Inside Private Markets Ep 5 - Understanding Risks and Challenges in Private Markets

Ladies and gentlemen, welcome to episode 5 of Inside Private Markets here on Ebenex Dream. Last episode, we unpacked the positives. We focused in on why you should be investing in private markets. Today, we're going to deal with the negatives. We're going to unpack for you what the risks are of investing in private markets and then explain, perhaps, you can go about either mitigating or dealing with those risks. Not just up to me though, I'm joined by two esteemed partners in this discussion. First of all, from Rescura Fundamentals, Director of Rescura Fundamentals, Kami and Bulawa. Very welcome and please quickly tell us what is Rescura Fundamentals. Thank you for that Leon. Thanks for having us. Rescura Fundamentals helps to unpack some of the complexity in understood valuations when the industry moved towards PE in around late 2000s, 2007 or so. Our business was born just to show people like Sonja who are capital allocators and look after people's capital that the valuations made sense. We deal with that spectrum of all understood assets. So we will come back to the risks, but basically what you did was help people mitigate the risks and the other. Cool. Sonja, Sonja, Chief Investment Officer of EPPF. I sometimes forget to introduce you because we speak often. But Sonja, welcome and thanks for joining us today. Thank you Leon. Nice seeing you again. So guys, when I try to unpack the positives in a list with theory path of RMA and David Murr of Grewith Kapitour in the last episode, they don't know how to make lists because everything they put on the list, they then try to explain. So I'm going to try to clear to you on this one. We're going to make a list of what the negatives or the risks are. Right. We're not going to talk about it. It's just what it is. And then I will make sure we come back and talk about the mitigation of those risks. I'm going to start or Sonja with you. You can just blur to the art. What do you see as being a risk of investing in private markets? Only one. Start with one. You'll get another turn on promise. Okay. Illoguida-di risk. Perfect. Cammy. valuation. Sonja. Manage a selection risk. Cammy. Maybe a bit of timing and an allocation in terms of people are now worried about outflows and inflows on a greater institutional available. So there's a lot of, I guess maybe the people don't understand the cash flows of this investment which I think is a risk to the asset class itself. Okay. Sonja. I'll stick with a abbreviated version. I think vintage risk would be my next one. Okay. You're going to have to remember that one and remind me as an old vintage myself, I'll market a monitor monitor. I'm not an art one. Cammy anymore. And don't feel too much pressure. Yeah. Come back and add to the list. Yeah. There's about the top four, five that everyone does worry about and then everything else is more on specialization of the type of I'm listed. So I'm going to add one risk just to the list so that I can say I added one. And I'm not saying what to specifically call it, but the risk of a, well, there's actually two, I'm going to add two, right? So the risk of lack of deal flow. So you allocate capital on your capital sits and cash and the other one is insufficient capital to support a particular opportunity. And therefore you sit waiting for others to come to the fore and never get invested off the back of that. And then we want to call that we can come up with names. See, you know, mind, I would like to start off, Cammy, on the valuation risk because and specifically what you guys have done in Triskura and and your role in that, that respect. So if you can explain to the audience, what is the valuation risk and what can be done in order to mitigate that that risk? Now, when I say mitigate, risk is seldom eliminated, but it can be managed. So we must keep it in that context. Sure. So I guess it's around the entire definition of unlisted. There is no pricing. And you know, our industry relies on relatively stable pricing to be able to pass ownership. So valuation then deals with that risk as terms of monitoring it. Because if you had elisted, you know, if it's starting to go in a way, you don't like, you could move your position in a couple of weeks with with private equity. You are locked in for the 10 years and it does mean that if somebody tells you that the value is X, you have to hope that it doesn't deviate too far because it's got implications for you. And you're put folio on your IRR and things like that. But in terms of mitigate, I think a lot of it's become more sophisticated over the years and a lot of general partners, what we call the asset manager, have started to put in a lot of valuation processes internally that make a lot of the institutional investors feel like they've got a handle on what this investment is doing and how they would make their money back. So yeah, I'm not sure if that's also your finding on the other side. Yeah, makes perfect change to me. Let's take a quick break to say thanks to our sponsor, old mutual alternative investments for their sponsorship of the series, allowing us to bring it to you for free. Old mutual are leaders in the space of private market investing. I don't know if you're aware of this, but there's a shortage of student accommodation in South Africa, which is a major constraint for some people to access higher education. And mutual has taken the step of investing in affordable student accommodation. Please watch this video to find out more. The numbers are frightened of students that there's no accommodation available. So then we decided what we have to do is convert this into student accommodation and then the construction of the city and the buildings. As a business, we invest in social infrastructure gaps, which primarily includes affordable housing and student accommodation. So the res has just opened as a January 2026 construction started almost a year ago, February 2025. So it's been heroic in terms of the professional team and the developer in achieving what they've done. So they've gone from 484 units to 1,000 in excess of 1,300 units. Those as at mid-February, which is where we stand today, are almost 100% full. We're just trying to get students to strive for that academic excellence. I think, yes, we do just try to create that home away from home experience for all our students that we're getting. So let's talk about the context of a defined contribution pension funded at Similarford