Schroders' Benjamin Alt reveals how Private Equity may deliver outperformance and could smooth out volatility, especially when markets get rocky.

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Hi! I’m John.

And I’m Julie.

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Well, Ben, welcome to the Human Centric Investing Podcast. I’ve been looking forward to our conversation together because, Ben I know you have a depth of experience dealing in private equity. And here in the United States, by the way, so everyone knows Ben is joining us this morning from Switzerland. But here in The United States it seems like because of the development of the market, regulation changes, whatever have you. The access to investors to private equity is becoming more widespread and the access financial professionals to offer those alternatives to their clients is becoming more widespread as well. So Ben, today, I’m hoping we can take a high level look at the private market, specifically kind of around private equity. And maybe I should start by asking you a little bit about your personal journey. Why as a professional investor, Did you initially get interested in this area of the market? And give us some of the reasons why you find it so exciting.

Hi, everybody. And John, thank you very much for having me today. Yeah, exciting topic. Obviously we have and if I think back that probably my journey, my interest really started already at university when I had a had a student job in an institute research Institute at our university. That was mainly doing research around family owned business. So entrepreneur driven businesses and often they find themselves in a situation where there was no successor. So the kids were maybe interested in other parts, not necessarily what the parents did and what they built the company on. And then you have a generation session issue and that can be solved by private equity. So those were my first touch points with private equity actually as a solutions provider. For those families and founders. And I found that incredibly exciting because often those companies are the most attractive companies in our economies. They drive innovation, they drive growth, especially in today’s world. So that was a bit my kind of path into the industry. I had a little since then in investment banking on the M&A side, but also there that topic is highly relevant. And Today, at Trotus and in the Hartford Fund, we’re following exactly also still that strategy tackling the small and mid-market very intensively with our strategy. That’s a bit my background. Now, to your other question, what happened and where are we today in terms of what is possible for private investors to really access that asset class? I think. We’ve come a long way. And I remember when I started in the industry back in 2008, similarly interesting times, then it was a very, still a exotic or, yeah, not possible to access for everyone kind of asset class, right? Institutional investors, yes, absolutely. They, they were open to it, started investing it. But for the private investors, it was hard to access, maybe through some banks. But also more towards the high-net-worth, ultra-high-net worth individual segment, right? Now we are opening up more to the affluent down to the retail investor. And this is really interesting time for us and for the asset class becoming less exotic, becoming more standard and not as alternative as it might have been explained and made in the past.

So Ben, I think what you said was interesting because many times on this podcast, we talk about demographics and their impact on kind of what’s happening around the world, both in terms of personal lifestyle, but as you just brought up, some of these demographic issues like these companies that are terrifically successful, small and mid-sized companies that just don’t have the successors to carry on that makes a terrific investment opportunity. So let me ask you this question. You mentioned back in 2008 when you started, this was seen as largely an exotic asset class, maybe for the benefit of institutional investors. So what is it that those institutional investors were looking for from this private market that now perhaps individual investors can also take advantage of it? What are the key motivators for looking at private equity?

I think there are two signs of the mountain to look at here. And the first one is obviously returns, right? That’s what we’re all looking for firsthand. It’s, you want to boost the return of your portfolio. And it doesn’t matter which period you look at or private equity now over five years, 10 years, 15, 20 years, there was an outperformance over the public markets, for example. This is reason number one, clearly looking for additional alpha, looking for our performance, but, and this is really, really important. It can be also highly attractive from a diversification point of view. And we also have to look at it from a risk perspective. And when we start from a diversity vacation point of view, what you want or what everyone wants in their portfolios, like many, many value drivers, right? With the access to private equity, you find companies, you find business models, you’ll find growth that you might not find in the public equity space. And look, it’s not about like either or it’s a combination. And what is the right combination depends definitely on the goals of every investor. But what we have been seeing over the last years is like adding private equity to your portfolio gives you higher returns and gives you better diversification and therefore a lower risk level and in a sense also lower volatility where they are a bit careful because volatility, obviously, if you have daily pricing and daily trading, obviously your volatility is higher per se, but valuations in private equity are more driven just by the financials of the company and not so much by market shocks. And that’s why it’s a bit of a smoothening effect, I want to call it, in your portfolio. Especially in difficult times and we have seen also that private equity especially outperforms during crisis and difficult times. It’s two to three hundred basis points more during those periods that we experienced in the past.

