All right, will public or private markets shape the future of global investment? Now, before we discuss this, we have to be very careful because I know the panelists are all going to devolve to the lowest common denominator. Will public or private markets shape the future of global investment? You're all going to say no, it's not one, it's the other, we need both, we need a bit of... aren't you, Mary? Mary, you're the CEO of Asset & Wealth Management at JPMorgan. That's what you're going to tell me: it's not one, it's not the other, it's both. But it is. Well, then we'll just go back and have a cup of tea. What's the challenge with that? By the way, we've also got Roger Crandall of MassMutual, Bill Ford of General Atlantic, Dame Julia Hoggett of London Stock Exchange, Julia, we have Ken Moelis of Moelis & Co., and Carlson Tong, the chairman of the Hong Kong Exchanges. So, accepting that you're all going to tell me it's a bit of both, let's start with where you think the primary investment opportunity lies.
Well, the primary investment opportunity, as we all know, is still the public markets. And that's the most liquid, deepest access to companies all around the world. But let's ground ourselves in what's happened to the US public markets as an instance. There used to be 7,300 public companies back at the height in 1996, and today there's 4,300. So we've dropped by 40% over the course of 30 years. In the meantime, private equity has grown sixfold over the course of 20 years, and private credit has grown fivefold in the course of just 10 years. So you have a complete shift in the things that are available to invest in. And the question is: do you have access to invest in those markets? Is it appropriate for you to invest in those markets? And can you sustain any periods of illiquidity? Because you're sacrificing liquidity in order to get access to these markets, which can provide great returns if done in the right hands, but you have to make sure you can weather through those times.
When you look at that dramatic shift in the reduction of the number of public companies, what do you take from it? I think it's concerning because it is the primary source of opportunity for investors to be in the public markets, despite the growth in the private markets. But I wanted to pick up one thing that Mary said that I think is important: this point about liquidity and illiquidity. The public markets offer liquidity, and that's why we need it, and investors need it. And the private markets need to offer excess return or alpha to justify the illiquidity that they have. We've always thought you need four, five, six hundred basis points of premium performance to justify the illiquidity in the private markets, and that's what we've tried to do. I think the asset class has delivered that, and it's why, as Mary said, we've seen significant growth. But we absolutely need a public market because it's not a replacement for the private markets.
So what is the difference in your view in the duties that each provides?
Well, I think in the case of private markets, it's really what generates alpha. And I think it comes from industry insight, deal acumen, company building skills. And it's the firms in that area that have to apply those skills and get them ready to be public companies on the London Stock Exchange, the Hong Kong Stock Exchange, and then be available to a broader set of investors, institutions, and retail investors. So that's really the job of the private markets.
I want to say first of all, I went public 10 years ago. I was a private company. Probably, we were talking about it before, I said this was probably the single greatest day in my life. There's nothing that demonstrates capitalism like watching your stock open on the New York Stock Exchange. Liquidity. I brought my family, my kids. It was the greatest day in their lives. So I just want to say to all the entrepreneurs out here who are thinking about it and are being told it's terrible, it's fantastic. Number one. But number two, what's happened that Mary was talking about? We have all these agencies now that are trying to tell you how to run your company. ISS tells me who I can have on my board, how I can get compensated. You have to go to consultants. So you go private and you have all this dynamic opportunity. I think that we've regulated the public market out of existence. 7,000 down to 4,000 because who wants ISS telling you who your director should be and what age they have to be and what your disclosure has to be about? I have a mine safety disclosure. We're an investment bank. I have to disclose our mine safety procedures. It's not really relevant. So these outside influences, overregulation...
The market will listen to it every day, but it'll tell you whether they like what you're doing. And they don't like what you're doing. And by the way, as a group, they're smart. The general market has an influence, and they'll let you know whether they think you're on the right track. And it's good information to have. It's good input. So we've only been private for 173 years, and we're owned by our policyholders, and I have no interest in going public whatsoever. How often does the debate come up? Zero. Because the alignment of interests with the long-term nature of our policyholders is so great compared to stockholders who may have a short-term desire. A half a percent of extra interest in our bond portfolio by investing in liquid private bonds is worth 40% more in accumulated value after someone's lifetime. That's a great thing, and we can do that because we're matching illiquid assets with illiquid liabilities. So there's a place for private companies for the long term as well. And from an investment perspective, a lot of lending is done by private companies. So we're largely talking about this in the context of equities, and I agree being public is great. I think the ability for ordinary people to own the greatest companies in the world in small amounts is an amazing triumph of capitalism. But we love being a private company for the long term.
But Bill needs both. Bill needs to be able to find the private company and then be able to take it public in the public markets for liquidity, right?
So we have beaten up on both of you. You, or at least they have. You're old-fashioned, you're sclerotic, you're overregulated, and there's far too much... Julia, why are they wrong?
Well, I think there are certain points I absolutely agree with Ken on, actually. Which is we've had a mindset in the UK that we have sought to protect people from the downside so much that we haven't exposed them to the upside. And one of the challenges in regulating one regulation for every different investment scenario is that you wind up with everybody being in the same bucket or being constrained by the same things. The simple reality is that we need a world, and I'm afraid it is answering both sides of your question, that enables private companies to thrive, and that entrepreneurship, that curation, that company building to happen in the way that is best to coach a CEO as to how to build a consequential company. But we then need to make sure they've got numerous courses of exit. One of the things I care about: I chair a task force for the UK that has a very simple vision statement: how do we create the best possible environment in the UK for great companies to start here, grow here, scale here, and stay here? To do that, you need private and public. We have incentivized all of our institutions to buy public and less incentivized them to buy private, which is why Bill's had great pickings, but it's why we've not had as much of our private money coming in. To solve that, you need to think differently about the problem statement. It isn't about CEOs of exchanges going 'boo, hiss, private markets are bad.' What we've done at the London Stock Exchange is set ourselves a very simple target: we want to be the first exchange in the world that is genuinely indifferent as to whether a company is public or private.