and Breloff and with multiple participating employers. What we're saying is, there's no place to go and buy and sell, where you can set a price and see that price, like on the JZ on a daily or hourly or every minute basis kind of thing. You are ultimately looking at the investment in private markets and putting a price to it through evaluation methodology on a quarterly or monthly or whatever the time period might be. And if you get that wrong, you then have members or participating employees that might be coming or going at any point in time and either buying and or selling out of the fund at a particular point. And if you have overstated the value, that person gets paid at a higher level and then the others have to cross subsidise that person and vice versa. That's the risk at the end of the day. But what you said there is that the methodologies of evaluation have become sophisticated number one. And maybe you can just quickly, so now we'll come to you so don't worry, but the methodology evaluations become sophisticated. I just want to understand that a little bit better. But secondly, and I don't know the answer to this one, how consistent is it? You've spoken about GPs. Do they all use the same valuation methodologies? Are there differences there? So can you have things all over the place? Sure. Good question. So the investors and the. as a class tend to be quite sophisticated. They report to their investors on a quarterly basis. So they release a quarterly later with evaluations and what's changed since the last time they communicated. And then previously it would be me saying, I did the deal, I valued it quarterly basis and I get emotionally attached to it. So it was a hundred grand, but things have changed a year later. Now it really is 50 grand, but I don't want to acknowledge it. So that's where you need several parties to go, I know you would have hoped it's a hundred, but at this point in time it's at 50 and this is how we close again. And a lot of GPs do that internally four times a year, but once a year it is good practice to get an independent valuation, but people have different levels of risk as we spoke about. So in terms of methodology, there's a sophistication and consistency to the valuation methods that you would expect to see. And most managers do follow a process that's quite consistent. It's just in the past we've had failures, valuation failures and people were burned. So it is quite a sensitive topic for especially previous trustees. - Does it differ based on, Sonia mentioned the word, the vintage, the stage of the underlying investment. So in, for instance, if it was a VC company quite early stage, there the valuation is very difficult to get right to get even be negative in some way. Compared to a more mature company, we're suppose there's more stability because there's cash flows and there's earnings and there's the usual stuff you can look at. - Yeah, agreed. It's definitely come a long way in terms of the sophistication and in this structure we have also what we call an LPA. So your LPs, which is institutional investors, would look at your valuations and say, "So there's a lot of, as long as there's enough people saying, "is this according to how we do things "and more or less does it make sense?" It really does go a long way to flag early distressed assets. So I'm gonna tangen cheek, I like to have a tangen cheek moment in every interview that I do. I do not understand why we build our own walls to make our lives more difficult. So we deal with trustees. Trustees come from a world where it's all different backgrounds and understandings of different things, yet just to make it a little bit more difficult for them, rather than calling it an agreement or an asset manager or cash. We choose dry powder, LPA, GP, so that they have no idea what we talking about at Edmund Pointe's and time. - And call them LPs, just to get a little bit more. - So I've said this hand in time, an LPs what I used to put on when I wanted to relax and listen to music. GPs what I go to and I'm not feeling so well. And dry powder, I try to avoid as much as possible because I don't know what to do with it. So I'm not certain why we brought that into repertoire. But anyway, let's move on to, if you don't mind, illiquidity because the valuation side, I understand is a risk, but I think in general it's a very much a manageable risk for funds and it has mature to a point where you can have a reasonable reliance on the valuation that is given in private markets. Illiquidity is one that's arm-stall struggling with to get my header on, particularly in a heavily DC type market where there's member allocations, there's two pot annual withdrawals, all of those kind of things. So Sonja, it's a tough question. - Okay. - But perhaps explain the illiquidity risk. And then let's talk a little bit about what are mechanisms to manage that? - Okay, perfect, I will do that. Just wanted to echo your sentiment that I think we as an industry to make things unnecessary complicated. But I do think just what you mentioned now in terms of almost a completely different set of terminology that we use in private markets speaks to the fact that you either enlisted person or you're a private markets person and you either grew up in the private market space or you grew up in the list of space. And I think that perpetuates some of the complexity. So we need more people to do what we're doing today so that we can actually break down so that some of those barriers. But okay, back to your question Leon. Illiquidity simply means, as far as what it says, it means you cannot convert an investment into cash quickly. You cannot quickly silence and I want to withdraw money tomorrow at the right value. You can't get it cheaply and you can't get it in a transparent marketplace. And of course we know that private markets, this is common for private markets because the assets are not traded as continuously as in the listed markets or on an exchange for instance. Exits usually will depend on something that happens in a grid sale or refinancing that's happening or a trade buyer that's coming along or another fund that's buying something from you. Sometimes you also get of course listings that happens and then there's an exit and now all of a sudden there isn't a grid price and you do get liquidity and I mean depending on what the deal structure is, you may get it at what you perceive the value to be or what your recent valuation showed or does not transpire into that. But normally you cannot simply