KKR's Henry McVey Talks Private Markets

SPEAKER_1 (0:02)

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Tom Keene (0:07)

This is a joy. Henry McVey held court at Morgan Stanley for years. To say he's a partner at KKR barely describes his holistic view of our economics, our finance, our investments. So you say, well, what's it got to do with personal finance? What's it got to do with retirement or wealth management? He and his team have put out an absolutely definitive report, history-based, as you'd expect for a guy from University of Virginia as a history major years ago. Let's start with the history of our regime change. What did we used to do that's maybe dated right now?

Henry McVey (0:42)

So pre-COVID, if you think about it, coming out of the GFC, we had secular stagnation, right? The central banks could not engender inflation in the system. So what would you do? You'd lower rates, try to increase boring, and then that would lead to consumption.

When COVID hit, you had a huge amount of fiscal stimulus come in the system, the money multiplier started to work, and we went into what we call a regime change. Bigger deficits, governments are spending more, more geopolitics, messy energy transition, and more things that get a bump in the neck.

Tom Keene (1:15)

In the Bloomberg Money, a messy bond transition as well. I want to go to this one quote. This is a really sophisticated report, folks. Get it from KKR. I can't say enough about it right now. And it's simple.

Productivity driven growth and increasing economic choke points for political gains. It reinforces Henry McVey's view. We are indeed in a regime change, and it moves to private equity. Why does Scarlet Fu mean private equity in her IRA?

Henry McVey (1:46)

Well, ultimately, I think if you believe in compounding, which we think is the eighth wonder of the world, you guys talk about it all the time, that's what private equity does. The second big point is that it actually lends itself to operational improvements in companies, making them better. So you're not buying beta of the market, you're actually buying alpha that's generated by making companies better. We typically own at any time 200 companies, we're using the network of what we're seeing across all those companies to share best practices and to drive growth for our owners.

Tom Keene (2:16)

Does Mr. McVey know that if there's a third Greek letter mentioned, the trap door opens?

Henry McVey (2:20)

Oh, yeah, but it's a Friday, so we'll let him off easy.

Scarlet Fu (2:23)

What happens in a higher interest rate environment though for private equity? Because they've had a hard time being able to exit some of their investments with barring costs elevated and it's only going to get more elevated.

Henry McVey (2:34)

Look, I'd say there are a couple of things which is interest rates is not your only lever, right? Your best thing is how you run the business. There's going to be a vintage of private equity that came through 2021, and you see this in some of the software deals where you paid high prices, that will be a little bit of a bump in the night, but that's ultimately why you need to diversify where you invest.

Ultimately, I think we have not been seeing that, and I know this catches the media's attention all the time, but if you look at our exits and we're publicly traded, you can see we've had pretty substantial exits of late.

Scarlet Fu (3:06)

What's the most common mistake or misunderstanding that individual investors have when they allocate to private markets? Because this idea of getting some private assets into your portfolio is new for individuals.

Tom Keene (3:17)

Kind of new. Revolutionary.

Henry McVey (3:20)

It's to be long term. Private equity is predicated on an illiquidity premium.

Scarlet Fu (3:25)

What, is long term five years, ten years?

Henry McVey (3:27)

Somewhere between five and ten years. If you're coming in and you need the money in six months, that's not the right time.

Tom Keene (3:32)

Okay, this is the heart of the matter. Good morning, Blackstone. Love you. Good morning. Is there any other companies besides Blackstone or BlackRock? The heart of the matter, Henry, is this liquidity issue.

Do we need to set up sensible guard rails within ERISA programs, retirement programs, to make it efficacious to wait five years to get that gross up from private equity?

Henry McVey (3:54)

I was around when we actually introduced the 401Ks into the public markets in the 1990s, when we took a lot of these asset managers public. If you think about somebody who's 35, they're going to be in the workforce for 25 to 30 years. Taking some small proportion of your savings and having that compound over time, where you don't have a threat of illiquidity, that is, in my view...