The Long View Podcast with Ila Kunumoto: A Deep Dive into Private Markets
Key Concepts:
- Private Equity (PE): Investment in companies not listed on public stock exchanges.
- Private Credit: Lending to companies outside of traditional bank loans.
- Limited Partner (LP): An investor in a private fund (e.g., PE, credit) who provides capital but doesn’t manage the fund.
- General Partner (GP): The manager of a private fund, responsible for investment decisions.
- Net Asset Value (NAV): The value of a fund’s assets minus its liabilities.
- Internal Rate of Return (IRR): A metric used to evaluate the profitability of investments, sensitive to timing of cash flows.
- Distributions to Paid-In Capital (DPI): Measures the cash returned to investors relative to their initial investment.
- Equity Multiple: Total value received (including distributions and remaining value) divided by the initial investment.
- Payment-in-Kind (PIK): Interest paid with additional loan principal instead of cash.
- Secondary Market: Market for trading existing private equity fund interests.
- Public Market Equivalent (PME): A metric comparing private equity performance to public market returns.
- Bilateral Development Company (BDC): A type of closed-end fund that invests in small and medium-sized businesses.
I. Introduction & Background of Ila Kunumoto
Ila Kunumoto, founder and editor of Accredited Investor Insights, joined the podcast to discuss navigating private markets from a Limited Partner (LP) perspective. She began investing in public markets in 2001 and expanded into private markets in 2020, currently holding investments in public equities, real estate, and alternative assets. Her background includes finance, management consulting, and advisory services at a Big Four accounting firm. Kunumoto’s initial foray into investing began with single-family housing in 2006, capitalizing on opportunities post-Great Financial Crisis due to perceived market inefficiencies.
II. Entry into Private Markets & the Rise of Syndicated Real Estate
Kunumoto’s expansion into broader private markets began with syndicated real estate investments in 2020. This involved investing in large multifamily properties through vehicles that pooled capital from individual investors. From there, she networked with high-net-worth investors, attended conferences, and gained exposure to private credit, private equity, and venture capital. She highlighted the “world’s your oyster” nature of the space once entered, offering access to diverse asset classes like mobile home parks and retail strip malls.
III. The Lack of Independent Voices & Information Asymmetry
Kunumoto founded Accredited Investor Insights due to a lack of independent analysis in the private market space. Most information originates from General Partners (GPs) seeking to raise capital or from the wealth channel facilitating access to these offerings. This creates a significant information asymmetry, leaving LPs without unbiased perspectives. She emphasized the need for a voice representing the retail investor allocating their own capital, challenging the prevailing narrative and “peeling back the onion” to understand underlying risks.
IV. Private Credit: A Canary in the Coal Mine?
The discussion turned to private credit, particularly in light of recent bankruptcies like First Brands Food Group. Kunumoto believes these cases are indicative of broader issues with underwriting quality and covenant quality, acting as a “canary” signaling potential problems. She noted the historically low default rates in private credit over the past decade, coinciding with a massive influx of capital and a period of low interest rates. This environment may have led to looser underwriting standards as funds were pressured to deploy capital quickly. She acknowledged Jamie Dimon’s concerns about systemic risk but differentiated the current situation from the 2008 financial crisis, emphasizing that private credit is largely funded by private capital, not the banking system.
V. Dynamics of Private Credit: Too Much Money, Weakening Protections
Kunumoto highlighted the issue of “too much money chasing too few deals” in private credit, potentially leading to a watering down of protections for lenders. She discussed key indicators of stress in the private credit market, noting the opacity of the space. A crucial metric is Payment-in-Kind (PIK) interest, where interest is added to the loan principal instead of paid in cash. An increasing trend in PIK loans signals potential borrower distress, as lenders may be accepting this arrangement due to concerns about the borrower’s ability to service debt. She also emphasized the importance of monitoring the maturity schedule of a fund’s borrowings and the structure of the debt itself (fixed vs. floating rates).
VI. Measuring Performance in Private Equity: The Flaws of PME & IRR
The conversation shifted to performance measurement in private equity. Kunumoto is critical of Public Market Equivalent (PME), arguing it doesn’t accurately reflect the investor experience due to the time lag between capital commitment and deployment. She also questioned the reliability of Internal Rate of Return (IRR), citing its sensitivity to the timing of cash flows and potential for manipulation, particularly through practices like oversubscription and early capital returns. She advocates for a holistic approach, considering DPI (Distributions to Paid-In Capital), IRR, and Equity Multiple to assess performance. Recent trends show declining DPI, indicating a backlog of unrealized investments and fewer exits.
VII. Secondary Markets & Disclosure Issues
Kunumoto discussed the growing secondary market for private equity fund interests, where large institutional investors sell their positions to generate liquidity. She highlighted a concerning practice where secondary funds immediately mark up acquired assets to NAV, creating artificial gains. She strongly believes accounting standards should be changed to prevent this practice and improve transparency. She also criticized the lack of clear disclosure of cost basis in some fund reports, making it difficult to assess investment performance.
VIII. Accessibility of Private Markets to Retail Investors & AI Tools
Kunumoto expressed optimism about the increasing accessibility of private markets to retail investors through brokerage firms acquiring private market trading platforms. However, she cautioned investors to be mindful of liquidity constraints. She also shared her experience with AI tools, specifically recommending Notebook LM for analyzing financial statements and extracting key information due to its limited data source and reduced tendency for “hallucinations.”
IX. Recommended Resources
Kunumoto recommended Benjamin Graham’s The Intelligent Investor as a foundational text for all investors, emphasizing the importance of understanding market irrationality. She also praised Howard Marx’s book The Market Cycles and his memos for their clarity and insightful analysis.
X. Conclusion & Disclaimer
The podcast concluded with a reminder that the information provided is for informational purposes only and not investment advice. Listeners were encouraged to subscribe, rate the podcast, and provide feedback. A standard disclaimer regarding investment risk and the need for professional advice was read.
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