say, "Well tomorrow I want my cash" and then you get it. That obviously takes time and timing may not be in your control and it also is affected by valuation. So first of all, I don't think we need to automatically assume that liquidity is a flaw. I mean for a genuine long term investor like for instance, the fine benefit pension fund will be to get to your second part of the question as well. I think we recognize that liquidity can be a feature that allows you access to an asset that you otherwise wouldn't be able to replicate in listed markets and therefore it can give you the diversification and yield pickup and all of those other things that we often do get from private markets. And we would be expected to be rewarded for the fact that the funders locked up. So the fact that we are deploying capital we do expect some sort of a premium associated with that. I think the real mistake is really that people take liquidity in a portfolio when they can't really afford to do so and I guess that leans itself to your second question. Well, second part of the question, which is for us is a defined benefit fund. We arguably are a bit more long term focus. We are fund structures more forgiving. So to speak because the investment horizon is of course a longer term horizon and we therefore can afford because we've got long term liabilities, we've got pensioners that's or actives even that's retiring 30, 40, 50 years from now. We may be able to find investment opportunities where we can harvest this illiquidity premium for the benefit of the member and we can write it out in the meantime. We don't have to get as frequent evaluation at an accurate rate because we've got a pool and the members protected by the pool and our liquidity is effectively our liability that we need to provide and that's been catered for by virtue of the amount of cash that we hold. So that's the perfect scenario of course. But to your question in a DC fund, yes, illiquidity is a much more as opposed to delicate balance to navigate because members are in that setting. They individually expose to the pricing points and the switching behavior and portability now as you said in South Africa, given the operational and liquidity implications of the two-pot system, I think we need to be able to think a little bit more about what strong liquidity planning is, I think, umbrella funds for instance are particularly prone to have to understand the differences between the different employer groupings that's part of the umbrella fund a lot more. I mean, if you're just a DC pension fund and you close to your member you can understand the liquidity profile a little bit better. It's already complicated, but it's much less complicated than if you for instance or a commercial umbrella fund because in that instance, of course, the whole liquidity problem is even more amplified because the member basis are not the same and liquidity is not that predictable. And yeah, so in those instances, I would argue for a lot more caution, a lot more understanding of what the typical liquidity profile looks like. Maybe even looking at thoughtful vehicle selections which vehicles are the appropriate vehicle for a DC fund and for an umbrella fund. And to also build in a strong sort of fairness principles around understanding of the pricing and how unitization works and the trade-offs that you were referring to earlier on what you know, I do you deal with those things in an umbrella fund. So they are mitigating ways, but it definitely is a complication for a DC fund. - Such a me liquidity risk star. that's the investor. I don't like to put responsibility back onto the trustees, but ultimately it does start with their men. It starts with understanding their own fund and the liquidity needs of that fund. It's actually not a difficult exercise to do and sometimes it might even be a bit more intuitive, but they can rely on their advisors to help them. So for instance, there was a recent case of an umbrella fund where the underlying asset manager invested in an ill-equate instrument offshore. That umbrella fund then had an employer that left and they handed over an inspecity transfer of that investment. The new umbrella fund to which the employer was going said, "I'm not taking that investment. You can't force an investment into my umbrella fund." So here's my problem in that scenario. Firstly, did the agreement with the asset manager allow for investments in unlisted? Was it communicated to the trustees? When it was communicated to the trustees, did the consultant say, "Okay, we're hang on a second." If that is the case, we need to change the agreement with our employers to allow for an inspecity transfer, i.e. match your liability, right? Some poor principle in that regard. Secondly, if you're an umbrella fund and you have a concentration, or first of all, if you have multiple employers and some can come and some can go, you can do some culture and you can cross subsidise. You send you with it. It will come out in the washing. But if you have a dominance of a couple of big fans that if somebody pulls out, suddenly you're waiting with increased exponentially to an unlisted instrument, well, that's what not responsible. You should never have elotted into the fund in the first place. You can rather, in that case, either say no private market investments and that's justifiable. Or when I'm testing this, you could maybe say rather private credit, which perhaps wouldn't have a 10-year term, but might have say a three-year term or something like that. So the nature of it can differ in that regard is that a way of mitigating it. Well, sure. So the kind of asset you're all, definitely. Well, first of all, as you say, you're client, neither investor and make sure that you size forward appropriately so that as people come and go, you can navigate it. That's the one mitigator. Second one for me is the asset. So what sort of asset is best placed for you to facilitate enough liquidity? And the third one would be the vehicle. So are you, for instance, in the very traditional closed-end draw-down funds, then you really don't get any liquidity. But there are newer generations of more evergreen or semi-liquid vehicles. And even nowadays, I mean, our industry, we've also been working on something and others in the market have done something similar to create listed vehicles of illiquid investors. I mean, I would even argue that some of the umbrella funds themselves may have balance sheets behind them where the balance sheet should be there, not