Transcript: Mario Giannini – The Big Picture

0
4
MiB: Mario Giannini, Hamilton Lane


 

The transcript from this week’s, MiB: Mario Giannini, Hamilton Lane, is below.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Google, Bloomberg, Stitcher and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

 

~~~

 

VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, yes, I have an extra special guest. His name is Mario Giannini and he is the CEO of private equity giant, Hamilton Lane. They oversee or manage over $500 billion in assets.

I kind of feel like this is one of those people that the average person in the industry doesn’t really know and yet, they’re quite important, quite influential and move around a whole lot of capital. His background is that of a bankruptcy lawyer turned private equity investor and he really has just a fascinating history.

There aren’t a whole lot of people who are more knowledgeable about the ins and outs of private equity, buyout firms, distressed debt, a whole run of different fixed income private — on the private side, really — just a really informative, really knowledgeable guy. I found this to be an orderly fascinating conversation and I think you will also.

So, with no further ado, my conversation with Hamilton Lane’s Mario Giannini.

VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: My special guest today is Mario Giannini. He is the CEO of Hamilton Lane, one of the largest private equity firms in the world. He joined the firm in 1993, two years after it was founded in Philadelphia. The company is publicly traded with a market cap of $3.5 billion and oversees over $500 billion in investments, including $68 billion in discretionary assets under management.

Giannini was named as one of CIOs 2020 Knowledge Broker All Stars. Mario Giannini, welcome to Bloomberg.

MARIO GIANNINI, CEO, HAMILTON LANE: Thank you.

RITHOLTZ: So, before Hamilton Lane was making private investments, you were advising companies on them. Tell us a little bit about your work history.

GIANNINI: So, I started ahead as a lawyer and was singularly unsuccessful at that and really branched off into — I came out of the bankruptcy side of the legal world and really went into basically turning companies around.

And at one point, had sold the company and used some of it and invested in Hamilton Lane and they said, you ought to go over there and take a look. And I really thought I was just going to spend a few months and find another company to buy and I never left. I was like the bad penny that stays.

RITHOLTZ: Can’t get rid of you. So, I have to imagine that having a bankruptcy background gives you very specific insight into what companies can be turned around and what really just need to be liquidated.

GIANNINI: Yes. I think the bankruptcy background helped in that. You’re absolutely right. It gives you an idea of what can go wrong. I think that’s the part that I took away was what can happen at companies whether it’s companies we’re investing in or at Hamilton Lane. What leads companies to go into a bad place and then what do you do with them, like you said, when they’re in that place? So, it was very helpful from that perspective.

RITHOLTZ: So, tell us a little bit about Hamilton Lane’s business lines, who are your clients and what sort of investments do you tend to consider.

GIANNINI: Well, our business line is basically we invest in our clients or anyone that is looking to be investing in the private markets whether it’s private equity, private debt, real estate, real assets, any of the column liquids (ph), the alternative markets.

And we look at investments in all of those different parts and we help clients develop portfolios, we help clients choose investments both on an advisory basis and on a discretionary basis depending on how they want to work with us. And the clients are global, it’s about – the business is about 60 percent clients are U.S. and 40 percent are non-U.S.

So, it’s a diversified client base, different types of clients, pension funds, high net worth, everything in between. And it really, as I said, covers the whole range of the private markets. We look at buyouts, we look at venture capital.

I would say the largest part of our business is the private equity side as compared to credit or real assets. But those are, as you know in the private world, increasingly larger parts of it.

And in the private equity part, I would say it is mostly buyouts, growth capital, little bit of venture. And in terms of geography, in terms of where we invest, it’s probably 60 percent U.S., 25, 30 percent Europe and then rest of the world accounts for the rest of it.

RITHOLTZ: So, I mentioned earlier you have $68 billion in assets under management that are discretionary and that you have either advisory or supervisory management over the next let’s call it $450 billion. I know I’m going to get questions about that. So, let me just pass them along to you. What is the difference between discretionary assets under management and the balance of the assets that you are either supervising or advising on?

GIANNINI: Yes. The difference is essentially who controls the final decision. So, with the discretionary assets under management, if somebody gives Hamilton Lane a dollar, a euro, a yen and says, you invest that for us, you make all the choices, you decide where you want to put it, which investments you want to put it in and it’s completely up to you.

On the advisory or assets under advisement however they’re phrased, they were working with the client. So, if the client will say anything like go find the best buyout fund, bring it back to us and recommended to us and we will make the final decision or we work collaboratively.

But in in the advisement or advisory part of the business, we don’t have the final say. It is really the client that makes that final determination and it may be on our recommendation, it may be just on our bringing five funds and they pick one of them. It depends on how we work with them. But that’s the essential differences, who makes that final call.

RITHOLTZ: Is there any real difference between assets under discretionary management or assets under advisement?

GIANNINI: There’s no specific difference. I mean, maybe a difference in terms of what a specific client is looking for. So, if a client is asking us to look at only large buyouts then sure, that’s all we’re looking out for them.

But in terms of the analysis, in terms of looking at which are the best investments, why they’re the best, the analysis is the same and it really comes down to then how does it fit in the portfolio. And there, again, it’s either our decision in terms of our discretion, we make the decision or it’s the client’s decision in terms of saying, I know you love that fund but it doesn’t fit for XYZ reason that we’re determining. But the analysis is the same.

