Lee Harris
Michael Milken (right) speaks with distressed-debt investor Howard Marks at the 2022 Milken Institute Global Conference.
This year’s Milken Institute Global Conference was as upbeat as it was balmy.
If Davos has a deranged energy, last week’s investor conference in Beverly Hills, thrown annually by former junk bond king and convicted felon Mike Milken, is its more relaxed counterpart. There is shiatsu massage in the Wellness Garden. The croissants are vegan, the chocolate is “Hu.” And whereas other Wall Street confabs have drawn critical press in recent years, making attendees cagier, the cream of high finance can still speak freely when it gathers in Lotusland.
Yet much of what spilled out within the Beverly Hilton complex was blithe optimism. Most panelists agreed that a recession is on the horizon, but insisted that the downturn poses as much profit opportunity as downside. A Harris Poll of attendees found that most Milken guests were bullish about their own financial performance and twice as likely as the American public to think that inflation will taper off.
“All the food groups are up, maybe with the exception of retail,” said David Hunt of Prudential (PGIM), the world’s third-largest property owner. “Are we going to have a recession? Who the hell knows. I’m not an economist, but we have a lot of recessions,” said Jonathan Sokoloff, managing partner of private equity firm Leonard Green. “It’s OK if we have a recession, the world doesn’t end.”
Even the plunging performance of star attendees couldn’t dent the mood. Tech investor Cathie Wood has seen her flagship portfolio at ARK Investment plunge dramatically in recent months, becoming the worst-performing U.S. equity fund among peers in the first quarter of this year. The nerdy-chic stock picker was still asked to headline a panel on “Crypto Pioneers.” Other celebrity funds like Tiger Global Management and Melvin Capital have tanked in recent months but were name-dropped to approving nods.
What kept spirits running high at the poolside cabanas, between shrimp bao and passion fruit parfaits, was a breezy confidence that even rising interest rates are unlikely to seriously damage the asset values of the rich. Instead, some contemplated whether the economic damage could grow the ranks of the propertied classes. As defaults loom in developing countries and ordinary Americans are hammered by rising costs, financiers maintained that they could keep serving up high returns to the owners of capital.
“IT’S KIND OF AMAZING that you’re going to be able to put Bitcoin in your 401(k), and yet it’s very hard to buy things like private credit, private real estate,” said Julian Salisbury, a former champion slalom kayaker who now runs asset management for Goldman Sachs. “We’ve raised capital through our own private wealth channels for many decades, frankly, but the expansion and democratization of alternatives, with a broader base of people being able to access it, is a real mega-trend.”
Salisbury, sporting black Blundstones under a dressy suit, was one of many financiers making the pitch to expand once-exclusive products available to an expanded investor class they dub the “mass affluent.”
For decades, top private equity funds like KKR ignored the portfolios of ordinary investors, preferring to deal directly with big asset managers, sovereign wealth funds, and “ultra high net worth” clients. But the wealth of the top segment of earners has swelled in recent years, forcing PE to look beyond the super-rich and court the workaday wealthy.
The feeling may be mutual. The financial crisis pulled institutional investors’ interest away from publicly traded stocks and toward private assets promising outsize returns, from venture capital and hedge funds to infrastructure and farmland. Trump’s labor department made it easier for pension funds to invest in private equity, and teams like Salisbury’s would like to go further still, bringing it to individuals.
Not all attendees agreed that Wall Street should push retail investors into private markets. Foundations and endowments have done well by being picky, said Kim Lew, who runs Columbia University’s endowment. Mass entry into those products could kill the possibility of making outsize returns in the sector—and could end up hurting small investors the most.
“We all were really excited about the fact that there was lots of retail dollars in the public market, because that was the dumb money that allowed us to make a lot of money when we were active investing. There is a risk that that’s what’s going to happen in the private markets,” Lew said on a panel with Salisbury. “They are not going to have the same experience that we had.”
Salisbury wasn’t having it. “I think having the manager selection process at the front end is going to protect against that,” he told Lew. “What you’re concerned about is a legitimate concern, I think, if you were selling it online—on Amazon. I’m not advocating for that.”
Salisbury was saying that banks like Goldman will do quality control, picking and choosing from among a wide range of private credit offerings. But that sidesteps Lew’s concern, that alternative assets like venture capital have performed poorly on average.
