Liquidity Demand in Private Markets Is Creating Business Opportunities

While investor interest in alternative assets and private markets has soared, these markets also face challenges. Interest rates have risen substantially in the last few years, and it has been harder to get owners of assets and potential buyers to agree on prices, according to Jeff Aronson, managing partner of Centerbridge Partners.

This creates opportunities for firms that can create liquidity, Aronson says on the Goldman Sachs Exchanges: Great Investors podcast with Alison Mass, chairman of investment banking in Goldman Sachs Global Banking & Markets. To that end, Centerbridge has been creating structured equity transactions to provide capital to businesses in situations where a sponsor is not ready to sell, he says.

“We will inject equity into a business—a business that we believe in—at a good price, not a crazy price,” Aronson says. “It’s not a bottom-fishing exercise.” The intention is to provide capital for the sponsor to reinvest. While Centerbridge doesn’t get control, it gets certain governance provisions and a senior position to the original equity.

Finding solutions for both sides has always been a better approach than squeezing the last dollar out of a deal, Aronson says. “A lot of people in the restructuring business tend to be pretty aggressive,” he says. “I’m not like that. I’m not a wallflower. If you’re a wallflower in this business, you're going to be run over. But I always leave the last nickel on the table. Always.”

A different approach to private markets

From its founding in 2005, Centerbridge has questioned the standard private markets model that keeps the analysis of private equity and private credit investments mostly separate. Aronson came from the distressed credit world, but he cofounded Centerbridge with Mark Gallogly, who led private equity investing at Blackstone.

“We took a different approach,” Aronson says. When looking at any given industry, such as financials, Centerbridge considers investments up and down the capital stack, he explains. “As opposed to having one team of investors focus on private equity financial services investments and a completely different set of people focus on private credit financial services investments, we said: Just do both.”

This dovetails with another important tenet at Centerbridge, which is to always develop a deep understanding of the businesses in which the firm invests, even when the firm is lending to or buying the credit of a company rather than doing an equity transaction. Credit investors are prone to focusing on the balance sheet and paying too little attention to how the business operates, Aronson says.

“It’s more interesting when you get into the company” and you’re likely to make better decisions, he says. Having done private equity transactions alongside private credit and real estate investments for more than 20 years has allowed Aronson to develop “a much finer appreciation of how businesses work,” he says. “And it’s about the people.”

Finding talent for financial services roles

One of the key reasons he cites for pursuing growth at Centerbridge has been to ensure that younger employees have a rewarding career path. Growth is important to keep up with industry changes, he says, “but you also have to give opportunities for younger people.”

When Centerbridge was young, and he and Gallogly were hiring quickly, one of their mistakes was in failing to realize that not every employee they selected was going to be a superstar. Some were clearly not working out, but still the leaders hesitated to act. “We let it go, and that was a mistake,” he says.

When it comes to the people in your firm, “in terms of decision-making, you have to be ruthless, but in terms of carrying it out, you have to be empathetic,” he says.

Now, according to Aronson, Centerbridge aims to hire contrarians. “I want people who are curious, really intellectually curious,” he says. He seeks people who are “always looking under a rock and asking a question,” he continues, “and then posing the question in a different way to see what types of answers you get.”

What he doesn’t want is the person who will second-guess their own or others’ decisions. One of the few things that he will not tolerate is Monday-morning quarterbacking. “People make mistakes,” he says. “If you’re a professional, if you make a mistake, you have to learn from it.” In his view, it becomes “culturally corrosive” if people in the firm are in the habit of saying “I would have done this” or “You should have done that.”

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