RITHOLTZ: There’s been some criticism about performance reporting in some private markets, IRR in particular. What’s the best way for private markets to report investment performance?

GIANNINI: Yes. There really is a lot of criticism about IRR and I think it’s misplaced honestly. I mean, obviously, I’m in in private equity for someone say, well, it’s misplaced.

But it’s not that hard to do private equity on an IRR or a TWR, time-weighted return, which is how most asset classes are judged. And so, this whole notion that IRR is misleading, it is one measure. The problem with private equity unlike the public markets is in the public markets, if I give you a dollar to invest, you go and invest it in the public markets, you invest it all at once and it stays in there.

In private equity, if it’s a dollar, you commit a dollar and then I invest 25 cents periodically. It’s doesn’t go in all at the same time. And so, all the IRR is, if I measure, of trying to figure out how to determine performance when you’re not taking all the money at once and investing it at once.

And it’s just one measure and we have a lot of clients that use IRR and then used TWR that use different ways of measuring performance. So, yes, if you’re using IRR alone, it can be a little hard to then compare it to your other asset classes. But most people don’t do that. They really compare it in a number of different ways. So, I wouldn’t be too exercised about this whole IRR debate.

RITHOLTZ: So, one of the things we’ve been hearing is that the public markets have gotten pricey, fixed income is yielding practically zero and that is creating a lot of opportunity and competition in the private space. Tell us a little bit about what you see in the private equity markets and for you that includes private debt markets as well.

GIANNINI: Yes. I look at it from two perspectives. One is from the one you alluded to which you we’re seeing a whole lot of interest in the private markets and it’s driven by the factors you cited. Let’s talk about credit for example.

In the credit markets, if you’re a public credit investor, you’re getting lousy returns. I mean, it’s just historically they’re very low. And so, it drives you to look at private credit because the returns are so much higher than they are in the public side.

And frankly, there’s — on the private credit side, there’s a huge amount of opportunity because when you look at where the public markets provide credits, it’s the larger companies and private credit tends to provide to smaller companies. So, there’s a big opportunity set there and with banks having less that market after the financial crisis, there’s just a lot of space for private credit to grow.

On the equity side, private equity, you have the same factors at work that you have in the public markets where valuations are really high and there’s a lot of competition for deals. With that said, you look at the number of private companies that there are compared to public companies.

You look at the number of public companies. I think, what is it, over the last 10 years, they’ve gotten down 50 percent in the U.S. There’s just more places to invest in the private side than there is the public side.

And so, there’s opportunity out there but I am the last person to tell you that the world is screaming by because prices are cheap on the private side. They’re not really have to work to get returns. There’s a ton of money floating around the world right now.

RITHOLTZ: Let’s talk a little bit about what’s going on with the public markets. You mentioned earlier that the number of publicly traded companies in the U.S. has dropped practically in half. I think the Wilshire 5000 is now down to about 3,400 companies. Why do you think companies are staying private longer over the past decade? What do you think is driving that?

GIANNINI: I think it’s a couple of reasons. The first is — the most publicized reason is the hassle of being public. You read about the cost associated with whether it’s more auditing people, more financial, more compliance whatever it is. I think being public is just — it’s a hardship for many companies, for many executives.

And so, people would prefer not doing it if they didn’t have to and that really is the second reason why you’ve seen a reduction, I think, in public companies is the rise of private equity and private markets. You now have a very, very credible alternative financing source for some of the things that you would otherwise have to go public 10 years ago.

If you want to acquire a company, private equity is there to provide the capita. You don’t have to go public to raise the capital. If you want to take out a founder, if you want to do whatever you want to do with your shareholder base, you can do it on the private equity side.

There’s just an enormous amount of capital that is there ready to provide corporate finance in a way that before, it really either was the bank or the public market. So, I think it’s a combination of those two things that has led to a reduction in the number of public companies.

RITHOLTZ: So, how has all this capital that’s been sloshing around changed the PE landscape? It’s more than just quantity. How is this qualitatively changing that market?

GIANNINI: It’s changed to how you have to go about getting return. I think what has happened is when there wasn’t as much capital, then you really could use just financial engineering. I mean, it was a much smaller game in the sense of there wasn’t as much competition for deals. It wasn’t as well-known on the private.

I mean, you look at 20 years ago even coming out of the 2001 downturn, it just was not a normal way to do financing to use private equity. That’s just not the case anymore. So, what it means is from the qualitative perspective, you need to do something more than just figure out how to lever a company and reduce costs or whatever you did 25 years ago.

You have to do something to make that company better whether it’s an acquisition strategy, whether it’s an operating strategy. You got to grow that company and it has changed the nature of how private equity generates return (ph) in my view. I think if you look at we run value creation models, let’s say how does — how was return generated from these deals, and you’ve see a shift over the last 10, 15, 20 years into much more emphasis on operating results, much more emphasis on EBITDA growth. So, that has really changed what you’re looking for in general partners, what you’re looking for to make money.

RITHOLTZ: Interesting. So, Hamilton Lane is one of the few alternative asset managers that’s a publicly traded company. What’s the motivation for somebody that manages private investments to themselves go public?