It’s interesting to hear you say that because, again, when you think private equity, especially in the small and mid range, I think many financial professionals in the U.S. Would think increased risk, increased volatility. But you’re saying that in part because these companies don’t have a public to answer to necessarily in terms of quarterly earnings, so on and so forth, they may offer a different risk profile. And in certain cases, maybe even. More conservative than public market companies.

Yeah, I think that comes really down to three factors. Maybe the first factor is the entry valuation that you have, especially when we talk small mid cap in private equity. Given that the capital demand and supply balance in that market, so how much capital is raised from institutional investors also now, private investors, and how many companies do you have available as a universe, right? Reference to the US market, 90% of all companies above 100 million enterprise value are not listed. So, it’s a huge pond to fish from, to find attractive assets, and so far still a relatively limited volume of capital. So it’s not like a huge auction bidding process and the prices go up like crazy. First point. Second point. The level of leverage that is used. And that’s also a bit of a misconception of private equity. It’s not always high over levered companies and that’s why you have great performance. We see in our portfolios roughly a 30% depth to 70% equity ratio in the portfolio companies. So very healthy, very conservatively financed. And that gives you good stability into your portfolio. The second point is that you want to see real transformation in the portfolio. So transformative growth must be the key value driver and the key performance driver for your deal over that five-year period. We want to seek companies doubling and tripling over a five- year period in terms of revenues, in terms of EBITDA. And this is also important to mention because often private equity in the past was seen like. People invest, bring down the cost, squeeze out everything from the company as possible, and then sell it off. That’s not really the case, especially with those small mid-cap companies. It’s about growing them, professionalizing them. And then once you’re at the end of your journey after five years of your value creation journey, the exit route that you have in that space. The different channels where you can sell the companies the two is much broader and diverse than let’s say at the larger end. And this is why in all of those three stages, like from entering transformation to the exit, you have great opportunities and always when you have many opportunities, it reduces your risk because even if Plan A is not there, you can go for Plan B or C and still get a good deal.

So Ben, you mentioned those three stages, entry to exit, transformation in between. As an investment professional, what’s your time horizon? I’m sure there are different factors that impact it, but do you have an average length of time you expect to hold one of these companies?

So what we see typically, and this is kind of established itself as a standard in private equities around four to five, sometimes six years of a holding period. There is no scientific explanation for that. I think it was the reason for that is because closed end funds normally go for 10 years with an investment period of five. So, if you buy a year five, then everyone would... Would highly welcome it if you sold the company by year 10. But five years is a good period where you have enough time to change something, but also don’t lose yourself in an endless value creation cycle. What we experience, it’s extremely important to get it right in the first, let’s say, 100 days and then in the 1st year. This is really the foundation for the future growth, to implement the systems, to improve. Or strengths and management to really go full steam ahead then for the next two, three, four years. That’s our experience.

So you mentioned some of the dynamics of the US private equity market. What happens when we look internationally? Obviously, sitting in Switzerland, I guess that you’re not just looking at US companies, but what is the opportunity if we expand our horizon to be all over the globe?

