Show V/O:
This is Alternative Allocations by Franklin Templeton, a monthly podcast where we share practical, relatable advice and discuss new investment ideas with leaders in the field. Please subscribe on Apple, Spotify, or wherever you get your podcast to make sure you don't miss an episode. Here is your host, Tony Davidow.
Tony:
Welcome to the latest episode of the Alternative Allocations podcast series. I'm joined today by Bobby Stevenson. Bobby, we've been talking about having you on the podcast for quite some time. Why don't you share with everyone your background and your role?
Bobby:
Yeah, thanks for having me on. I'm excited to be here. I've actually been at Franklin Templeton for 21 years, basically my entire career since college. I work in the Franklin Equity Group, which is sort of the original kind of flagship group from back in the days when we were just Franklin, not even Franklin Templeton. The group now manages nearly $200 billion in what people would think of when they think of Franklin Templeton – traditional long only equity mutual funds.
And I started my career as a public equity research analyst, covering a number of different industries across the industrial and technology sectors. I also was a co-PM on an all cap growth fund. Post-financial crisis, there were three of us on the team who really started thinking about where we could go to start to find alpha for our clients that was not directly correlated to the public indices. And so, we started looking around in the private markets and thinking about whether or not some of the mutual funds, it was within their sort of strategy and mandate to invest in these private companies. We started doing that right at the beginning of 2014, so it's now been over 10 years. That's hard to believe.
We then launched our first private funds in 2017, so we've been working on sort of dedicated strategies now for nearly a decade, eight years. About five years ago, James Cross, Ryan Biggs and I, who are the co-founders and the co-heads of the platform and sort of the investment committee across the funds, dedicated ourselves full-time to growth equity investing.
That's been my career path. It's been interesting time to be at Franklin, right? I mean, there's been a lot of change in the markets and I think, you know, obviously Franklin is, I think doing a great job of responding to that and they supported us to do that organically, which was really incredible from a career perspective.
Tony:
So again, a interesting opportunity where a lot of people outside of our walls weren't aware that we've been making private investments for quite some time. So Bobby, you and your team have been doing this, and I recall being in San Mateo visiting with you a couple years ago when we talked about a fairly challenging environment. You know, it was after ‘21 peak valuations, and we talked about how much disruption had occurred and how valuations still needed to come down quite a bit. So as we sit here today. Where are you seeing the best opportunities? How do you think the market looks today from a broad PE perspective? And then we'll hone in a little bit about where specifically you see the opportunities in growth equity.
Bobby:
We certainly sit in a different place than we did two years ago. I would say mid- to late-‘22 through mid- to late-‘23 maybe, was kind of the trough for valuations in the private market. Obviously, it's very different in the private market because you're not watching a stock ticker every day, right. We tend to respond with a little bit of a lag to what's going on in the public market. Broadly speaking, if we look back to the 2021 timeframe and we look at some of the best known private companies, and we fast forward to today, four years later, as we come to the end of 2025, what you're seeing across the board is that sort of the best companies from that cohort have now sort of returned to their 2021 valuations. Now, what I would tell you is those companies are generating multiples of their revenue from 2021 today. So, by definition, their valuations are more reasonable from a multiple perspective today. But if you think about that sort of four years to return to your previous peak valuation is a long time.
Obviously you're also seeing a lot of companies from that time that have not, and kind of frankly will never, return to the valuations that they saw back then. That's the majority of private companies from 2021. They'll never see those peak valuations again. And then AI sort of post-ChatGPT moment, we're obviously seeing these AI companies emerge and trade at or raise capital, et cetera, at some extremely high absolute valuations. However, I would say if you dig deeper within all of those companies, I think what you'll find is that there are some 2021 type valuations being placed on some of these businesses, and there are what we would think to be some more reasonable valuations and some really interesting places to go deploy capital within that cohort.
So it's a little bit of a mixed bag, right? Some companies are never gonna recover. The best companies have kind of just recovered to those previous valuations now, but they are at much more interesting multiples from an investment perspective. And then with the emergence of AI, you have an entirely new cohort of companies to be looking at.
Tony:
We'll focus a little bit more on the macro themes in just a bit. I think if I summarize what you say, which I think is kind of what I'm hearing across the industry and across different asset classes is valuations have generally come down, which affords you a better entry point to really look about deploying capital.