just to sell at the marketing point when you're trying to get a client, but with that balance sheet should be able to absorb some of the shocks that come that may come with liquidity. And then the last defense, I can almost call it is, of course, to think of a fund structure so that you dilute that exposure to something. And you can improve the access and the diversification overall. But yes, there are many ways in which you can mitigate for that. And all of those should be investigated. I think we shouldn't just assume that all private markets are the same. And to your example of credit, for instance, versus private equity versus venture capital or whatever, they've got different profiles. You get different vehicles. They all structure differently. Plus, I would argue that they are other mitigators for some of these umbrella's as well. So just to finish, sorry, chemical, I come back, I just want to come back to this point because I wanted to bring you in on specifically a particular point, but I just want to finish the analogy I use the analogy of an umbrella fund. I don't want to just pick on umbrella funds because of that one case. You mentioned define benefit funds longer term nature, but even in a defined benefit fund, you might find the fund is mature at sitting with 10 pensioners and they, you know, are all in year 15 of their pension as an example. So that wouldn't be appropriate in that case to invest in illiquid tar tarp investments. And a defined contribution fund people say, oh, but with two pot and transactions, it's not that we tend to think because there's the annual withdrawal allowance that the the asset base will reduce, but it's actually not the case. So imagine the sense that it's also encouraging greater preservation because you can't simply take our money when you leave employees. So in fact, the longer term nature of a DC fund provider, you've got a good spread across the ages. You can invest in private markets. I just wanted to to park that because it's appropriate in all cases, but depending on your own profile, that's the the key thing. And the consultant has a role to play in that regard. Now you mentioned listed vehicles. And as soon as you say listed vehicles, I go, okay, because I've heard bad stories internationally. And that's where I wanted to bring in Camille because it makes sense to me if you can list a bit of, I've always been told and I've realized to the valuation that they trade at a discount to the valuation's deep discounts to the valuation. So Camille, what is your understanding and thoughts on that? With my asset consultant hat on briefly, just to speak to the liquidity issue, I mean, it's a very real risk, but it's a private market, such a small part of the portfolio that they don't necessarily cause liquidity just by itself. A lot of the funds we have are only invested at 4% if at all. They might have a bigger, you know, they might have a bigger and listed property, but in terms of what is actually there and your asset, your strategic asset allocation, it shouldn't, an liquidity event shouldn't be caused by 4% allocation to an asset class. But yeah, to your point, then you have to know your underlying client very well. And then a lot of people also do like the private credit as that's softly quidating. So you get liquidity as they pay it down. And then on the listed and listed vehicles, it's a very complex thing to try to get across to listed markets that there is value, there's this deep value underlying that need asset value because they just don't have the same level of transparency in reporting as, you know, the JSC. So you can get a sense of what the underlying driver of the value. And I think maybe that's the disconnect between the investor and what we see in the deep discount. Evian Net is proud to bring you top quality content from experts across the financial services industry and South Africa and internationally for free. Your support helps us in doing this. All we ask is that you subscribe to our channel by clicking the subscribe button below. Share this video with others you think will benefit from it and give us thumbs up if you're enjoying the content. That way you help us help you. Thank you from the team at Evian Net for more great content. Please visit www.ebnet.co.z. So you mentioned the liquidity is less of an issue because people aren't that heavily weighted in, in analysts. Now it's largely that 4% comes from the larger pension funds, the more sophisticated funds with research teams like the the EPPFs and so on. I'm arguing from the perspective that funds should be 15-20% that the alliance is there in South Africa for that to happen. And South Africa as a country requires that development capital to come to the fore that government cannot do it on its own, the coffers aren't on there. So liquidity in those cases becomes a more serious issue and that's why I'm looking for solutions if I could put it that way. So yes the trustees need to look at their funds. Good to hear that there are a full of experimentation around listed vehicles. Other days someone mentioned to me the use of a quiff, so the whole qualified investments, funds or whatever. There's ETFs perhaps down the line where that can also be used, but I don't think any of those problems of discounts would disappear with that. So a question that I have and Sonja 2, can you explain what a development financial institution is? And when they talk about capital capital to catalyze, what do they mean by that? And why can't they play a role in catalyzing liquidity? Or am I spoken too many weird things? No, well, the FIs are certainly a critical part of the of the value chain. And yes they certainly do play a role. I mean you already get insurers that also play quite a big role to make sure that they can actually support with the right level of insurance so that it is something that is a little bit more favored and people can see some of the risks being taken away. And I think traditionally a lot of the the DFI's have played some of that role already. They they've managed to mitigate some of the risks they've managed to to help people see educate people a lot more. They play a very important role. They they often are the anchor provider for capital. First loss of sometimes even concessional layers, the some Some of the guarantees I've seen the DFIs provide. We've worked well with DFIs like the IFCs and others in the market where they can provide technical assistance as well. I don't think anyone expects any pension fund or any