Yeah. No, it’s- private equity is a global market and everything almost is global, obviously, nowadays, and same with the private equity market. In our view, it’s important to also have that global diversification because the world is becoming more complex from a totally almost globalized world, a bit more to a tendency of being more local again. De-globalization, decoupling, everything, all what we experienced and heard over the last years. But how we see the world today is like in the U.S., in Europe, in Asia, you can find bottom-up fantastic companies that are not so much dependent on each other and also not region on region, especially when you’re in that small mid-cap space again. I give you some very simple examples. That whole discussion became more and more relevant with the introduction of tariffs in the beginning of the year. But if you let’s say you are in a German ERP software company selling your ERP software to other businesses, let’s see, only in Germany, and you have your German employees, the programmers sitting in Germany. You’re not affected by tariffs at all, right? If you are an HVAC services companies in the Wisconsin area. You don’t care so much about complex supply chain issues that other producing companies might have that are more multinational. And this is where we figured that a high kind of focus on services and being local is very favorable as a single company when you look at it, but as an investor, I want to have a global portfolio to have all those different value drivers and different dynamics in my portfolio. Point. Best example for us was when COVID started, where China, or at least some areas were in lockdown, where we still went to super return conference in Berlin with a couple of thousand people, went to one of the largest IP events and it’s all like, yeah, okay, it’s not that bad, right? Couple of weeks later, Europe was in lockdown. The US was in lock down. And then China opened up again earlier and then performance was good there. Different things affect different regions in a very different manner than standard, then you’re happy if you have not all OLX involved.

So Ben, where does all this start? How do you source these great companies? Like, obviously, as you’re managing portfolios, you don’t have time to go out and hunt individually, but how do you find out about these ideas, and where does your vetting process start?

Yeah. I think- How we are set up is a bit special in the sense that we started with our private equity activity in 97, 98, so we’re around a long time. And at the time, we started as a group that invested mainly in other funds. And we’re still covering, and that’s also still a part of our business today, an important one, I would say, like we’re still covering around 6,000 managers globally. Where we build like really strong relationships of 2 to 300 of them and they are a bit our sourcing platform for great deals and other great secondary transactions. So through that network, we have the chance to look at around 600, 700 companies globally from the US to Europe to Asia, where we then often go into a co-underwriting process, That’s how we call it with those managers where we do the due diligence together. And that is the fantastic sourcing platform. And then of those 6, 700 deals that we see, we normally execute on around 30 to 40. So we also can be highly selective, let’s say like a 5% ratio of deals that we see and that we really didn’t invest in. And that said, activity is important because that was a bit of a quality insurance. That you have when you don’t go for everything, but only for the best ones that you see.

I know from an earlier conversation that we had, Ben, during the time that you hold these companies, it’s not like you look a year out or two years out and say, hey, is today the day we should sell? Or maybe our expectation was exceeded in the early days, or maybe it didn’t live up to it. You’re really hanging on to these companies because you have faith based on your research. That there are good things to come in that four to six year period that you mentioned, right?

Absolutely and and it is Although we keep the companies in our portfolios for the time period and we want to drive the change, thinking about what is the most feasible exit and who is the logical buyer for that company is extremely important and often underestimated. I think two things that you find very often with our strategies, also like consolidation, so-called buy and build. Where you buy a platform and then you buy more companies into that platform to, let’s say, create a market leader in the region or even in the whole of US or whole of Europe. That strategy is very important that you have a good idea which targets can be bought. And then once you integrated those targets, who will be then the ultimate buyer for that company? Because otherwise, there’s a risk that you first of all don’t get into the acceleration mode and really transform the company. And secondly, I mean, you don’t want to have a company that is a good company, but no one wants to buy it, right? Because at the end of the day, We have to. Create liquidity in our evergreen funds, in our closed-end funds. I mean, investors want money back and especially in the last two, three years where we had a relatively slow exit market, even more important to think that through and have a good idea.

So I think it’s important, Ben, that we also talk about the risk of this asset class. And one of the risks that I think of right away and maybe can help explain a little bit is these are not, I think you mentioned it in your comments, they’re not daily valued assets. There is a certain liquidity risk to these investments. And can you talk a little about that, but also why why that risk also translates potentially in greater opportunity because you as a financial professional maybe don’t have to hold as much cash or so on and so forth.