GIANNINI: Yes. It’s interesting, isn’t it? We preached the virtues of being private then we’re public. I think it’s part of the lifecycle of many companies. I think for us, there were a couple of things that drove it.

One was we were always an equity culture even when we were in a private. The mantra around the firm was you create value, personal value, through equity ownership and we had well over 100 of the employees that had equity stake in the company. And I think you reach a point where everyone has equity and they go, what am I doing with this equity.

And it’s amazing, it leads to the question of, I get what’s going to happen, we’re going to get sold to someone and then everyone is going to realize their equity value. And internally, they begin questioning that and externally, people begin asking you that.

So, when you look at how do I — how do I give people a path over 10 years, over 15 years to realize equity value in their holdings, going public is one of the ways you can do that. And so, that was certainly probably the most important factor.

The other factor was the branding. What we realized, there was a group in Europe, partners group that went public and the branding impact was huge. I think in an industry that people viewed it small, the ability to say, yes, we’re institutional enough, we’ve got quality controls, we got SEC controls, we’re legit and that really mattered particularly outside the United States.

And then the third factor was just when I talked about or alluded to with the equity ownership was it tells people you’re going to stay independent. I think all the questions about who’s going to own you in five years, which is really important in the business we do. People want to know that you’re going to be around for 10 years. They’re signing up for quite some time to be doing these investments.

So, those three factors made it an interesting way to go and the markets were open to it where they weren’t, I don’t know, 15 years ago. You couldn’t really think about going public in the business we’re in.

RITHOLTZ: So, you guys IPO-ed in 2017. What was that experience like?

GIANNINI: It’s like — because — you’re all of a sudden talking to public equity people and we’re always used to talking to private equity people that the roadshow, all of those things, that was just a very, very different sort of thing. Public — I know this sounds stupid and probably said something about how little I know but in private equity, you spend all this time analyzing companies because you’re stuck with them for some period of time. You can’t just say, made a big mistake.

In the public world, it’s just a very different experience because they all have a mentality of I’d like to make the investment. But if it’s a mistake, I can always change my mind in a month, a week, whatever it is.

And so, that’s just a different mindset. So, it was interesting. It was kind of getting your head framed around they have a different timeframe. Their perspective, their time horizon is just different from what we’re sort of used to as what we do day to day in our business.

RITHOLTZ: So, does — having to report to shareholders every 90 days, does that change your perspective on anything? How does that impact how you think about managing a company with over 400 employees and I know you’re international, what do those quarterly requirements due to how you see the world?

GIANNINI: Yes. It hasn’t changed anything at this point. I think a couple of reasons. One is we went out as a controlled company and — which technically just means that while — if things like 50 percent, 40 percent of the equity is owned by management, voting control is something like 80 something percent, we own voting control.

So, we don’t have to worry about hedge funds buying us or activist investors and demanding changes. So, there’s no real pressure on, my gosh, the shareholders are going to demand, we do this and vote us out or whatever they do on the public side on those situations.

That is a huge factor. It eases all of that pressure. The other thing we’re very clear with people is don’t judge us quarter to quarter. This just isn’t a quarterly judgment business. We look at it year to year and that’s how we’re going to do things.

And there’s sort of, I believe, a self-selection process. Investors or shareholders that want that perspective will buy your shares and others that don’t won’t. And so, we’ve not really felt a whole lot of pressure in terms of quarterly earnings or meeting numbers. You look at our quarterly numbers, we’ve hit consensus on some, we’ve exceeded, we’ve not met consensus in other quarters and it’s just sort of that’s kind of what it is each quarter, you can’t really help that.

RITHOLTZ: Quite interesting. Let’s talk a little bit about what’s been going on in 2020 with the pandemic and lockdown. You guys are a global company. You have, I think, 17 offices around the world. How early on did you recognize how severely the economy was going to be impacted by the pandemic?

GIANNINI: I don’t know that we recognized it a lot earlier than most. I think we were — so, our offices in Asia closed very early. But even at that point — so, this is probably, what, December, they’re closing early January.

RITHOLTZ: Right.

GIANNINI: Even at that point, I think there was a feeling that the — there wasn’t a feeling that the virus is contagious as we now know it is. And so, I think we felt that it was probably going to be contained in Asia. When we really began to realize when it spread to Europe, our European offices at that point and our European clients were saying, this is not — this is not your average flu, I’ve got news for you people.

And so, I would say we went into pretty heavy-duty beware mode that maybe a few weeks earlier than general. But as you know, once it hit Europe, it really started to spread pretty quickly. But I think in February, it was pretty clear that this is going to be a pretty big impact if not globally at least in some very major areas of the world.

VOICEOVER: Masters in Business is brought to you by T. Rowe Price, delivering a strategic investing approach with a long-term perspective to help advisers and their clients feel more confident through good markets and bad expect. Expect rigorous research and prudent risk management from an experienced team of fund managers since 1937. T. Rowe Price, invest with confidence.

RITHOLTZ: Quite interesting. So, are there any advantages to private companies during a pandemic and lockdown versus those that are public? How does that impact management of those entities in very tumultuous volatile times?

