← Alt Goes Mainstream: The Latest on Alternative Investments, WealthTech, & Private Markets
Alt Goes Mainstream: The Latest on Alternative Investments, WealthTech, & Private Markets
Alto's Eric Satz - retirement assets: the next frontier for private markets?
00:51:05
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Intro/Outro Announcer
Everybody gets a piece we're going mainstream Everybody's gonna eat we're going mainstream all my family see see you on mainstream we're going mainstream From Wall street to.
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Michael Sidgemore
Melrose Avenue we're going mainstream Venture capitalists to athletes to creators to the person who has collected trad.
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Eric Satz
In a collision.
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Michael Sidgemore
Of culture and finance welcome back to.
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Podcast Host/Narrator
The Alcos Mainstream Podcast. Today's episode dives into an important and growing part of the private markets ecosystem, how investors can access and invest into private markets through their retirement funds. We have Eric Satz, the CEO of Alto, a self directed IRA custodian, with us today to discuss how he's on a mission to provide everyday Americans with the same investment opportunity long favored by institutions institutional investors. Alto provides custody for a wide array of private markets assets including private companies, real estate, crypto loans and securitized collectibles. Alto has streamlined the process for companies funds and SEC registered investment platforms to include IRA investors in their offerings. They've partnered with firms across the private market space including Angellist, Coinbase, Equityzen for Public Masterworks and others to enable investors to invest into private markets through their Iraq. Eric is a serial entrepreneur and former investment banker. He worked at dlj, Credit Suisse versus Boston before co founding Currentex, which was acquired by State street for $564 million. He also founded Plum Good Food and Tennessee Community Ventures. His passion for entrepreneurship led him to serve on the board of the Tennessee Valley Authority from 2015 to 2018 and he teaches an entrepreneurship class to high school students. On today's podcast, Eric teaches us all about the merits of a self directed Iraq. We discussed how Alto is trying to create the TurboTax for IRAs, why retirement accounts can make sense for private market investments, how and when investors and advisors think about retirement vehicles with their private markets investments and what it will take to get a portion of the trillions of dollars from retirement accounts allocated to private markets. Thanks Eric for coming on the show to share your knowledge and passion for private markets and retirement solutions.
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Michael Sidgemore
We're going Mainstream Eric, welcome to the AltCo's mainstream podcast.
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Eric Satz
Michael, super excited to be here. Great to see you again.
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Michael Sidgemore
Likewise. Great to see you as always. I'm really excited for this discussion because I think private markets have come a long way. The IRA space has also come a long way with it, so would love to hear where things are today, but also where they're heading. I think you'll have a great perspective on that. First, I'd love to start with just the background and the beginnings of what Made you start Alto.
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Eric Satz
This is a great question. I don't know if you remember, you and I met in San Francisco probably close to eight years ago. And it's also fun, by the way, to hear you say ira, IRA instead of ira. And I know that IRA is your default, but when we met eight years ago, I was just then embracing this ability to use my retirement money to invest in private companies. And my experience was less than desirable. And so I ran into this industry that I didn't know existed after, you know, almost 20 years of investing. I didn't know that self directed IRAs were a thing. And I ran into this industry that was still people and paper based and phone and faxes. And it felt very 20th century and we were in the 21st century. And so I had this feeling that if we could sort of do for self directed IRA investing what TurboTax had done for self filing, that we could expand this investment opportunity to millions of people instead of the tens of thousands that were employing it at that time.
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Michael Sidgemore
So what made things click for you where you were like, okay, this is the way in which people can invest into private markets or alternatives or things from a tax advantage perspective.
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Eric Satz
As you know, the conventional wisdom for retirement investing pretty much has always been risk off. Do not take risk in your retirement account. This is money you're going to need when you're 62 and a half or 65 or 70 whenever it is. And you need to make sure that it's going to be there when you need it. And as I started thinking about that value proposition from a duration matching standpoint, it actually didn't make sense to me. One should endeavor at least to match long term assets with long term savings. And retirement dollars by definition are long term savings and traditional alternative assets. And we can talk about why I say traditional alternative assets later, but we're talking about private equity, venture capital, direct private company investments, real estate, et cetera. Those are long term investments. You do not expect to get liquidity at least today in two to three years. It's more like a seven to ten year proposition. And so I took that knowledge and understanding of the space together with the demographics of the IRA industry overall, by which I mean at the time, and this is, we go back eight years again to when we first met. I think IRA accounts were, give or take, 8 to $9 trillion. But what's most interesting is that they had surpassed the size of 401k accounts and they were growing faster, which is the more important piece. And it's because the Younger generations don't stay with the same employer the way they used to. And so every time they move from job to job or employer to employer, they roll that 401k to an IRA account. And so if we fast forward to today, we've got, give or take, $14 trillion sitting in, which is unbelievable growth, by the way, $14 trillion sitting in specifically IRA accounts and I don't know, maybe 9 to 10 and 401k accounts. But what hasn't changed from the time we first spoke until today is the amount of that savings bucket that actually gets invested into alternative assets. It's still less than 2%. And really it should be something much greater because if we talk about the ultra high net worth and even the high net worth individual, and certainly when we talk about institutional investors like endowments and pension funds, the percentage of a portfolio that gets allocated to private markets is really, let's just say 50%, plus or minus 10 points, and yet the rest of us are sitting at less than 2%.
