The state of capital markets through the eyes of GIC, Blackstone, Investcorp, and PIMCO

Singapore. Photo: Unsplash

The recent unpredictability in the capital markets has given rise to many risks and opportunities, which global fund managers must parse through to forge effective investment strategies.

These emerging trends in private and public capital markets were the subject of a panel discussion titled ‘Navigating the Investable Universe’ hosted at the Milken Institute Asia Summit on Monday. Participating in the talks were GIC’s group chief investment officer Jeffrey Jaensubhakij; Investcorp’s co-CEO Hazem Ben-Gacem; Blackstone Alternative Asset Management’s (BAAM) global head Joe Dowling; and John Studzinski, the vice-chairman of the US investment manager PIMCO.

The panelists made three key observations regarding the current state of private and capital markets:

1. Hedge funds are emerging as substitutes for bonds: There has been a lot of interest lately in alternative assets like hedge funds.

The huge money flowing into hedge funds and the proliferation of hedge fund managers have suppressed returns there, said GIC’s Jeffrey Jaensubhakij. “If we think about the evolution of hedge funds, the average returns have come down. And maybe it’s not surprising given that there’s been more and more money over the last couple of decades that have gone into hedge funds, and more managers have also gone in.”

Investcorp’s Hazem Ben-Gacem noted that there is widespread investor skittishness due to a combination of high market valuations, inflation rates, and geopolitical tensions. “In a way, hedge funds may be that perfect holding vehicle until there’s clarity on where the world is heading,” he said.

2. Crossover funds: Panelists also discussed the emergence of crossover funds — i.e public market funds employing private equity (PE) strategies and vice versa.

According to Joe Dowling, Blackstone conducted a study of 145 companies worth at least $1 billion, between 2010 and 2021, and found that the average time they took from their pre-IPO round to going public was 1.7 years, returning an average of 2.2 times. “That return is very high,” he noted.

He explained that one of the reasons for crossover funds is ambiguity in the asset class. “When you’re going to do due diligence, the private team will say, these aren’t really privates, they’ve been 1.7 years in untraditional funds…If you go to the public side of the house, big institutions say, hold on a second, these are private companies, and it all gets lost,” said Dowling.

3. Preparing for the next crisis: All four panelists were largely in agreement regarding the precariousness of the current markets, exacerbated by the global pandemic, and the lack of trust in policymakers.

Investcorp’s Ben-Gacem underscored a more cautious approach in his investment strategies moving forward. “You’ve got this giant steamboat called the Titanic going down. I think my only advice is steady as it goes. Take it easy. There might be some serious icebergs ahead,” he said candidly.

But there may be glowing pockets of opportunity yet. GIC’s Jaensubhakij highlighted sustainability as a theme, which may unlock opportunities in markets that are significantly underpriced.

The panel discussion was moderated by Debra Ng, managing director at UK-based Albourne, which provides research and advice on assets such as hedge funds, private equity, real assets, and real estate. This transcript has been edited for clarity and brevity.

Debra Ng: One of the big trends we’ve seen lately is the huge allocations to alternatives. Some people describe hedge funds as bond and equity substitutes.

Jeffrey Jaensubhakij, GIC: If we think about the evolution of hedge funds, the big story has been that the overall average returns have come down. And maybe it’s not surprising given that there’s been more and more money over the last couple of decades that have gone into hedge funds, and more managers have also gone in. 

At the end of the day, hedge funds are not an asset class. It’s earning some returns from whatever risk is being taken. You’re paying for the skill of the manager, and it is a zero-sum game, and the more competitive managers there are, the harder it is to actually earn alpha.

At the same time, beta returns available in fixed income are significantly lower than in the past.  

For us, we’re not aiming for a portfolio that has the highest returns competing with equity year on year, but rather one that can have a good return with good downside protection, and that downside protection can have a lot of use, when other assets are selling off. So I think there’s still room for asset owners to put hedge funds into their portfolio.

The capacity to increase alpha is also becoming increasingly limited, as there is more competition. How are you dealing with that at GIC?

Jeffrey Jaensubhakij, GIC: Yes, it is difficult. There are some who can not only pay better and hire better managers but also maintain a culture that tends to drive performance and risk management. I think if you can find those and then try to keep capacity available to those managers, there is a chance to create a portfolio of managers that you like. 

John, how do you compete against Jeffrey’s team at GIC in terms of getting access to good managers?

John Studzinski, PIMCO: So, we don’t compete. We help each other to go and find the best managers in the world. Evaluating talent is not easy. You got to monitor it… it changes all the time. You’ve got to think independently. We tend to favour going early versus going later.