Before we get into your forward-looking macro views though, I did want to talk a little bit about the environment, and I know as we wrote our outlook in the beginning of the year, the expectations were that we'd start to see a little bit of a pickup in exits. We thought the administration would be a little bit more business friendly, so we see more M&A activity, more IPOs.
That hasn't necessarily been the case so far, although we are starting to see some signals there. So what's your view on exits and how do we think that's gonna play out for the next several years here?
Bobby:
What I would say is, I think if the outlook was written right at the beginning of the year, I think you were right. I think you were maybe six months too early, which is pretty good. That's not too far off. We've seen some IPOs start to happen, particularly this summer, that have the market extremely excited. I think they're kind of being pointed to as the IPOs that may sort of drive the reopening of the IPO market in the fall.
What we would say is actually, you know, we tracked 15 or 20 IPOs across 2024 and into early 2025. So, they were happening. They were absolutely happening at a much slower pace than you might've expected. There were no meaningful IPOs for a couple of years, which was longer than the dotcom bubble, or longer than the financial crisis, which is, which is certainly odd because from a broad economic perspective and even from a broad stock market perspective, the drawdown of 2022 was not as large as the drawdowns of the dotcom bubble on the Nasdaq, or certainly the broad economic fears that resulted from the financial crisis.
I think the notion that the public markets were closed was really driven by the fact that some of the highest profile names from 2021 were not choosing to go public, but there were still things happening. That being said, there's no question that the pace has started to pick up during the second and third quarter of 2025 from an IPO perspective, and we would expect that to accelerate in the fall when everyone comes back after Labor Day.
When we talk to the banks and the companies, the pipelines are extremely full. So I think you're going to ultimately be proven right that this is the year that the IPO markets really do reopen in a robust fashion. There's also no question that from an M&A perspective, things are picking up. You are seeing things being tried by public companies that I think absolutely would not have been tried in the previous administration.
So I think there's no question that there's a perspective from the public markets that there are things that can be done now that could not have been done under the previous administration. And then what that leads to ultimately is if you go into the private markets, it leads to people feeling more comfortable executing transactions in the private market, potentially rolling up a number of smaller companies, putting together something that is more of a platform, something that might be more attractive to another buyer or to the public markets. So, I think it is happening, and I think that that is going to be very clear when we look back at the end of this year, that this was the year the public markets reopened. And so, like I said, you may have been off by a few months, but that's pretty good.
Tony:
And I think as you described the environment today, it sets up well for an opportunity to deploy capital. Little challenging in the last couple years, but sounds like it's much more constructive today, which again, I think is consistent with what I'm hearing across the industry.
So let's get into it. Where are you finding those opportunities? Where do you think the best opportunities? You mentioned AI earlier, everyone seems to be talking about AI. What are the other areas that interest you?
Bobby:
AI is sort of this catch-all term, and obviously there have been sort of these moments that have caused AI to enter into the public consciousness. Obviously, ChatGPT is sort of the standard bearer, the flag carrier for that moment when AI opened and really entered the public consciousness. What we're finding is that AI is being applied much more broadly by companies than just sort of the things that maybe people think about when they think about how AI is affecting their personal lives and how they use it personally.
So that's to say in the industrial technology space, we're seeing AI being brought to bear on robotics and the pursuit of human robotic form factors to do all manner of, you know, manufacturing jobs initially, as kind of one of the early focuses. We're seeing AI being brought to bear in the defense ecosystem with a number of companies being started that are really focused on autonomous capabilities across land, air, and sea forces.
We're seeing AI being brought to bear in software companies. Obviously, one of the things people talk about the most is in terms of being used to increase the productivity of coding. But also generative AI, we're starting to see across any of the sort of creative pursuits, whether it's designing an app or a website, all the way up to creating scenes for Hollywood movies, right?
There are really a lot of places where you can go to find interesting applications of AI that are being embedded into the types of industrial technology or software businesses that we've been looking at for years that people may not think about when they just think about sort of the large language models and like I said, kind of ChatGPT types of use cases.
So we're finding opportunities in all of those places right now. We think the next 10 years are gonna be incredibly, incredibly exciting in terms of the applications of AI across the economy, and we think it's gonna create a lot of opportunities to put capital to work.