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Michael Sidgemore
So you bring up a really interesting point, which is even in a vehicle that in theory could be a good fit for private markets investments, there's still only a small preponderance of capital that's actually going into those investments. Is that an educational problem? Is that a structural problem, regulatory problem, an access problem? What's the reason for why more people haven't put private markets investments in their self directed IRAs?
- [07:51]
Eric Satz
The answer to your question is yes to all of the above, and I'll expound upon that in a second. But I'm going to say there's one more which is really, really interesting, which is there was a psychological problem. So you and I are talking about private markets. Eight years ago we were talking about alternative assets. So psychologically, when people are talking about alternatives, that feels risky. And by the way, the Blackstones, the Apollos, the I Capitals and the cases of the world figured this out. We've gotten to a place as they've really begun to broaden, expand retail access to this asset class. Alternative assets is not a household phrase that they want to use. It's private markets. So that's the first thing. The second thing, and this gets to the sort of the structural component, which is that it was always really hard to use an IRA account to make these types of investments because a custodian has to be involved, which means more paperwork and more eyeballs that have to look at it. And the way to automate that, of course, is with technology, which Aalto and others have been doing. But I'll take you back to our launch in 2018 with AngelList. And for those who don't know, Angellist is sort of the opposite end of the spectrum versus Blackstone and Apollo. And certainly if we go back to tinua's direct company investments that angels were making, that individuals were making and evolved to include funds. But the point was that as an investor was going through the, let's call it the checkout process, like, oh, I like this company, check the box, I want to invest $25,000 and then I continue to check out and it's like, okay, how do you want to make this investment? And then all of a sudden, Alto, Alto IRA was at the end embedded in the positive, which is like, just check this box. And all the magic happens behind the scenes. And that's what we need to have happen for the rest of the community or ecosystem, whether it's Blackstone, Apollo, Case I Capital, we want Alto to be there.
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Michael Sidgemore
So you talk about something that's really important in this whole process of investing into private markets and investing through retirement accounts, which is the user journey from the investor perspective, how and when do they think about using a retirement account to invest into private markets? Are they starting off saying, I want to invest in private markets, I'm going to do it through the most tax advantaged way that's going to be an ira, or are they saying, I want to invest into private equity, I'm going to invest in Blackstone's Evergreen Fund bxpe and oh, I can use a retirement account. How do they think about that? And I guess embedded in that question too is not just the individual end investor, but it's the advisor. And particularly as you think about more of the traditional alternatives, or I would call it private markets at this point. But how are they all thinking about how to actually invest in private markets? One, but then two, do it through certain vehicles.
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Eric Satz
There's a continuing evolution of this user journey and process. I think where it starts, by the way, and I think this is where most of America is. It's like, oh, private markets, like these other really successful people and investors are all invested in them. I'd like to participate. I want some of that upside and outperformance. Where do I go get those opportunities? Who do I know that can help me get those opportunities? And that's where it starts. And so someone would go to Angellist or they'd go to iCapital, or they'd go to Case and they're like that funds. And what, what happens is as they go through. And this is the way it starts. It's like, oh, wait, I can use an alto IRA to what? And it's really the question, what's Alto ira? What, what is that? Because most people still haven't heard of the self directed IRA industry. And so then they do a little homework and you're like, oh, it's tax advantage. You talk about duration matching, you talk about portfolio diversification, you're like, oh, this seems like a, by the way, oh, Peter Thiel did this. Peter Thiel invested 500,000 in Facebook with his Roth IRA and now his Roth IRA is $5 billion. Oh, that sounds like a good way to do this. So maybe I'm going to do that. And so there's this evolution of first, I want to learn about private markets and I want to invest in them. And then second, I want to do it the best way possible. I want the greatest tax advantage in making these investments. And one of the things that you and I have talked about in the past with respect to this conventional wisdom of risk off in a retirement account is like, hey, if someone has a liquidity crunch for whatever reason, do we really want them incurring the taxes and penalties of having to sell out of an IRA investment that's in the public markets, or should they be using their after tax cash to do that? And the answer is the latter, not the former. And so there's this continued evolution. And with respect to the financial advisor community, I think we're now at a place where that community is ready to embrace the private market opportunity. And now there's a lot of homework to be done there. Because what the financial advisor doesn't want, and I don't blame them, is they don't want to be responsible for a single direct company investment or a single private fund investment, or a single venture capital fund investment that performs poorly. You know, it's funny, it's okay if that happens in the stock market, but it's not okay if it happens in the private markets.
