Show V/O:
This is Alternative Allocations by Franklin Templeton, a monthly podcast where we share practical, relatable advice and discuss new investment ideas with leaders in the field. Please subscribe on Apple, Spotify, or wherever you get your podcast to make sure you don't miss an episode. Here is your host, Tony Davidow.
Tony:
Welcome to the latest episode of the Alternative Allocations podcast series. I'm thrilled to be joined today by Matt Katz from Fiduciary. Welcome Matt.
Matt Katz:
Great to be here. Thanks for having me.
Tony:
Let's start with the basics. Talk to us a little bit about your background, what drew you to the industry overall and your current role at Fiduciary.
Matt:
Currently at Fiduciary, I'm a Managing Director and I lead our efforts on private markets, diligence, research, underwriting, portfolio management. I started my career right out of school. I was a finance major.
I knew I wanted to be in asset management. Like many folks, I wasn't sure really what direction I wanted to head in. So, I got a role as a generalist research analyst at a consulting firm, investment consulting firm, underwriting and analyzing mutual funds for large institutional clients to invest in.
It was a great learning experience to really understand the industry, the people that are in it, but importantly, the different asset classes in which institutional investors invest, including private equity. As I started to get more ingrained in the space, I really started to gravitate towards the private markets. So, this was 2008 post-GFC era where you could really see an inflection point of the growth of the number of private companies in the US and relative to stagnant, even dropping public companies.
And so I was really curious to sort of understand why that was the case. We had a small group of analysts that were focused specifically on private markets and private equity. And so, I did my best to sort of latch on to them and sit in with the meetings that they were sitting across from private equity investors and some of the smartest allocators in the world.
And I really just wanted to be like a sponge and absorb everything I could about the asset class, about the mechanics, about the industry and the structure of the different funds that were out there. It was that time where something went off in my head, where I was like, this private equity is really, you know, it's about relationships. It's about process. It's about accountability, control. I'm a little bit OCD, so those are kind of like music to my ears, if you will. And so it was at that point where I was like, I want to dedicate my career to analyzing the space.
I spent a number of years analyzing private equity funds, private real estate funds for that firm, eventually moving to Boston about 12 years ago when I joined Athena Capital Advisors. And I worked under the one and only Kate Huntington, who I know you've had on this podcast before. And we were allocating private equity, private real estate investments across our multifamily office clients and continued to learn a ton, build my network, relationships in that space.
Then Fiduciary Trust purchased Athena about six years ago now. And at that point, Kate became the lead of our advisory solutions group, which is our multifamily office side of the business. And I took over the lead of our private markets practice.
Tony:
So you were early and you've seen that transformation. Something we talk a lot about on the podcast is the shrinking public universe and the growing private universe. And it's interesting as I speak to young kids today who are leaving the academic world and thinking about getting into the business, they're all gravitating to private equity.
You did it and you saw the writing on the wall long beforehand, but it is an exciting time. It is growing. And now of course, we're taking that discussion from the institutional family office world and having discussions of how these strategies can be translated into the wealth channel.
So great background and very, very helpful as we have our discussion here today. I wanted to maybe start with kind of a high-level discussion, which is where are you seeing the most attractive opportunities? Private markets is a big and diverse set of opportunities out there.
From your vantage point, where are you seeing the most attractive opportunities today and why?
Matt:
We've always tended to gravitate towards the middle market and lower middle market side of the asset class. I think it's even more prevalent today as to your point, the asset class has just continued to grow exponentially. One of the reasons that we like that space is we think there's a structural capital availability and opportunity imbalance.
So if you think about it, as the asset class continues to grow, and if you're a private equity firm and you're successful, the natural thing to do is to hire more talent, raise more capital, raise larger funds. Now what happens at that point is eventually the size of the equity checks that you need to deploy to have a successful fund get larger and larger. So in order to deploy that capital, you have to invest in a larger amount of companies.
There's this sort of asymmetry where there's not as many large companies for which to invest, but there's much more capital that's been raised and so that increases competition for those assets. A lot of those assets come from auctions or competitive processes and so they get bid up over time. Then the middle market and even the lower middle market, and there's various ways to define that. For argument's sake, let's say anywhere from 10 million to 250 million in revenue. There's over a hundred thousand companies that are ripe for the picking for private equity to partner with, but there's not as much capital and there's not as many funds.
And so inherently there's less competition. You're sourcing these deals typically off market. They're proprietary deals. They're from your relationships and networks. And so you're going in at a lower entry multiple. Further, because these companies are smaller, there's a lot of low hanging operational fruit that you can do. A lot of these companies are family or founder owned. They don't have a CFO or professional financial operations. They don't have an M&A engine. The CEO is oftentimes the head of sales.
And so private equity can come in and say, listen, you've got a great product and a great set of customers, but we want to help take you to the next level so we can help augment your talent. We can set up a sales and marketing practice. We can set up an M&A engine and take that company to the next level.