GIANNINI: The one thing I will say and not just because I’m in private equity but paying some credit to the private equity world, private credit world, the private world, they learned from the ’08, ’09 downturn and what we saw really beginning in February certainly in the western world was immediate and I mean immediate action saying this is really going to be bad, we need to honker down and prepare.

And so, I would say that the private world reacted far faster and maybe because they could because if you’re private, you can do things instantly. You’re not to worry about saying anything to the public or what the public reaction is going to be.

And we had people talking about contingency planning in February and putting those plans into place. But I think it was more driven — I think it was less driven by the pandemic then it was driven by I know what happened in ’08, ’09 and it feels like that kind of thing happening again. So, let’s prepare for the worst. And I would say that was across the board. It was surprising how quickly it happened.

RITHOLTZ: So, that’s a really interesting observation. How does 2020 compared to an event like ’08, ’09 or how does it compare to the dot.com implosion 2000 to 2003?

GIANNINI: I think we all thought in March that it was going to be almost a replay of ’08, ’09. I think everyone prepared for it as if we’re going to have 12 to 18 months of just all hell breaking loose. And that’s when it all changed as you know.

I think a couple of things were different. One, you had a monetary and fiscal response in literally the period of a month or two that did, I don’t know, 10 times what it took the fiscal and monetary authorities in ’09 to do over 18 months, 24 months. So, the speed of the response was unbelievable and — which, in my view, really led to the stock market certainly doing better, all markets doing better, and the economy sort of flatlining and not falling apart.

That was big difference number one. But the other big difference that only became apparent after a month was in every other downturn I’ve ever been associated with, you could look back and go, here’s the companies that did well and here’s the companies that didn’t. They had too much leverage so they didn’t do well. They had lousy management they didn’t do well, whatever.

You could point to mistakes that were made or things that were done wrong. That wasn’t the case in this pandemic. Here, it was random. If you are in the right industry, you did well. If you are in the wrong industry, you did poorly.

And it didn’t matter what your balance sheet looked like, it didn’t matter how good or bad your manager it was, you — it was kind of the luck of the draw or the bad luck of the draw. If you’re in a pandemic, hit industry. If you’re in a hotel, if you’re in a restaurant, if you’re in travel, you’re in trouble and no amount of great foresight would have helped you.

And that is — we just haven’t seen that before. It’s a very, very unique situation that way. Sure, after a few months, then it became apparent who knows what they’re doing, who can adjust to it. But that initial shock to the company or that initial boost to the company had very, very little to do with the genius, with a lack of genius of anyone associated with that particular investment.

RITHOLTZ: Are your investors aware of that or understanding of that? Because I can imagine certain people just demanding performance regardless and markets don’t work that way. How empathetic and understanding has the private equity investor class been to what’s clearly an exogenous shock?

GIANNINI: I would say pretty good. I would say pretty good. I think there’s still the demand for performance and so, that doesn’t go away. I don’t think you get — I think you had a free pass to say, guess what, I just invested in all restaurants. So, you don’t get that.

But I do think, again, conditioned by ’08, ’09, investors — I was surprised that in March, we weren’t getting a lot of calls the way we got in ’08, ’09 of people really saying, get me out of my investments or you got to do something or, my gosh, I don’t want to be anywhere near illiquid assets.

Instead, people said, I get the grill, I understand what happens, I actually would almost rather be in illiquids than in public right now. So, I’m not panicking. And I think that that, again, was more a conditioning from the ’08, ’09 experience.

And that’s how people have reacted. They’ve taken it in stride and, again, they’re not something that you would have expected that if you would talk to me in April, I would not have thought that that’s how people would have reacted on the investment side on the private markets. But that’s been the experience.

RITHOLTZ: Really interesting. Are there any particular areas in the economy that, because of the pandemic, because of the lockdown, have created some opportunities? I mean, I understand no one wants to put money into restaurant chains or hotels or live entertainment venues. But anything that has popped up because of this that suddenly has become more interesting?

GIANNINI: Well, here’s the funny part, I think. You mentioned three industries where I think people are looking. So, I think one of the things people have to make a decision about today is are they going to be value or growth investors. And I know in the public markets, that’s the sort of common refrain.

But in the private markets, that has not been the normal refrain. We really never thought of the world as growth versus value. But as investors, I think we have two choices today and you can choose to be agnostic and just do a little bit of everything.

But are you going to invest in the growth areas, the areas that right now are selling at multiples than they were pre-pandemic because these companies have done great whether they’re technology companies, whether they’re some home improvement companies that have done great during this pandemic?

They’re growth companies, they’ve grown and you believe they’ll continue to grow because people in this pandemic moving on sometime longer and/or people’s behavior will have changed and they’ll be using these sorts of services companies longer.

Or are you going to pay cheaper prices for assets in those very industries you described, restaurants, hotels and you’re going to make a decision that those industries are coming back in X timeframe in X way, like they’ll grow – they’ll be equal to what they were before, they’ll be 80 percent what they’re — pick your number.

I think that’s where investors right now where we’re all sort of trying to figure out where are we going to lean, how are we going to invest and what are we doing because the cheap prices are in those assets you described that are in industries that are hit. But do you believe they’ll ever come back? They will, I’m sure they will. But when, what’s the right capital structure for these companies and what’s the right price today?

