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- [00:00]
Michael Batnik
Today's Animal Spirits Talk youk Book is brought to you by Invesco. Check out Invesco.com to learn more about their private market research and their alternatives playbook. That's Invesco.com to learn more.
- [00:11]
Ben Carlson
Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Gritholz Wealth Management may maintain positions in the securities discussed in this podcast.
- [00:41]
Michael Batnik
Welcome to Animal Spirits Talk, your book with Michael and Ben. On today's show, we are joined by Danielle Singer. Danielle is the head of wealth management platforms at Invesco and Ben Linder. Ben is a partner at LGT Capital Partners. I think we did some myth busting on the show today. You asked some questions about volatility, laundering and private equity and we talked about illiquidity. And it was good to hear some straight answers from people in the private market space about, you know, how to actually think about these things.
- [01:08]
This is really good, a frank and candid conversation about some of the legitimate benefits and some of the wildly, in my opinion, overblown benefits of investing in a, in a different asset class. So we bring all of that together in this conversation. It was a good one.
- [01:22]
Yeah, we talked about the whole diversifying in private markets and anyway, I wouldn't step on too much now. So here is our talk with Danielle and Ben.
- [01:32]
Danielle and Ben, welcome to the show.
- [01:34]
Danielle Singer
Thank you. Good to be here.
- [01:35]
Ben Carlson
Thanks for having us.
- [01:36]
Michael Batnik
All right. It is a new era, one where advisors are offering and being asked about private investments. Obviously, traditionally this has been reserved for the institutional allocators, foundations, universities, pensions, endowments, et cetera. But there have been technological advancements and financial advancements that has brought private investments to the mainstream. One of the challenges, and there are many, because this is a new investment landscape. It's a new language that advisors are not necessarily fluent in. And of course they're trying to learn. Part of the reason for the show is advisors trying to learn one area that I think is often overlooked because maybe it's taken for granted that advisors just know what they're doing when it comes to asset allocation. When you all are talking to advisors who are talking to their clients, how are they thinking about carving out a piece of the client's portfolio for something that Is illiquid, different, maybe non correlated.
- [02:37]
Ben Carlson
Yeah, Michael, I think that's a great point. And part of the benefit of platforms like this is helping to provide maybe better education around that. I think we're still in a bit of maybe this antiquated approach of thinking about alternatives as a separate sleeve of an overall asset allocation. And we really should be moving towards thinking about these investments in terms of their intended outcome, just like you would with a public market portfolio. So thinking about how can I expand my reach in terms of growth assets, income generating assets, diversifying assets. So I think it's really just about people expanding their purview of these and the education that comes with it to deploy and access areas of strong risk adjusted returns that private markets provide.
- [03:26]
Michael Batnik
It is interesting because yeah, you're right. Private credit is a fixed income investment. Private equity is an equity investment. Right. It's just there's different forms of investing in them. I guess I'm curious, like, what is the feedback you're getting from advisors now? Because I think a lot of advisors who don't have access to private markets or don't invest in them now for their clients are just unsure if this is a space they've never used before. It feels like you're taking a big leap of faith. And I'm curious how you help educate those people who this is their first time getting their clients allocated to stuff like, what process does that look like for you guys?
- [04:01]
Ben Carlson
Yeah, I think it's multidimensional. I think part of it is helping them figure out what the right vocabulary is to use with their end investors. Right. Understanding that this is a little bit different. But as you noted, Michael, in the beginning there's been a huge evolution of access, especially on a more familiar chassis like the 40x space. So those things that used to feel very scary and different and complex. Right. Have moved into at least an access point or a vehicle structure and wrapper that they're a bit more familiar with, which I think helps. And then I think it's really a matter of acknowledging that there are these great diversifying pockets again of growth and income that can be accessed. But having the smart segmentation of your client base to know who can accept some of that illiquidity that is driving the premia that's possible over public markets. I don't know, Ben, what your thoughts are on that.
- [05:00]
Danielle Singer
Yeah, I think in addition to what you said, it's interesting as we talked about when you mentioned that private credit and fixed income could be one in the same. It does feel as though there's a kind of inflection point where people are able to access private markets as something entirely new. But at the same time we really can't be thinking about it as entirely different. And I think that's also very important for advisors and others to think about is that you're really just accessing a different part of the market. Yes, fundamentally, structurally there are differences, but at the same time you should be looking through your entire portfolio and the types of risks that are being generated.
- [05:39]
Michael Batnik
So it's not just different investments. All right, Ben mentioned like equity credit, we get that. But there's infrastructure and data centers and like all sorts of different opportunities. So there's that there's different wrappers that advisors are not necessarily used to working with. There's obviously different liquidity profiles, there's different platforms, there's different places where you can access these sort of things. It is a lot. So you, Danielle mentioned your platform earlier. What exactly is the platform that we're talking about?
