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Mike Miranda:
Today is September 8th, 2025, and I'm excited for this conversation because it marks an important pivot in our series. With the past few episodes, we've focused heavily on the public markets, equities, fixed income, and the macro themes that drive them. But public markets are only part of the story.
Welcome to Beyond the Portfolio. I'm Mike Miranda, Head of Investments for BMO Private Wealth North America. In each episode, we'll bring you expert analysis from BMO's top strategists and economists, to help you navigate market conditions and stay informed.
Increasingly, private markets are playing a critical role in high net worth and ultra-high net worth portfolios. These asset classes offer differentiated sources of return, new opportunities for diversification, and unique risks that investors must understand. To help us explore this space, I'm joined by Rod Larson, North American Head of Investment Management Research. Rod and his team spend their time evaluating strategies, analyzing trends, and identifying the forces that shape private markets.
Today we'll use his perspective to build a bridge between the public markets discussion we've had so far, and the private market opportunities and challenges that lie ahead. Let's dig in. Rod, let's start first with the big picture. Can you give us a quick snapshot of the private markets environment today? What are some of the key themes and dynamics shaping the space?
Rod Larson:
Absolutely. Thanks Mike, and very happy to be here. When we really try to capture a candid snapshot of the private equity market environment, there's three big indicators right now that we're looking at, dry powder, and for those of you who do not know what dry powder is, that's the amount of capital that has been raised in aggregate by private market managers. Also, distributions is the second point we look at. Distributions quite simply are when a manager exits a company, that is money coming back to use the investor. And then finally, valuations. Somewhat self-explanatory, but, what are the valuations we're seeing managers paying for companies? Obviously this fluctuates a lot over the course of different cycles.
Starting with dry powder. Dry powder while off the 2023 high, is still significantly high. It is over four trillion across all private markets. To be very clear here, when we define private markets, we're talking about three major groups. That's private equity, private credit, and private real assets. And the age of the dry powder, meaning the capital on the sidelines that was raised four or five, six plus years ago, has never been higher. On the distribution side, we started seeing signs to life of distributions after a bit of a pause. Q1 was fairly strong, right? I think we all read about the IPO market. We heard rumblings that the M&A market while lagging IPO is also coming to life. And in Q2 we saw a slight reversal of that. This means that there's a very large backlog of PE owned companies that are just waiting to get sold and bought. If when, and hopefully we think the second half of the year continues a trend of IPO market and M&A activity picking up, you're going to see a lot of announcements about companies being exited and then hopefully distributions picking up.
On the valuation side of things, we've seen a slight decline, but things are still fairly near historic highs across valuation. So the point of all this really, if you were to encapsulate is, the snapshot of private markets right now is that everything is pointing to a bit of a lull, but a lot of excitement around potentially when things unfreeze the activity we're going to see.
Mike Miranda:
All right, thanks Rod. That's very, very helpful. I like the way that you frame that, the three focus lens there between dry powder, distributions and valuations. You talked a bit about PE or private equity in that space. Private equity has long been a driver of the private market's growth. What trends are you seeing specifically there, deal activity, sector focus, maybe the different lenses of perspective within the PE universe?
Rod Larson:
We're really looking at the trends in PE through two lenses. There's the investing lens and then there's the private market industry. How is the industry evolving? If we start with the investing lens, more than ever, we're really seeing domestic politics, geopolitics, resulting policy, really impacting how and when managers invest. We started noticing five, eight years ago that, increasingly as managers were underwriting a company, the risk weighting given to the geopolitical situation was only increasing. It was coming more and more at the forefront of their deal evaluation. And I think when we first started seeing it eight years ago, that concern has only grown.
And without pointing any fingers, there's a lack of clarity, wild oscillation in policy, economic uncertainty, it has created a wait and see posture that we really do see reflected in the big three factors we just discussed, more granularly, AI, AI and AI, right? We can't pick up any periodical without reading about AI. So how are we looking at AI? We really see it through two vectors. There's the tool creators and then there's the tool adopters.
The tool creators are private equity managers, really in this case specifically VC managers, are investing in the companies that hoped one day, to be the giant in a certain application for AI. Where are we right now in that? Those of you who are old enough like me to remember the great search engine wars of web 1.0 will remember names like, Excite@Home, Alta Vista, Yahoo's still holding on by a thread, but then out of nowhere this group called Google came. Nobody knew which search engine was going to win. Right now what we're seeing is a lot of, it isn't spraying and praying, and I want to be very clear on this, it's intelligent investing, but it is a broad, broad spreading the chips, in the hope of capturing the set of AI companies that will ultimately rule the industry.
On the adoption side, very different. That actually the investment activity we see there, is really more from buyout and growth managers where they're looking at AI and their companies and saying, "Hey, how can AI really increase our margin? Really unlock margin value and productivity, which, no secret, ultimately leads to higher valuations." The other thing we're seeing last but not least in this space is a continued evolution and adoption of the secondary market. Mike, you know this, we talked about it all the time, this could be its own podcast. But in short, it's good news. The evolution of the secondary market is increasingly creating liquidity options for LPs that don't have to remain firm to the 10 to 12 year fund life.
