- John Pomeroy -

- Eldon Mayer -

- Renée Haugerud -

Portia Richardson:  Are public and private equity valuations really being propelled by liquidity rather than fundamentals?

John Pomeroy:  I don't think it's an either/or situation. In fact, I think it's mostly liquidity that is propelling things. Of course, you know, the exit strategy is to IPO these things ultimately and I think – in my way of thinking, that's where the problems may arise is when the exits come up in the next five to seven years. Will the markets really be able to sustain the investments that are being made now?

Renée Haugerud:  I would generally agree with that. Though this isn't really my area of expertise, I'm more in the commodity arena, but I think they're really linked, that the liquidity creates the convergence that changes the fundamentals and I would agree it may not be able to be sustained. But the point is to look outside of the center stage, or mainstream investments, and focus on value rather than just the liquidity. You might get a lot more liquidity in the non-mainstream markets seven years down the road.  So I think that  convergence will continue to take place, and it's important to be on the edges as well as the center.

Raj Gupta:  Yes, I would agree with that, too.  If you look at exit strategies, there've been about seven to ten hedge funds that have gone public in the last five or ten years, mostly through the London stock exchange and you're starting to see some kind of volume in those trades, and what would be interesting to see is how the Fortress IPO plays out.  Obviously that will be an indication.  But I think in terms of liquidity, you're starting to see short selling being allowed in countries like India and also just the valuation process taking a more definite shape.

Obviously, in the United States, valuation is still an issue in certain strategies.  It continues to be an issue, but I think how the market reacts to it, and the stratification of valuation process, is going to go a long way in terms of determining liquidity.

Renée Haugerud:  Yes.

Portia Richardson:  Renée, when you were talking about the non-mainstream markets, which ones were you referring to?

Renée Haugerud:  Well, I really think that as a whole, commodities are becoming more mainstream, and I also think that commodity-rich emerging markets are no longer emerging markets—they have emerged.  I buy into the theory that commodities are in a secular shift, rather than a cyclical upturn.  It's demand driven, not supply driven, and we price off demand not off of supply right now—I don’t think that risk aversion will not be as negative for commodities and commodity-rich emerging markets as it has in the past.

We bifurcate the emerging market investment arena between commodity-producing and commodity-consuming emerging markets.  Whether it's Brazil, or other commodity-rich countries, they are going to be so mainstream that the US could even be bypassed.  So while currently the US is  the world’s most global liquid market, we could even see a situation in the future (5 to 10 years from now), where US markets are illiquid , and today’s  "emerging markets" may be the main markets if they have a lot of commodities, and they have their fiscal houses in order.

Eldon Mayer:  Well they certainly are, at the margin, the primary suppliers of liquidity right now, and have been lately.

Renée Haugerud:  Right, right and, you know, the other aspect, comes into play particularly when people say, “We need to get at least five-percent exposure to commodity markets.”  Well, if you really looked, the commodity markets are driving everything from interest rates, to currencies, to equities, because the real assets are going to start squeezing the margins as well, and that's going to affect your valuation and equity multiples.  So instead of loading your portfolio with a high percentage of equities,  … why not buy what's going up?  A five percent commodity allocation is just not enough.  To my mind, it should be 50 percent.  Commodities could possibly even replace the equity standard seven to 10 years down the road.

I'm not making a prediction, but I definitely think even five to 10 percent for these public institutions and foundations is just playing a game.  The real inflation is coming in real assets—hard and soft commodities—and they will want to participate

Raj Gupta:   I think Renée's comments are pretty interesting. I did want to add that commodity indexing is undergoing a transformation. There are dynamic indices that are now being made available in the marketplace, and people have more choices in terms of the investment vehicles themselves, and so I think that those issues are going to obviously propel more investing in commodities.

Eldon Mayer:  You know, one of the things that's fascinated me for decades is the – what you might call the psychology of the – of the institutional investor, particularly the pension fund investor.  They're oftentimes – not always, but more often than not, a little bit on the timid side as they move into what they perceive to be more risky areas, or more volatile areas of investment, or areas where they're not as comfortable or familiar, and so they're probably thinking that – those that are at five percent they're probably thinking, wow, you know.… ...continued