Animal Spirits Podcast - Talk Your Book: Moneyball Meets Private Equity

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to by Crane Shares. Go to cranechairs.com slash bio. That's B-U-Y-O to check out the Crane Shares, Man Buyout, Beta Index, E-T-F, Bio. That's ticker B-U-Y-O, Cranchairs.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities

Starting point is 00:00:41 discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. On today's show, we speak about an ETF that tries to give exposure to companies that private equity companies, I'm sorry to saying companies twice in a sentence, would target. And Ben, I gave an analogy or I posited a question, does it actually make sense that there might be a premium to these companies that are private instead of public, which historically was the opposite?

Starting point is 00:01:09 And after being shut down, I kind of thought like that scene in Billy Madison. You want there to be a liquidity premium, not an illiquidity premium? Exactly. That is, make out of mercy on your soul. You know where I'm going with that. Yes.

Starting point is 00:01:22 So in the past, I think there was a much wider spread between private companies and public. I think has narrowed in the past 20 years, there's more money has gone in there. And these buyout funds are now way bigger than they were in the past, right? And you can't just, I think it was fishing in the barrel before, and it's not like that anymore. So this sort of public equity or private equity in a public wrapper is something that I've seen a lot of firms tried to do over the years. Without the leverage.

Starting point is 00:01:52 Yes, without the leverage. And that's a big piece of it. There's a lot of people say, well, private equity just gives you the S&P with leverage. And I think some people are okay with that if that's what you're going to get. But it does seem to me that to your point, I don't know, maybe it maybe has reversed a little bit where it's the illiquity. Illiquidity premium is not what it once was. So maybe this is just a better moushtrap for exposure to smit cap companies, right? Get rid of the most expensive, get rid of the junk, focus on profitability and things like that.

Starting point is 00:02:21 Yes, I think if you just look at the small caps in terms of more high quality, yeah, we've talked forever. about the 40% of them are unprofitable. And I'm sure some of that 40% group is tech stocks or biotex that is going to have big returns someday. But a lot of it probably is just junk. And I think in those smaller names, yeah, getting rid of the bad stuff that probably half the battle. All right.

Starting point is 00:02:41 So here is our conversation with Greg Bond again. Greg is the CEO of Man Numeric and Head of America's for Man Group. Greg, welcome to the show. Oh, great. Thanks for having me. So one of the themes that Ben and I have been discussing, discussing is the rise or the transition from public markets to private markets. We all know that there used to be a whole 5,000 stocks in Wilshire 5,000 and now there's

Starting point is 00:03:04 much less. And Torres and Slok has this great stat showing that 87% of the companies in the United States that are doing on $100 million in revenue are privately held. Private equity is becoming a bigger and bigger part of the economy. and you all with the crane chairs man buyout beta index ETF, ticker B-Y, I'm sorry, B-U-Y-O, bio, are taking an interesting approach to benefiting from the secular tailwind of private equity. So what was the thinking behind this idea? Where to come from?

Starting point is 00:03:39 Well, the idea is basically, can we look in the public markets and try to find proxies for what the private equity folks are dealing? Again, a very valuable part of the economy. but in a way that we could build a more liquid version of that, something that would fit more easily, perhaps, in people's portfolio, something that would have some scale. And at the same time, giving you that kind of exposure that you might find in a private equity portfolio. So just taking a lot of the tools and things that we've been developing as a systematic investors for many years and I'm trying to deploy it into this space and really thinking there's some commonality of some things that we can do and in some of the capabilities there that would be quite complementary and build a very, very interesting, we think, strategy. So does that entail looking at this types of companies that private equity buyout firms are buying? Is it entail looking at different valuation metrics? How do you think about making those public markets more private-like? Yeah, it was a very, very, you know, a lot of time. Interesting project for us very much focused on trying to understand what private equity looks for in particular kinds of companies, a style of companies, with size of companies, those kinds of things and features and see if we could identify similar things in the public market. So it was really about building a portfolio that looks like those stocks in those companies in the private equity portfolio. So look at it generally cheaper, more profitable companies, you know, operating margins are. are super important. But it's not just about deep value there. There also needs to be some growth