traditional, long-only asset manager to be able to know everything on their own. So they do provide technical assistance as well. They provide a lot of environmental and social discipline. They give a lot of credibility as well. I mean, if you talk to investors and you mentioned some of the DFIs that are involved, I think it creates a sense of comfort that there's a level of oversight, there's a level of governance involved in a level of credibility so that you can crowd in more private sector investors. That's also why some of the larger funds in South Africa do have strategic relationships with some of the DFIs to help them understand blended finance as a concessional fund risk mitigation, the tool that you can use and to help you rebalance the risk reward in a proper way. But not all smaller pension funds, of course, have the same level of access to DFIs. But even that has different solutions if you think of pooling vehicles and all of it. But yes, Leon, I think the DFIs play an absolutely critical role and a lot of them all in our market looking around to do their component worth and where they can work with to make it more billing for asset owners and capital allocators to go into it. I really believe that if they could act as a buyer of last resort and allocate capital per fund, that should it be required in the certain extreme events that will appease the need of the fund to the point that they can go, I can live with that. I know at least I can get out, yes, there might be a discount or whatever it might be, but I know I can get out in those events. I think I haven't seen anything like that and I would hope to see something because I think that's the difference between four and 20 in terms of Cammy's example there. Cammy, Sonia mentioned vintage risk. I think what she meant was that as you go through the spectrum of different private market investments, the risk differ. So I'd like you to quickly explain all the way from angel investing all the way through to buy arts just quickly what the risks are, credits as well thrown in there. But then also when you're looking at a GP and your choice of your GP, they will offer you a fund. Sometimes I'll talk about fund one, fund two, fund three, hopefully fund ten. What is the risk when assessing GPs in terms of the vintage of the fund that they bring into to the fore? Let me start with maybe the ecosystem. So an angel investor, that's me giving my cousin 10,000 rent, go start something. They manage to build a small case for it and then I say, "My friend Sonia has another 10,000 she'll add it to you." And then you can double your footprint. At some point you grow to the point where say, if you're a retailer, a small shop right might be interested to buy you out. Then we talk in private equity and then it kind of goes on to extremely big deals as well in the cycle. And with angel investing, that's why it's called friends and family. There's a high probability of not kidding it back simply because you're backing an idea. So not for pension funds? Maybe the latest age to be fair to my VC colleagues at a latest age. So once they've met their own milestones, we have a huge VC network in South Africa. So you can see the guys, they raise their couple of funds, they get marketing, they clear return market. Then it starts becoming more stable for institutional investors too. In the VC space is a series A, B and C. So A is early stage and then going through to see which is late in the VC cycle. Based on my experience in Europe, VC funds are a tough sell. But in South Africa that's a bit more, I wouldn't say common place, but it's a bit more driven. People are trying to draw VC a lot more. Why would that be the case? I think that's because we also, I guess a take-up. A big time Nairobi and Lagos have a lot of that type of energy and people who can do those skills. And then a lot of the international software companies have like a wage arbitration so they don't mind basing, so that started off kind of that Silicon Valley. And then a lot of the Ceptonian VCs were going straight to San Francisco to raise their money. Which shows that. So is it a sector based type issue or is it there's a lot of companies looking to raise capital that are mid-sized type companies and there isn't easy capital and people refer to it as the missing middle and I promise that African perspective that's where jobs are made. There's a space. So is that also not why we actually should try to support the VC space for in South Africa or suddenly I'll put it to you, is that too risky? Yeah, I have to say we haven't gone into VC because of risk appetite. I do think VC grows equity, distressed strategies and opportunities. Certainly there's a range of outcomes that's a lot less predictable for us specifically looking at how we can underwrite mistakes, being timing, funding risk, weak access. I mean, there's a whole lot of valuation risk that we talked about before. I think you can destroy a lot of value but again, you can size for it appropriately. So it is something that we keep looking at. But certainly there are periods like everything else in our economy. There are periods of cyclicality to win VC does better than something like private equity or something that's a bit more conservative. We tend to earn a little bit closer to the side of co-infrastructure equity and co-infrastructure debt purely because we want the predictability of the cash flows into our pension fund. But yes, there is an argument to be made that it isn't interesting investment. But you know what I would also argue is that within a diversified portfolio is, let's say you have a private markets program and you would have a spectrum of investments across that. So you would add a specialist or generaliser but you'd have some VC, some buy-art, some growth and so on. Maybe some credit. That's maybe 10% of your overall funds. About the time you look at the individual VC holdings, maybe it's 0.01 for your total. You can wipe out way more on the stock market in a day with Donald Trump around, just on in your major stocks. So there's a tree that much more risk. So I interrupted, Camille, you were going to now talk about private equity and where that becomes what at least risky in nature. Sure. I mean, for that exact same reason that I think we've discussed the business is more stable. You know, it has audited financials. It's gone through a few life cycles. It's proven it's case. And that's where institutional, I mean we struggled to get institutional there. It took a lot of, it took