Tony:
And I think Jenny Johnson sounded kind of a, a similar sort of message where AI really gets integrated and provides efficiencies across virtually all businesses, and that's exciting. But talk to me a little bit about where else you're seeing opportunities. I know you've talked about like sustainable energy and FinTech. What are the other sort of areas, because you have kind of this free lens to look at the whole world, or at least within that growth equity sort of space.
Bobby:
I think there are some really interesting things. Let's talk about FinTech first, right? Obviously, this administration has made it very clear that they feel that it is going to be important for America to be a leader in the crypto space, right? And the crypto space has evolved quite a bit from kind of the pre-2021, sort of a lot of focus on kind of Bitcoin and sort of other coins, and there was sort of the meme coin craze that went on.
The focus right now has really turned to stable coins, and that's a really interesting opportunity for crypto at large. But I think also for the U.S. When you think about the opportunity for more and more of the world to have a way to peg their lives to the U.S. dollar is really an opportunity for the U.S. dollar to continue to maintain its status as the reserve currency of the world.
Which is, you know, obviously incredibly important to America from sort of like a geopolitical perspective as well as an economic perspective. So we think there are gonna be a lot of opportunities created in the FinTech space and in particular sort of in and around the stablecoin ecosystem, which is very, very different from kind of the speculation on the crypto space that was going on in 2020 and 2021. So we think that's really exciting. We continue to think in the FinTech space that there are going to be really interesting opportunities for next generation banks that are serving consumers in the way that they want to be served, which is sort of clearly not walking into a bank and talking to a teller, right? An evolution of sort of, we all used to know our local teller to we all went to the ATM to now we don't even want to go to the ATM, right? We can't even be bothered with that. So we think that there are gonna be some really interesting opportunities in FinTech in that space.
In the energy space all of a sudden, and the energy space does tie a little bit back to AI, but energy demand in the US has basically been flat for decades. And all of a sudden we're looking at sort of 3% annualized growth, which may not sound like a lot, but the rate of change of the demand for energy growth, that's extremely high. And we think that there are going to be a lot of people trying to figure out how to deal with not only an increased demand for energy, but a different cadence of how, when and where you need that energy. So in other words, traditionally you sort of had these peaks in energy demand that were driven by people's daily lives, right? When do I get up? When am I doing things at home? When do I go to the office? Then everyone goes home at night and residential demand for electricity surges, right?
But when you look at some of these data centers that are driving a lot of the demand for energy, you say, hey, we are training these models 24/7, so we really need consistent, always-on energy demand. We need to be able to manage spikes and troughs of the energy that's coming through the system. So, you're talking about needing to utilize both baseline supply, but also you need to be able to have supply that's on site to handle spikes and troughs.
So we're looking at places where you need to utilize energy that used to be wasted, which is to say things like natural gas flaring around places where we're drilling for oil. We shouldn't just let all that energy go to waste. We're talking about having battery storage on site at a lot of these places to manage spikes and troughs in demand.
So, yeah we think that there are going to be some incredibly interesting and different ways to generate, store, and utilize energy over the next five to 10 years that really kind of 10 years ago were probably thought to be unnecessary to go figure out because there really was a view that there was not a lot of growth in baseline electricity demand.
Tony:
It's interesting you talk about energy that way because you're right, we consume an awful lot of energy and the base is so high. So any incremental growth on top of that is a huge number. I wanted to go back a little bit, you know, 'cause oftentimes the discussion around defi and blockchain get conflated and put together, and I thought you made a really compelling case on stable coins and how that's ultimately going to be used and play out over the long run.
I'm curious if you have a view on blockchain and how that can be transformative, providing these efficiencies that everyone's talking about, whether it's an asset manager like us, or other industries. .
Bobby:
Yeah, the blockchain has been an interesting space to watch, to say the least. The places where we might have expected the greatest efficiency gains five years ago, I feel like people are still waiting for those things to happen. And what I mean by that is we still generally transact on real estate the way we did five years ago. Banks sort of talk to each other in the background, kind of still on the same rails that they did five years ago. We thought back then, and we still think that there are going to be some real opportunities for blockchain to streamline all manner of complicated financial transactions in the coming years.