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Michael Sidgemore
And for good reason. If you think about that perspective, if, you know, private investment or a fund generally lasts, if it's a private equity fund, 10 years. So for 10 years you're having to, as a financial advisor, explain that line item as to why it's not performing. So, so I can understand that. But to your point, I think there's some interesting conceptual frameworks embedded in there. One of which is the fact that you have an asset that you should hold onto in some respects, maybe in private markets, there's a reason for Illiquidity at times that actually saves investors from themselves. Why not put it in a vehicle that enables it to compound where an investor can't touch it. So from the educational perspective, are we at a point where people understand certainly some of the challenges of private markets are risk, but also the merits of private markets and why putting something that's a long duration asset is a good thing to put it in an account or a vehicle that can just compound without somebody touching it over time.
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Eric Satz
I think there are many people who are there, but I don't think it's the majority of the investing community. And in part like we see what the largest asset managers in the world are doing in order to address some of this, let's call it concern. So now you have a lot more registered funds, 40 ACT funds with partial liquidity on a given periodic basis. And that provides some sort of security blanket to both the direct investor as well as the financial advisor. But I think you said something really important, which is sometimes it protects the investor from themselves. And I am a huge believer in that, which is, hey, you had a thesis and a belief when you made this investment. And sometimes what you really need is just time. And if you wake up in a panic one day and you're allowed to just sell out, you're kind of fighting yourself. And what we know is that most people are not good traders. They get it wrong. And it's just human psychology. It doesn't make them a bad person, it's just hard to do.
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Michael Sidgemore
That I think hits on a really important point which is if you think about all the things that are happening in private markets, again I'm talking about the more traditional part of private markets, the what Apollo's done with buying athene, the insurance business that provides annuities. They're figuring out a way to help create retirement solutions for investors. How much do you think that nomenclature and some of the branding of private markets as a way to help people save for retirement or generate income into retirement has helped people understand why IRAs, IRAs can be a good vehicle for people to invest into things like private equity, private credit, venture, real estate, et cetera.
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Eric Satz
Athene is not a household name for most people. I think it is a growing name in the financial advisor community for sure. And by the way, those are some really smart folks over there, like really smart. And I think their efforts are only going to expand the desire to explore the private markets. And you hit on another piece which, which is also important, which is the current income that one can earn in a retirement account. And that's important because it's tax advantage. If it's in a Roth account, you're never going to pay tax on it. If it's in a traditional account, it's tax deferred, which means you get the benefit of compounding. And that's huge.
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Michael Sidgemore
You're hitting on something. That's a really important point. I actually wrote about this recently on one of my weekly newsletters on Altcos mainstream around the concept of really being patient and investing in things over a long term horizon. Because if you think about it now, especially the younger generation, they are investing in things that are incredibly volatile. Some of these assets go up in very irrational ways. Even the public markets, one could argue, has gotten to levels from a valuation perspective that may be a bit irrational relative to fundamentals. But then when you think about some of the reports that firms like KKR have put out. KKR put out a report last year around Evergreen Fund Structures. And there's a number of reasons why evergreens require lower IRRs, provided the investments are good relative to a drawdown fund because capital is invested right away, things like that. But KKR effectively said somewhere between 10 to 11% annualized IRR compounded over 10 years gets you to two and a half to three times multiple. If you think about that over a 20 year period, if those investments are as good as the data would suggest that they are, and that's what's happening, you're ending up with three times multiple over 10 years, nine times multiple over 20 years. That's hard to do if you're allocating to funds unless you're in the right manager. But the right types of assets that help you compound and again do it in a tax advantaged way. I think that hits on a lot of what you're trying to talk about here.
