
Decades ago, Steve Schwartzman and Larry Fink were partners. Following an alleged disagreement surrounding compensation, Fink split off to start Blackrock, while Schwartzman continued at the helm of Blackstone.
While both incredibly successful in their own right, Blackstone trades at much higher multiple of assets under management thanks to the healthy fee structure of its alternatives business relative to Blackrock’s largely lower-cost products.
Blackrock’s recent acquisition history tells a story of converging interests and strategies. $12 billion for private credit firm HPS, $12.5 billion for infrastructure giant GIP, and $3 billion for private asset data provider Preqin, all within the last 12 months or so. It’s a dramatic shift, and a doubling, tripling down into attractive, and high-fee, alternatives sub markets.
Indeed, private markets are exploding, a trend that’s been bubbling since the advent of the modern leveraged buyout in the last 1970s. After the Great Financial Crisis, though, there’s been a distinct acceleration, with bulge bracket banks pulling back from lending to private companies thanks to more stringent regulations. Then, there’s the simple difference in the size of the sandboxes. According to Capital IQ, private companies with more than $100 million in revenue outnumbered public companies of the same size by more than 6:1 (as of Jan 2022). That’s a much larger pool from which to allocate capital, do bolt-on acquisitions, and try to exploit market inefficiencies.
We had the chance to sit down with White Wolf Capital CEO Elie Azar to discuss all things private markets, and LBO, an ETF dedicated to investing in publicly traded alternative asset managers.
Q: It’s not hard to notice we are in an alternatives bull market — where would you say we are in this cycle as far as adoption is concerned?
A: We’ve come so far, but it still truly feels like we are in the early innings. When these alternatives strategies were still emerging in the 1970s and 1980s, institutional investors were allocating relatively small pieces of their holdings to private equity, in the range of 1% to 5%. Today, as those strategies have broadened out, that allocation has climbed to 20% to 30% in the institutional lane. To me it feels like we are about to see that same type of transition for the individual investor, who may have grown up wedded to the 60% / 40% portfolio. These days you are seeing more appetite for allocations into private market opportunities among HNW investors, and alts managers increasingly see the wealth channel as a huge opportunity.
Q: Where do you see the strongest potential for returns in this market?
A: I believe there will be pockets of strength in infrastructure, which I am bullish on, but I also think there will be strength in what you might call derivative strategies. Secondary funds buying and selling LP stakes, for instance, have quadrupled over the past 10 years, a 20.2% CAGR1 since 2000, vastly outstripping the overall annual growth rate of private equity AUM at 12.9% over the same period. But that’s still a very small piece of the market.
According to Bain, secondary transactions provide only about $120 billion in liquidity annually for an industry with over $20 trillion in assets under management globally. So clearly there is a lot of room for liquidity providers to come in and provide value, whether that’s on the GP or the LP side of things.
Q: Talk to us about LBO, what is the fund all about, what’s the color, and how is it managed?
A: At our core White Wolf is a diversified asset manager focused on finding value in inefficient private markets. We have historically advised on private equity and private credit, and LBO is our public markets strategy offering exposure to a diversified portfolio of publicly listed buyout firms & sponsors, BDCs, leverage providers, and related asset managers. Top holdings include companies like Ares Capital, Blackstone Secured Lending Fund, KKR, etc.
Q: Investing in a private equity fund (as an LP) is a very different thing than investing in the publicly-traded companies themselves. Can you talk to us about the structural differences, and the advantages of investing in the ETF wrapper?
A: You’re right, investing as an LP is a very specific beast. It comes with long term lock ups and the need to reserve or plan liquidity to answer capital calls as investments are underwritten. This is a structure typically reserved for qualified purchasers, and not always a fit for clients.
The ETF wrapper on the other hand has long been referred to as a democratizing force in financial markets with many great attributes for clients. Diversification, tax efficiency, professional management, to name a few, all the while you have exposure to the underlying fee streams that make alts such an attractive business model for the GPs.
Q: What sets LBO apart from some of the other public vehicles investing in private allocators?
A: LBO is the first actively managed ETF of its kind and is distinct because the other ETFs in the space are either only PE or only BDC related. Whereas competing funds are market weighted, we leverage our expertise in active management and private capital to attempt to find underpriced securities and deliver alpha. We think we are very well positioned.
Q: Thank you very much, where can advisors go to learn more?
A: Please visit www.lbo.fund for additional details.
1. CAGR: The Compound Annual Growth Rate is the mean annual growth rate of an investment over a period longer than one year.
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a Prospectus or SAI with this and other information about the Fund, please call +1-305-605-8888 or visit our website at https://lbo.fund/. Read the prospectus or summary prospectus carefully before investing.
Investments involve risk. Principal loss is possible.
Investment Risk. When you sell your Shares of the Fund, they could be worth less than what you paid for them. The Fund could lose money due to short-term market movements and over longer periods during market downturns. Listed Private Equity Companies Risk. There are certain risks inherent in investing in listed private equity companies, which encompass financial institutions or vehicles whose principal business is to invest in and lend capital to or provide services to privately held companies. Generally, little public information exists for private and thinly traded companies, and there is a risk that investors may not be able to make a fully informed investment decision. Business Development Company (BDC) Risk. BDCs generally invest in less mature U.S. private companies or thinly traded U.S. public companies which involve greater risk than well-established publicly traded companies. While the BDCs in which the Fund invests are expected to generate income in the form of dividends, certain BDCs during certain periods of time may not generate such income. Master Limited Partnership Risk. An MLP is an entity that is classified as a partnership under the Internal Revenue Code of 1986, as amended, and whose partnership interests or “units” are traded on securities exchanges like shares of corporate stock. Investments in MLP units are subject to certain risks inherent in a partnership structure, including (i) tax risks, (ii) the limited ability to elect or remove management or the general partner or managing member, (iii) limited voting rights and (iv) conflicts of interest between the general partner or managing member and its affiliates and the limited partners or members.
The Fund is distributed by Quasar Distributors, LLC. The Fund’s investment advisor is Empowered Funds, LLC which is doing business as ETF Architect.