Hazem, hedge funds used to be an area that you invested in and still continue to do so today. Talk to us about what you’re doing that’s different here, compared with 10 years ago.

Hazem Ben-Gacem, Investcorp: Your point about more capital going into hedge funds is accurate, especially in the last few quarters. A part of me is wondering if hedge fund inflows are part parking capital… there is a market nervousness around where we are today. There is an expectation that capital will be rebalanced across the different asset classes both in the public and private markets as a result of market valuations, inflation rates, and geopolitical tensions.

In a way, hedge funds may be that perfect holding pattern until there’s clarity on how the world is heading.

Increasingly we’ve seen the advent of crossover funds and GP staking [GP stakes investments are direct equity investments representing a minority ownership position in a GP’s underlying management company]. How do you view that?

Joe Dowling, Blackstone: I think crossover investing is an interesting space to study. Within Blackstone Alternative Asset Management (BAAM), we did an internal study where we looked at 145 companies from their last private stage to when they went public — the average time was 1.7 years, and the average return was over 2.2X. Our cut-off was companies doing over a billion dollar IPO. 

If you just think about that for a minute, that return is very high. I think part of the reason is that it’s not a clean asset class. You don’t see the major institutions having a crossover team, so what happens is when you’re going to go due diligence, the private team will say, these aren’t really privates, they’ve been 1.7 years in untraditional funds. And most of the top funds in the crossover space actually started in the public arena and then migrated over. If you go to the public side of the house, big institutions say, hold on a second, these are private companies, and it all gets lost.

But anytime you find something that’s uncomfortable to put in your portfolio, it’s always a good place to look for abnormally high returns.

Ben-Gacem, Investcorp: I believe that as an alternative assets manager, you should always be relevant and provide solutions for clients. I promise you today it’s GP staking, but in two years time, we’re going to be sitting here talking about a new strategy. So the question is how can you take your core competence and build on it? 

Now the interesting thing about the GP staking is that it’s one of the handful of asset classes where you can have potentially PE-type returns over an extended period of time. It’s also an asset class that started sometime in the 80s.

So today, you have a number of generational changes. So there is that opportunity, which only came today as opposed to a few decades ago. Where there is that shareholder change, some of the larger players have gone public, while for some of the smaller players, that is not an option — that’s where the GP staking comes into play.

PIMCO has been a bit more focused on liquid solutions. What do you see as the risks in this rush to private markets and illiquid strategies?

Studzinski, PIMCO: We’ve been active in alternatives for about 10-12 years. And we’ve got a number of strategies that focus on the private credit space. And I think if you look at this environment you can always produce the most successful return through a cycle, whether you focus on private equity, private real estate, or private credit.

 “If you look at this environment you can always produce the most successful return through a cycle, whether you focus on private equity, private real estate, or private credit.”

The most interesting thing that’s come out of the COVID environment is a whole range of dislocations. I would say given our platform, and the fact that it’s over $2 trillion of active trading, we see more dislocations in the markets, so we’ve identified dislocation windows which can produce putting funds to use in sort of 12 to 18 months, and producing sort of over 15 20% returns on those funds.

But you’ve got to be in the market, present, focusing on the geography, the industry, whether it’s aviation, specialty finance, or certain types of real estate even in Asia, looking at it very specifically for dislocations. So there are opportunities, but you’ve got to have a strong credit backup, in order to take advantage of those opportunities. And you’re going to see more people move into alternatives during these next five years, where you’re going to have a much more volatile market. The last thing I would say is that the biggest growth area is going to be retail targeted at the alternative space.

John, given your experience during the post-financial crisis restructuring of AIG, are there any risks that look familiar?

Studzinski, PIMCO: The financial crisis was in 2008. We were sitting in many, many meetings which was all about counterparty risk and lack of transparency in terms of liquidity, and I think then the global financial environment was very much in lockstep.

I think the thing I’m worried about today is that if you look at the COVID health crisis, the global environment was not in lockstep. It was actually very dysfunctional. There was a lack of trust, lack of transparency, and even though science did an extraordinary thing of producing the vaccines in a record time of 12 to 18 months, there was very little international collaboration.

So I think for the next crisis, including in the financial space, I worry that there isn’t going to be enough international collaboration.

The next question is about the geopolitical landscape. It’s changing so rapidly in terms of each country’s prerogatives, priorities, and objectives, and everyone’s trying to take care of their own populations. 

