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Gideon Berger of Blackstone discusses temporal diversification in private markets.
Key Takeaways
- Gideon Berger, former head of hedge fund solutions at Blackstone, explains vintage diversification.
- Vintage years are the year that private funds begin investing.
- Vintage diversification is the idea of diversifying your investments through time in private markets investments (similar to the idea of dollar cost averaging in public markets).
- Diversifying across vintage years helps investors be more agnostic to valuations at the specific times their funds are deploying capital/exiting investments.
- You get some natural temporal diversification in private markets because fund managers invest over several years, but he suggests deploying capital across 3-5 vintage years when investing in funds.
Transcript
My name is Gideon Berger. I spent basically my entire professional career, 19 years, at Blackstone, in our hedge fund solutions business, known as Blackstone Alternative Asset Management.
I genuinely think it's prudent to just spread your investments out over time, just the diversification in a portfolio context. There's the same notion of temporal time diversification. And so if you were to allocate, if you set out willing to put 20% in illiquid stuff and then you allocate 20% today. Well, that means if prices go down a lot, you're not allocating tomorrow and you don't want that.
You never know if this is a good time to invest in private equity or venture or whatever. I mean, even today, where people are saying that, for example, venture valuations are super high. Well, a) maybe they are, maybe they're not. I mean, who really knows? That's number one. And number two, if you allocate to a venture fund, hopefully you've identified folks who are smart enough to pace their own investments, depending on valuation. So even if you allocated money to a venture fund, if valuations are stupid high hopefully that venture capitalist that you've selected is smart enough to say, you know, we're not going to rush to allocate this money, and if things are cheap, they'll be more aggressive. So you get some governing of the pace of capital by having a good partner.
If you think about a venture capital fund or a private equity fund or a real estate fund, they tend to raise money and then be back in the market, raising money for the next fund, sort of three or four years from now. I tend to think about that, you know, sort of three to five years as the cycle and and they tend to hold things for a similar period of time, maybe private equity, a little shorter venture capital, maybe a little longer. But if you think about sort of a five year cycle and you allocate money, you know, 20% over five years and expect to get money back kind of over five years, it creates a nice cycle, by which you're getting money back, reallocating it and maintaining roughly that 30% of your portfolio in illiquid.
I'm a big believer in not trying to be too smart in terms of timing. Spread your bets over multiple vintages. Don't think that you have an edge on knowing when it's a good time to do this stuff. Do it with the right partners and don't put all your eggs in one basket because no one's that smart.
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