Louise: Private markets investing has grown significantly in recent years. Why do you think this is? Has Flexstone also experienced this strong growth alongside this trend?
Nitin: You’re right, Louise. Private markets have grown significantly, and we have as well. I mean, Flexstone has grown to over US$10 billion in AUM since our founding back in 2005, and we provide access to private equity now across the US, Europe, and Asia.
Within private markets, private equity is really an attractive asset class, right? This growth is really driven by the fact that if you look at any dataset over a 5, 10, or 15-year timeframe, you can see time and time again that private equity outperforms other asset classes, which is why now it’s become a key part of the asset allocation strategy for institutional investors, for family offices, and now slowly for retail investors as well.
Is there a private assets ‘bubble’?
Louise: Yeah, the growth story in private markets has prompted some speculation that a bubble has developed, but bubbles are notoriously hard to spot, even in public markets, where they’re more transparent. Do you think there’s a bubble in some areas of private equity? And how do you ensure that the valuations you place on your investments are accurate?
Nitin: Right. I mean, bubbles are very hard to spot. We don’t try to, you know, time the markets or sectors. I’ve been in this industry now for close to 30 years, and I can tell you that market timing just doesn’t work. It doesn’t work in public markets, and it certainly doesn’t work in a long-term asset class like private equity.
We always recommend to our investors that they maintain a consistent and diversified allocation to private equity year after year. The way we build our funds is not to chase hot ideas or sectors from one year to the next, but rather to build very well-diversified portfolios across traditional sectors like healthcare, business services, industrials, and consumer, targeting companies that have a proven business model that have shown the ability to sustain macroeconomic cycles. So we’re not chasing the unicorns.
Louise: In terms of accessibility, private assets have traditionally only been available to very large, sophisticated investors, usually institutional investors. However, there’s now a push to open up private markets to wholesale and retail investors, essentially to democratise private assets. Is this movement something that you’ve been involved in, and are you also opening up opportunities for these kinds of investors?
Nitin: Right. I mean, we are definitely focused on this, and we believe opening up private equity to retail investors is really a great equaliser in terms of providing individual investors an opportunity to access private equity, which was historically reserved for institutional investors and the like. So, we have been approved to launch a product in the French market that will start before year-end. That’s really catering to the retail market. So, we’ll start that in France before the end of the year but hope to bring that out to other geographies over time.
Why Flexstone invests in everyday, ‘boring’ businesses
Louise: Let’s take a step back and look at some of those companies that you invest in because I find this really fascinating. You talked about mission-critical businesses, and you have a focus on smaller companies in the lower middle market or Main Street companies. I find it fascinating that many of these businesses are essentially family-owned, and over the 10-year holding period that you expect these companies to grow significantly. What are the different ways that you work with these companies to add value? Can you give us some examples?
Nitin: Sure. First of all, you know, as I’ve said in the past, we love to invest in everyday, boring companies. Now, why is that? Well, it’s because many of them have been around for a long time. They have a proven business model, and these are old economy businesses that you can touch and feel. We see them, we might know their products, we might have seen their ads, and we might have experienced the services that they provide.
These companies, as I mentioned, are not chasing some hot trend that’s great one day and gone the next.