Around the Horn: Risks and Opportunities in Global Capital Markets

Please welcome our panelists and moderator, Commonfund OCIO Chief Investment Officer, Julia Mord. Good afternoon. It's a real honor to be on the main stage at such a marquee event. As many of you know, I started at Commonfund nearly a year ago, just a few weeks actually, right after last year's Forum in Orlando. Today, I'm joined by my esteemed colleagues to discuss risks and opportunities in global capital markets, focusing on asset classes that they've covered for most, if not all, of their professional careers. I'd like to begin by introducing Paul Van Steenberg. Paul is a Managing Director at Commonfund OCIO and Head of Real Estate and Infrastructure Investing. A little bit about Paul. When he's not touring cold storage warehouses, data centers, and senior living facilities, or chauffeuring his daughter to swim meets across Connecticut on weekends, you could find him hitting the pickleball courts. Next to him is Mark Bennett. Mark is a Managing Director at Commonfund OCIO overseeing the firm's public equity portfolios. When not spending time reading manager letters and reviewing thirteen f's, you may find Mark golfing and fishing off the coast of Cape Cod in the summer months. He's the proud grandfather of one and soon to be two grandchildren. Vin Kravec is a managing director at Commonfund OCIO and Head of Fixed Income and Credit Investing. One thing to know about Vin is that he travels far and wide, not just to meet new credit managers, but also for his sporting events. Following a memorable trip to Paris for the twenty twenty four Olympic Games, Vin is now planning a trip with his family to watch Formula One. Last but not least is Miriam Schmitter. Miriam is a Managing Director at Commonfund Private Equity in the firm's Munich office and is Head of International Private Equity for the firm. I learned recently that Miriam is quite the operaphile, having worked at the Beirut Opera Festival as a university student where she listened to Wagner for thirty consecutive days. It's hard to ignore the events of the last twelve months. As citizens and investors, we've been inundated with uncertainty around deep seek, Doge, Liberation Day, the Donro doctrine, Greenland, the Fed's independence, the longest government shutdown in US history, and the dollar's worst performance in fifty years, to name just a few. As I was preparing to moderate this panel, I wanted to reflect on what has changed over the last year and what has remained relatively the same. So I'll start with what remained the same. The US economy has remained resilient, supported by two point two percent moderate GDP growth, modest but sticky inflation, low unemployment and a consistent narrative around AI productivity gains. Markets remain at or near peak concentration levels, although we are beginning to see a broadening across sectors and market caps that began in twenty twenty five and is continuing well into this year. The Fed continues its accommodative monetary policy cycle with rates ending seventy five basis points lower after three cuts in twenty twenty five, following four cuts in twenty twenty four. As for what's changed, well, slower labor market moment momentum with the US economy adding only a hundred and eighty one thousand jobs in all of twenty twenty five, far fewer than the one point five million jobs we added in twenty twenty four. Significant fiscal stimulus set to take effect following the passing of the one big beautiful bill. Higher tariff rates. Though SCOTUS recently struck down the administration's IEPA tariffs, Trump immediately pivoted to section one twenty two of the nineteen seventy four trade act, imposing a fifteen percent rate for a hundred and fifty days. So now the trade weighted effective tariff rate remains elevated at thirteen point two, up from the two point four we saw pre inauguration. We also are seeing increased M and A activity, which is a nice change, but continued sluggish IPO activity, now that may change as we heard from the last panel, a weaker dollar and US exceptionalism has given way to global diversification. Emerging markets saw the greatest outperformance versus international developed and US since twenty seventeen. The starkest difference is on the geopolitical front, where we've seen a fraying of traditional alliances and emergence of new political alliances and trade relations. With all of that as a backdrop, let's begin. So, Mark, I'm gonna start with you. Okay. The S and P was at historical peak concentration as of December thirty first, with the top ten names comprising over forty percent of the index. This is over twice the concentration we saw back in December of two thousand. How should investors think about the risks inherent in the current market structure? And how are we at Commonfund positioned considering these risks? So last year at this conference I moderated a panel on this exact topic on index concentration and one of the panelists was from GMO who'd done a lot of analysis on the behavior of the S and P five hundred from volatility perspective and his conclusion was that the S and P was behaving like a thirty or forty stock actively managed portfolio and not the diversified market proxy that many investors were were using it for. And the reasons for that were twofold. One is just that the concentration you know forty percent historically high concentration for the top names which at the time he did his analysis was actually a little lower than where we're at today. But the second and equally important component of that is what we just heard in the prior general session that the MAG-seven are effectively highly correlated with one another. They're all tech stocks, they're all trading today on the AI theme. So when you combine the elements of high concentration and high correlation it creates the separate cohort within the index and the behavior of that cohort is quite different than than the rest of the index and so there's a couple of different ways that that manifests itself. One we saw last night actually in Mark's slide about the role of