- [18:59]
Eric Satz
I think that's right. And I think the other thing that's interesting about, and you write about this as well, if you look at what's happening in that asset management universe, think about all the acquisitions that they are doing and all the growth that comes with it. They're diversifying their portfolios. Because ultimately what I think the financial advisor wants is some form of solution, whether it's bespoke or otherwise, where they're getting access to a broad base of private market assets. And that could be some sort of fund of funds or other similar type vehicle where they don't have to pick winners, but they get some current income, they get some real estate, they get some private equity, they get some Private credit, they get some venture capital, whatever the case may be. But it's really interesting to see this asset management universe expanding the way you would expect an operating business to expand.
- [20:03]
Michael Sidgemore
I think that's one big trend in this space, which is these firms trying to be solutions providers for investors, institutional and individual, or the wealth channel and the intermediaries that work with them and become one stop shops. It's a really interesting question of then how infrastructure solutions in the pipes and plumbing like Alto fit into that. Because you have created the infrastructure and flow to enable people to access private markets investments through their ira. You also have a marketplace I'd love for you to deconstruct why you have both the infrastructure B2B solution as well as a more investor facing B2C solution. And you've obviously done certain things that you've created funds to create diversification. It's not just here's a bunch of investments that people can do on a single asset basis or single fund basis.
- [20:55]
Eric Satz
That's a really interesting question because again, if we go back to the beginning of Alto, if I were trying to sell the pipes and plumbing to the asset management space, or even to some of the other intermediaries, the wealth management space to the I capitals or cases of the world, it would have been like banging my head against the wall. It would have been closed door. And so what I felt we needed to show first was that the retail investor actually wanted this investment product. And I feel like we've done it. We have 30,000 clients and 1.8 billion in assets under custody, which is, yeah, it's not Blackstone, but it's better than a poke in the eye with a sharp stick. And I think it's a start. And so now there are two big pieces, and we've been talking about this that have begun to unfold. One is private markets is becoming a household phrase. The Financial Times, the Wall Street Journal, the New York Times, the economists, wealth management trade pubs, Michael Sidgemore and agf, everybody writing about it, talking about it. At some point over the next five years, private markets will not be like, oh, what? What is that? Everyone will know what that is. But the thing about using an IRA account to make these investments is going to trail. But more and more in terms of where the money is, $14 trillion across a broader retail investor segment is a lot of money. And the way you unlock that is with the plumbing and the pipes and having an easy to use solution at checkout. But when we started it was sort of if, you know, you Know, so someone who knew they wanted portfolio diversification and they knew they could use their retirement account to make these investments, they'd come to Alto in order to execute. Right? And some of this was just word of mouth spreading from AngelList and our AngelList partnership. So, oh my God, I can use my IRA to make these types of investments. And so we have what's called a private raised portal. So Michael knows a lot of people. He's in venture capital, he's in the alternative asset space today, private markets. And he gets to see lots of different investment opportunities. And he wants to use the tax advantage vehicle to execute these investments. He comes to Alto to do it. There are less than a million Michaels out there. In terms of the. Those people who are in the know they're in the right circles, they're in the deal flow. They live in the Bay Area, they live in Boston, they live in New York, maybe Austin, Texas. But everybody else has to ask the question, where do I get these opportunities? How do I see these opportunities? And this was an incredibly long winded way of saying that's why we created the Alto marketplace, because that's where we bring these issuers, funds, some direct company opportunities, farmland, other real assets. These are deals that we vet as a broker dealer. We bring them into the marketplace and we make them available to the public. That's why we've done the marketplace. And the last thing I would say here it is the final differentiator for us versus the rest of our competition. Because now you can bring your own deal, you can go find a deal and then what we haven't talked about is crypto and everything that's going on there. But we also have a crypto IRA account, which I don't believe is. It's the most liquid asset in the universe. It's not the traditional alt that we have been talking about historically, but it plays a role.
- [24:53]
Michael Sidgemore
I don't know how many Michaels there are out there, but I do believe that in the late 1980s, when my parents decided to name me, it was a popular name. I don't know if that's still the case, but. No, no, joking aside, I think you bring up some really interesting points around how people are now navigating investing in this space. How much of the process and the pipes and plumbing is out of your control. And what I mean by that in a more specific way is back in the early days of people investing through their IRA account, they had to take those assets from somewhere else. Often another a 401k or retirement account they had to then transition it to an IRA account. How much of that created too much friction for people to have to do this. And it just made it hard. And then you've obviously made it easy. Then I want to get into, okay, so how do people then think about picking and choosing what should go in an ira?
- [25:51]
Eric Satz
I read recently that in terms of how you price something, price has to equal or be less than value minus friction. And historically, and when I got started, this industry had no idea that that equation existed. You believe that there's a lot of value in this asset that you're investing in. But the friction was incredible. And so to do what you had just described required a bunch of people, a bunch of paper, a bunch of faxes, back and forth, phone calls. Sometimes the goal posts would be moved. We know we said we didn't need this, but now we need this. And so in part, we wanted to standardize that process. And this is not rocket science. We wanted to quote, unquote, digitize it and automate the workflows.