Ben-Gacem, Investcorp: I gotta say it’s a bit heartbreaking to see the tension between the US and China. In a way, it makes me wonder if it’s really necessary and a part of you feels kind of being pushed into big sides. 

As a global investor, that’s the last thing you want to do. We’re not there to take sides, we’re there to take an active role as a responsible investor, investing in whatever it is from China all the way to the West Coast. I hope that there’s going to be a resolution, which unfortunately doesn’t look like it’s going to be the case. 

Regarding where the risks and opportunities are, I think by far, the biggest opportunity in my mind will always be North America. It is the single geography that has survived the test of time because of its resilience.

By the same token, I think the macro momentum in Asia is just as compelling. So I love the US for resilience, and I love Asia for its growth.

But what I see probably as the biggest immediate opportunity is very much the Middle East. It’s a 1.5 trillion economy, 60 million population, one of the world’s highest GDP per capita, one of the world’s lowest debt to GDP, 85% of the population is in urban cities. 65 of the population is under the age of 24. It’s got all the ingredients of a solid momentum, coupled with a young set of audacious rulers who are destined to make their nation evolve. 

“So I love the US for resilience, and I love Asia for its growth. But what I see probably as the biggest immediate opportunity is very much the Middle East.” 

On to risks. I don’t know if anyone noticed but there were two coup d’etats in two African nations in the last two months. It probably didn’t even make it to the news. And this is unfortunately the reality of today, that the world has moved to a place which was a bit more benign indifference. 

Second, I worry about COVID 2.0. We all know a few remember this time last year, we all thought, come December or Christmas, everything would be back to normal. And Christmas came and left, things did not go back to normal. 

Finally, I’m worried a bit about changing weather patterns and what that means for food production and that instability that comes at the back of that. It’s actually nearer to us than we feel. It’s not a 2013 or 2015 issue. The change in weather patterns and that material disruption has been happening over the last few years that’s kind of gone unnoticed. 

Jaensubhakij, GIC:  I agree the US has been amazing in its resilience, its inventiveness, and innovation, but it is priced that way. 

We haven’t talked about sustainability. One of the ways in which we look at sustainability is the companies that currently look like they were priced to be the worst… if they pivot around the transition and take the decisions that allow them to become more sustainable — use energy more efficiently, use the right edge energy sources — suddenly the market rewards them for that climb up.

There are many regions that are priced like they’re going to continue to fail, whereas the US is priced to continue to succeed. And so I think many of the regions and countries where the governments really are making the environment a more amenable one for innovation, technology adoption… as those happen and as they succeed, I think you will get a re-pricing, and that’s the opportunity that I think today is really worth looking at. Many Asian countries are in that category.

I understand that GIC plans to open an office in Sydney next year. Is that an indication or is it long overdue?

Jaensubhakij, GIC: Well, we’ve been invested in Australia all along, particularly in real estate, but also in some of the private equity funds and public markets. It’s just one of the countries where institutionally there’s a lot to do.

We’ve had a record-breaking year for sovereign wealth funds, pension funds, endowment funds. What is the most promising investment opportunity that will enable investors to continue this trend?

Dowling, Blackstone: So maybe instead of just talking about one particular investment, we would talk about an approach that resonates. Blackstone uses the same strategy, which is to get behind huge secular trends that have a lot of opportunity, huge addressable markets. John Gray refers to them as good neighborhoods, and staying in those good neighborhoods and staying in those themes, is a very good way to ensure strong risk adjusted returns. What happens to most people is they get bored, they want a new theme every year.  So anything with secular growth, large tailwinds. And as Jeffrey said, you’ve got to be tough on valuation.

Studzinski, PIMCO: I talked about dislocations before. The thing that’s most interesting right now is looking at gaps in the market where there isn’t funding available, PIMCO will step in and obviously right now, specialty finance. There are lots of gaps in specialty finance, but I think that’s going to continue to be the case over the next several years.

Ben-Gacem, Investcorp: So in my mind, you’ve got this giant steamboat called the Titanic going down the water. And I think my only advice is steady as it goes. Take it easy. There might be some serious icebergs ahead. And perhaps preservation of capital at times is more important than returns.

Jaensubhakij, GIC: I actually agree a lot with that sentiment. But having said that, I think there are estimates of $50-150 trillion that need to be spent so that we can be on the right path in terms of controlling the rising global temperatures. Who is going to be the beneficiary of that $50-150 trillion actually isn’t really clear yet, because the decisions haven’t been made and the regulations haven’t been set up. The taxes haven’t been set up. But I think that’s the opportunity.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.