like what the past 15 years to get private assets to come into the mainstream. So we've done a lot of work to bring it there, but moving slightly against up the risk curve. There are a few pension funds who are there. There's guys we call sophisticated investors and they'll be the first to move. It's a VC fund they're there because they're very comfortable with the underlying assets. And a lot of it I guess it's a network effect with VCs. You know, if you don't know what you're doing, you could get sold nothing. So that and a lot of the networks and understanding we value lies becomes very, very important. Is private credit any less risky than private equity because surely it's dependent on who you're lending to? So maybe yes, it's less risky because there's a shorter time period. But the reality is if you're lending to a startup, I mean that's a lot more risky than taking equity in the management buyout. I mean it's standard kind of counterparty risk. It is less risky but you're moving down the return curve. So you can't have both. You can have stable return and you know, but you so it kind of depends on big interest to hear Sonja's view because you guys take quite a cross-fiction of risk. We certainly do think and Leon's of course is right. I mean you can at the extremes find less risky private credit private equity opportunities and much risk here private credit opportunities. But I'd say on average if you look at private equity, you do tend to introduce more business model risk. You do tend to introduce more leverage risk and therefore there's also a bit of an exit risk because of the nature of private equity. There's also an exit risk and a manager selection risk that we've very mindful of. Now again, it doesn't mean that you can paint all of it with the same brush and say private equity is much more risky than private credit because yes, you can't find credit opportunities where these valuation subjectivity, these operational execution, complexity, these sensitivity to growth, you've got inflation and interest rate sensitivity. There's all host of its own unique risks that you need to think about for private credit, but on average, I would say that it does pose a little bit less risk to a pension fund than the standard private equity space. So, Cammy, you'll notice Sonja and I have worked together before. So Sonja's learned to say Leon is right because that was made her life a lot easier in the past than she then she disagrees with me then post saying that. But they also say I would really ask. And I've learned to nod as we go like. So, infrastructure in really state, where does that come into the discussion in terms of the call at the risk spectrum. So if a pension fund is looking, yes, private equity, yes credit, now there's this infrastructure in really so thing. Where does that fall into its on you? So for us, we think of if I can go to the conservative side of the spectrum that you guys were talking about, then call infrastructure debt or senior secured private credit is really sort of the more conservative side of it. That's where cash flows are relatively contractual and the outside protection tends to be a little bit stronger. But then we think of call infrastructure equity a little bit up the spectrum. And I would put real estate and sort of income strategies and any asset backed private credit opportunity there where you may still offer some some yield and an element of defenciveness. But now there's a lot more valuation subjectivity involved. There's a lot more as I said earlier the operational execution and sensitivity to interest rates inflation and those kinds of things involved. So it is infrastructure towards the more conservative side. We love that asset loss because of the predictability of the or the cash flow matching criteria as a defined benefit fund. But depending on whether it's debt or equity, call infrastructure debt or call infrastructure equity, they definitely have different risk drivers. I would put real estate squarely into that same space as the core infrastructure equity space. So there's different asset opportunities. When you assess asset opportunities, they have different risk return profiles. They also in this space tend to have a different and they use the term impact outcome at the end of those. Some might create more jobs than than others. Sometimes the riskier ones give it more value to society at the end of that in terms of development growth and the whole lot. And that should be part of a trustees or far juicies thinking because it's about making sure we can develop the future returns. The future opportunity to continue to ultimately invest for the sake of the members. So the only way I can try to sum up this discussion is to say that for the average pension fund, all these things we've spoken about, they don't really really need to solve for. They don't need to determine exactly which assets opportunities they're going into, but they should seek something that packages that together, where there have been people doing all of this work in assessing and blending to ultimately manage the risk. But to understand generally the risk that they're exposed to is at all VC in which case outside be careful. But if it's a blender cross, well then the care there's a good opportunity. But ultimately selected based on the risk that they comfortable with, but also what they try to unpack, what they're trying to achieve from an impact perspective overall because that's a significant part of why we should be investing in private markets. But now let's just shift slightly to the one risk that I raised, which is the risk of insufficient deal flow for the asset managers to actually deploy the capital. And the other one is the asset manager or GP not raising enough cash through the process of fund raising in there for the money sits and waits and sits and waits and you get a cash base return that will you never get invested in the market. So in that regard, the statement from ASAP, the more people that come together to support the filling of these funds, the more you mitigate that risk. So in that case, why don't we collaborate? Why do we all work in our silos? And go make investments alone? Why don't we come together to say, right, this is the ambits of what's out there? Who do we want to support? How do we want to do that? It was that a park dream. So I'm going to ask that and I'm going to come to you, Camille, but I want to ask that of Sonia because our thing Sonia has been working on things like that and then I have