RITHOLTZ: So, those value sectors you mentioned, the immediate question that pops into mind for private equity investing is, is this an equity investment or is this on the credit side?

GIANNINI: Yes. It’s both. People are looking at it — that’s exactly right. They are looking at it both ways. Where do I want to put — what’s my risk return profile around this and what does company want?

Obviously, I’m going to take a lower number if I’m — lower return number if I’m doing credit but I’m going to have more security around it. So, I think that’s — those are the areas that people are really — but even on the credit side.

So, maybe I want to put my money with a growth company because it’s going to be safer, it’s going to grow, I don’t have to worry about whether this pandemic is going to go on a year or more and my value company will be hit longer than I thought.

It’s a very, very interesting time to invest. People have to make some real choices. And I think unlike pre-pandemic where you didn’t have a choice, you either run an industry that was hit or you weren’t. I think investor return over the next two or three years will really be determined by decisions you make today around whether you’re going to look for growth, whether you’re going to look for value, whether you’re going into credit, whether you’re going into equity.

I think people will be making portfolio and investment decisions that will really matter when we look back. When you and I have this interview in a couple of years, we will look back and go, my gosh, what was I thinking, I really thought growth is going to continue like this.

RITHOLTZ: Let’s talk a little bit about what the future of private equity investments look like. But I have to start with the question of IPOs. IPO markets have been on fire this year. Does that create a tailwind for private equity?

GIANNINI: Probably. Probably. It — everything is sort of the good side and bad side. The good side is it create exits and at the end of the day, investors want exits. They want some monetization of their investments. And so, the IPO market provides that.

It also provides another path. It’s not the only path. It gives a company — if I’m going to say I’m on IPO, that almost automatically attracts strategic investors. And so, I’m creating an environment where my investment will probably do better because there’s more interesting ways to exit and it creates a competitive environment around that exit price.

The bad side of it is twofold. One is that it creates — on the buy side, it creates a competitive market with a higher price. Generally, IPOs are higher priced. And so, if I want to buy company X, they say, well, you can buy me but you’re going to have to pay twice as much as you just said because I’m on IPO. So, it has that sort of effect on my ability to invest in some companies.

The other thing it does is it creates some pressure interestingly for private equity of keeping up performance post-IPO. You saw that part of the reason some people were skeptical about private equity in ’08 was because the companies that they took public in ’06,’07 didn’t perform as well as people wanted.

And so, it took a period of time for private equity to regain its credibility in the public markets. And so, that adds just another layer of pressure if you will in terms of private equity and the scrutiny on its performance because it’s not just performance as a private company now, it’s performance as a public company.

RITHOLTZ: So, let’s delve into that a little bit. If you’re evaluating a private investment company to determine whether or not you want to put your own personal money in there, what would you be looking for, what sort of questions would you ask management?

GIANNINI: I always think that one of the most underrated things in investing is the quality of the management team. I think that is where, yes, the financials are important and they always are but those are relatively straightforward to analyze. It doesn’t take a rocket scientist to figure out what kind of interest — an exposure, what kind of interest cost a company can bear.

You got to make some judgment about whether that industry is right. But at the end of the day, I mean, we’ve always said this that if you’ve got the right management team, the right culture around that management team, you’re going to have the wrong business strategy and you’ll probably be OK.

But the opposite is not true. You can have a great business strategy but if you got a lousy management team, lousy culture of that company, you’re probably not going to do well.

And so, I think that first question is around how does this management team work, what are their motivations, how do they think about the future, what are they looking to achieve. I think those are the things that you end up spending a lot of time around and that are not really quantifiable. There’s a whole raft of quantifiable things you can look at but there’s an enormous qualitative element.

And I would say if you look at some of the best investors, one of the things that’s always struck me is how some people are just really good at judging human talent and they do a great job of picking the right management teams and picking the right people to go into management teams. So, I think that’s an underappreciated art of investing.

RITHOLTZ: Quite interesting. So, there has been increasing chatter about private equity potentially finding its way into smaller than a credit and investor portfolios, including of 401(k)s. What are your thoughts of private equity becoming — I don’t even know if normalize is the right word but sort of becoming just another asset class option?

GIANNINI: Yes. I’m probably in the skeptical camp on that one. I think there are a couple. On the good side, I think it is — look, it’s a good returning asset class. And so, people should have access to it. But it’s also an asset class that doesn’t have the kind of transparency that the public markets have. It’s an asset class, as you talked about with IRR, has a different way of reporting, a different way of money flows coming in and out compared to public equity.

And so, I think we all have to be really careful about assuming that this should be a great 401(k) or retail investment option. To me, it’s a little bit like what happened with real estate when they created REITs. I think that it will take some legal changes in regulatory structure, in law in order to create structures that make private equity a good investment choice for the retail investor.

And I’m not sure that having a retail investor going to some of these structures is really the right way to go. But I worry about it, I worry about what happens in a downturn when investors go, wait, I didn’t — like you didn’t tell me that this was going to happen.

So, I would say that, yes, it is an asset class that will be an increasing part of high net worth channels. But I am skeptical that existing structures are really going to be a way that retail investors will be happy with their experience with private equity.