the Mag7 in generating such strong earnings growth at the index level and that's clearly a good thing. The second is more from a valuation perspective and there's been a pretty stark differential in valuations between the MAG seven and the rest of the index what's now commonly referred to as the remaining four ninety three which is quite reflective of the environment we're in but as of a few weeks ago the Mag-seven were trading at roughly thirty times earnings and this has persisted for the past couple years whereas the remaining four ninety three were largely around twenty earnings. So a pretty large discrepancy from a valuation perspective there. But probably the most important figure comes to return generation. And so we've all enjoyed the benefits of a strong equity market over the last three years the S and P's compounded at about twenty three percent. Well half of that return over half of that return has been generated by the MAG-seven. So when you talk about risks we haven't really experienced the risks at all. We've experienced is the tailwinds of MAG seven being huge earnings and return generators in the index but clearly the risk is if that were to change and even if the if the MAG seven just stops becoming return generators in the index then it becomes structurally very hard for the index to generate return because they've carried the load for so long. So that to us is probably the biggest risk not to say that we're going to go through something like the tech bubble in the late 90s but if they just stop contributing as much as they have then it becomes a much harder structurally for equity markets to go up. So we're mindful of this and we do use some passive in our portfolios and we've largely taken that weight down by about a third over the last six months or so just to be mindful and reflective of what has been a really concentrated environment. Mary, I'm going to shift to you. I want to talk a little bit about privates. It is well understood that private equity as an asset class has underwhelmed over the last three years. Yesterday, at the advisory lunch, I showed some some performance data across the different asset classes. As of ninethirtytwenty twenty five, global private equity according to MSCI Burgess annualized at eight point eight and venture capital at three point two over the trailing three years versus twenty three point one for the MSCI ACQ wave. Help the audience understand and maybe start by sort of level setting and explaining what were some of the drivers of that underperformance? Right. Maybe starting that there's a few aspects to that question. And I think the first one we already spoke about, Mark alluded to the exceptional performance in the public markets. So that's a very challenging benchmark to begin with and one that might not continue at this level. Secondly, private equity is inherently a long term asset class. And if we look at the five, ten, fifteen, twenty years, it's actually averaged as an asset class on a median level, both in the US as well as in Europe, very consistently returns at fifteen percent. So that means still that I think especially in the compressed a little bit over the last few years. In Europe, it's actually remained more resilient at about five to seven percent, but a big factor of that was that until recently, public market performance there has lagged. So as for the drivers, we have to think carefully about the chosen endpoints. I was just speaking to my venture colleagues about this before. So even if we just roll one quarter forward, venture returns, for example, could look very differently because we're rolling out of a period of value correction. So I take it with a bit of grain of assault at that one data point. That being said, I think it is much more difficult to achieve as a sector, and that includes, for example, large cap, much more commoditized pieces of private equity, the returns that we've seen ten years ago because interest rates are higher. Some companies were acquired at pretty high multiples in the twenty twenty to twenty twenty two period. So they need to grow into this valuation. There might be no multiple arbitrage. In fact, there might be multiple compression for these companies. Although again, that's not true for all parts of the private equity market. So in the small and middle market, we've still seen nice multiple uplifts at exit. And then not to forget that many of these companies have gone through a very challenging period. So there's been all these macro factors that Julia has been alluding to, COVID, inflation, energy prices, tariffs, and it needs time to work through these effects. But these effects have led to longer holding periods. So if you go back to two thousand ten, the average hold for private equity was five years for a company, and currently, that stands at seven years. Yuri, we just wanna follow-up on that one. This is the the hard question. I'm certain everyone in this audience would really like to know what returns can they expect from private equity going forward, especially if we never get back to a zero rate environment? Yeah. No, that's obviously a question we think a lot about. But to just level set going back in time, yes, interest rates are higher than they've been over the recent past. But in a historical context, I think they're actually still quite moderate. And if you go back to the nineties or the early two thousands where rates were at five to six percent, and that's the the benchmark rate, you had some very strong private equity returns. That being said, some people say twelve is the new five. What does that mean? So historically, you might have bought a company using fifty percent leverage. You paid six to seven percent for that leverage. Then this company had to grow five percent to get to kind of the traditional aspirational private equity return of two and a half times over five years. In today's environment, you might just get thirty to forty percent leverage and you're paying more for that. So you might pay eight to nine percent. Then this same company needs to grow at ten to twelve percent to get to the same