What does that mean in terms of what I was talking about before, in terms of all that capital that's being raised in the larger market? It also creates a great exit opportunity for those clients. Once you professionalize them and scale them, you've got these financial sponsors and strategic acquirers just ready to purchase those deals.
Tony:
And you're talking about something that I certainly talk to advisors about a lot. And that is we sometimes lose sight of the fact it's more than just giving money. A lot of time, it's that expertise that really helps unlock value in those companies. And it seems like the middle market is a richer opportunity set. By the way, we see the same opportunity looking at the lending opportunities where middle market is an opportunity to provide more value where the top of the market seems a little frothy here.
Maybe one point somewhat related to that, that is a phenomenon we've certainly seen over the last couple of years where slowing exit environment. We've definitely seen that kind of post-‘21 peak. After ‘22, we've seen a slowing of exits. We're starting to see some signals of green shoots. Are you seeing that? Is this a better entry point than perhaps over the last couple of years?
Matt:
You're setting me up nicely to continue to talk about the middle market. I'll take a step back and talk about the exit market in general. You know it has been a little bit of a slog over the past couple of years, but we are starting to see signals of momentum in both deal activity and exit activity.
What we're really looking at is the larger end of the market to see signals there because we've been noticing there's been uptick in exit count and exit value from 2024 to 2025. That being said, the rate at which deal count is accelerating and exit count is accelerating is much higher than value. So what that tells us is that a lot of smaller deals are still getting done, but it's the larger end of the market that has yet to see an opening of exits.
There have been notable ones over the past couple of months, but we are seeing a lot of liquidity alternatives, if you will, for distributions. Think about continuation vehicles or CVs, NAV loans, dividend recaps. Those are a lot more popular at the higher end of the market because LPs are so thirsty for distributions, but the larger funds just can't sell their companies, so they're finding creative ways to provide distributions. Once we see those full exits start to come, then we're going to really start to see the flywheel come back in the private equity market.
Tony:
We tend to look at private markets as long-term investments. I'm curious if there are any sort of things that you're watching carefully like the economic environment or geopolitical risk. We both talked about exits a little bit.
That's probably something we're both paying attention to because we think overall it's a catalyst for the growth in the market, but are there any economic signals that you're looking at telling us it's going to be more attractive in the future or any sort of warning signals?
Matt:
Not necessarily. Because we're really long-term investors, we're not looking at short-term catalysts and things like that. I'd say where we find attractive opportunities and are really spending our time are in industries and sectors that have long-term secular growth tailwinds, but are also complex and highly regulated.
Private equity can help navigate some of these complexities. Think along the lines of say healthcare or financial services or aerospace defense. These all have strong demand and long-term tailwinds, but they're very hard to sort of understand at the granular level.
And you need to have the right relationships, and you need to have the right operating capabilities to help take a company in that space to the next level. We invest in both generalist funds and sector specialist funds. So, one of the areas that we've been leaning into a bit more are these sector specialist funds that have creative ways of sourcing deals in smaller companies within these spaces, but also have networks that are exclusive for these companies to help navigate through those complexities.
Tony:
So I wanted to maybe talk a little broadly, and that is, I think one of the big challenges for advisors is how do they evaluate? You, of course, have a lot of experience doing this. You have dedicated resources.
I think for a lot of advisors, it seems intimidating. You can understand the intellectual argument pretty easily why you would want to have private equity in your portfolio or private credit or private real estate, but sometimes the how-to is what slows down the process. You've been doing this a long period of time.
How would you recommend that advisors think about evaluating the various structures and strategies available in the marketplace? And again, maybe just high level because everyone isn't going to have the access that you do.
Matt:
How much time do you have? Because I spend my life living and breathing this stuff. And to your point, these are long-term investments. A lot of people talk about the 10 to 12-year fund life of a typical drawdown fund. We look even further. We're looking at 20, 25 years because if we're partnering with these groups, we want to partner with them, not for this fund that they're raising now, but for fund three, four, or five going into the future.
And so the robust due diligence process is really, really important when investing in private markets. A lot of people talk about the P's. I don't know if it's three, four, or five. Typically people, philosophy, process, performance, we're no different.
I'll start with the people. We believe firmly that the principal asset in a private equity firm is the people. When we're speaking with folks at a firm, we take a look at the senior folks. We want to know what their history and experience is like. We want to know what their motivations are. We want to know if there's alignment of interest between us and them. We want to know if there's a number of folks that are senior people, do they have complementary skill sets? Are they investors and operators? And how they are building the firm for the future, because I mentioned these are very long-term relationships.
So we want to understand that next level of investors. We want to understand their hiring practices. We want to understand if there's upward mobility and accountability. We want to understand what the compensation structure is, how the carry interest has changed over the years to make sure that they're sharing and retaining the talent that they believe is the next generation. So, when we talk about the people, we're looking at that, talk about process.
There's pre-investment process, there's post-investment process, there's realization process. Particularly at the lower end of the market, the pre-investment process is extremely important. Sourcing channels that are unique, whether it's through intermediaries, whether it's through the networks that you have with advisors, whether it's the success that you've had previously with other entrepreneurs that are referencing you to other companies and founders that they believe you're the right partner to take them to the next level.