Managers of alternative assets have long argued that they deliver higher returns in exchange for hefty fees and less liquidity—you have to be willing to park your cash with them for years. Whether or not they are even delivering better performance to their first-class clients is a subject of debate. But today—just as financiers are expressing more enthusiasm about drawing in a wider set of participants—the structural conditions for the market could be souring.
THE RISING COST OF BORROWING and the tumbling stock market should, in theory, threaten private equity’s business model, which is based on rising asset prices and debt-leveraged buyouts. But top fund managers at the conference insisted that the outlook remains rosy.
Take Renee Noto, the president of Brightstar Capital Partners, a buyout fund focused on midsize business-to-business firms. Noto said current conditions are prime for her strategy: Make an initial acquisition in a “fragmented” sector, buy up and add on smaller companies, and raise prices. For instance, she said, Brightstar owns the second-largest used-vehicle auction platform in the country, and has identified opportunities in “150-plus smaller, independent mom-and-pops.”
It’s important to pick essential sectors, she emphasized. “We own a large fleet maintenance business. It’s a national business. Their customers are all folks you all would know. They deliver many things to your homes. We offer critical business. Families and founders, they don’t like to ruffle feathers with their customers, so raising prices is very difficult. It’s something we can coach managements on.”
Family businesses can be counted on to underprice their product, Noto told the Prospect, since “they have these long-standing relationships.” That gives investment firms an opportunity to mark up prices upon entry.
Furthermore, the economy is at an inflection point. Baby boomers built the service industry and, she said, are now holding onto some $60 trillion to $85 trillion in value.
“They have to transfer it, they’re gonna die. Ultimately, that’s the endgame. But for us, a lot of it is held in families and businesses,” she told the Prospect. Many families are willing to be bought out by private equity to avoid hefty taxes, and market conditions are only accelerating that transfer. “These headwinds are starting to scare families, so, from a sourcing perspective, we’re going to see a lot of opportunities.”
“A declining market means they can acquire new businesses on better terms,” agreed James Howe of Mercury Capital Advisors, who raises money for private equity deals, after watching Noto’s panel. However, he added, “the only thing is the fundraising market, which gets very difficult when the markets go down.”
The disconnect between macro worries and enduring opportunities in private markets rippled through the conference. Higher rates should in theory make it harder to fundraise, said Brad Bauer of Värde Partners, an alternative investment firm. Yet, he added, “you wouldn’t know that from the fundraising trends you’ve seen in private credit.”
“I’M REALLY CURIOUS why we haven’t spoken more about energy,” one investor in nuclear fusion told the Prospect on the last day of the conference. He appreciated the high spirits, he said, but was struggling to match the exuberant mood. “I come at it from a different perspective. I’m from Europe, and I see the threats happening there. Obviously because of that situation, I’m worried about geopolitical issues, social unrest, higher prices … people don’t want to think about it.”
Not a single panel at Milken was devoted to a key physical commodity like oil or lithium, at a conference where half a dozen talks zeroed in on private markets with hopeful names like “Private Credit Comes of Age” and “Time to Shine? Private Markets in Periods of Uncertainty.” A bored-looking Joe Weisenthal mingled politely and then snuck upstairs to a hotel room to tape episodes of his brass-tacks Bloomberg podcast, Odd Lots.
Another conspicuous absence was talk of investment in China, where many financiers hope geopolitical tensions and a tech and real estate crackdown won’t spoil returns.
“It feels global, but Asia is missing,” reflected Jean-Paul Lemonnier, who works at a family office for the French Peugeot family. He shrugged off the suggestion that politics played a role and pointed to Chinese travel restrictions. Asian financiers are still welcome, he said, waving at a passing guest—“He’s a big, big, big, big guy in Taipei.”
Others argued that supply chains should be based closer to home, and even tailored counter-pitches for their own regions.
“Look at Latin America as the opposite of China,” offered André Esteves, chairman of Brazil’s BTG Pactual. “Since Latin America is geographically close, safe, culturally and sociologically close to the U.S. or even continental Europe, I think it’s a good moment.”
Trade and manufacturing weren’t totally off the radar. Eric Schmidt, the ex-Google CEO who now runs a tech company called Steel Perlot, drew crowds to a talk on applications of artificial intelligence, where he held forth on ethical dilemmas from emerging biotechnology to whether China will soon be able to conduct war on the scale of milliseconds.