return. That being said, again, there's many types of private equity. I think this is most relevant for the large cap segment where prices are the highest, so leverage has been a key component in driving these returns. In many of the situations that we back, be it growth capital, be it smaller deals, there might be no leverage to begin with or the leverage is only two to three times EBITDA. So we think those segments of the private equity markets still have the potential to deliver the fifteen to twenty percent we've seen historically. Paul, I wanna turn to you. Real estate. We know that the sector has been a laggard, but it's finally finding its footing. Talk to us about some of the macro and regulatory tailwinds you are seeing in the industry. Yeah, I think to talk about some of the maybe tailwinds starting today, you really have to go back to some of the headwinds that the asset classes experienced over the last five to seven years. Really starting with COVID which is still working its way through some of the system from a real estate asset class class perspective and the negative impacts that really unprecedented event had on the asset class. And then subsequent to that two years later where you had you know again a relatively unprecedented event of five hundred basis point increase in interest rates in a sixteen month period of time. Really an incredible impact on the sector and so it's sort of been going through this adjustment phase. And then more recently with the administration creating some level of uncertainty as it relates to trade and tariff policy impacting ports and industrial markets. And then probably even more recent today is around immigration policy and its impact on population growth and potential impacts on the residential sector. So it's been going through this period of time that which is I think really laid some of the groundwork for what's supporting the asset class on the go forward basis and that's predominantly around supply. And so as a result of this interest rate increases as a result of the wage inflation and some impact on construction, finding construction workers to develop things. Development pipelines have really come down quite precipitously across most sectors of the asset class and a tremendous amount obviously is flowing into the data center space. But outside of that, we're really seeing a reduction of supply pipelines. In some cases we're seeing really almost negative supply growth in certain sub segments of the real estate sector. So really it's been the headwinds over the last five to seven years are created I think in underpinning for the asset class. From a specific sort of regulatory perspective, I think one of the things that hasn't really been talked about is within the one big beautiful bill where it was passed effectively where there's a bonus depreciation expense allowed for effectively equipment acquisition and CapEx expenditure which will reduce sort of near term income tax burden for companies. And so you're seeing an investment into equipment that's related to things that are going into data centers like servers or chips. It's also related to manufacturing. Our equipment going into industrial warehouses for manufacturing. So from a pure regulatory perspective, would say that's the one thing that's that's happening is also helping drive some of this CapEx spending that we're seeing. But then the supply aspect and then the last piece I think is obviously around interest rates and credit spreads. So we've seen credit spreads come in quite a bit. Ten year has stabilized. In fact, I think we just saw another three handle on the ten year and then the Fed funds coming down a little bit and that's gonna be helpful for real estate owners from a cash flow perspective. And that backdrop combined with relatively sticky inflation, I think over time is going to benefit the asset class because again with supply coming off, inflation still being sticky, the idea around replacement costs I think will be generally supportive for the asset class on a go forward basis. Ben, I want to turn to you. The active versus passive debate has largely been concentrated in public equities. But many of our active fixed income and credit managers have been able to add significant alpha over their benchmarks. So how does Commonfund incorporate active management into its fixed income offerings? And what do we look for in our managers? Sure. We incorporate active management across all our programs. In some spots, we're also using passive or beta as well as a lever to take advantage of dislocations in the market, for example, liquid credit. But when we're looking at pipeline building and manager performance and manager track records and building that funnel of managers that we're looking to work with, we're really focused on firms and teams with long term track records that have shown the ability to navigate cycles, whether it's the GFC, the COVID dislocation, the Fed tightening cycle of twenty twenty two. We wanna see firms and teams that have managed client portfolios and shepherded capital through those difficult environments. And importantly, in the case of credit, where it's either liquid or private, we're really focused on teams that have proven the ability to deal with borrowers in the event of default and shown the ability to work out the defaulted borrowers and extract value and protect value. Maybe staying on credit, another a common concern among investors today is historically tight credit spreads. Again, I showed it during the advisory lunch yesterday. As of a couple weeks ago, the OAS for IG corporate credit was point seven seventy seven basis points versus the fifteen year average of about a hundred and thirty. Similarly, the OAS for a high yield credit was two point eight four percent versus the fifteen year average of four point five. How have we positioned portfolios in light of these tight credit spreads? That's a great question and spreads have backed up a little bit since then. IG is about five basis points wider, high yield about fifteen. There's been some noise in the market. But importantly, our