More on the industry side of things. We continue to see this bifurcation between what I would call the traditional private equity, and new private equity players. The traditional is what's really driven returns and the illiquidity premium, for the industry over the past four plus decades. And it's really what's capturing everybody's attention today, understandably. And if you think about it, these are single strategy, industry focused, raise a close end fund of responsible size every three to four years. Where responsible size really being defined as, money that you know can deploy without having to employ strategy drift, either doing bigger deals or doing too many deals. And then you really stick to your knitting and you take advantage of the massive inefficiencies offered by private companies, both on the operational side.
Oftentimes on these, especially in the lower middle market, when these companies are purchased, they are not run efficiently. You can unlock value almost the first day you own them, and then also from a valuation perspective. This new scale model as we refer to it, is very much a model where former traditional players, so these aren't new managers, these are former traditional players that have evolved into a more of broad asset management platforms of scale. The model is really all about providing a multitude of strategies, fund vehicle types, and really extending that reach to increase AUM.
Democratization of private equity has very much fueled this evolution in a huge way. So access, lower minimums, armies of professionals focus on distribution as opposed to a single IR person. The business model itself becomes really more about revenue on the management fees and the empire building, a little less about upside in maintaining singular strategy discipline. Many of these firms are publicly traded and the street evaluates them really using the metric of total AUM and the management fee driven off that AUM. We're seeing the market and looking at the market very much through those two lenses.
Mike Miranda:
That's very helpful, Rod, and I really appreciate your perspective on how the industry and the investment perspective has evolved. It made me think about perhaps maybe the risks that are out there, right? That no asset class comes without risks. What do you see as the biggest risk or challenges facing private markets today?
Rod Larson:
Absolutely. And that really is the question at the moment. Hey, no different than if people remember the hedge fund hype before '08. There is a bunch of hype based on these past returns and that's really driving interest, which is fair enough, right? Who doesn't want to participate in that? The traditional model I would remind everyone, it really has been tested, and we've been doing this long enough as a firm 40 plus years. We've seen it tested, we've seen how it behaves through different cycles. The newer model, this access at all wealth levels, liquid alternatives, really not yet tested.
It's funny, I was walking by a TV in our lobby here the other day. I saw a CEO of a large retirement services company talking about 401k access, which was recently proposed by the president, has to go through some legislation, but more likely than not will start to occur. And the interviewer asked about the dry powder question and the competition for deals, and the guy just, he absolutely blew through the question. He made it all about, almost made it sound like a moral imperative to provide the same 20-year return profile and illiquidity premium to everyone in 401K. Just making it sound like it was almost a sure thing that this return profile was going to persist.
I think what we would say is that, that's dangerous, and I think it's dangerous when playing with people's retirement assets especially. And what I am not seeing, I want to be crystal clear on this, is that the democratization of private markets is wrong, in spirit it is absolutely the right thing to do and it absolutely could work. We do question if people truly understand the risks or if private equity firms right now are overly tempted by what that broader access represents from a business expansion perspective.
For example, you and I talk about this all the time. You've heard me say that a lot of this liquid alts, there is a lot of talent there, there is a lot of attractive opportunity, but if you were looking at it at large, it really is illiquidity masquerading as liquidity. And what I mean by that is, if you look to the details, this isn't the highly liquid mutual fund where you're getting your money out in a day or 90, these are funds that actually can exercise gates. Where only 5% of capital can actually be distributed for those redeeming per quarter. You can see where if there's a market downturn, you can see how that so-called liquidity suddenly is pretty illiquid. It could take a few quarters, even a few years for that investor to get all their money out. We just question, do people really understand that and is the industry being responsible really explaining that?
I think also, we really have to look at, hey, looking forward, is there return expectation resetting, illiquidity premium resetting that needs to occur? I do not have an answer for you on that, beyond saying like anything looking backward is foolish and you need to look forward at the dynamic to evaluate that question.
And then last but not least on this, I think I put forward, is there enough talent to staff the growth of private equity? And I don't know if you've ever heard this, it's something that has always amused me. I was told a long time ago that business school graduates are a very unscientific indicator of calling the top of a market. At one point it was Web 1.0. Every graduate wanted to get into the first wave of tech and web services, then it was consulting, then it was investment banking, then it was hedge funds. Well, guess what it is now? It's private equity. Every single graduate out of business school would kill to get into private equity.
I think what we're saying is, opportunity set exists, the risks are very real. The risks even look slightly different than they did in the past, or maybe there's new risks that we need to evaluate and we're very much focused on that.
Mike Miranda:
I think that's a good way to put it. Obviously the opportunity set is pretty significant and we obviously think about that day in and day out for our clients, but we always want to be thinking about it through the lens of risk as well and making sure that we're taking the appropriate positions for client portfolio. Maybe let's talk about how to navigate. The question is always how do you position in the face of some of those risks? How can we successfully navigate these challenges and continue to capture opportunities in the markets?