RITHOLTZ: So, you mentioned one of the obstacles is the lack of transparency. What include the industry do if it wanted to become more transparent?

GIANNINI: Well, I mean, the thing it would have to do is provide essentially daily pricing. The thing it would have to do is provide much more transparency around operating performance at companies and their barrier and that struggle with the whole purpose of private equity is that you’re not doing that.

And so, are you twisting the very — one of the very things that makes private equity interesting in order to allow other investors or to give access to other investors to come in? That’s a tough one. I think it is the fundamental daily pricing that is just completely different thing from what — how private equity operates that makes it tough to say, OK, we’re going to be exactly like our public equity brother and then do it this way.

I don’t have a great answer other than to say the REITs did it but they did it in a completely different structure and had tax changes that allow them essentially to create a basket of companies and that worked. And I think if you do it that way for private equity, I think that would be an interesting way to go.

RITHOLTZ: Yes. The nice thing about REITs is it sort of solves the K-1 tax issues if you’re going to have 100 separate private holding.

GIANNINI: Yes.

RITHOLTZ: So, somewhere between an ETF and a REIT might be one situation. I know there’s a lot of reporting and custodial issues. But how on earth could you possibly get a daily price from a relatively small private company that that becomes all but impossible.

You could barely get annual prices, really quarterly prices. What are they — how much does a private business really change month-to-month, quarter-to-quarter?

GIANNINI: It doesn’t. I mean, I think some of the things and you’ve seen it people talk about is essentially an algorithm that mimics. So, private company is in, I don’t know, it makes drywall. And so, you get a basket of public companies that are in that industry and then you’ll apply its daily changes to that private company’s changes.

I mean, it’s synthetic. You’re not really pricing because at the end, pricing is a matter of a buyer and a seller and you don’t have that in the private context. So, anything you do will be synthetic.

VOICEOVER: Masters in Business is brought to you by T. Rowe Price, delivering a strategic investing approach with a long-term perspective to help advisers and their clients feel more confident through good markets and bad. Expect rigorous research and prudent risk management from an experienced team of fund managers since 1937. T. Rowe Price, invest with confidence.

RITHOLTZ: Quite interesting. Let me switch gears on you and talk a little bit about ESG, environmental, social and governance issues. Last month, Hamilton Lane created a position to formally lead your efforts in that space. How is ESG and impact investing playing out in the private markets and are you seeing any sort of demand for institutional investors for this?

GIANNINI: I would say if you project out a few years, what will be the biggest changes in the private markets, I think ESG will be up there. I don’t know if it’s number one or number three but it will be up there. And it’s been an important factor for some time, but I think interestingly though, the pandemic will make that even more of a focus whether it’s because people go — the reason the pandemic happened is because of human encroachment on nature, whether it’s because people go during the pandemic, we’ve seen that we can reduce our reliance on certain things.

There’s just – it is going to be a part of everyday conversation and I’ll divide it into two parts. The one part is, have we seen more interest in impact investing or ESG focus investing? I would say there’s a little more interest in specific investments targeted in those areas but that’s sort of been a generally increasing part.

Where there is a really increasing focus is on ESG as a criteria on every investment you make. So, it’s not to say I am going to make an impact investment because it will have XYZ impact on the environment. Every investment will be analyzed and we’re getting more inquiries around this than we’ve ever had.

What is that investment’s impact on the environment? How does that impact? How is that investment? What the governance around it? So, I believe that just as we all become accustomed to looking at an investment and saying, what is the projected EBITDA in year three, whatever it is, I think we will have every investment report, every investment analysis look at a deal under a set of ESG criteria and we will be judged by that as part of our investment performance.

RITHOLTZ: I’ve heard from a number of different analysts who look at ESG not as a sort of progressive versus conservative political battle but rather in context of, hey, this is a methodology of doing certain types of risk screening. You don’t end up with this sort of MeToo movement that in companies where there’s diverse boards and promotion for women and people of color and you don’t end up with a sort of disaster we saw in the Gulf of Mexico a few years ago with a giant oil spill when you’re screening for ESG.

So, the bigger question is, is this merely a risk screening tool? What is the impact of this when you’re looking at private companies?

GIANNINI: Well, it’s certainly a risk screening tool but it’s also a return enhancing tool. So, for example, will — take a consumer-oriented company, will consumers respond to a company that has a more diverse board, a more diverse management team? Will consumers respond better to a company that is making efforts to promote — to retard climate change?

I think it is becoming, yes, certainly a risk factor but it is becoming a factor of my business will do better or it won’t get hurt because I’m perceived as a company that is indifferent to the environment or indifferent to social factors or isn’t governed properly. So, I think as we look at it, it is both, it is both a defensive and offensive part of generating return and reducing risk.

RITHOLTZ: So, let me …

GIANNINI: And I think that’s here to stay. I don’t think this is a fad. We’ve crossed whatever line you cross when you say, now, this is part of mainstream investment analysis.

RITHOLTZ: That’s quite interesting. I wanted to address one of the issues you raised in terms of governance and diversity on boards. Hamilton Lane was recently named International LP of the Year by the Private Equity Women’s Investor Network. Our industry is very underrepresented with women, with people of color. What does that honorific mean about your approach to diversity?