Starting point is 00:05:04 opportunities. So it was key that it was a balanced approach, looking for combinations of good business models at an attractive price, but also showing some potential for growth. So that was just sort of like the kind of company. The other part is where does private equity deploy its assets typically? What kind of sectors do they focus on? I think a lot of some of the natural benchmarks that people use in the public markets for private equity or things like the S&P 500, other sort of large cap universes that aren't necessarily applicable to kind of the typical private equity portfolio. So we started with thinking about the sector focus. So looking at what private equity deals are getting done and then mapping those over into kind of a public

Starting point is 00:05:49 market sector definition. So rather than buying an ETF or something right off the shelf, let's get something that matches the macroeconomic exposures of private equity, which is really the sector tilt. So that was one part that was really, really important. The other part is, what size of company, right? And what's the right universe to play in? And looking at that universe and doing some research, it's not necessarily that we need to get into the really small microcap area.

Starting point is 00:06:16 What we found is if you get into something, we use at the Russell 2,500 as a starting point. So I think the biggest 3,000 stocks in the U.S. take out the top 500, things like that would be in the S&P 500, and then what you're left over with is called the Russell-2500. So kind of a smid type set of companies. And the reason for that is one, just looking and trying to match some of the long-term return characteristics. We didn't need to get as small as microcap. And also practically speaking, I think building a $200 million capacity strategy is not going to help anybody, right, in terms of what the space is and the market opportunity. So I have a three-part question, and let's see if I can keep this in order.

Starting point is 00:06:55 Number one, was this trying to give better exposure to smit-cap companies? Was this trying to keep up with a private equity type of investment just in a liquid wrapper with lower fees? And or was this the type of thinking where you said, these are the companies that are actually more likely to get acquired by private equity? And forgive me for the three-parter. No, that's good. So I think specifically it was really to proxy what is currently held by private equity. So it's really that ability to go in and see what those company characteristics were like and trying to build those in a public equity portfolio. That's different than saying, hey, I want to build a portfolio of stocks. This is generally going to outperform some broader index. So it was really about giving people the kinds of the exposures that you would get in a private equity portfolio, but done in a public market way. We were also looking for opportunities for people to have some scale and liquidity to help them trade around those names and being able to go in and out in a more liquid fashion, which we think would fit very nicely in a portfolio that's already has, you know, a lot of private equity investments. And it wasn't necessarily that we're

Starting point is 00:08:02 targeting companies that are going to necessarily be taken out by private equity, those companies that are going from public to private. Those are very different sort of than the standard private equity deal. You know, they're very large, very oriented around valuation. So we're sort of We're fishing in a similar pond here, but it was really about getting the right characteristics to match what we think and looking at the research of what would be in a private equity portfolio. So like a liquid private equity basket-ish, but I guess without the leverage, because that's obviously a big part of the story. I'm curious, in your study of private equity and trying to sort of quantitatively match a

Starting point is 00:08:41 private equity portfolio, how you've seen that space evolve? because I've seen interviews in the past with Mitt Romney where he talks about, hey, in the 90s, we were buying these private companies at like a four times EBITDA. And it was just the only one of the reasons that we had such big returns is because the valuations were much lower. Are the valuations much, because obviously the valuations are higher in public markets. Are they much higher or are they getting close to one another in the private markets as well? I mean, from our side and some of the data that we see, I think the multiples that are in

Starting point is 00:09:09 private equity have definitely gone up. I mean, I think there's more competition in private equity space. there's more capital being deployed. I think some of the stories changed in private equity as well. I mean, back in the 90s, it may have been more focused on metal bending kind of companies. Now it's more kind of software and services type companies that would require a higher multiple. So I would definitely say that private equity is not a all about valuation and deep value. And that's why our portfolio has characteristics that have some valuation to them,

