Finally, there is real PE alpha, by firms that manage to enhance cash flow and drive revenue higher while timing their exits propitiously. These are the firms that one wants to invest with. “You can’t just buy the market because the performance dispersion is so wide,” Veronis told attendees.
iCapital and others like Artivest have built platforms for advisors to access the private equity market. But while advisors are tiptoeing into the space, no one expects them to dial up to the 15% to 18% allocations that some pensions and endowments are deploying.
Meanwhile, there are reports that Nasdaq may try to create some kind of liquidity system. It has also been reported that Airbnb is exploring whether it can issue shares to participants in its sprawling hospitality network. Most private equity companies don’t want their secondary share pools trading randomly around the market, Veronis added.
All this means the sharp lines between public and private companies could begin to blur. Moreover, Veronis’s argument that the best values may lie outside public markets has merit, particularly when it comes to large-cap businesses in the S&P 500.
Investment managers specializing in the small-cap universe take issue with the idea that R&D spending in America is in serious decline. “That may be the case in the large-cap world, but we aren’t seeing that so much in the small-cap world where we are focused on companies that have significant R&D spending,” says Randy Gwirtzman, portfolio manager of the Baron Discovery Fund.
Like managers in the private equity and venture capital space, Gwirtzman spends a great deal of time with companies before and after initiating investments. “Not every great idea has been absorbed into the larger companies in this country,” he says, adding that many of his holdings end up being acquired. “It is true that many of our companies are focused on handfuls rather than warehouses full of products. We view that as an advantage—it is easier to track successful market penetration in such instances, and the companies can be more focused.”
On that subject at least, he and Veronis would agree.