Rod Larson:
Well, that's what we're thinking about every day. And I'm going to ask you to go on a journey with me here. This is going to lead somewhere. Please believe this. I am currently watching a documentary called 100 Foot Wave. It's about big wave surfers. They're pioneering a massive break in Portugal called Nazaré. Nobody was surfing this thing 10 to 15 years ago. You get towed in by jet skis, and waves that are 40, 50 feet high routinely, 70 to 80 feet often, and the record currently is 94 feet. There are people surfing basically 10 story buildings. Many would think that these guys are sun bleached crazy cowboys with a death wish, right? But when you watch their approach, countless hours of dry land training, countless hours of planning, countless hours spent asking what could go wrong and setting complex safety systems to counter, if something does go wrong. And then finally, what you see is the controlled fear they display and the respect they have for the ocean. They succeed by planning and taking calculated risk and protecting themselves in the case of something going wrong.
Of course, now Nazaré is on the map. The sets are crowded, it's harder to catch a good wave. It's more dangerous for both the newcomers and the veterans. And as a result, there's a lot of amateurs out there, they're not respecting the ocean and the risk, and they're paying for it with their lives. I'm going to tell you that this is absolutely an over dramatized simile. We actually approach private markets much the same way. We leverage our 40-year history of putting ultra-high net worth client money into private equity. We've selected well over 200 funds, billions and billions and billions of dollars allocated. We've seen the cycles and we've learned some lessons and we have a healthy, healthy respect for the private market industry and what can go wrong.
It's worked very well for our family office clients, as you can attest to for over 40 years. And more recently, we've had the pleasure of being able to broaden some of this access across the wealth spectrum for the bank. We respect the asset class. By doing so, we stay objective. We put client interest first in always identifying and mitigating the downside risk potential to protect the clients. We approach every investment first. What can go wrong? We focus on best of breed traditional managers, but we also evaluate the new model opportunities. You cannot get stuck or stayed, you have to evolve with the industry, but you do it very, very cautiously.
You and I have been doing this a long time. I think you'd agree with me when I say, very, very rarely, do decisions motivated by FOMO or easy money, turn out well. You need to consistently revisit how the return expectations of the liquidity premium could change, as private markets continues to grow as an industry. Don't just look at the rearview mirror and assume the same opportunities exist. And then you also need to recognize that the space is more crowded now. There is a crowding at the wave and it's going to disrupt things that make things more dangerous as a result. So we have to be ever vigilant of where's the industry evolved and how do we make sure we're still assessing the same risk to the benefit of the client?
Mike Miranda:
That's fantastic, Rod. I really appreciate the historical perspective, but also how you're thinking about navigating the future and appropriately thinking about both the risk and the returns for clients. Maybe let's close with that and think about clients a little bit more directly on the portfolio side. How should investors be thinking about private markets in the broader context of asset allocation? Where does this asset class fit today and what role might it play going forward?
Rod Larson:
First of all, what I don't want to do is dampen enthusiasm. We have absolute conviction that private markets belongs in client portfolios is a critical diversifier. There is upside to be had. You can access markets that you really can't access through any other industry. The efficiencies are very much there and probably always will be, especially at the lower end of the market. Really, the onus is on us, Mike, to create a positive client and advisor experience, through the access to the best ideas and the managers, that we do have long histories with, to always be transparent with advisors and clients and to make sure that our program is easy to use.
And in the end, really, the mandate is quite simple. You take the right risk to drive the return for the client and everybody is going to be happy. You also have to be cognizant of not falling prey to the no. There's a listen, acknowledge the noise that you're seeing, but make sure that you're sticking to your knitting. No different than what we talked about with the traditional manners, that we stick to our knitting, to what's brought us through 40 years of successful private market investing for all to high net worth families.
Mike Miranda:
That's fantastic, Rod. Thank you for sharing your insights and perspectives. I think it's very, very well received, especially given how the market is increasingly focusing on, as you said, private markets and how to think about them for client portfolios. I think that today's discussion has been a valuable step in broadening our lens here on the podcast, from public markets that we've talked about for the last couple of months to now private markets, which are increasingly shaping the long-term outcomes for investors. As we heard from you today, private markets offer distinct opportunities for return and diversification, but they also bring unique risks that require care for due diligence, thoughtful structuring, and patient capital.
For clients, the challenge and the opportunity, is to understand where these strategies fit, how they complement your traditional investments, and how they can help portfolios weather different market environments.
For our listeners, I hope today's conversation highlights the importance of viewing portfolios holistically. Recognizing that both public and private markets contribute to the building resilient and long-term growth in your portfolios.
Thanks again for joining us on Beyond the Portfolio. We'll continue to explore the evolving investment landscape in our upcoming episodes, bringing together leading voices and perspective to help clients and advisors navigate what's next.
Thank you for listening to Beyond the Portfolio. You could follow us on Apple Podcasts, Spotify, or your favorite podcast app. Until next time, I'm Mike Miranda.
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