Starting point is 00:09:36 but a lot of trying to capture some of the other components. I think it's very much an evolving space. And, you know, one of the things we hope in our strategy is that as it runs and private equity does change its stripes in terms of the sum of the sector focus that we'll pick those kinds of changes up. Do you find, though, that some of these small and mid-cap companies are maybe even cheaper than some of the private counterparts or is not quite there yet? That can be the case. That can definitely be the case, particularly to agree that private equity, if it's focusing on more of a growth story, there might be more opportunities in smaller-cap public companies as well. So I think it's just generally the span of private equity is obviously quite large. And what we're trying to do, again, is find really companies and really mainly avoiding the companies that we don't think are in private equity portfolios. So we want to avoid the most expensive, the least profitable, the least cash discipline.

Starting point is 00:10:25 So a lot of our process is just not trying to get too cute about it, but look at what we see and what we read about it in private equity and then knocking out the companies that we know have a high likelihood of not being in a private equity portfolio. So it's really about screening out companies. Greg, let me ask you a perverse question. I never thought of it this way. Does it make sense that privately held businesses would be more expensive than equivalent ones that are publicly traded? And the reason why I say this is because there's been a lot of active invest, active managers that have bemoaned the fact that if nobody's going to come in and see these

Starting point is 00:11:01 valuations to fruition, like, yeah, these publicly traded companies can stay cheap forever because nobody really cares about them. Whereas if a company is privately held, then there's a potential for an exit to, you know, via M&A. Like is that, is that so ridiculous or is there maybe something there? Well, I think there's always a catalyst and I think there are enough investors in the public market side as well that there is a unique opportunity, something that is permanently undervalue.

Starting point is 00:11:26 There are people that can go in and alleviate that, go in and actually buy that company and bid it up. I think you're also getting one of the nice things, at least in the public markets and people forget this is that we do have, you know, audited financial statements. There's a lot of standards around that. I think the public markets do bring a level of clarity around some of the regulatory stuff for these companies and things like that. So that, yes, very sophisticated investors are doing private equity transactions, but there

Starting point is 00:11:53 is a layer, I think, on the public markets of transparency that I think can actually be quite helpful. So there's a give and take, I think, between public and private, which explains maybe differential valuations at certain points in the cycle. But as anything, I think as opportunities are perceived. system in the market, you'll see more capital come in, which is why I think you've seen a lot of private equity capital go into the markets. And some of the concepts around, there used to be a lot more publicly traded companies. I mean, if you go back, some of that was a bit of a bubble in the

Starting point is 00:12:22 90s around the number of companies that were publicly traded. If you go kind of prior to that, I think it's more aligned with what we're seeing today. So I think really it's just the market coming to grips with kind of a tradeoff between private and public. We think there are opportunities for both. And I think we're also seeing people, I think, forgot perhaps there is a cost of illiquidity. There's a benefit and a premium that should be there. But there are cases now where rates go up and other things and kind of locks down what you can do on the private market side that having a public market sort of equivalent or something that's a proxy or similar could be quite valuable. One of the stats that Michael and I have talked about over the years is the fact that

Starting point is 00:12:59 something like 40% of all companies in the Russell 2000 are not profitable. That number has been increasing over the years. So when you go through your process and you talked about trying to screen out the worst companies, is that the kind of thing where you're trying to screen out like your process is the first step getting rid of the bad apples? And a lot of it probably is those lower quality unprofitable companies. Is that how it works in your process? That's definitely a part of the screening, exactly. So we take the broader, you know, the Russell 25, so a little bit bigger than the Russell 2, so the next 500 largest on top of that and go through and say and screen things out that we think, again, aren't proxies or what we think would be in a private equity portfolio.