Yeah, I mean, first of all, it’s historically illiquid asset class, right? You hold the companies, the history of private equity, as we know it, was organized or structured through closed and general partner, limited partner, vehicle setups, so limited partnerships in a way that was the standard. And this is a no-bomb and this is now established and it’s growing. We see in the U.S., we see in Europe, many, many new providers and vehicles that are set up that style. So evergreen structures that allow an in and out. But for me, it’s always very important that we all understand what we get into. And even though those vehicles allow you to be two, three, four, five years in and not 10, 11, 12, 13, 14, 15. That we all agree that should sit in your more illicit pocket. So even you have like a tool or a structure that allows for it. And I always say like in special situation, like the three terrible disease, divorce, or anything that happens in your family where you have to act then under normal circumstances, right, you can act. But Private equity should never be the portion in your portfolio that you see like as a trading strategy where you invest today and then next year you want out because you want to buy a new house or car. That’s not that pocket where it should sit in. But you have much more flexibility through those structures and also the entry points, the amount that you can rest much smaller than when you go through the traditional closed end funds because they’re the minimum was often one, two, five million for one fund.

So it sounds like from a liquidity risk perspective, it’s not as available as a daily valued fund or investment option, but it’s also not a zero income option where you have to wait to the end of a term to get any money back. So as you mentioned, these new structures have been created to provide liquidity windows, which some investors may find necessarily, maybe that liberalizes things a little bit for people thinking about. How can an asset class like this be part of my portfolio in order to diversify and decrease that risk? So Ben, let me bring you to current day. What excites you about, let’s say that the next 12, 24 months moving forward, what is it about the market right now that you feel is really compelling?

I mean, what I really excited always in times where you think it’s difficult and the environment is complex and those have been historically always the best private equity years because that uncertainty in the market also creates opportunities and the valuations are still at a good level I find after the correction we saw in 2022, 2023 when the interest rates when the app we. We haven’t seen a massive rebound, and we have been in that slow recovery phase, which is good, because some people were really impatient last year, year before. They almost forgot how much of a booming period we had towards the end of, let’s say, 2021, probably the strongest asset inflation. And now I think we still find very good opportunities at, at, um, relatively fair price or valuations. And some of the themes are still there. Like we’re big fan of software and investments, but in mature, small to mid-size software firms with high recurring revenues, really good margins locked in customers in a positive way, little customer churn, very stable, very predictable. Those opportunities still excite us a lot because There’s still so much to do, there’s still so many companies, especially also in the small to mid space. Right when we talk about digitalization, digitization, it’s really in that space. There’s so much more to do. That normally means to introduce better and newer initially software that helps you to run a company. And there’s so so much to do many great opportunities in that place. Now AI. Is starting to really come in also into our segment and our companies and every company. So how will the adoption be implemented there? How can it help businesses? Also the discussion we have in our investment committee, which business models we would rather not touch anymore because maybe in five to ten years they are less relevant, right? I don’t think overnight, everything will be different with AI, but clearly there are. This is models that can profit from it. This is model that would probably take a bit damage from it or become irrelevant. And that’s exciting in a way. Yeah, we have a lot of discussions about that currently.

So Ben, if you put yourself in the shoes of a financial professional here in the US that is listening to our podcast today and saying, you know, I think this is an asset class, I should take a better look at any words of advice in terms of your initial approaches to the asset class. Things that Ben Alt would say are kind of best practices for those financial professionals to think about.

I think when I, when I because most investment professionals are very familiar with the public markets, right? And if you see end of the nineties in the US, you had roughly 8,000 listed companies. Today you have 4,000 companies. The reduction of 50% companies tend to stay private for longer. And especially in the small and mid-cap, the most attractive businesses. They private now for longer, because they find the private equity funds that that want to invest or continue the journey there. And you don’t want to miss that opportunity, because they’re very good returns to be achieved, and less correlated to your public portfolio, and and therefore a real bit in terms of diversification, additional value drivers that you want to add to your portfolio. And if you If you start the discussion a little bit faster and look at the portfolio, what kind of champs you have in there, really fantastic businesses that sometimes sit out of nowhere but a world market leader in their little niche and make something to perfection. Those are things I want to have in my portfolio. That also keeps us really excited. That’s why we love what we’re doing, because you always find those businesses not everyone has heard about, but could be a real winner in your portfolio.

