KKR's Henry McVey Talks Private Markets

0:00For Begrim, one of Thailand's oldest established companies, growth does not begin with the deal. It begins with trust. Later in this podcast, hear how that approach has taken the company from Thailand to South Korea and the United States. Bloomberg Audio Studios Podcasts, Radio, News This is a joy and really very helpful for Morgan Stanley for years. To say he's a partner, KKR barely describes his holistic view of our economics, our finance, our investment. So you say, well, what's it got to do with personal finance? What's it got to do with retirement or wealth management? He and his team have put out an absolutely definitive report, history-based, as you'd expect for a guy from University of Virginia as a history major. Years ago, let's start with the history of our regime change. What did we use to do that's maybe dated right now? So pre-COVID, if you think about it, coming out of the GFC,

1:02we had secular stagnation. Central banks could not engender inflation in the system. What would you do? You'd lower rates, try to increase boring, and then that would lead to consumption. When COVID hit, you had a huge amount of fiscal stimulus coming to the system. The money multiplier started to work, and we went into what we call a regime change. Bigger deficits, governments are spending more, more geopolitics, messy energy transition, and more things again bump into the money. In the Bloomberg money, a messy bond transition as well. I want to go to this one quote. This is a really sophisticated report, folks. Get it from KKR. I can't say enough about it right now. It's simple. Productivity-driven growth and increasing economic choke points for political gains. It reinforces Henry McVeigh's view. We are indeed in a regime change, and it moves to private equity. Why does Scarlett Foo need private equity in an IRA? Well, ultimately, I think if you believe in compounding,

2:04which is we think is the eighth one of the world, you guys talk about it all the time. That's what private equity does. The second big point is that it actually lends itself to operational improvements and companies, making them better. So you're not buying beta of the market. You're actually buying alpha that's generated by making companies better. We typically own at any time 200 companies. We're using the network of what we're seeing across all those companies to share best practices and to drive growth for our owners. Does Mr. McVeigh know that if there's a third Greek letter mentioned, the trep door opens? Oh, yeah, yeah. But it's a Friday, so we'll let him off, you see. Okay. What happens in a higher interest rate environment, though, for private equity? Because they've had a hard time being able to exit some of their investments with bar and costs elevated, and it's only going to get more elevated. Look, I'd say there are a couple things which is interest rates is not your only lever, right? Your best thing is how you run the business. There's going to be a vintage, a private equity that came through 2021, and you see this in some of the software deals where you paid high prices, that will be a little bit of a bump in the night. But that's ultimately why you need to diversify

3:09where he invests, and ultimately, I think we have not been seeing that. I know this catches the media's attention all the time, but if you look at our exits and we're publicly traded, you can see we've had pretty substantial exits of late. What's the most common mistake or misunderstanding that individual investors have when they allocate to private markets? Because this idea of getting some private assets into report-fold is kind of new for individuals. Kind of new. Relevitational. It's to be long-term. Private equity is predicated on an illiquidity premium. What, is long-term five years, ten years? Somewhere between five and ten years. If you're coming in and you need the money in six months, that's how it works. Okay, this is the heart of the matter. Good morning, Blackstone. Love you. Good morning, Black. Is there any other companies besides Blackstone and BlackRock? The heart of the matter, Henry, is this liquidity issue? Do we need to set up sensible guardrails within Erissa programs, retirement programs, to make it efficacious to wait five years, to get that gross up from my money? I was around when we actually introduced the 401Ks,

4:12into the public markets in the 1990s when we took a lot of these asset managers, public. If you think about somebody who's 35, they're going to be in the workforce for 25 to 30 years. Taking some small proportion of your savings and having that compound over time, where you don't have a threat of illiquidity, that is in my- Totally agree. Have you seen evidence that people will be adults and do that? Or do they sell or ask to sell on the first dress? I think it gets to a lot of this gets to investor education, which is what's the right vehicle, where are you, what is your long-term goal, and ultimately what's the best vehicle for getting you getting you there? Henry, Tom talked about your regime change framework, and that goes back to the end of COVID. I think 2022 is when you really started talking about it. But a lot has changed since 2022, right? In video kicked off the AI boom, you have the return of a new president or old president, Trump, and his many policies which have proven to be inflationary, whether it's tariffs, the war, or immigration, or the one big, beautiful bill. So how do you fold those

5:14developments into this framework? Yeah, so a couple things I say at the heart of what we're talking about is that stocks and bonds are now positively correlated. So if you think about liberation day, what happened? The dollar went down, bond sold off, and stock sold off. For the prior 20 years, you had when stock sold off bonds rallied, and that's how you diversified yourself. Our view is that is a more sustainable trend. What's happened, I would say probably geopolitics has accelerated, that was one of our key foundations. The second is the deficits have accelerated. We have not left the call that you're in this higher resting heart rate for inflation. And so if you think about what KKR has done, more operational improvement in private equity, more real assets in the portfolio, and then credit, be up in the capital structure where you're not stuck in just a fixed investment. In your brilliant regime change report, there's a chart of the sharp ratio. William Sharp Stanford, X beta, you learn three risks with the CFA3, sharp trainer Jensen. Let's go to the very

6:14sharp ratio with Henry McVeigh. It's irrefutable with private equity. You pick up an efficacious sharp ratio that will benefit someone in wealth management. Why the struggle now? In terms of, let me drill down. Selling it to the public. Yeah. Look, I think when you look at, I mean, I don't think that anybody at KKR, I think we think that it should go into the wealth business, individual investor business, but it doesn't have to be accomplished overnight. Again, I get back to, we want to be thoughtful stewards. We want to think about education. But when you think about long-term retirement savings, that's the business KKR isn't. We're in the retirement security business. If you can extend that beyond just pensions and sovereign wealth funds and family offices, it makes sense for individuals to have some portion of their portfolio in that. But I don't think you want to do this irresponsibly. I think where you've seen, you've seen this go back to Janus in the 1999. It's like taking way too much money in way too quickly. It's hard. That happened in the .com era. Everybody learned a lesson. We've seen that in different areas. So just slow and steady wins the race. This is our 50th year at KKR. This is

7:20in our first radio. We've been around and I think you know our founders. Ultimately, you've got to have a long-term focus. It's too much a Janus. He's throwing massive shade on Denver. But ultimately, concentration, all the things that apply to the public market supply to the private markets, which is have linear deployment, think about concentration, think about leverage. If you listen to financial news, you know a lot of time to spend thinking about what's next. The next opportunity. The next investment. The next move. But sometimes what matters most is being ready for what you never saw coming. For more than 75 years, Cincinnati Insurance has worked with independent agents to help protect businesses, homes, valuables, and more. Because planning for the future isn't only about knowing what's next. It's about making sure you're ready for what you can't predict. Let Cincinnati Insurance make your bad day better. Find an independent agent at CINFIN.com.