Starting point is 00:13:33 And that naturally leads to a bit of a quality tilt. If you wanted to find it, screen out less profitable companies, companies that aren't doing good things with their cash, you know, buying back debt, buying back shares, managing the working capital. So again, we didn't want to, as I said earlier, dad get too cute about it. It was just sort of let's knock out what we see, what we think is not in the portfolio.

Starting point is 00:13:53 And what we'll end up with is something we take that broader set of that universe and maybe we end up with about half of the universe left over after all of the screening, right, that we do. And then we try to match the sector exposures that we have on private equity. So that's looking at taking the Russell 25, looking at all the deal activity in private equity, and then reshaping that benchmark to look like private equity capital allocations, and then we run our portfolio against that. So what does the sector composition look like?

Starting point is 00:14:21 So we're typically, you know, relative to what you find in a kind of a standard cap-weighted benchmark. We, you know, typically more software and services kinds of exposures, more industrial, you will be sort of underweight, you know, financials and reeds and those kinds of companies. So it's very much focused on trying to see where the deal activity's been and then reshaping that bench. As businesses have been gobbled up or transformed into technology companies, have better visibility into their clients or quicker able to adapt, therefore have higher margins and rising. Doesn't it make sense that multiples for businesses not just publicly held but privately held are going up as well? Exactly. I think if you have, you know, efficiencies in terms of operating margins, growth opportunities, I think you should be willing to pay a higher price, right, for that kind of company. And I think that's the key is that we don't want to build or have just a deep value strategy. This is about the combination of the tradeoffs between growth and profitability and the valuation. And I think that's the math, the private equity companies are trying to, you know, do. But also to that point about rising valuations in private equity, yeah, well, guess what? If historically, a lot of the purchases were manufacturing companies or whatever,

Starting point is 00:15:30 it was back in the day. And now they're software related. Well, it's an apple, it's an apples to oranges comparison. And that's very fair. And I think that's the key is that the industry does evolve over time. And you need to be aware of that and what kinds of companies are going into these portfolios. And so how far do you try to narrow things down? You got this universe of 2,500 stocks. I don't know what the typical size of a PE portfolio is, but where do you stand in terms of concentration and diversification? So we end up with a pretty diversified portfolio because again, we're trying to knock out what we don't like, right? So just not. locking that out. And then what's left over, we try to trade very kind of risk-aware,

Starting point is 00:16:05 transactions cost-aware to give a portfolio that we think is very, you know, scalable and hopefully added value for people's portfolios. So we take that universe, we bring it down, you know, into a holding. So it's a pretty well-diversified portfolio. We're not trying to build a hyper-concentrated portfolio by any means. It's really trying to get a reasonable exposure that not only matches the kinds of companies, but also that the sector exposures that I was talking about. So what are private equity companies looking for as they comb through their investable universe? Is it predictable cash flows? Is it potential cost savings?

Starting point is 00:16:44 What do the quantitative screens look like? Yeah. So we get it. It's a blend of different things. I think one, we do screen on valuation. So we are knocking out, you know, the most expensive part of the universe. And that's looking at a lot of cash flow generated metrics like EBITDA, EV. gross profits to enterprise value, those kinds of free cash flow yields. So metrics that you would think

Starting point is 00:17:05 would be very focused on valuation. So we start there. We knock out about 10% of our universe just from that valuation screen. So that's important. Again, we don't need to pay deep value, but I think having some concept of value, it does align. And then it's things like profitability, different versions of profitability, knocking out again, about, you know, sort of 10% of the least profitable. We also want, again, trying to proxy says there's a bit of a tradeoff here between what we call pure alpha factors that you might find in the public markets versus trying to match up a bit on private equity. We do look at things like debt capacity of the company. We think, again, it should be something that can have some serviceable debt around it. We're also importantly,