managers have really been derisking the portfolios over the last year, year and a half, taking corporate credit risk down, taking risk down in places where they view spreads as particularly tight. As you mentioned, spreads are tight in both high yield and investment grade. So managers have pivoted the portfolios in part by either taking money out of corporates or shortening up the exposure. Selling a ten year corporate and buying a two year corporate as an example. The other thing they've done is they've tilted those allocations away from corporates to a degree and into spaces and sectors where they think they're getting better risk adjusted returns. Over the last year and a half, that's really been agency mortgages. And when we saw the tightening in mortgage spreads based on the plans that the administration announced recently, we saw those spreads come in a bit. That benefited portfolios. But I think whether we're talking about investment grade, whether we're talking about liquid credit or private credit, the managers generally believe that there's a lot of complacency in the market and they're mindful of it and trying to sidestep that. With the view that if you do get a meaningful dislocation, we could take that money that's in mortgage or securitized, recycle it back into corporate credit at more attractive levels. Mark, I'm gonna turn back to you. Okay. Still on the topic of active management. As you know, the last decade has been very difficult for active management. Through December of twenty twenty five, the median global large cap core equity manager underperformed the MSCI ACWI Index by sixty seven basis points annually. Can you talk about what's been contributing to this challenge? I think everyone wants to know, is active management dead? Heard that before. I don't think it's dead for sure. Maybe it's been in hibernation as that statistic would indicate. And clearly, you know, global strategies, not surprisingly, US strategies have been even worse. In fact, if you look at the average ten year US strategy performance relative to the S and P it's upwards of three hundred three fifty basis points behind the benchmark. A lot of that has to do with you know the concentration that we talked about earlier. But once you once you go overseas and you look at historically more inefficient markets like emerging markets, developed international equities, there you do see still a little bit of alpha within the median or average manager and this is all looking at universe data. But when you compare those numbers to perhaps where we were ten years ago, so looking at ten year returns of active managers at the end of twenty fifteen, it was a very different environment. There was very different market cycles back then as well. We had a lot of volatility in the markets for that ten year period but you saw in that ten year period pretty good alpha representation amongst median or average managers across global, across developed international, across emerging markets and even in the US the average strategy was about in line with the S and P. So clearly the past ten years have been different. What's what's changed? It's pretty obvious but largely the role of passive in markets today is much greater than it was certainly ten years ago. In fact last year I think passive strategies overtook active strategies in the US as the largest at the largest cohort of assets under management in the US. So the growth of passive clearly has that needs to be funded somewhere it's been funded largely from from the active management community and even in areas like non US markets where passive strategies haven't been as popular the growth in passive is still quite large it's doubled in size again not to the level that we've seen in the US but has doubled in size relative to where it was five to seven years ago. So clearly the growth of passive has created a pretty major headwind for actively managed portfolios. I'd say we saw something similar you know in the run up to it to the late 90s very similar environment to what we see today in that passive had very strong years ninety seven, ninety eight, ninety nine the markets were focused exclusively on one theme and I think as a catalyst potentially to get to get people interested and active again because let's face it the the decision to go passive has been the right one because the markets provided all of the return that we've required as equity investors. I mean for ten years you know the equity index is up twelve, the S and P's I think is up fifteen percent for ten years, twenty three percent for three years. So the return has been there. Market beta has driven a lot of the return potential for equities but if that were to switch, if markets do go through a low or even lower returns coming through from indexes then alpha becomes even more important and that's where we think active management can really shine is to the extent that we begin to see some harder returns and let's face it the past three years in the US has been the three year return at the end of the calendar year was one of the top five three year periods for the S and P since nineteen seventy. So to the extent that we might see some more difficult lower returns from the equity markets and Alpha becomes certainly more in vogue and investors will look again to active managers generate which is going to be an important component of people's portfolios. Thank you for that. Miriam, I'm switching back to you. I want to show some data points. Mean, we were started out a little bit negative on private equity but as you alluded to, there are some green shoots and most in the form of pick up and exit activity which we see here in this slide, both in count and in value. And it also looks like maybe we had a little bit more of an acceleration in count I'm sorry, in value versus count, implying larger deals last year. Could you provide some color and specifically, what does it mean for distributions? Absolutely. So you see here twenty twenty five was actually the second best year for exits in a long time or post twenty twenty one. Exit value has been up about forty