Ultimately though, you need buy-in from a lot of parties that are around the table with these sort of embedded systems, and I think that's proven tougher than we might've thought five years ago. I think we'll get there. I think blockchain is an incredibly interesting tool. I just don't know that blockchain to me has yet found its sort of broad and kind of obvious application that sort of pulls it into the mainstream the way that, you know, like we said, the way that ChatGPT did for large language models, which sort of pre- that ChatGPT moment, if you'd asked the average person what a large language model was, they would've said like, you know, I don't know. And if you'd said, what's it gonna be used for? It kind of would've said, I, you know, I don't know. And it feels like the crypto space is starting to get its footing under it with stable coins. I'm just not sure that we yet see where that moment is going to land for blockchain. We think it's gonna happen, but we don't quite know where that is yet.
Tony:
I appreciate that perspective 'cause I'm also waiting for a lot of those things. Maybe again, we're early or maybe it will be much, much longer than we all anticipate. Bobby, you painted a pretty rosy picture about putting capital to work today relative to certainly where we were a couple years ago. What are the issues that you're looking at? What would change your view on the market? Is it geopolitical? Is it some sort of disruption? Are there things that keep you up at night other than your new baby girl?
Bobby:
Yeah. Well, my wife is quite nice. She tends to deal with nighttime stuff. I try to help out a bit in the morning. So look, from 15+ years spent in the public market investing, what I would say is the one thing I believe is that you can't time the markets. You can't stay up at night worrying about. macro themes. You know, I would say if you look back to April of this year when the public market was making lows on tariff fears, the broad consensus was that the market was heading lower, right? And that was a, that turned out to be a great time to put capital to work.
Very difficult to know with certainty which direction that's gonna go. Steve Jobs used to say it's really easy to connect the dots when you're looking backwards, right? And I feel very strongly about that when it comes to public markets. So I wouldn't say that there are macro themes that make me nervous.
What I would say is we really try to tie all of our work in the growth equity space back to the way that we would think about public investments, which is ultimately, when you're talking about companies at the stage that we are investing, you can build a model, you can build a DCF, you can sort of tie that back to some expectation of fair value in the public markets, which is how we think about it 'cause we're making investments looking towards an IPO. So we think about how that company's going to perform when it gets into the public markets. And so for us, when we get excited about putting capital to work, is when we can invest in the private markets at a discount to where companies would trade in the public markets.
And that sounds easy, right? Traditional finance theory would tell you that you should get an illiquidity discount when you make an investment. Well, in 2021, what I would say is private companies, in many cases, were trading at a premium to where they would've traded in the public market. So I would say that's kind of, if you want a broad theme of kind of how we think about things and how we think about whether or not it's a good time to deploy capital or how we think about an individual investment, I would say we are looking to get rewarded for taking illiquid risk.
And we ultimately are looking to generate returns both from the growth of the underlying businesses and from an elimination of the illiquid discount when a company ultimately goes public and is liquid, we should get some multiple expansion on top of the growth that the company has experienced while it was private.
When you get into situations where you're paying premiums in the private market, we believe it gets tougher to generate interesting returns for our investors because you have to fight through multiple compression just to get back to level, and then you have to generate returns from there. So that's kind of our broad thought process.
I always say there are a lot of smart people around the investing ecosystem, and in 2021 I think one of the things that drove the DCFs that people were building was the low cost of capital. And so, I do think one thing that is going to help keep multiples and valuations at a little bit more reasonable level right now will be, you know, if we do not have a return to a ZIRP interest rate environment, right, a zero interest rate policy. Which I don't think, even though people are expecting some cuts, I don't think there are very many people forecasting return to a zero interest rate from the Fed. So, when you have a cost of capital, that tends to keep some growth expectations in check because the cost of there's an opportunity cost to burning capital to grow, which had sort of disappeared in 2020 and 2021.
Tony:
Bobby, thanks so much for joining us. I'm glad we waited 'cause I feel like this is a much more constructive environment to put capital to work. You shared a lot of those broad macro themes. Hopefully it gave people some idea of how you think about deploying capital and how you value the long-term opportunity there.
With all of our podcasts, we encourage people, let us know what you like. Please rate if you haven't already done so. Please sign up and subscribe to all podcasts so you never miss an episode like this. Bobby Stevenson, thanks so much for joining us today and we'll have to have you back again.
Bobby:
Thanks, Tony, that'd be great. Look forward to it.
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