Starting point is 00:17:47 I think this is thinking about what's in private equity portfolios versus what they may go out and acquire. We are trying, we do buy companies that are, you know, cash efficient or they have good solid cash management specifically knocking out the least efficient. So if you think about the private equity J curve, we're somewhere along that in the kinds of companies that are there, right? We obviously are not going to go in and sit on the board of the company and force them to be cash efficient. It's more that these companies are already cash efficient. So that knocks out, again, some of the universe. But at the same time, we also want to have growth opportunities. Some private equity ideas, you know, the sources of alpha, you buy on a

Starting point is 00:18:25 relatively cheap price, you can adjust on the operating margins, and then you can leverage leverage the portfolio, and at the same time, hopefully, you know, capitalize on some growth opportunities. So we want to make sure that we've got some growth tilt in the portfolio, meaning that we will knock out the lowest growers. So it's not just deep, the deep value type socks that there is some growth component. So that's the, what I call fundamental screens. And that was really, you know, a lot of the process. But since we do sit in the public markets, we do have one advantage in that is we can look at other proxies for value added. So sort of mimicking hopefully some of what private equity does in terms of their value added.

Starting point is 00:19:03 Some of that can be very deep industry analysis through some of our models and looking at the supply chain and the health of the supply chain of companies. We can look at other informed investors in the market to see how they're positioned. So, you know, if there's a company that's very heavily shorted, for example, we may want to screen that kind of thing out of the portfolio because there's something potentially going on there. And also just companies, back to one of the points about being more stable, able to support a debt load, companies where there's not a lot of, you know, business uncertainty, at least measured by looking at the volatility of the company, how much their shares turn over

Starting point is 00:19:38 in the marketplace, given there's a lot of share turnover, a lot of volatility, there's a lot of uncertainty around that business. So trying to identify both with what we call those fundamental screens around valuation through growth and then adding in some other proxies that hopefully are trying to replicate some of the, you know, the deep due diligence of private equity ceiling. Do you have a hard and fast set of rules that you follow here in terms of quantitative models, or is this a more flexible approach? Yeah, so this is a very systematically implemented approach.

Starting point is 00:20:05 And I think that's where another thing that, you know, try to differentiate and bring to the table is hopefully this is a, you know, a repeatable process. So everything that I just described is, you know, the way, you know, we run the portfolio and those screens and the models around it. So that's, you know, what we've, that's the process that we've built. And then on top of that, you know, how do we actually put the portfolio into the market and think about buying individual names? And that goes back to both kind of risk and thinking about the risk relative to this benchmark that we've talked about. But also, what are the trade costs and being very focused on transactions, cost awareness and we do these kinds of things?

Starting point is 00:20:42 So crane shares is the delivery for the man buyout beta index. Again, the ticker for this is B-U-Y-O. Man Group is one of the largest asset managers in the world, especially talking about private companies. So you all have a long track record of doing deals like this. Can you talk a little about the history of the firm or anything you want to add there? Yeah, Bair Group's a very, you know, basically the motto there is sort of alpha at scale, right? providing investors, you know, alpha across different types of investments. And so some of that is through discretionary, you know, traditional equity long short, credit long short type, you know,

Starting point is 00:21:26 portfolios, but also systematically driven investment strategies. That's hardly where, you know, obviously the ethos of this strategy really much came up on a systematic side. Other, you know, systematic more macro type trading strategies as well. So it's a very well diversified, focused on delivering alpha for investors. And that is all predominantly through the, you know, the public markets, but we also have some private markets businesses as well, particularly on the credit side. So great, you have a, I don't know, your full background, but you spent some time with the Boston Red Sox doing the money ball thing. What was, what was that experience like? Oh, no, it was very interesting. I've always, you know, obviously like a systematic investing and, you know,

Starting point is 00:22:09 using quantitative techniques and, you know, through after some several years here at Man Group, I think there's an opportunity to work, take a sabbatical and do some work on Moneyball type things with the Red Sox. And a lot of that was around draft strategy and sort of we take fundamental scouting reports and turn that into something that's systematic, we're systematically driven. And so those kinds of problems are always very interesting. I think getting in a different context and seeing systematic things work at a different context and bringing that over. I think has always been a good experience. And I think you're seeing a lot of the concept of the money globalization of the world

