Pods that do public and private - how do they work?

Pods that operate in both public and private markets, particularly at major multi-manager platforms (like the "Big 4" hedge funds), function in a unique way due to the inherent differences between public and private investments. Here's a breakdown based on the most helpful WSO content:

1. Public vs. Private Investments:

   • Public investments are marked-to-market daily, meaning their value is determined by external market forces. This provides immediate feedback on performance.
   • Private investments, on the other hand, are not marked-to-market. Their valuation is typically based on internal assessments or third-party appraisals, which can create challenges in terms of transparency and liquidity.

2. Drawdown Limits:

   • For pods that handle both public and private investments, drawdown limits can be a significant issue. Public investments are subject to strict risk management and drawdown limits, as their performance is continuously monitored. Private investments, however, lack this real-time valuation, making it harder to enforce similar limits.
   • To address this, some funds may impose stricter oversight or require additional approvals for private investments to ensure they align with the overall risk framework.

3. PM Discretion vs. Mothership Approval:

   • The level of discretion a Portfolio Manager (PM) has over private investments varies by fund. In some cases, PMs may have full discretion within their allocated capital, while in others, the "mothership" (the central management of the fund) may retain approval rights over private deals.
   • This approval process ensures that private investments are consistent with the fund's broader strategy and risk tolerance.

4. Operational Challenges:

   • Managing both public and private investments within the same pod can be operationally complex. Private investments often require more extensive due diligence, longer holding periods, and bespoke structuring, which can differ significantly from the fast-paced nature of public markets.
   • Additionally, the lack of liquidity in private investments means that pods must carefully manage their capital allocation to avoid being overexposed to illiquid assets.

5. Examples and Structures:

   • Some Big 4-backed managers or pods (e.g., Graves) may have specific mandates allowing them to operate in both spaces. These setups often involve a hybrid approach where the pod leverages the expertise and resources of the larger platform while maintaining some level of independence in decision-making.
   • The structure and oversight of these pods are typically tailored to balance the flexibility needed for private investments with the risk management rigor required for public markets.

In summary, pods that handle both public and private investments operate under a hybrid model that requires careful balancing of discretion, oversight, and risk management. The exact mechanics depend on the fund's structure, the PM's mandate, and the nature of the investments involved.

Sources: An explanation of Limited Partnership Agreement (LPA) in Private Equity, 75-bps Fueling a Rally | The Daily Peel | 7/28/22, https://www.wallstreetoasis.com/forum/private-equity/why-i-left-pe-switched-to-the-public-markets?customgpt=1, PE Investment Activity Amidst Spiraling Markets, Q&A: VP in LO Public Credit