four percent, while the count has been up just a tiny bit or flattish depending on what data source you look at. So that means exit above ten billion in value were up one hundred and thirty percent and seven exits above ten billion actually accounted for twenty two percent of exit value, the largest being Macquarie's exit of Allied Data Center to BlackRock. So I wouldn't deduct too much from this, so that doesn't mean that there's been a flood of exits in the large cap space. I think it's more indicative of the congestion that has built in people's portfolio and we spoke about the longer holding periods. And that applies especially to the large cap sector. If we look at it a bit more holistically, another metric that people look at for distributions tends to be distributions as a percentage of industry net asset value. And there, it's actually still muted compared to long term averages. So it's been the fourth year where distributions have been less than fifteen percent of NAV, whereas historically, those numbers were running at more twenty to thirty percent of NAV. Although a historic drop, just to give more context, was in two thousand and nine, where only eight percent of NAV was distributed in the GFC. And that drop in distributions as a percentage of NAV is an outcome of two kind of sides of the coin. One is the longer holding periods, but the other one is also that portfolios are being held by and large closer to the likely exit value because people have paid more for these exits to begin with. So there's much less of a pop at exit that leads to that increase. That being said, again, it's I can't stress enough how important it is to talk about the industry versus other segments. So, within our portfolios, we've actually seen very encouraging demand from both strategic buyers as well as larger private equity firms that are still sitting on a lot of dry powder that needs to find a home for kind of the smaller and low middle market companies that our managers have been trying to bring to market. Thank you. Turning back to real estate. The asset class as we know it, it's not a monolith. In fact, currently different property sectors are experiencing different market conditions. Can you comment on the dispersion that we're seeing in the industry? The dispersion's actually been quite incredible for almost fifteen years now. I think it started post GFC with the retail, what folks referred to as the retail apocalypse and basically the emergence of e commerce and Amazon moving away from sort of physical store footprint to ordering online. That really devastated that sector for really a decade until a lot of supply was taken out. And conversely, industrial was on the flip side of that generated really incredible returns for a number of years. During COVID, we had folks move from working in the office to working at home and digital infrastructure take off as a result of the increased demand for working online and then office being the flip side and suffering from that perspective. So we've seen pretty wide dispersion across sectors. We've seen dispersion within sectors. So the residential sector for example, there's been a significant difference in between what's happened with market rate multifamily to affordable housing to manufactured housing. They've all had relatively different outcomes over the last five to ten years. And then there's differences within geographies. So within the multifamily market an interesting fact is that both San Francisco and Austin markets are basically back to their same level of nominal rents that they were pre COVID but took the complete mirror opposite paths to get there. So Austin rents went like this, San Francisco rents went like that and given the increase in rents a lot of supply went into the Austin market and so we've seen over the last three years now Austin rents come down and no supply being added to the San Francisco market and we're seeing rents go up and it's now actually that sort of top multifamily market in the country right now from a rent growth perspective. And so that dispersion we think is really you know was what creates the opportunity within the asset class. And you mentioned earlier about you know the difficulties the asset classes had over the last you know five years or so generating returns. And I would say that's largely true from a beta perspective meaning the own stabilized real estate predominantly what's owned in public REIT market or in the core sort of core real estate market world. That's been a difficult place to generate returns, but it's in the non core areas, the more private equity style real estate where if you've been tilted in the areas where the opportunity has been, you've actually generated relatively good returns and I think on a going forward basis while some of that dispersion I think will compress a bit. That's really where I think the opportunity exists within the asset class really become much more diverse than it was I would say pre COVID where not pre COVID pre GFC where you're really sort of four major subgroups. People had forty percent of their portfolios in the office asset class, another thirty percent multifamily. And so it was a very very different type of asset class and is really diversified over the last you know fifteen years or so. Just staying on the topic of dispersion in real estate, I think we're seeing kind of the most dispersion in REITs, right? I think the Green Street most recently reported that the healthcare sector, which is really senior housing, is currently trading at an eighty nine percent premium while cold storage and life sciences are trading at a thirty six and thirty four percent discount respectively. What drives I mean, are disparate valuation differences. What's driving them? As a Commonfund, how are you thinking about investing just given in this asset class, specifically in REITs, just given this level of dispersion? Yeah, I think you know each is a little bit different. What's driving the dispersion between the public market, what its view is and the private market valuation. All of it comes back to demand and supply