an asset consultant to say, why aren't you talking to the other asset consultants? Yeah, and Leon, if I can start with an open, I'm not putting Camille on this project, but I think that depending on where you sit in the value chain, you look at the problem differently, something you and I've discussed before as well. Certainly from my perspective, no, not being at a product house, but being at a pension fund, and understanding the fight usually role that you play and trying to drive everyone around that I make is for the member, everyone that I lose or spend is the member's money. So in that setting, every decision that I make, yes, you need to think about not just the commerciality of what you're doing and how it looks versus others in the market, but whether it actually has an impact for the member. And so I would argue that if you think of private markets from a long term, outcomes for the member perspective, and I mean, you know this very well, but things like diversifying the risk, getting access to real economic activities and opportunities, contributing to the economy, everything that you've said before in this session, almost makes it a slam dunk. Now you just need to mitigate the risks in the most appropriate way and make sure that you size for it appropriately within your fund. So what are we doing about it? I think as asset owners, we've recognised the need to work together. There are various initiatives. We've got an asset on a forum where we discuss share knowledge, where we put a pool of assets together so that we've got biggest scale that we can work together. I think it's the moment that the asset owner goes into the commercial space where asset managers, they livelihood depends on who's getting appointed to managing the assets. How do they grow their business? I think that's when it becomes a little bit more complicated. We have worked on and we're still working on, as I said earlier, the listed vehicles that we, as asset owners, can sort of go fund and you can share the risk, you can share the costs, you can learn from each other, it can also solve for a lot of the liquidity problems. So these are all most of things that we're doing, but I fully acknowledge that the pending on where you are in the ecosystem, it becomes a little bit more complicated and with that I'll give the bet and to gamut. Before Cammie Cappens and on that, what I would challenge in that regard, I'm just trying to spark thinking, is that we're not actually trying to outperform each other, right? What we're trying to do is grow from 2 or 4% to 20. So we're actually trying to grow the asset opportunity and the acceptance of the asset opportunity. So it's not about, can I get more than that one over there? That to me seems nonsensical. We need to all work together to increase the comfort from the investors. So Cammie, I'll bring you in there. It's the catch $22 million question. Yeah, to maybe bring in one of the risks that Sonny has spoken to is manager selection, which is then bleeds into the deal flow and your fund one and your fund two and your fund three. It's obviously it's tucked to bet on a first-time manager so everyone takes the safe risks and you know, a bet's on the guy who's gone to two or three. And then this was such a cog in the system that a few, also think coming through with the asset owners forum, they decided to put something together called the manager's development program. That's managed by a few houses. And that was the real frustration. Everyone's looking at a hundred million deal by themselves, but you don't really have the capacity. If we all put that together and it's a billion and we split it. And I'm surprised Sonny I hadn't said she they've got a very successful program as well around those unlisted. And the impact, if you look at the impact report, it was quite important to EPPF. So there are people who've got a balance sheet who can do it by themselves like EPPF and then you've got some of the smaller guys as well saying well what could we do with what we've got. And that's where we are at the moment, but it's not a solvable query until we make the asset plus a lot more transparent around the underlying. So people can be like well, the whole point of evaluation, if I was given the same information, I would come to the same conclusion as you. So if we close that gap a bit, yeah, I think there'll be a lot more transparency and then flows. So I personally bet on the fact that if you can take more initiatives like that asset owners All right. initiative and bring that to the fore as call it commercial vehicles. You're providing the gateway to allow people to invest more. Even though there's not on a commercial basis, because as a border trust is, I think the heart is there to want to make the investment. The point is, where is the bridge? What do I do? How do I go about doing that? And now there's the risk. Okay, well, you scared me. So rather just sit on your hands and not do anything. So by having more people together mitigating some of these risks, like not raising sufficient capital and so on. A lot of guys, to be honest with you, none of the PRC won't like me on this. They go to the PRC, they get funded for their first fund, and then they do that. And then second fund, PRC says we're meant to be up and running on your own. And then they don't raise capital. So what was the point? Okay, so I think the more we can do things to keep that cycle going, the better it will ultimately be. And that comes to the other risks, which I'm going to now close off, is that there is a manager risk. Now I'm going to come from a manager research background since I literally could walk kind of thing. And there it was all about people process performance and whatever the fourth P was. I can't even remember philosophy. All right. So now you're researching a GP. Right, very fancy. And that's that research risk is actually greatest as far as I'm concerned. Is that fair enough to say? And there has to be greater operational focus as well. So coming. So yeah, and I think that's part of the information. I guess maybe a symmetry that people don't know. It's they will like why on the consultants not, but it's a lot of work to go sit and with each and understand their structure. And so that's why I guess maybe some kind of some consultants like a fund of fund, because then it's all packaged nicely together. There's a bit of a fee, but you know, they don't have enough people speaking about the consulting and margins, alien, things like that. So it's definitely