JPMPB – Vintage 2020 – Transcript

Ms. Kallergis:

Given J.P. Morgan’s Long-Term Capital Market Assumptions suggest more moderate returns on a go-forward basis, our clients are looking to us to find ways of achieving their long-term goals. With over $70 billion in commitments over the last 20 years and over 100 professionals dedicated in the space, we believe we have a unique perspective and ways of finding and achieving growth in a low-growth world, finding durable yield in portfolios as well as investing with folks in uncertain times. I’m excited to be joined by Josh Helfat for a discussion on where exactly we’re finding some of these opportunities.

Thanks Josh for joining us for the conversation today. I know the three areas in particular that your teams continue to focus a lot on are technology, healthcare and Asia. In technology, one of the themes that we really have been investing behind is the increase in cyber and the need for cybersecurity. Companies like J.P. Morgan spend over $600 million annually in cyber to protect our clients and our assets, and the number of breaches continues to increase. I know it’s over 1.6 billion breaches since 2005, an incredible number to think about. If I shift the focus, though, a little bit more to healthcare, it’s a growing part of the economy. Why are there so many opportunities within private markets that your team is seeing?

Mr. Helfat:

A lot of the innovation, a lot of the growth, is happening in the private markets, and we’ve invested behind that over the past couple of years. Think about drug development, innovative therapies—smaller cap opportunities are happening in the private market.

They’re where a lot of that research is being funded because the larger public companies today are more aggregators of those opportunities. They are outsourcing that research and development to some mid-cap companies, but mostly to private markets. And we’ve found a variety of great places where there hasn’t been a lot of capital, and we’re focused on that relative to what you can do in public markets, which is much more focused on big distribution of ideas and sort of blockbuster drugs. Being able to sell a great idea in the early stage to those companies has been really attractive in our portfolio—companies a little bit orphaned, a little bit distressed, where a traditional private equity investing can also be effective. And so we’ve got both flavors of it this year. When we can pair that with some of the late-cycle themes and make private equity a little more compelling, corporate carve-outs and M&A, I think that’s a powerful combination as well in this vintage year.

Ms. Kallergis:

The third part of the finding growth in a low-growth world, I know your team has looked to emerging markets like Asia.

Mr. Helfat:

Asia is a dynamic market. It’s a very high-growth market. You think about growth in the middle-class population. We’ve been investing behind that for the past decade, and that continues to be attractive. Where were spending a little bit more time today is really around the buy-out opportunity, which 10 years ago didn’t exist. Today, we’re seeing a lot more of that opportunity. You think about a market like Japan. The top 10 companies in the NK 225 alone have over 5,000 subsidiaries. Finding great franchises, maybe great product companies, great customer-backed companies where separating from their parent, inserting a great management team, capitalizing them, maybe considering some add-on M&A, globalizing those businesses, is a fantastic traditional private equity opportunity, and there’s a handful of players in that space who are really well set up to take advantage of that. Particularly in Japan today. And I think there’s opportunities following that in markets like Korea and maybe even Southeast Asia, where there are other conglomerates with similar profiles.

Ms. Kallergis:

The second thing we’re focusing around is yield.

Mr. Helfat:

Yeah.

Ms. Kallergis:

Given that rates have been low and grinding lower for the last 10 years it feels like, clients are looking to us to find other ways of sourcing that yield in their portfolios and sourcing that income. I know one of the places in particular we’ve looked is private lending. People that can go to small and medium-sized businesses, who can’t access loans in the public market like they used to and rather are looking to private markets, whether it’s for certainty of execution, for flexibility of the capital structure itself, or the structure of the debt that they’re provided. Real estate is another part of the portfolio where we do find additional yield for our clients, whether that’s in core real estate where it might be class A office that generates good durable yield, because even in a downturn, the value of the building might have gone down, but the renters, if you have good tenants, continue to pay their rent. So we continue to like real estate as a source of yield. We’re looking at everything from the core to all through opportunistic. One of the new sort of items in what we’re looking at right now is infrastructure. You looked at it for many years. What do you like about infrastructure in particular?

Mr. Helfat:

There are essential service companies, essential service assets that you can invest behind that are yielding, they have a reason to exist, they’ve got good, contracted returns. Those are great types of opportunities for our clients, the water assets, power assets, utility assets of different kinds, and we’re going to continue to work behind that in sort of open-ended structure. You can earn really nice, single digit returns and high cash yields in those markets. In addition to that, in infrastructure you’ve really got to look for more private equity opportunities and asset-rich companies. You see a lot of opportunities around digital infrastructure—think data center construction. It could be fully contracted out to a big high-tech company, but development of that asset, it’s a high recurring cash flow company with a great counterparty. You think about the energy and utility space, whether it’s mid-stream assets, whether it is renewable energy assets, those are great places today for infrastructure, PE investing. And then in transportation and logistics, there’s lots of great companies that have, that are real asset focused, real asset backed, more private equity–style return.

Ms. Kallergis:

One of the opportunities that I know sort of straddles both the yield component is investing through uncertainty— 

Mr. Helfat:

Yeah.

Ms. Kallergis:

—is some of what your team’s looked at using some of the sector specialists and using structure to participate with some protection. Share with us a little bit more about what you’re seeing there.

Mr. Helfat:

It relates to this vintage year, but we’ve been thinking about this for the past four or five. We feel very late cycle. We want to be building return drivers into the portfolio that, if we get a dislocation, if there’s a downturn, we have managers who are equipped to capitalize on that downturn. But the funds have three to five years to put the capital out, and we don’t have a crystal ball.

Ms. Kallergis:

Right.

Mr. Helfat:

We want to make sure that if we continue to have a benign environment, they can be successful, that there’s good opportunities, they can earn a private market’s rate of return. And so we’ve been really focused on that. We’re looking at private equity firms that have a growth mindset that can invest but can pivot to special situations investing. We’re looking at more distressed credit players who can invest in the credit markets, who can find pockets of opportunity consistently through time, and then if there is a dislocation, be really well mobilized to invest behind deep distress and think about turnarounds, think about financial restructurings.

Ms. Kallergis:

Our conversations with clients are across all of these themes.

Mr. Helfat:

Yeah.

Ms. Kallergis:

We look forward to continuing to having those conversations with our clients, so thank you for joining us today.

Mr. Helfat:

Thanks.

END