at the end of the day. Senior housing or the healthcare sector, most of that premium is being driven by one company Welltower which is a one hundred and fifty billion dollars REIT that focuses almost exclusively on senior housing. And it's basically trading at almost a three cap today in the public market because the market views there to be basically no supply and heading into what is seen as being a tremendous demographic wave from a demand perspective. So that demand supply imbalance is what's driving a big part of that premium. So they're expecting NOI to effectively go up significantly and the yield to increase over time. On the flip side, life science was basically the mirror opposite. Following COVID, senior housing was absolutely destroyed and life sciences which are basically buildings that were biotech companies do research It was a rocket and so again, the market moved in created a lot of supply and it turns out that you know that the demand that people associated with COVID wasn't necessarily there. Now we've had some recent pullbacks from an administrative perspective to fund research. At the same time, we have a much higher level supply that impacted that sector. The cold storage one is a little bit unique. Again, there is probably too much supply of what the REITs own, which is old stock that is being disintermediated by new technology, new assets that are taking share away from those publicly traded REITs. And so there's different things impacting these various sectors and then there's ways that we can access the private market that might be different than what you can actually do in the public REIT market. One of the areas that's I think probably the most interesting is in the residential sector, both multifamily and single family rentals that have been trading at persistent discounts for a while now and are trading more cheaply. We view in our view and are more of a comparable asset class to what's happening in the private market and in the public market. And we think that's an interesting dynamic. Some of our REIT managers are taking advantage of that. And so they're basically trading at sort of a six percent, seven percent cap rate versus the private market where they're trading at more of a five percent cap rate. So there's a pretty significant difference in in in views. I would say, ultimately, the particularly in real estate, the private market is the ultimate arbiter of of the you know, what the value is. And so we've seen a number of residential REITs being taken private as a result of that. I think a little known fact is that really real estate is ten times the amount of capital in the private market than what's in the public market versus the public equity versus private equity dynamic. And so really prices ultimately set. REITs can give a good indication of value, but ultimately it's set in the private market. Vin, I wanna turn to you. We're gonna talk about private credit. As many of you know, private credit has been making headlines in the popular financial press for the last several years. Most recently, the dominant narrative is that private credit is a bubble. So in your opinion, Vin, is private credit a bubble? I would say yes and no. And firstly, we should begin by saying that we approach private credit as a multistrat. When most investors, you know, read Bloomberg or watch CNBC, when what they're talking about when they're talking about private credit is senior sponsor backed floating rate loans. There's been a lot of capital that's flowed into alts over the last seven years from twenty eighteen to twenty twenty five. Eighty percent of that capital has focused on the twenty three percent companies with the highest revenue in the US. So there's a lot of concentration of capital at the upper end of the market, is something Miriam alluded to as well, and their focus on mid and lower middle market and CFPE. So a lot of capital has come in. Additional capital will come in, could be from four zero one k plans, things of that nature. The transmission mechanisms are being set up now. But that capital continues to focus on the largest borrowers. So at that end of the market, our view is that things are definitely a bit frothy, a bit expensive. So spreads have come in. Underwritings probably a little bit weaker than it has been in the past. And really it started to look much more like the high yield market or the broadly syndicated loan market which doesn't really offer much protection to investors from traditional lender protection type perspective. So if that's what upper middle market sponsor back is starting to look like, it really begs the question, why would you commit to a drawdown vehicle, lock your money up for extended period of time when you're not really getting a liquidity premium for that? But in sectors we tend to focus on, which is the mid market, lower middle market, and corporate space in North America and Europe, as well as asset based and opportunistic strategies, which that capital I talked about earlier hasn't really focused on as much the last few years, There's definitely opportunities there. There's opportunities for alpha diversification different types of collateral. Different types of rate sensitivities fixed rate opportunities for example instead of floating rate that you find in sponsor back. Which means that in a tightening cycle you really want to have the floating rate exposure but if you're in the middle of an easing cycle it's nice to be able to tap into some fixed rate opportunities. So there are bubbles in spots. There's tight very tight spreads in spots. Think the data I heard recently is that the upper middle market spreads are around four and a quarter. You can pick up fifty basis points or more by going lower middle market, which is attractive with a better underwriting as well. Another head sticking with you, Ben. Another headline grabber has been the risks in BDCs. Right. We can't we we can't run away from it. The most infamous bankruptcy of twenty twenty five was First Brands Group, which involved twelve BDCs. What are some of the risks associated with BDCs that you