You want to be? So you're not yet?
Well, I need the regulation to go through in the summer of next year.
The regulation? Just what we'll come to you just one second. Yes, sir. She's going to be the first, by the way. All right. Good. Now, being the chairman of the Hong Kong Stock Exchange, which is the public market in Hong Kong, you will think that I'm slightly biased. I'll be forgiven to be slightly biased towards public markets, right?
Well, I would hope so, since you're running one. Yes, that's right. And I think you probably have to ask yourself why the private markets have grown so much. I think it's the low interest rate environment, the abundance of liquidity, and also the desire to seek high returns. I think those are the major reasons why the private markets have grown so strong. But let's look at the difference between a private market and the public market. The public market has got far more stakeholders. So I think the public markets have to answer to regulators, to shareholders, to community, to employees. So that's a big difference between the two.
Yes and no. Yes, go ahead. No, I was just going to jump in because that's exactly right. But the reality is that if you don't have to look at your portfolio every day, every hour, because you're not in need of making a decision or needing liquidity, you're much better off in private equity holdings or private credit holdings that don't have day-to-day mark-to-market values. You will make better long-term decisions.
When you say 'you will make better decisions,' you the investor, right? But what sort of investor are we talking? Institutional pension fund? Or are you talking today?
Today, it's everybody. We have a term called 'accredited investor' (AIQ) which allows smaller investors to be able to invest in private equity, private credit, anything private. That rule was established back in the 1980s and it said you had to have $200,000 US dollars of income or a million dollars of net worth. That rule hasn't changed since the '80s. Inflation-adjusted, that's now $3 million or $500,000. But that hasn't changed. So all you need is the $200,000 in income and a million in net worth, and you can access these markets, which will probably allow you to make better long-term decisions for a portion of your portfolio that you shouldn't have to want to sell every day.
How many of your clients would you say take advantage of investing in private markets?
Well, we try and get as many as possible who can sustain the fact that they can't have access to 100% of their portfolio on a daily basis. If they don't need it, it's better for them long term.
What sort of differential of gains have you seen between those investments?
Well, it's what Bill said first. You take away the liquidity premium you're paying, right? So call that 100 basis points, 200 basis points, depending on the market. And then you find someone in this room who will manage your private investments in a very smart way, and they will add alpha. And it can be 200 basis points in a bad year, it can be 500 basis points in a good year. And now you're talking real compounded returns. And that's why the stakeholders at the end of the insurance policy are getting so much more in their balances, which allows them to retire better. And that's, at the end of the day, every asset manager's goal is to make sure that the end amount of money that the person has is better with them than had it been done on their own, which people usually make human decisions and they tend to sell at the wrong time and buy at the wrong time.
Surely not. Often times? I find that hard to believe.
I just want to tie something Mary said to what Ken said. We've watched over many, many years the 7,000 companies to 4,000. I think it is tied to overregulation. It's why companies are choosing not to go public, and they're waiting to a much higher level of valuation to go public. And that opens up the private markets for us. We've got more opportunity to invest in high quality private companies because they're waiting longer to go public. We still want and need the public markets because we need to deliver liquidity ultimately for our investors, Mary's clients. But they're waiting a lot longer to get there because of the regulatory point. And look, this is the rationale for the strategic reset that we've taken at the exchange. But I think it is an important thing when you're looking at that delta of 7,000 to 4,000. The public markets have to ask themselves that question. They have to ask themselves what have they done when they had all of those right ingredients? And they still have a huge number of them. But I think the question is, we, the public markets, have to look at ourselves and go, 'What is my value?'
That's you. Well, I don't write most of the regulations for most of the public markets, but that's exactly what we are doing in the UK. So we're looking at everything from our listing rules, the demands on corporate governance, the demands on disclosure, the risk appetite in the country, and the creation of a crossover market. We're looking at all of those things to look at that reset. And I think it's an important debate to have. It sounds like an unusual thing for the CEO of an exchange to say, but I think we have to look at ourselves and say the world and the global economy works best when you have a very synchronistic relationship between the private and public markets. Each play their part, but the public markets have to make sure they are something that can take and are attractive to those private companies that Bill is curating.
I think what you have to ask yourself is what's the purpose of the market? Is it just shareholder return, or should we consider other social, societal benefits? Because the markets are obviously to allow companies to have access to funding, to market valuation, to liquidity. But I would like to ask: does a CEO have a greater responsibility more than shareholder return?
So you take us down a road. What would you suggest is the wider societal role of the public market outside of the narrow definition of liquidity raising for companies?
That's correct. So what is it? It's inclusiveness, diversity. What Roger said before, it actually reinforces capitalism because when the public sees companies go from inception to growth, being public, and then the wide public being able to participate in that growth—think Apple over 40 years of being public, the public's been able to participate in that. That reinforces the whole notion of free markets. And Mary made the point, actually, it's a democratizing force. The best way is people feel that they've got a stake, whether it's in your 401k or in a pension in the UK or wherever else, you've got a stake in the success of society. That definition in the US means that in private company investment, you don't quite yet have that for everybody.
