested. It seems to be a common topic of conversation. We've all seen what happened to Zoom stock. So, I guess if you want to try to find the next Zoom, it would be another reason to go read this. But I think it very much uniquely applies to the world we're all living through right now and the telehealth… My kids are on remote school. So, what are all these new programs used to enable schools to go remote? Our analyst that wrote that section actually used to live on the East Coast and now lives in Seattle, but he brought up snow days are a regular thing across the country and having these types of infrastructures, digital infrastructures, is going to make sense beyond just the pandemic. I think a lot of these where the pandemic accelerated the adoption of these things, but there's use cases certainly beyond it, work-from-home trends, mobility trends. People are going to be pulling away from public transportation. How do some of the new things that the companies are working on—mobility--factor into that? So, the emerging technology is really right now, it's accelerating and it's affecting our daily lives in a way that we, I think, at the beginning of the year wouldn't have seen happening, and in a lot of really great ways. So, I would recommend people to look at "The Great Unlocationing" note, some of the other work we've put out around just the emerging technologies, helping us all, hopefully, live a little bit better during this time and be safer so that we can get through all this.

Ptak: Well, Adley, this has been a really fascinating discussion. Thank you so much for your time and insights. We really appreciate it.

Bowden: Yeah, my pleasure. Hopefully, it was also valuable time for the audience. I know it's little outside of their probably normal day-to-day, but hopefully still interesting and useful.

Benz: Thanks so much, Adley.

Ptak: Thanks again.

Bowden: Thank you.

Ptak: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

Benz: You can follow us on Twitter @Christine_Benz.

Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at Until next time, thanks for joining us.

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