a GP selection of fund of fund is safe, but it is it's also, you know, still exposed to the underlying risks. So a couple of years ago, there's a specific ventages that haven't done well simply because that's the macroeconomic environment. They were operating in. So a fund diversifies some of that, but then you have to be willing to pay a slightly more just for that. And maybe combine it with some of your private equity, your VC, and then it becomes a blended risky, less riskier, unlisted exposure. So Sonny, you've got a team of people that have researched these GPs. Is it as is it more difficult than a traditional asset manager or there are as many of them? How do you find it? Yeah, the selection risk becomes more critical. And there's obviously a lot of other legal risk. I mean, we talked about some of the things earlier, valuation risk and documentation risk. There's all sorts of things. And therefore, you typically do need to have an ecosystem of people that support you in that space. Yes, it is definitely more complicated than the listed space for various reasons. There's no surveys. Oh, well, there's some form of surveys, but it's not as prolific and well researched and definitely not with the same history as the rest. It's not feast and feast structures or very opaque. It's not as obvious as what it is on the listed side. So there's definitely a lot more scratching that needs to happen, a lot more digging, a lot more operational due diligence work that needs to happen. What we've done, I mean, even as a large pension fund like EPF, yes, we've got certain skills that we opted to keep in house, but we do partner with various consultants or valuation entities and independents, of course, being important for us there to make sure that we can back up some of our investment thesis or some of our due diligence work or whatever the case might be. If there's a direct investment or a go-in investment that we go and do the due diligence on site that we understand the actual projects in a lot more detail, but that we can also make sure that we research to the full extent by being on an online basis involved with the on a board on an investment committee or whatever the case might be. So there's various ways in which we get involved at the outset in evaluating something but also to help do the monitoring at the end of the day. But we also partner with others in the market where we don't have the right skills. So I'm gonna draw this to a close now. I'm gonna end with the worst question in the world and then I'm gonna switch off from run like hell. But before I get to that, the solution to so, I'm gonna start off on the premise that South Africa needs this development capital. Private capital is where we need to ultimate decatalize to in order to facilitate that development for South Africa. That I mean not so much for me, but my kids and their kids and then equal robust South African economy. So the only way to do that, and I really believe this is the only way to do it, it's not gonna happen in individual rights and individual pension funds. It's too complex. These things that we've spoken about today are listened and I think, I get it, but for it to expect a trustee or to debate this and then to come to solutions, it's just not possible. That I have the time or the inclination, whatever. That comes down to collaboration. And if commercialization is killing collaboration, it's a classic case of reshooting ourselves in the foot. So I'm gonna leave it with that comment and then I'm gonna raise the question, which is, I'm gonna ask each of you to just quickly comment on this. Nothing can make you run from an investment more than the term two and 20. So Kami, what are your thoughts on the fees and do that actually matter if the net return is ultimately achieved in line with what's promised? - They do a lot of work to be honest. That fee is meant to align interests. So that two percent just allow them to actually operate, go find deals, do the things. The 20 is meant to incentivize them to first return my money and then they can shame the pull that's left. I've seen a bit of some guy saying one 10 as well because there's like a financial viability for them and then versus a fund one or fund two. If you're only on fund one, you're two and 20s going to make all the difference. So I mean, I can see the fact that you want to save pension the underlying fees, but at the end of the day, there's a lot of work involved in these assets. So I must say, I am very much under, if you earned your 20, you've earned your 2%. - Yep, Sonia. - Yeah, I think fees are high and I think they disproportionately are high and I think investors should not be embarrassed to interrogate them a lot more. I think to Kimmy's point, there's a lot of genuine sourcing skill and operational value creation and specialist structuring skills and all sorts of hard to reach opportunities where you need a particular skill set that does warrant a fee and that does warrant a IFE than someone sitting behind a desk and sorry, now I'm going to get in trouble with the listed managers. But you know, that you can on an easier way in interrogate and understand a lot more because it's more published and that sort of thing. But I do think that there's not yet full alignment in terms of what we are trying to achieve as an industry and from the capital allocators perspective, full alignment in terms of why we invest in these opportunities and to your point of also wanting to help the country and move forward and grow the economy and stimulate the economy. I do think that these complicated carry structures and carried interest and you need to know when things are crystallized and I need to really go and appoint someone that CIA to come and help us calculate the fees and things. So I think we make it unnecessarily complicated. I do think they are structures and various initiatives in the work, the ill-bubble principles and all sorts of ways in which the industry is trying to address it, but we're not there yet. So I do think that we should push a lot more than industry and ask a lot more before we commit to these asset classes. - Well guys, I want to say thank you, Sonja, to you, Kami, to you as well for joining us today and sharing this with us and please keep solving and keep seeking to collaborate and may your GP's drive partner align with your LPI and drive a carry for you. - Oh, thanks, Neil. - That's no thanks, thanks. - Thanks for the first few words. - Thanks for having us, bye. - Bye-bye. (upbeat music)