- [26:41]
Michael Sidgemore
So you've done that. And I think that gets to if I take the parallel to the payment space. So you think about what the Buy Now Pay Laters have done. Klarna affirm. What they've done is they've made it easier for people to decide to actually go through with checkout with merchants and actually complete the process. And there's increased throughput for the merchants, which is why in some respects, it's a merchant facing product and they're the beneficiaries of more clients deciding to say, hey, I'm going to buy this. Now. I understand that there's a lot of differences between buying a few hundred dollars product with e commerce versus buying an investment that's a $25,100,000 or more decision. So very different buying and in purchase psychologies. But how much has throughput increased for funds or investment opportunities by what you've created around making it easy for people to invest into these investment opportunities and funds through their ira.
- [27:43]
Eric Satz
So I don't have a quantitative answer for you. I have a qualitative answer for you, which is that it's been tremendously successful and people just love it and they talk about it. This is how we grew. This is why we grew, because people told their friends about it. And While buying a $200 laptop is a little bit different than making a $20,000 investment in Hamilton Lane, what I think is similar about what the Buy now pay Laters have done and what we're doing is that all of the heavy administrative stuff happens underneath the covers behind the scenes and it happens with technology. So I no longer have to do work as the investor to use my retirement account. I just, I just check a box and sign my name.
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Michael Sidgemore
How much are the funds or the issuers, the ones telling investors, hey, excited that you want to invest in this fund or opportunity, you should use an IRA account to do so?
- [28:47]
Eric Satz
I think people are still experimenting in the retail channel. We launched Hamilton Lane at Q4 of last year. And by the way, they are just a fantastic firm to work with. The people I have met there are just salt of the earth and tremendous. They wanted to see some proof that would allow them to invest further in the relationship. And so we did that. We've done that. And so we expect that relationship to grow in 2025. I think the other folks that you can expect to see here in Q1 are a couple different funds from Franklin Templeton. We're in conversations with another very large asset manager about exposing them directly to the retail.
- [29:36]
Michael Sidgemore
I think this is a really fascinating conversation to have because where my mind goes with this is when you think about the future of private markets, the Wealth Channel is obviously becoming a bigger part of that. You mentioned Franklin Templeton. They recently had their last secondaries fund with Lexington Partners. The secondaries firm they acquired that was 10 plus percent of that $22 billion fund was from the Wealth Channel. That was a significant increase. Already in the same thing, they just raised a $30 billion secondaries fund. From their last fund to this fund, they doubled the size of wealth channel participation from 11 to 22%. So like $6 billion raised from the Wealth Channel. That's a big, big number. And we're seeing this all over the place. So what's fascinating about what you're saying is the Wealth Channel is becoming a bigger investor in private markets mainly through intermediaries. But when you think about the potential and the number you mentioned, 14 trillion in retirement accounts, that's really more of a direct to consumer conversation. Do you think that the way that this market structure will evolve with platforms like Alto that are providing the infrastructure is that issuers and funds will want to work directly with you because ultimately they will end up engaging with the end investor? Or you think this will still be very much intermediary driven where it's the advisor in the middle and they're the ones who you're engaging with or the funds engaging with. But the individual investor opportunity is huge. 401k and IRA accounts are individual investor products to Some extent. Not always, but some extent. Does that change how this world evolves in private markets?
- [31:11]
Eric Satz
First of all, I'm going to say the Financial Advisor channel is going to play a significant role. And if you think about where a lot of the less 401s but more IRAs, oftentimes they sit with financial advisors. But historically a financial advisor doesn't think about using that account to invest in alternative assets or private market opportunities. And what I think is going to change over the next three years is that the financial advisor says, you know what, we do have this money sitting over here from a duration match. And Apollo talks about this from a duration matching standpoint. The retirement funds are the ones that you should be using to make these longer asset commitments.
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Michael Sidgemore
How do you educate the advisor that IRAs are a vehicle that can be used in a thoughtful way to invest into private markets?
- [32:07]
Eric Satz
I go on podcasts of people like you where you know that the financial advisor community is paying attention. You go to different conferences that are geared towards the financial advisor. We've got one coming up in March in Miami that I'm sure you know about.
- [32:23]
Michael Sidgemore
We'll both be there.
