Private Markets At Inflection Point As 40-Year Tailwinds Reverse

In Brief:

Jacob Miller, co-founder and Chief Solutions Officer at Opto Investments and former Bridgewater Associates investor, warns that private markets face a fundamental shift as three massive 40-year economic tailwinds are reversing course. In this S&P Global Market Intelligence podcast, Miller identifies falling interest rates, increasing globalization, and the shift from manufacturing to tech as the primary drivers of exceptional market returns since the 1980s. He predicts these forces will now become headwinds, potentially cutting equity returns in half while creating new opportunities in "boring AI" applications across legacy industries. Miller's firm works with family offices and institutional investors to navigate this transition through customized private market strategies that emphasize operational improvements over financial engineering.

Big Picture Drivers:

• Interest Rates: Four decades of declining rates provided massive tailwinds through lower borrowing costs and debt refinancing opportunities

• Globalization: Foreign sales grew from under 20% to over 41% of S&P 500 revenue, but trade wars and tariffs threaten this growth engine

• Sector Composition: Economy shifted from low-margin manufacturing to high-margin technology and services, boosting measured productivity

• Technology Adoption: AI applications in legacy industries present opportunities for operational improvements and margin expansion

Key Topics Covered:

• Macroeconomic Outlook: Analysis of why traditional risk assets may underperform as structural tailwinds reverse

• Deal Flow Management: How Opto uses AI and database systems to screen thousands of potential investments annually

• Boring AI Strategy: Focus on practical AI applications in healthcare billing, logistics, and other legacy industries rather than consumer-facing technologies

• Liquidity Trade-offs: Warning about semi-liquid private market products and preference for traditional drawdown structures

Key Insights:

• Historical Performance: Over half of equity returns from the past 40 years can be explained by three structural forces that are now reversing, suggesting significantly lower forward returns from traditional beta portfolios.

• Private Credit Risk: Large private credit managers face deteriorating loan terms with lighter covenants and lower spreads due to excessive capital flows and limited deal capacity among investment teams.

• AI Opportunity: The most promising AI investments are in "boring" applications like healthcare billing ($280 billion annual expense) where 80-90% cost reductions are achievable through automation.

• Alpha Generation: Private markets offer superior opportunities for outperformance because unique access and information advantages are legal and common, unlike in public markets where they constitute insider trading.

• Liquidity Illusion: Semi-liquid private market products tend to be liquid when investors don't need liquidity and illiquid when they do, creating false security around access to capital.

• Productivity Wave: Proper AI implementation could push U.S. potential growth above 6%, representing a larger impact than the early 2000s manufacturing automation wave that reached 4%.

Memorable Quotes:

• "I saw our next door neighbor go from driving a beat up old Honda to a Ferrari back to a beat up old Honda over the span of about two years and thought you know that game looked pretty interesting." - Jacob Miller, explaining his early interest in investing during the dot-com boom and bust

• "You really only can outperform one of four ways. You can have unique access, you can have unique information, you can have unique insight, or you can get extraordinarily lucky. The first two are illegal in public markets." - Jacob Miller, contrasting public and private market opportunities

• "If you can set up AI agents who sit on both sides and we've already seen this in a couple systems and some early pilots, you can reduce that cost by 80 to 90%." - Jacob Miller, on AI's potential to transform healthcare billing inefficiencies

• "Rising tide lifts all boats. If the tide doesn't continue to rise, where does your portfolio sit, what risks do you have and how can we mitigate those risks." - Jacob Miller, warning investors about the end of broad market tailwinds

• "There's no way to fundamentally make something that is illiquid liquid without trade-offs." - Jacob Miller, cautioning against semi-liquid private market products that promise false liquidity

The Wrap:

Miller's analysis represents a sobering reality check for investors who have grown accustomed to exceptional returns driven by structural tailwinds that may never return. His emphasis on "boring AI" and operational improvements over financial engineering reflects a more disciplined approach to private markets investing. As traditional sources of alpha disappear and market volatility increases, investors will need to become more selective and focus on managers who can deliver genuine operational value rather than relying on favorable market conditions. The conversation serves as both a warning about complacency and a roadmap for navigating a fundamentally different investment landscape.