GIANNINI: Well, I feel like — I’ll pat ourselves on the back. I feel like we have always been very, very conscious of the importance of diversity for us as a firm in terms of being a better firm. It did — it just matters to us.

And so, I feel like we’ve always been at the forefront of that in terms of our industry. But you’re right, our industry is not (ph) great both financial industry in general and private equity specifically. And so, I’m very proud of that honor. I think it says that people recognize that we are — we have done a lot in terms of diversity.

But we need to do more. I mean, it’s just simple as that. It is still — we need to do more both for Hamilton Lane and we need to do more in terms of making the industry more diverse. I mean, I think the good news about being our size and having our place in the industry is that we have an ability to frame the conversation and make sure that where we’re investing, diversity is one of the goals that our invested companies, that our general partners understand is important to us and to our clients.

So, it’s a process. We’re very happy with where we are. But we just got to keep moving.

RITHOLTZ: So, I know you represent Hamilton Lane on a couple of boards, both boards of advisors and boards of directors. What sort of — what is that work like? Do you enjoy it or do you feel like you really have input into some of the companies you invest in or are these really more just advisory positions?

GIANNINI: Yes. I’m more on the advisory side. So, I’m not a huge fan of advisory board to say the truth. People always laugh at me about that. They’re fine and they’re good in terms of particularly when it gets to talking about conflict of interest issues. I think they are important that you have a board to do that.

But in terms of getting information, in terms of providing feedback, in terms of the kinds of things that really matter in shaping how groups invest, I think the smaller meetings are still more important. I don’t know that advisory boards really accomplish as much as you’d want them to.

As I said, I think their ability to opine on conflicts is important and the fact that they’re there and provide a way for the general partners to be more transparent is important. But as a decision-making body, I am not a huge believer in that.

RITHOLTZ: All right. Let me throw a curveball at you. Tell us about the Hamiltones.

GIANNINI: That is a curveball. We have a house band essentially. It’s — I don’t know how many — there are 12 or 13 of us and we do — well, we’ve gotten to pandemic but we do a charity concert every year and it’s fun. We get 600 or 700 people. We pick a charity that we want to give — to whom we give the proceeds.

And it’s a good outlet. We have, I don’t know, four or five singers and like every other band, there are the divas and we do whatever they want us to do. I play guitar poorly but I play and it’s fun. I think people enjoy it.

During the pandemic, what we’ve done is I think probably every month, we do a song. We’ll do it virtually and then someone puts it together and then we send it out over Slack channel. And it’s fun, people enjoy it. All different genres of music.

RITHOLTZ: I can imagine that being fun. When I sort of happened to cross in in a research, I said, I have to save that question because it does look like fun.

GIANNINI: Music is a big deal for us. So, our conference rooms, I don’t know if you know this, but our conference rooms are — we don’t have like the LinkedIn room or Talkroom or whatever people name things. We have — on one floor, we have guitar makers, Gibson, Fender, Martin. And on the other floor, we have guitar players. So, we have Eddie Van Halen room, Jimmy Page room, Jimi Hendrix room. So, music is a big deal for the firm. It’s always been that way.

RITHOLTZ: That’s quite interesting. So, let me jump to my favorite questions that we ask all our guests and let’s see how you manage these. Tell us what you’ve been streaming under lockdown, what are your favorite Netflix or Amazon Prime shows, what are you listening to, what do you keeping yourself entertained with.

GIANNINI: So, this – I hate to say this but I don’t listen to podcast. I shouldn’t say that, right?

RITHOLTZ: I don’t think anybody does. Yes. Well, we’re going to get to your favorite books. I’m going to — that’s my third question but …

GIANNINI: OK. But, no, streaming …

RITHOLTZ: But this question …

GIANNINI: I am a big fan — I’m a big fan of mysteries on Amazon. I watch things like “Shetland,” “Borderland” “River.” I love those kind of Scandinavian noir mysteries. I love them. I just watch these things like at night

RITHOLTZ: My wife is similar and I remember her watching the original woman with the Dragon tattoo in, I think, it was Danish or she — not the …

GIANNINI: It’s the Swedish version.

RITHOLTZ: The Swedish version.

GIANNINI: It is so good.

RITHOLTZ: Yes. Right. She — and when the U.S. version came out, she’s like, nope, no interest. So, that’s kind of fascinating.

GIANNINI: It was terrible. It was terrible. The Swedish version was compelling. Tell her to watch “River.” I don’t know if she’s seen it. But “River” is — it’s a one season show on — I think it was Amazon, I can’t remember if it was Amazon or Netflix. Just phenomenal.

RITHOLTZ: If you like those sort of odd mystery short seasons, have you ever seen “The Room”? I believe that’s on Amazon Prime also.

GIANNINI: I have not. I have to watch that one, “The Room.” OK.

RITHOLTZ: Very interesting cast. Really sort of borderline sci-fi-supernatural but intriguing and definitely worth playing with. So, let me ask you this question, tell us about your mentors who helped shape your career.

GIANNINI: I would say certainly in the private equity world, there had been a couple of general partners who I have viewed as mentors, who I have turned to for advice, who I have turned to for help. But I would say my main mentors interestingly were teachers I had him in college who I remain close to over the years. They were an enormous influence on my life.