So you have your own inbound interest. These unique sourcing channels are key. Then there's once you get in front of someone and you source the company that you want to invest in, how are you going to do it? How are you going to take it to the next level? You need to build that trust and rapport with the founder or the entrepreneur. And so what are your operating capabilities?
Are those operators involved at the beginning? Are they helping source deals based on their networks? Are they helping underwrite the deals or are they names on a page and they're just sitting at board meetings collecting a board check? We're trying to figure that out as well.
Performance-wise, at a bare minimum, you need to have above-median performance consistently. There's a wide dispersion in private markets performance, much wider than in public markets. At a bare minimum, you need to have that consistent performance over time. There's also a higher persistency of performance. So if you've done it before, there's proof that you can do it again. But specifically, we want to know how they're generating that performance at the deal level.
So there's looking at partner attribution. Who's leading the deals that are the most successful? There's sector and size attribution. Are you staying in within your strategies or strategy drift? And then there's the drivers of returns. Is it real operational value-add? Are you growing organically or are you just leveraging the company up and adding more risk to it down the line? And so these are a lot of the things that we take a look at.
Tony:
And I think that's helpful because I think many advisors are comfortable with the 4Ps. Of course, there are nuances when we think about private markets. I'd argue that nothing replaces history and experience.
And I think in the private markets in particular, that's the only thing we can really rely upon is, have they done this before in good markets and bad markets? Do they have a deep and dedicated team? I suspect that a lot of advisors, they get really excited and they feel very intimidated.
But again, the more that we make it relatable, I always encourage advisors as well, leverage work that's done by your home office. The home office often does a really good job of vetting a whole handful of managers and narrowing that down to just a few that make it to their recommended list. Leverage third parties who might be doing the due diligence for you.
Or ask the asset managers because every asset manager coming, knocking on your door, they're familiar with who their competitors are, where they stack up, what are the differences between one and the other.
Matt:
I do want to just hammer home that point because one thing I did leave out of the Ps is an R and we call that references. I think that helps verify all the work that you've been doing. It's a key, key part of our diligence. It's speaking to portfolio company management. It's speaking to like-minded LPs, it's speaking to other GPs that are asking who the people that they respect. It's speaking to ex-employees and understanding. And now a lot of these GPs will give you a list of references. Those tend to be pretty strong for them, but to build your network and to go to conferences and go to annual meetings and really take some off-list references to verify all the work that you've done, that's invaluable.
Tony:
I think that's important and it may be intimidating for advisors out there, but there are resources. Leverage all those resources you have at your disposal. Make sure you're comfortable with it.
One thing I say is if you can't get comfortable and you don't understand what a manager does, the edge they have in the market, the way the fund is structured, you can pass. You're not obligated to invest in it. But given the historical performance and the excess return that you could potentially capture, why would you just ignore that you now have access to some of these great investments that were historically the domain of institutions and family offices?
So an exciting time for all of us. I appreciate the deep dive here on private equity. I think that's where a lot of people are spending their time and effort at, again, just maybe high level. Where else are you seeing opportunities? What do you think about private credit? What do you think about real estate? What about infrastructure?
Matt:
One area where tactically we've been seeing a lot of capital, and it makes sense just given the lack of distributions, is the secondaries market. Secondaries can be used in our mind as a tool in the toolbox within a private markets allocation. Secondaries are structurally different in many ways than traditional private equity.
In secondaries, you're investing into a mature portfolio of companies and funds. What that can do is it can ramp up your allocation more quickly. You're eliminating the blind pool risk. There's less of an investment period sort of wait and see what they're going to invest in and so your capital gets called more quickly.
At the same time, because these investments are more mature, you're going to get distributions back more quickly. So it's a great way to get a private markets allocation started. And then as you're investing in secondaries, you can supplement that with a kind of traditional private equity that we've been talking about today.
Tony:
We're a big fan. It's our highest conviction idea. We think for all the investment merits and all the structural reasons, it's a key part of the allocation. And it's interesting. I'm hearing more and more from institutions and family offices, they're often thinking about the secondary as their core exposure and then adding to it selectively along the way.
A lot to get excited about. Thank you for all your guidance. Thank you for leveraging your history and sharing it with us here today. I hope our audience gets a few nuggets out of it as they think about one, where they're allocating capital, but two, how to allocate capital and how to vet the various structures and evaluate what might be available in the marketplace.
Matt, this has been very helpful. We thank you for joining us on the Alternative Allocations podcast series. For all of our listeners, as always, we encourage you, let us know what sort of topics you're interested in. Please rate the episodes, continue to share with your friends and your peers. Our audience is growing. We're very happy about that. And we know that a lot of it came from happy listeners who have been sharing with others. So thank you all. Matt, so much for joining us here today. Thank you.
Matt:
My pleasure. Thanks so much for having me.
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