Starting point is 00:22:46 is really, we're seeing that, right, in different types of markets. You know, hopefully you see a little bit here in sort of a public market application for private markets. So I think just the data intensity, data driven, a decision making is just, it's proliferating across the entire economy. And so while it started off maybe in sports and there was, you know, a really good movie around that, moving into, you know, broader parts. to the economy, and I think it's a trend that's going to continue.

Starting point is 00:23:11 Was that the kind of thing where there was big-time first mover advantage? Kind of like in the markets. Back in the day, Ben Graham and Warren Buffett, it was much easier for them to produce alpha now that's so much more competition. It's harder. Are the edges harder to find there now? I think, you know, if you're thinking in sports and some of the technology and there's some data out there.

Starting point is 00:23:27 So, you know, I think the movie Moneyball was obviously set around the Oakland A's and the Red Sox from an early adopter as well. But if you look at where the market is today, I think there's a guy named Zach Scott, who runs, has his own podcast, but does some other analysis and used to be a general manager, I think he calculated something like there's 750 people now involved in baseball alone between data analysts and technologists, where, you know, at the Moneyball movie, it's a couple of people, right? So I think that you're just seeing like any other market when there's an advantage, people

Starting point is 00:23:59 go out and take advantage of it. So to Ben's point, I think the benefit of systematic anything, certainly investing, is not necessarily that it creates like a predictable outcome or even a better outcome, but I think what it clearly does is it takes out some of the predictable negative outcomes that you could have around all the sorts of behavioral biases that we know. But, and I guess it's like it's hard to answer. But when everybody is sort of agreed that systematic rules based is better than the alternative, I don't know, it just seems stands to reason that it's going to be harder.

Starting point is 00:24:35 Yeah, I think, you know, to say that one is better or worse, are different. I think it's, for me, it's, they've been quite complimentary. And I think, you know, if you look at man group having both kinds of, you know, systematic and discretionary type businesses, they're obviously ebbs and flows. But over time, you know, there seems to be a, having both is right, a diversifying. So that's why I'm thinking, you know, it's not just one approach is better than the other, but having a set of each is very interesting. And in fact, it can be hard, I think, to, in one portfolio to have systematic and discretionary together. But I think if you can sort of split it out and have kind of two different investment processes, they blend

Starting point is 00:25:12 quite well together. And I think some of, you know, bankrupt's best strategies are taking advantage of both of those kinds of approaches to investing, which is why even, you know, for this particular portfolio, we think it's an interesting approach. We think it's a repeatable approach. We think it's, you know, transactions, cost-aware, and efficient. But it's not saying that we're out there to necessarily replace private equity. It's obviously got a very, very valuable part of the economy. But this is a nice compliment. It's a way for people to get liquidity, to get that kind of exposure with a more liquid option. I think also a more cost-effective option in some ways. We can talk about the fees and the various things around it. But I think having something that's

Starting point is 00:25:49 diversifying and interesting, that's sort of our approach, or not that one is better than the other. I think to make it like private equity, you should try to get your investors to agree to only see their marks four times a year and it comes like three months after the quarter is done, and that's the only time they can look at their portfolio, right? That's fair. Right. So I think there's always been the mark to market, you know, questions around it. I think, you know, some of that's gotten better over the years and what's required. But it's definitely a hurdle, let's say, to being in the public markets, if you want to call it that. I think it's a fair hurdle to be marked every day. But I think that's brought into kind of the design choices and thinking about the market.