So, I would say — I always say this to people, the teachers you meet in your life have an incredible — can have an incredible influence on what you do in life and how you do it. That’s a surprising thing as I look back and think about that.

RITHOLTZ: You mentioned reading. Tell us about some of your favorite books. What are you reading now and what do you like to recommend to people?

GIANNINI: I’m a fiction fan. I don’t read a ton of nonfiction. I don’t read business books or how-to or good-to-great kind of stuff. And I just — I like all sorts of fiction. What did I just read?

RITHOLTZ: Just a few title.

GIANNINI: Eleanor Oliphant — Eleanor — I have to get the exact title, Eleanor Oliphant is OK. What have I read? What’s that I read recently? “Americanah.” Books like that. I just — all sorts of different kinds of books.

RITHOLTZ: And what sort of advice would you give to a recent college grad who was thinking about a career in the private market space?

GIANNINI: What I would tell them is to be a little more flexible and open to changes around what you’re doing and how you’re doing it. What I find is a lot of people coming into the private markets have a very, very fixed view of what they want in life and how they want it, and it just doesn’t happen that way.

The markets — the world is going to change over the next five or 10 years, it always does, and people just need to be way more open to trying different things, doing different things, experiencing different things. I worry a little bit about, OK, here’s how the private equity career span works and that’s what’s I’m going to do come hell or high water and people just need to — and coming from me who’s kind of rich but go with the flow a little more.

RITHOLTZ: Good answer. And our final question, what do you know about the world of private equity investing today that you wish you knew 30 or so years ago?

GIANNINI: What do I know today that I wish I knew 30 years ago, I think it’s the advice I would give — I would have given myself the same advice that it is not going to look the way it does and you can’t — you cannot — I wish I had known that you can’t assume that things are going to move in any sort of linear direction.

Had I known that, I think it would have been more aggressive about pursuing certain changes. I would have been just more open to certain changes. I just thought things were going to — since it did happen that way before it was going to continue largely to happen that way going forward and that’s not how it happened.

RITHOLTZ: Quite fascinating. Mario, thank you for being so generous with your time.

GIANNINI: Thank you.

RITHOLTZ: When this nonsense — when this nonsense is all over, we’d love to have you actually in the Bloomberg building to do this live and in person. It’s a different experience. We’re all trying our best under lockdown. But I’d love to have you back to continue this conversation.

GIANNINI: I’d love to do that. I mean, it’s interesting. I have said to people, I’m an introvert and I thought this would be right up my alley like I would thrive and what I’ve realized is the ability to see people in person, the ability to exchange five minutes in the hallway is vital, vital to how we operate, how we live, how to learn and it’s just — it’s amazing to me how much I miss it and I suspect how much we all miss it.

RITHOLTZ: So, let me slip in one final question. All this talk about the end of cities, the death of the office, the ability for everybody to work remotely, how much of that is just hype from within the lockdown and as soon as we get the opportunity to kind of return to normal, a lot of things might end up going back to the way they were.

GIANNINI: I think we will return much more quickly to the way we were than anyone anticipates and I offer two anecdotal things. One is look at China where they’ve basically gotten rid of the virus.

RITHOLTZ: Right.

GIANNINI: It is — and people I know in China telling me, it is largely the way it was before other than international travel. People are going to movies. People are going to restaurants. People are going to parties. And I think we will be the same way.

The other thing that’s interesting is just that Hamilton Lane before the pandemic, we were moving our offices in March, before the pandemic, we asked our employees whether they wanted to work remotely, meaning did they want to be in the office less than — outside the office three days a week or more and it was something like 40 percent wanted to work remotely that this was really good.

We asked the same thing a couple of weeks ago because we’re going back to the office on a voluntary basis like one day a week if people want to go back in certain groups. Out of the client and investment teams, 100 percent of the people said they did not work remotely, did not.

RITHOLTZ: Wow.

GIANNINI: And I think that’s — it’s telling. I think people before this pandemic and during the pandemic, there’s both the feeling of changing the way we live is good and during the pandemic, nothing will be back to the same, no, it will come back much faster.

Sure, business travel might be a little bit less because we’ve all realized we don’t need to go all over the place 10 times a year. But leisure travel, all of the stuff we want to do together, it will come back very, very quickly once we’re certain we’re not going to get the virus.

RITHOLTZ: Thanks, Mario, for being so generous with your time. We have been speaking with Mario Giannini. He is the CEO of Hamilton Lane.

If you enjoy this conversation, well, be sure and check out any of the other 350 or so we’ve done over the past six and a half years. You can find those at iTunes, Spotify, Overcast, Stitcher, 0wherever, wherever you find our podcasts are sold.

We love your comments, feedback and suggestions. Give us a review on Apple iTunes. Write to us at mibpodcast@bloomberg.net. You can check out my daily reads at ritholtz.com. You can read my weekly column at bloomberg.com/opinion. Follow me on Twitter, @Ritholtz.

I would be remiss if I did not thank the crack staff that helps put together these conversations each week. Tim Harrow (ph) is my audio engineer, Michael Boyle is my producer, Michael Batnick is my head of research, Atika Valbrun is our project director. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.

 

Print Friendly, PDF & Email



(Source)