Preqin Founder: "We are at a uniquely volatile moment in history and in financial markets"

Mark, when Preqin started in 2003, global AUM across alternative assets was about $1tn. By the end of 2023, Preqin forecasts total AUM to reach $16.3tn. What does the private capital industry’s massive growth mean for the future?

I believe the growth we've seen will continue, because our industry is structured to deliver superior returns to investors. Even though the private capital industry is large today, it's still small in relation to public equities around the world. There's a lot of runway ahead of us. Also, our industry is fragmented, so there’s plenty of scope for consolidation. Within that consolidation, where more of the money is going to the big firms, I believe there will be enormous opportunities for a huge ecosystem of other types of private asset fund managers. These managers are highly motivated, highly aligned, and very dynamic in finding opportunities. At the moment, we're seeing enormous opportunities in private credit, for example.

How has the investor universe shifted since you founded Preqin?

Going back 20 years, two groups of investors were incredibly important. One was the US-based public pension funds who were investing in private equity, and the other were the foundations and endowments who were also big investors in venture capital. That spawned the Harvard and Yale models of investing with a large allocation to alternatives, driven by high returns.

Fast forward 20 years, and many investors who weren't in private capital then have been converted: sovereign wealth funds, insurance companies, and family offices. The big change that we're on the cusp of now is private wealth – individuals with $10,000, $100,000, or $1mn or more to invest. These mass affluent investors want access to private equity, because they see attractive returns, and in many cases, they have a long-term horizon. Meanwhile, the private equity fund managers want to access that pool of capital. This dynamic is incredibly powerful, and it will transform our industry in the coming years.

As an investor in alternative assets yourself, what data do you see as critical to making the best investment decisions?

Data is critical when you’re an investor. After all, we can all make good investments on an individual basis. But the question is, how consistent are you? And how do you compare to other investors investing in the same space? Was your performance a lucky home run, or was it consistent across the patch?

Back in 2003, when I started Preqin, there wasn't much information on performance. Private capital was very opaque. Today, if you look at Preqin Pro's database of fund performance, it is the biggest and most robust data set on private capital performance on the planet by a significant margin. Our acquisition of Colmore in 2021 has taken that to the next level. Colmore has thousands of funds it monitors, tracks, and administers for its clients. It gets penny-accurate information on those funds and the performance of individual assets within the fund, and after anonymizing and aggregating that data, we produced our new Asset-Level Benchmarks product.

Let me give you a little example of why it’s so important. As an LP, looking at specific industries like technology, I want the ability to carry out due diligence on the returns within that sector, to benchmark the performance of particular GPs. Our Asset-Level Benchmarks data provides deal performance and valuation multiples for a very wide range of businesses, and that’s incredibly valuable information for investors. It’s the kind of data I rely on myself.

What are the keys to success for top performing GPs and their investors? To what extent have these success factors changed over the past 20 years?

Let me share some of the things that I think are permanent and enduring. I think GPs and teams who are strongly motivated and hungry for success matter. If you look at Preqin data, you see that first and second time funds on average perform better than third, fourth, or fifth time funds. The variability is higher – some of them do really well, and some of them don't do well at all.

Personally, speaking as a small LP, I've met with a number of GPs and invested in their funds. The managers who really impress me combine a number of things. One is a meaningful commitment to the fund. They are investing a material amount of their own wealth and have got true skin in the game.

The second thing I look for is managers who have a modesty and a humility to understand what they're good at, and what their limitations are. They don't think they walk on water. They see opportunities for value creation, and they have strength and competitive advantage in those areas. That has been and will be a driver of success.

What has changed, and is changing all the time, is the specialization and expertise that is needed. The bar is getting higher and higher. Twenty years ago there were many more generalist firms than there are now. Today, there are teams of people and individuals within the big firms who focus on narrow niches where they can be true experts. To give an example, I just met with a colleague from the US who’s also an investor in the climate tech data sector. He is involved in raising a climate tech fund of funds. That means searching for the best venture capital firms investing in climate tech, and then selecting the best of the best, so you can invest with those firms. That’s an interesting example of specialization in the market, and I think we'll see more of that in future.

Mark, you're a serial entrepreneur – Preqin is your third success story in a row. What has driven that success? What are some of the lessons you'd like to share with aspiring founders?

Let me first say that Preqin is not the third success story in a row! I’ve had a number of failures as well. I’ll give you an example. Back in 1998 I'd just sold Citywatch, a UK equity ownership database. It was the time of the dot-com boom, and I saw lots of businesses with no real business model, no revenue source, but were highly valued. I’d been sitting on the sidelines because I didn’t understand it.

And then one morning I woke up and thought, “Mark, people are making huge returns. Go and invest in some of these dot-coms.” That was the morning an old friend contacted me with an investment memorandum for a business with a lovely idea to create 3D images of the interiors of rooms for architects and interior designers. We’ve got that today of course, but we didn’t have it back then.

The founders had no idea what the business model was, but they were going to do this. I didn’t understand how the company would generate revenue either, but I said, “I'm in.” Then came the end of the dot-com boom, and the business went broke. I didn’t understand what I was investing in, and I paid the price. So I’d say the moral is only invest in businesses you understand.

And that’s what you did five years after you sold Citywatch – you founded Preqin, a business in an industry you know well, financial services.

Right. As for what’s driven Preqin's success, I’ve talked about the growth of the private capital industry, and that’s been an enormous factor. More than that, if you think about the dynamics of our business, you can start to understand its fundamental attractiveness. Let me explain with Harvard Business School Professor Mike Porter’s famous Five Forces analysis. This applies to any industry, be it cement, airlines, or financial data. You can tell if it’s likely to be attractive or not by looking at five forces operating on it: competition among existing players, the threat of new entrants, the power the company has over its suppliers, the power it has over its customers – or that its customers have over it – and the threat of alternative products or services.

In the case of private capital, the customers are financial institutions or service providers of one kind or another. Data is mission critical in raising funds and making good investments, so it’s very valuable to customers. That’s why the business that Preqin and Colmore are in is inherently very attractive if you get it right. Does that mean success is guaranteed? Absolutely not. We are at a uniquely volatile moment in history and in financial markets. The geopolitics we face are increasingly complex and dangerous, and we have rising real interest rates and inflationary pressures.

How do you see the alternatives industry evolving amid a more challenging global economy?

I believe the alternative assets industry will continue to grow. We’re seeing big names in the financial sector looking to enter the private markets data space. That means competition is going to get tougher of course, and there’s the wild card of artificial intelligence. It’s already changing the rules of the game, and it will change the opportunities and threats going forward.

Nothing is guaranteed, so we will have to work harder, more innovatively, and more intelligently than ever before, and listen to our customers and support them more than ever before. The bar for success in our business is set very high, but the prize is huge.

^{The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin accept no liability for any decisions taken in relation to the above.}