It’s terrific advice Ben, but before I let you go today, I want to do some international diversification of the human centric investing podcast, because it’s not all the time we have international guests with us. So I do want to introduce something that we call the lightning round to you on our podcast today. So how this works, if you’re agreeable, is I’m going to ask you a bunch of questions, just looking for kind of your top level first thing that jumps into your mind kind response. And the purpose is to help our audience get to know Benjamin Alt a little bit better outside of the private markets and into the public, Ben Alt, who he is and a little bit of how he thinks. So I’m going to kick it off with one of my favorite questions to ask, but I’m especially looking forward to your answer. If you could go any place in the world to spend a holiday or vacation, where would you go?

South Africa

South Africa.

Yeah, it is it is a bit of our family’s favorite place. And yeah, so we’re going actually 10 days. Oh, terrific. Looking forward to it. Yeah.

Phenomenal. Ben, what did you want to be when you grew up when you were a kid? What do you think you were going to do for a living?

So first an architect when I was when it was very little and then when I was a teenager I wanted to become a professional golf player. Didn’t didn’t work out as you can see but still still like to play golf.

What’s your favorite thing to do to unwind after a busy day or maybe after a busy week on the weekend? What’s you favorite thing do?

Um, being with the family, being with friends, uh, maybe playing a round of golf or go skiing in winter and, and definitely enjoy some, some good food and wine.

There you go. Well, speaking of food and wine, do you have any favorite dishes that you like? Like more so, if someone were gonna make you a special birthday dinner, what would you tell them to prepare for you?

I’m definitely totally into all kinds of fresh fish and seafood, a big fan. Even though in Switzerland it’s not really hard to get because you know we don’t have a coast, so I always enjoyed it when I’m somewhere else. But we are close to Italy, so really freshly made pasta is also something I get really excited about.

Excellent. Well, we talked about software companies, so this one’s kind of software related. What’s the favorite app that you use on your phone?

Um, honestly, for, for just a quick search and, and, uh, using AI, I’m quite a perplexity fan, uh it’s, it’s really fast and, especially for, uh just went on in summer vacation to do some research on it, I think for, for private, uh research it’s it’s really good perplexities of the news.

Well, Ben, other than the human centric investing podcast, what are some other of your favorite podcasts that you listen to if you listen to any other podcasts?

Um, why, why mix and probably none that you that you might know, because I’m from Germany. They did. They are not so not so widely known. But yeah, they’re one or two good history ones. When I listen to podcasts of history related history. And there’s a there’s a good one in Germany, but I think no one knows it in the US.

All right, so I got to ask, I see you as a karaoke guy. Am I right or wrong?

I guess.

So what’s, now this one you might not be able to answer as well, but what’s your favorite karaoke song? Would I know it?

Most likely, because probably everyone has an Oasis Wonderwall.

Awesome. That’s terrific. What’s your favorite game or favorite board game?

Um I like chess but also backgammon probably more the the classic guy there but um yeah those are the two that I would i would rate highly

And if I had to ask you for a quote or a saying or something that you kind of tell yourself time and time again, or maybe it’s been a kind of a guiding quote, if you will, in your life, could you pick one for me?

Um... I think that what I learned more and more, especially also through my kids, is just to be patient, humble, and extremely thankful in what we have. If you look at today’s world, it’s not always everywhere easy. I think we are very privileged in how we grow up and how we live, and I think it’s important to wake up in the morning and be thankful about that and hopefully also give back in one or the other direction.

Well, that sounds like a pretty good way to put a wrap on our podcast today. Ben, I wanna take a moment to thank you for sharing your insight with our audience and sharing a little bit about yourself. I really appreciate you coming on the podcast today

Thank you very much, John. It was a pleasure.

Thanks, Ben. Thanks, everybody, for listening.

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