see? And if you can give some examples. Sure. Well, you know, I think when a lot of investors look at BDCs, especially public BDCs, the first thing is it tends to be retail investors. Data I've read suggest that upwards of seventy percent of the investors in BDCs are public BDCs are retail investors. So, you know, that gives you pause if you're looking at that. Who are you investing alongside of? We know that retail tends to time buys incorrectly and time sells incorrectly over long term time frame. So you really wanna be putting your capital alongside that. Aside from that, when people invest in public BDCs, you know, they might think they're getting senior first lien loans. Well, those are definitely part of the underlying portfolio. But when you look under the hood, find second lien loans, mezzanine loans, pref equity, and equity exposure. So if you're not doing your research and you don't know what you own, there's a potential for significant surprises. Another issue with BDCs that investors are just starting to realize is Raymond James put out a report recently talking about the overlap among large BDCs and positions. These managers tend to club up on deals, share the same deal. So if an investor is buying three or four or five BDCs for diversification purposes, thinking they're getting diversification across the BDCs, and they're not looking at the individual line items, they might have significantly higher concentration in individual borrowers than they think. So this Raymond James report talked about the fact that among a pool of BDCs they analyzed by looking at their quarterly filings, there was over thirty five percent overlap among the underlying borrowers. So that's a significant degree of overlap. And if a borrower goes wrong in one part of your portfolio, it can obviously ripple through and and cause a larger impact than you probably anticipated. Being publicly traded, you know, the valuations also get dragged along with equity markets. So you have equity mark to market noise. And if people want to take a negative view, if institutional investors wanna take a negative view on credit, one of the ways they can do it is short that public BDC. So if you're investing in BDCs, there are many additional factors you need to consider beyond whether, you know, are you getting exposure to a senior first lien loan? And that's on the public side. Private BDCs have also made the news recently as well because unlike public BDCs, which investors can sell into the market on the stock exchange to get liquidity, in the case of private BDCs, the managers typically offer liquidity of about five percent per quarter, twenty percent per year. However, if enough investors ask for liquidity at the same time, there have been several cases cited, not just recently, but over the last couple of years, where the manager has been unable to meet the liquidity terms that they offer to investors. As a result, investor redemptions queue up over several quarters or I think in twenty twenty two, twenty twenty three, it stretched out over a year for one manager. And so if you're depending on that liquidity in that private BDC that the manager promised, and didn't take it with a grain of salt and everybody's heading for the exits at the same time, you're not gonna see it. So there's definitely several issues around BDC space, both in terms of the types of exposures you're getting, the overlap in those portfolios, the potential for equity mark to market risk, and who you're investing alongside of that really give us pause. Know, there's there's a reason and a reason why people might want that in their portfolio, but if you don't know what you own, it can be a problem. Okay. Thank you, Ben. In the interest of time, I I do wanna turn back to you, Miriam. I wanna talk about international. You are head of international private equity firm and you have a very unique vantage point from your Munich location. Can you shed some lights on the opportunities for international private equity versus US? And, you know, maybe more specifically, why should investors seek private equity opportunities outside the US? Yeah. Abs absolutely. So as I mentioned earlier, I think historically, in long term, the returns have been surprisingly similar in US and European private equity, but with a much higher illiquidity premium in Europe. So some people have been suggesting investors might wanna overweight private instead of public in Europe, so that would be one argument. I think yesterday there was already talk about the benefits of diversification, so that's an obvious one. But I'd also say many of the international markets, Europe in particular, but also Japan, Australia, have many more inefficiencies compared to the US market. Private equity penetration is also still much lower. So Europe, for example, is still half the size of the US private equity market. You have barriers through language, regulation, networks, all of those require a highly local approach and that builds barriers to entry and inefficiencies that you can exploit if you're backing the right people and often that translates into lower entry pricing, lower leverage. So a bit more of a margin of safety and we generally also see a more conservative approach to valuations among our international managers. So a bit more still of that pop at exit. Yesterday, think this morning, was also talk about kind of divergence in growth between the different regions. And it's true that in the public markets, US companies have been growing at roughly double the rate of European counterparts. But interestingly, again, in the private markets, the growth rates have been higher than in the public markets. And over longer terms, again, identical in the US and in Europe, and that also speaks to kind of the broad opportunity set that there is to be had. Sticking on the international theme, back to you, Mark. Yep. Commonfund recently made an investment in international small cap equity manager that pursues activism in Japan and Korea. Could you share some thoughts on the manager and why we're constructive on this strategy? Sure. Maybe just to take