Apollo Global Management Inc. announced last week that it will soon provide daily pricing for its private credit. It may not sound like a big move, but its decision to lift the veil on these assets could be the most impactful development in financial markets and investing in a long time.
The private asset giant’s commitment presumably means that its daily prices will account for the myriad market forces that inform the value of all corporate debt, notably interest rate moves and changes in credit spreads, rather than merely quoting the same daily price for months or years. The latest artificial intelligence should make quick work of that, which may explain the timing.
If done well, I expect that Apollo’s competitors will follow, and that firms will soon offer daily pricing for a range of private assets. That would transform private investing in several ways.
One is that investors will be able to better evaluate the performance of private assets.
There are endless arguments about the merits of private investing relative to public markets, mostly because pricing is scarce for one and readily available for the other. More data, I suspect, will show little difference between the performance of private and public investments: Private equity will resemble stocks after accounting for leverage, and private credit will be roughly in line with bonds of comparable quality.
There is already considerable evidence that as private markets mature, their performance echoes that of more traditional assets. But much of that data is behind paywalls, which allows managers to continue making rosy claims about what private investing can realistically achieve. Those promises have attracted big money from institutional investors, many of whom are now rethinking their investments.
Another, related consequence is that private investing will become more volatile.
The lack of regular pricing has allowed private asset managers and their investors to pretend that private assets are more stable than comparable public stocks and bonds. Institutional portfolio managers are generally graded on risk-adjusted returns, with risk customarily measured by volatility. That’s because pensions, endowments and insurance companies must make regular payments to their beneficiaries, which is easier to do from a more stable portfolio.
The promise of higher returns with less volatility has transformed institutional portfolios. Many follow the so-called endowment model of investing popularized by Harvard University and Yale University, which calls for substantial allocations to private assets. Their portfolios typically report magical stock-like returns with bond-like volatility due to a lack of pricing and, thereby, artificially stable private asset values. No one seriously believes these institutions found a way around markets’ iron law of risk for return. More realistic pricing of private assets would expose the charade and very likely dampen enthusiasm among institutional investors.
It’s a price that private asset managers will happily pay to grow. Institutional investors already have their fill of private assets, particularly as exits and liquidity dry up. Individual investors, on the other hand, have little exposure to privates and collectively wield at least as much money as institutions. It’s an opportunity to tap a giant new market with premium fees. To reach them, though, regulators will require more transparency from the industry around private assets, an important component of which is continuous pricing.
Daily pricing could also open the door to secondary markets that allow investors to speculate on private asset prices using futures, options and other derivatives. That may be a more lucrative opportunity for the industry than selling private assets directly to investors. Secondary markets might even provide pricing for underlying private assets and enable private asset index funds.
Unfortunately, more money chasing private assets, while a boon for the industry and a lifeline for institutions looking for exits, will be terrible for investor returns. Earlier this month, at the 50th anniversary gala of KKR & Co., another private asset giant, founders Henry Kravis and George Roberts bemoaned how big the private asset industry has grown. “It used to be easy in the old days,” Kravis reminisced. “The world needs another fund like a hole in the head.” You could say the same about investors in private assets.
Still, it remains to be seen how useful Apollo’s daily prices will be. Some portfolio managers I spoke with were skeptical that prices of thinly traded assets could be reliably estimated. Pacific Investment Management Co. strategist Lotfi Karoui wrote this week that without more deal volume, Apollo’s efforts would “only increase the perception of liquidity without truly improving liquidity.”
One thing is certain: The industry has plenty of financial incentives to get daily pricing right. If it does, private investing will never be the same.
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