“Bioreactors, which are essentially like breweries, are going to take a lot of people. Those people will be manufacturing jobs in rural states, because that’s where the biomass is,” he declared, referring to steel vats where he expects future chickens will be grown.
But in the vast space between the limitless imagined profits of futurist science, and wringing more returns out of existing private markets, there was little meat. Ordinary Wall Street types from outside alternatives or crypto at times sounded wounded. “I would remind everyone,” said Citi CEO Jane Fraser, “don’t write off the banks.”
Why were real-world investments—the problem of producing and distributing stuff that has consumed economic thought since the pandemic’s onset—so absent? A recent story in the Milken Institute Review, strategically scattered around the conference, provides one clue. Noting that after the tremendous run-up in late 2020 and 2021, asset values are now almost 50 percent higher, relative to income, than the long-run average, the authors consider whether the world is entering “a new paradigm in which the value of assets relative to income remains historically high.”
Rather than flowing to workers through pay, the new wealth generated in this new paradigm flows first to the existing owners of capital. That can shade into gains for ordinary people—teachers and firefighters with pensions, or truck drivers with invested savings—but new gains collect at the top. This is clearest to see in the Federal Reserve’s support for capital owners during the pandemic, which channeled money into already-existing pools of wealth. But the report suggests that beyond being mere crisis-fighting measures, the same dynamics could stick around as long-term trends.
“AMERICAN DREAM INTERVIEWS 3RD FLOOR,” read one sign posted in the lobby, indicating interviews for the Milken Center for Advancing the American Dream.
Good intentions were sometimes botched in delivery. At one outdoor panel, “Where Values Meet Value: Doing Well by Doing Good,” guests struggled to hear speakers over the chants of United Steelworkers protesting labor conditions at Chevron.
Fund managers came prepared to answer expected questions about ESG (environmental, social, and governance) investment initiatives. A group of private equity tycoons led by KKR and Leonard Green introduced a new nonprofit, Ownership Works, that they say will help grow the ranks of capital owners by cutting employees a share of profits at portfolio companies.
The growing threat of extreme income inequality was a recurrent theme. Some speakers referred to the existence of “two Americas.” Gene Ludwig, former U.S. comptroller of the currency, warned that “we are headed for civil unrest.”
Perhaps oddly, it was the non-financiers at the conference who expressed doubts that wealth inequality defines that split. Andy Stern, the former head of SEIU who is supporting the Ownership Works initiative, dismissed talk of a new wave of unionization. He’s unconvinced by a few recent high-profile examples of labor organizing at media companies and Starbucks, he told the Prospect, since many of those workers are college-educated.
“Starbucks workers are not Dunkin’ Donuts workers,” Stern said. “A tight labor market always makes people more courageous. I won’t say this about Amazon, but a lot of the organizing is amongst higher-educated workers … it’s sort of workers who are more used to being paid attention to.”
At a panel on the future of the news media, pundits fretted over a divisive cultural turn in which the higher-educated are out of step with the masses. Writer Bari Weiss lamented “the capture of American institutions.” Asked about her warm reception from the Masters of the Universe—she’s back at Milken this year after speaking last year about her cancellation—she clarified that she was just passing through.
“I just came in to talk on stage. I haven’t even, like, been at the conference. My relationship to the conference is my relationship to my readers, is my relationship to my listeners—to tell the truth, in whatever context I’m ever in,” she told the Prospect. Unlike the Wall Streeters at the conference, to whom it seemed patently obvious that unequal asset ownership is the fault line running through American life, Weiss and others brought in as cultural cognoscenti suggested that the key divide was cultural: the co-opting of liberal institutions.
Even bluff Jim VandeHei of Axios, who emphasizes the importance of facts-driven coverage, was moved to say that “the morality that we all live with in big cities, and in the areas that we all live, is just different than the morality and the values of maybe half or more of the country.”
These days, it costs almost nothing to open news outlets in cities stripped of legacy media, VandeHei said. His no-frills news site is now pushing into local news, with a business model that skips capital-intensive investments like a fully staffed physical newsroom.
Instead, Axios is launching low-overhead email newsletters in a handful of smaller cities, since, VandeHei explained, “the beauty of the post-COVID world is nobody expects a building, and nobody reads a newspaper.”