- [32:24]
Eric Satz
Yeah, that should be fun. It's a boots on the ground, I think, type of exercise right now. There's a saying that investments are sold. And I believe even with the digital experience, I believe we're still at a place where invest investments are sold. And so that means you've got to meet people where they are, you got to go talk to them, you got to sit down in front of them, you got to explain the benefits of using this account and why it makes sense. Because most people were taught don't take risk in your retirement account. And it's just a little bit of going around the barn backwards.
- [33:03]
Michael Sidgemore
How much of the education of using an IRA is simply married with educating people on the merits of private markets versus actually educating people on what an IRA is and why they should use an ira.
- [33:19]
Eric Satz
Think about this way with the Hamilton Lane fund that I was talking about. It's their private asset fund, incredibly successful fund. If you're a direct investor, you're writing a million dollar check. There are a lot of wealthy people in the United States, but not that many people want to write a million dollar check for a single investment. If you participate at Alto in the way we aggregate, you're writing a $50,000 check. And so if you think about the transfer of wealth that's coming just over the next decade, I mean, you can go out a lot farther, you can go out over the last 30 years, but you actually can go out over just the next 10 years and you can look at the trillions of dollars that are going to flow and the number of accredited households that will get created. We're already at 20 something million accredited households. There are only 2 million, give or take, what we would call QP households. And yet the dollars in those two groups are roughly the same. A little more in the 20 plus million than in the 2 million. But then if you ask, okay, where is all that money money in the accredited household community, A ton of it is in retirement accounts. And so in order to unlock it, you do need solutions like Alto to play a role. And we would like to be that piping and plumbing that helps people get access to the investments they want.
- [34:43]
Michael Sidgemore
So you say that a lot of dollars are locked up in retirement accounts. I'm assuming you mean, and correct me if I'm wrong, but the 401k account, great question.
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Eric Satz
What I mean is that most people still don't know that they can use these dollars to make these private market investments. And so part of that learning curve, part of the educational challenge is to say, hey, by the way, you do have money here that you can use and it's the money you should use to make these investments.
- [35:14]
Michael Sidgemore
Whose job is it to educate? Is this incumbent upon the alternative asset managers to educate about not only the merits of private markets, but where and how one can invest into private markets? Because then everyone gets the benefits from tax advantage perspectives? Obviously, I think the alternative asset managers would look at the retirement space, the retirement account space, and say that is a huge pool of capital that if we can tap into that, that's trillions of dollars that could flow into private markets. So who do you think feels that it's incumbent upon themselves to actually educate? And who do you think will educate?
- [35:52]
Eric Satz
So again, I think we'll do everything I can. We would love the help of the asset management community. Think about everything that Joan Solitar is doing at Blackstone today. They have transformed their personality and culture by being as video and media forward as they have been over the last couple years. And so if Joan were to go out there and say, by the way, a great way to invest in Blackstone funds is with your retirement account, I think that would be huge. And not just Joan, but the folks at Apollo, the folks at KKR and TPG and everywhere else, I'd love to see them begin to talk about it more.
- [36:34]
Michael Sidgemore
What do you think the brokerage's role will be in all this? I Mean the fidelities which have large amounts of retirement accounts, Fidelity, Schwab, td, et cetera, how will they all play a role in this?
- [36:46]
Eric Satz
It's really interesting. The reason the self directed IRA industry exists is because the fidelities and Schwab's haven't historically wanted to take on the perceived risk of allowing their clients to invest in private markets. Because what we were talking about earlier, these are long term investments where potentially they could go to zero. To which I say, you know what, there are a lot of stocks that go to zero. And because of that, Alto has a place in the world now. Would I work with Fidelity, would I work with Schwab? It turns out that the workflows are non trivial for doing these things. Would we happily work with Fidelity and Schwab or Vanguard or anybody else to make this a better process for everybody's clients? You know we would. So I'd love to see that happen. There's no reason to reinvent the wheel or recreate the piping. We have it, it's there. And it's a question of whether or not, you know, the folks at Fidelity and Schwab want to embrace it.
- [37:53]
Michael Sidgemore
I think you're bringing up a really interesting point is who does the asset review? If you go back in the self directed IRA world a while back, the Millenniums, the penscos, et cetera.
- [38:04]
Eric Satz
Yep.
- [38:05]
Michael Sidgemore
PENSCO is now part of Opus Bank.
- [38:06]
Eric Satz
They Millennium's not called Millennium anymore.