us a little bit of a step back to kind of complete the thoughts between the earlier questions. You know we've been marginally you know removing the portfolio a bit more towards actively managed strategies a little less towards towards passive. So expanding the risk budget a little bit more so in the non US markets than in the US and this is a great example of one of those where you know as I alluded to earlier non US enjoys the benefits of less efficiency than the US. The data suggests that the active manager returns suggest that and so as we've expanded the risk budget to some extent in the non US markets this is a perfect illustration of where we're headed. So the allocation is with a very small manager less than a billion dollars in assets under management just closed the strategy down and they're focused on historically inefficient areas of the capital markets. Mostly in the emerging markets they've recently made some investments in Japan as well and so what they're looking for specific and this isn't a isn't a bet on emerging or Japan outperforming the rest of the world. It's a really it's a bet on uncovering the misperceptions that companies have in these very deep markets that are historically inefficient. So the manager Mary Capital it's an idiosyncratic play on their ability to work with underlying holdings management teams to improve whatever needs to be fixed from a deficiency standpoint that the market can recognize and reward with higher share prices. It also has the benefit of operating in two areas of the world right now where government reform has been strong in targeting higher equity returns both Korea and Japan. This has been going on for Japan for many years and we've been exposed to it through managers as well that going back to two thousand and eight as Japan continues to go down the path of improved corporate governance and that theme is still it's been long winded but it still has a lot of room to go. In Korea I'd say they're newer to the game of reform but they've accepted it much quicker and so Korea for a number of reasons as a market was up over a hundred percent last year partly driven by the enthusiasm from government tailwinds of government reform partly also the fact that Korea as a stock market is a very big play on AI infrastructure through mostly semiconductors and so this strategy and manager really works with individual companies to understand where they might fix a certain deficiency such as deployment of how a balance sheet should be deployed, corporate governance, how a firm might interact with the street from a communication standpoint. There's a whole host of reasons or the toolkit that they might use to improve stock returns and they've done a very good job historically of doing it. This is a manager that's compounded in these markets over the past several years at over twenty three percent. So we're quite excited about not only the opportunity set but the expansion of the risk budget in the portfolio. Paul, I wanna turn it back to you. Commonfund has made some very successful early calls in digital infrastructure. In fact, our first digital infrastructure investment was made in twenty eighteen and has been a meaningful contributor to returns. There's been a lot of digital infrastructure development since. So are we in the eleventh inning or is this or is there more room to run here? Alright. I'll try to answer this in three minutes. So what I would say is AI is just beginning and is a long term obviously trend that we're going to be experiencing for decades. The digital infrastructure build has been happening and data centers have been around for decades in the publicly traded REIT space. The cloud groups, the Amazons, Microsoft started taking off and building their businesses really around twenty ten, twenty twelve. Early investments were predicated on the continued growth of cloud environment. And that's where most of the workloads are today. AI is really a smaller percentage of that, but it's really supercharged the demand. When we first started investing in the digital infrastructure space, there were less than a handful really, you can count on one hand the number of groups raising dedicated funds to invest in that sector. Today, everybody is investing heavily into the space raising massive funds and everybody's a data center expert. And so in that environment we get relatively nervous given the level of capital flowing into the space. That being said, we do think that there is a window here over the next five years where the hyperscalers are going to invest ahead of growth expectations. They're really capacity constrained right now, but they need all of them need to build this infrastructure in order to grow, continue to grow their cloud infrastructure, but also to grow the AI revenue that they all forecast are going to grow. And so we have effectively front loaded a lot of our investments into the digital space and we think we're sort of relatively advantaged if you will in our ability in the amount of capacity we have to deliver in window. And I think it's very similar to what Amazon did with their logistics infrastructure, right? They had this idea of e commerce delivering products to your home, but they needed the warehouse infrastructure in order to make that happen. So they heavily invested into that warehouse infrastructure in order to be able to monetize that strategy and realize that vision. I think it's a very similar thing that's going to happen in the digital infrastructure space. The fiber to home is largely that's in later innings. The enterprise fiber is being still built out, but is a little bit later innings. Once they build the infrastructure over the five years, I think they're gonna sort of slow down the spending on a go forward basis. They're always gonna be optimizing adding some capacity, but the big spend in my view is happening over the next five years. Well, I actually think we're up for time. So I wanna thank my panelists for your really thoughtful insights into investing in these capital markets, and I'd like to thank the audience for your time and attention.