Starting point is 00:26:28 I'm curious your thoughts on the opportunity set in small caps because a lot of people, the past, five, 10 years have said, listen, a lot of these companies are IPOing later, and they're bigger when they do come to IPO. So they're just skipping over the whole small cap step. I'm curious to hear what you think about the opportunity set there in that broader universe of small midcaps. Yeah, I think we found it. It can be a bit more volatile, but there is an opportunity to add alpha in those smaller cap names. Again, if you can trade it effectively and get that all lined up. So I think that just like anything in particular as a systematic investor, we like broader opportunity sets. And I think there's some definite opportunities from an alpha

Starting point is 00:27:06 perspective in that area. And I think that's why, as we look at this portfolio, I agree that, again, it's sort of knocking out the top 500 stocks, that there's another interesting way to play the market to get exposure to names that might be more underfollowed in some sense and maybe provide a good opportunity for actually stock selection in the more traditional sense. One of the biggest inputs to private equity and the companies that they invest in is the cost of capital, especially for private equity that's taken on debt. But these companies, you know, generally speaking, the smit cap companies that are more exposed to higher barn costs. These are not, this is not Apple or Google we're talking about, right? When rates go up, so does their cost of

Starting point is 00:27:41 capital. Now that that is mostly behind us, do you think that, I know that you're not a macroeconomist or anything like that, but like just theoretically, it stands to reason that given that the hiking cycle is behind us, hopefully, that that headwind should at least, if not be a tailwind, at not be ahead with anymore. Yeah, I think it's also, it always comes down to also the valuation, right? So some of the macroeconomic environment might be a little more straightforward now or for companies we've gone through, as you say, the rate hikes and people re-optimizing their balance sheets, et cetera. But I think it also comes down to valuation, what we related pay, and then also thinking about sort of the concentration effects that are going on in a large cap, but it might

Starting point is 00:28:23 be, you know, an opportune time to think about being more diversified in the kinds of companies that people are looking at. And I think, you know, obviously in the last 10 or 15 years, you should have just sort of stayed in the top 500, and you would have been quite handsomely rewarded for that. But ultimately, kind of long term, we think they're, you know, we don't want to neglect just parts of the universe because they just haven't worked in the past.

Starting point is 00:28:45 I think it comes down to what the opportunities at, which you're currently, what you're valuing those companies at. And then having a process, you know, it's a lot harder when you're doing small cap in the sense there's just so many more to kind of follow and focus on. And we think that's another area where systematic can be quite helpful because we can look at a bunch of stocks kind of simultaneously. We talked earlier about leverage and how that's sometimes an advantage for private equity just because you're adding to the beta component.

Starting point is 00:29:10 How does that work when rates are rising, though? So small caps already kind of took it on the chin a little bit when rates rose in 2022. It seems like those things might take a little longer to filter through to private equity. So the other side of that leverage is the fact that they have higher hurdle rates now. They're borrowing at a higher rate. So does that take longer to filter into private equity to make where it makes it more of a challenging environment in that space? Well, it's an interesting question because I think a lot of the debt there is floating. So I think they felt that kind of immediately when rates go up and

Starting point is 00:29:36 sort of the impact there, which I think is one of the reasons you had a little bit of a lockdown in the capital there, right? Deal's not getting done. Coming up with sort of interesting ways to return capital to investors, you know, given that the deal environment's kind of locked up. So I think it goes back to my point that there is a premium to being less liquid in the market, but it also comes at a cost, and that is sometimes in these environments, when rates go up, you could have lockdown in the market there. So again, that's why I think there's a complementarity thing that's going on here between your optimization between liquid and illiquid. And if there's a way to get a slightly more, you know, get a more liquid portfolio that shares a lot of the

Starting point is 00:30:14 characteristics of every illiquid portfolio, that might be a good thing to help diversify your portfolio. All right. Greg, thank you so much for joining us. Great. Thank you. Thanks to Greg, remember check out cranechairs.com slash bio to learn more about this fun. Email us, Animal Spirits at the Compound News.com.

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Animal Spirits Podcast - Talk Your Book: Moneyball Meets Private Equity

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