- [38:09]
Michael Sidgemore
Yeah, there you go. So we're going back in the early days, but they had to do the asset review. They're not responsible for the merits of the investment. They're not saying this is a good investment or a bad investment. But they still had to do a review of the asset to make sure it fit into the confines of an IRA account. Does that added review process put more of the onus on them if things don't go right? And how have you thought about that at Alto as well? Because I think that's an important piece of this is there's more of an administrative burden. And maybe that's part of the challenges of this space and why it's had to evolve over time.
- [38:46]
Eric Satz
So there's no clearing platform for private assets and there's no transfer agent. And so the thing about investing in public market opportunities is all of the infrastructure, infrastructure is there. None of the infrastructure has been there for private markets. We've been building and administratively reviewing this type of asset looks like going to Mars for the Fidelity or Swabs of the world. Maybe it's not as easy in New York anymore. But they want the subway ride from Wall street to 14th Street. They don't want the trip to Mars. And I imagine this feels like a trip to Mars. And I, and I get it. But that's what we've spent the last eight years solving for. Not that we could ever go to Mars.
- [39:38]
Michael Sidgemore
What do you think the next eight years look like?
- [39:41]
Eric Satz
I don't even know what tomorrow looks like, much less the next eight years. But what I'd like to see over the next three years, and I'm going to say this myopically and selfishly, I'd like to see Alto embedded in all those places that we're talking about right now at the pos. It could be a direct investor or it could be a financial advisor dealing directly with Blackstone or Apollo or Hamilton Lane or Blue Owl or whoever it may be. Or you're going through your financial advisor and your independent financial advisor and you're using I Capital or Case or somebody else, but you get to the checkout and you see, use Alto ira. And that's my hope, that's my desire. So again, we're 1.8 billion today. I'd like to be 10 billion in the next three years.
- [40:36]
Michael Sidgemore
Given the pool of assets, that doesn't seem out of the question.
- [40:40]
Eric Satz
So if you ask my team, you know, they're like, oh, that's crazy. And I'm like, no, it's not crazy. This is entirely achievable. And it's really just a question of continuing to push and evolving our platform. So again, our platform started as a direct to consumer platform and we have been making this transition to a B2B 2C platform. And so long as we do that, I don't see any obstacles to getting to 10 billion.
- [41:10]
Michael Sidgemore
You're mentioning working with some of the platforms, the iCapitals, the cases, those types of platforms that already have large preponderances of financial advisors, the funds themselves may end up saying, hey, let's work together. You have a marketplace. I mention all of that because I think Europe has started to figure out how to embed what they call LTFs, long term asset funds, which are private market strategies, into defined contribution plans. How much do you think the industry can learn from what's been happening in Europe as a way to think about how private markets can interact with retirement products and the right types of vehicles?
- [41:56]
Eric Satz
I'm going to zero in for a second on the defined contribution part, which of course in the US is 401s. And I think the effect of figuring out how to get private assets into 401ks only lends legitimacy and broadens the appeal and the desire to participate to the entire retirement industry. And so I'd love to see it. And the analogy I would use by the way, is look at what crypto ETFs have done for the crypto industry overall. And some people want to set it and forget it and they want to invest in and other people want direct investments. And so what I think is going to happen is I think we'll see an evolution of indexing, which is what a fund of funds is of private market opportunities. And we'll see other people want to make some direct investments on their own. I think both are good. But most important is it lends legitimacy and it makes it less scary and increases the desire and willingness to learn and participate. That's what I'd like to see have happen.
- [43:11]
Michael Sidgemore
Well, there's some interesting data. I found a study from Georgetown and CEM Benchmarking that found again, this is back testing returns and this was over a certain period of time, but from 2011 to 2020, adding a 10% private equity sleeve in DC target date funds in place of public equities increased net returns by 22 basis points a year again. Now let's see if things happen going forward in the same way in both private markets and public markets. But it seems like there's a reason to think about adding private markets to retirement solutions.
- [43:44]
Eric Satz
Well, you can also go backwards and you can say, okay, what do public markets look like today? Well, they used to have 9,000 public companies, now we have 4,000 public companies. And every single mutual fund is sort of comprised of this same set of companies. And by the way, if you're missing the Magnificent Seven, forget about it. And so are you getting any more diversification as you add mutual funds to your portfolio? I would argue no. I would also say that private market people can cherry pick time frames to show outperformance. That said, what we do know is if you get true portfolio diversification, you're going to lower overall portfolio volatility and you will have higher returns. And I think that's across all periods.
- [44:37]
Michael Sidgemore
So then the next question for many goes back to something we discussed earlier, which was liquidity. So people are concerned about putting private markets assets in retirement accounts because it may be more risky, it may be less liquid. Is there a solution for liquidity? So one thing that comes to my mind, and I think we're going to start to see more innovation around this, is investors Being able to borrow against their private markets holdings. Is that something that is feasible in the retirement asset world? Because to your point earlier, you can compound your navs of your holdings in an IRA over time. If you're just holding those assets and they're in private markets, you then have this large pool of assets nav that you need to maybe generate some liquidity from, but you don't want to sell those assets as you mentioned earlier because of the tax impacts of that. Is is borrowing or lending against that a solution here?
- [45:38]
Eric Satz
It can be, but this actually gets at the heart of one of the discrepancies and I'm speaking to the fact that 401ks are treated differently and the 401k investor is advantaged in the following way. The 401k investor can save 20/8 thousand dollars a year in their 401. The IRA investor gets less than I'm going to ignore age catch ups and all that. The IRA investor can save less than $7,000. I'd love for someone to explain to me why we have set the system up that way. The other thing is that 401k participants can borrow against their 401k funds but IRA participants cannot. I think there may be a house exclusion like a first home exclusion, but for the most part, no, you can't just borrow. Whereas in the 401k world you can borrow it so long as you pay it back within a year. And for me I just don't understand why when there is more money in IRA accounts, why are we disadvantaging those savers and investors relative to the ones who found the employer who's willing to support a 401k plan. I'd like to see these things get merged where everyone can save $25,000 a year if they're able to do so and if they need to borrow that they're able to do so so long as they pay it back in a year. Like there shouldn't be a difference between these types of accounts if you ask me. No one's asking by the way.
- [47:14]
Michael Sidgemore
Well, I mean I think as retirement accounts become a more important part of private markets, those things are going to converge and these are all going to be really important questions to have to figure out because it does seem to make sense where retirement accounts and vehicles would be the right types of wrappers for certain private markets investment.
- [47:32]
Eric Satz
Can I add one thing that has to do with regulations as we talked about a little bit earlier and as we both know, only QPS qualified participants get to participate in certain types of funds. Accredited investors can invest in different types of funds based on total number of investors and dollars raised and all that stuff. And then everybody else is sort of relegated to registered opportunities. I'd like to see some common sense applied to this industry such that the not yet accredited investor can participate with qualified participants. And there are actually some really easy ways to do it such that you're not creating this major loophole that will expose the not yet accredited investor to scam artists. There are lots of different ways that you can just apply common sense and allow the rest of the American population to participate in these opportunities.
- [48:33]
Michael Sidgemore
I think that's a really interesting point because it's investing in the right things in private markets matters. I think it's going to matter for the space too. If people are investing in certain high quality products, they'll have a good experience and hopefully they'll come back again. I think that's the important piece of private markets as well, that the next phase we'll have to think about that ties into the last question I always love to ask people, which is I've historically asked people what their favorite or most interesting alternative investment has been. But I think we're going through such an interesting period in private markets. I want to ask that same question, but looking forward. So in today's world of private markets, what is the private markets investment that you are most excited about or most interested in?
- [49:15]
Eric Satz
I don't think I'm different than many other entrepreneurs in this regard. I like to bet on myself. So, you know, I'm going to say that Alto is the most interesting investor. Can you put that in your ira? Yeah, so. So that you, you know, you just opened up a whole can of worms in terms of whether or not an individual can invest in their own company, which you cannot with your ira. I think we have to pay very close attention to what's happening in Web3 and all the companies that are operating in Web3 and the infrastructure that's taking place there. And I don't know what they're going to be. And by the way, I don't want to answer AI, which used to stand for alternative investments and obviously now stands for artificial intelligence. But I don't want to answer AI. I think what's happening in the crypto infrastructure, world blockchain and, and the evolution of Web3 is going to be incredibly interesting. And as all of the solutions that have been centralized in the past become decentralized, I think they're going to be some, some really interesting opportunities There that's.
- [50:23]
Michael Sidgemore
An interesting thing from a forward looking perspective of where we might head from here. Also the retirement account space. So much potential. So thanks Eric for showing and showcasing everything that's happening in this space and the work you're doing to create the pipes and plumbing at Aalto. So thanks so much for coming on the show, Michael.
- [50:43]
Eric Satz
Always a pleasure to spend time with you and thanks for having me.
- [50:46]
Michael Sidgemore
Likewise.
- [50:48]
Podcast Host/Narrator
Thanks for listening to this episode of Alt Goes Mainstream. I hope you enjoyed it.
- [50:52]
Michael Sidgemore
You can read more about Alts at my substack altgoes mainstream.substack.com Thanks a lot.
- [50:58]
Podcast Host/Narrator
And have a great day.
- [51:00]
Intro/Outro Announcer
We're going mainstream.