- [06:09]
Ben Carlson
I think in terms of just providing a holistic educational platform, kind of meeting the advisors where they are. So making sure you have that end to end service model that starts with again those client conversations, then being able to help advocate for good asset allocation decisions by being able to give data and analytics to the advisor in terms of what are the pros and cons or the trade offs of allocating to a certain asset class. And we would apply that to good portfolio construction techniques across the public market space as well as introducing public and private and then also having the right vehicle wrappers. So when I think about a platform, I think about it being able to provide an end to end service model to meet the advisors and their end clients where they are so that they can feel comfortable with allocating to this kind of newer part of the market to them.
- [07:04]
Michael Batnik
So I'm curious, what does that look like at Invesco? Like what's the partner up here with LGT and Invesco? How does that work for clients?
- [07:11]
Ben Carlson
So the partnership model that we've seen a number of asset managers take is one to I think provide better outcomes, better ability to access total market solutions for the end investor. So I think it pulls on that thread that we were talking about earlier, which is how can you make this otherwise maybe complex or scary part of the market easier, easier for investors to access. And so with Invesco and LGT both having very long institutional track records of managing in these less liquid parts of the market, what we are able to do is come together and have very Complementary ways that people can access the total capital markets that live within private market space.
- [07:57]
Danielle Singer
I'd also say I think we have the humility as institutions to recognize that this is a lot to tackle and take on for an end investor really thinking about, okay, what are the best outcomes for them. There are a lot of things you need to get right. I think that's something we'll spend perhaps a lot of time talking about with clients, is that this is at the end of the day not just a one stop solution that you click a button. Yes, you want the ease to be there for investors to access private markets, but there's a lot more that goes into it. It's the portfolio construction, it's the distribution, it's the education. We're fortunate that both Invesco and LGT Capital Partners do have broad organizations, but we also have the humility to recognize that each of us doesn't have everything. And that's where having partnerships is key. That said, a partnership needs to be very long term. We think about this asset class, we think about any of the asset classes we're talking about. They're extremely long term in nature and as such you need a partnership that reflects that. So that was something that was pretty critical for us and think a bit unique.
- [08:57]
Michael Batnik
All right, an advisor comes to you, they say, I've got my portfolio, I need help, whatever. For whatever reason, I'm thinking about poking around in this, this new thing. This is me talking, not the advisor. But like you have exposure. So clients might say, I want exposure to AI, I want exposure to data centers like the build out, the lease, all that sort of good stuff. And they might not know that they are actually quite exposed through various public vehicles that they invest through. So walk us through the conversation that you guys might have with an advisor that comes to you and says, hey, I want to look at X, Y or Z. How does that partnership work?
- [09:37]
Danielle Singer
First and foremost, I mean, if you think about what is success look like in having private markets in your portfolio, it's having some sort of additional return for a given level of risk. And what does that mean is essentially you're accessing some risk freemia, but you're also accessing diversification. You're accessing different types of investments that you otherwise would have. Say for us right now, it's not that we're providing advice on everybody's individual line items in their portfolio, but basically saying what is the goal of having private markets in your portfolio? And at the same time also setting expectations that this is not a Magic wand where all of a sudden your returns are going to go up more than incrementally over the long term. That said, when we think about what it means to be successful in investing, it's being incrementally better over the long term. So for us, when we're having these discussions, one, it's level setting about what expectations should be, that yes, you want to do better. Two, it's also recognizing that the markets, what they look like today, are going to look different tomorrow. And therefore, if you look at like the last 10 years, your public equity portfolio is probably a whole lot more concentrated than it used to be. That may continue to be the case and therefore you have another lever to pull with private markets. So for us, there's a lot of level setting around education in terms of what do private markets deliver to your portfolio. We also see again secular trend towards more private companies, therefore to access kind of whatever the future may hold, whether it's megatrends like you mentioned, data centers, et cetera, a lot of that is going to be held within the private markets.
- [11:08]
Michael Batnik
How do you help advisors get over the hurdle of dealing with illiquidity? Because it seems to me that all the private credit stuff that we've heard in recent months, a lot of it is these advisors put their clients into some of these funds and they wanted their money back. The first sign of danger. And so I think trying to have these fund structures that are maybe a little more liquid, but they're still kind of liquid. Like how do you teach with that? Because a lot of these strategies are long term strategies that need to be held for 5, 7, 10, 12 years. Maybe it's a long time horizon. So how do you help people get over that hurdle of, listen, you can't access this right away.
- [11:47]
Ben Carlson
I might flip that on its head. I don't know that we want to get people over the liquidity hurdle. I think we want to have good education and understanding of the liquidity that's actually in these vehicles. And I think that as an industry, you've seen a number of folks come out and talk about is calling certain vehicles semi liquid doing the an investor a disjustice, right?
- [12:11]
Michael Batnik
Yes, right.
- [12:12]
Ben Carlson
I mean, that's the thing. So I don't want them to get over the liquidity hurdle. I want them to almost embrace it where they have investors that can withstand the illiquidity or less liquidity of these underlying investments because they want to extract the potential illiquidity premium or complexity premium that they're getting from them. So I think it's making sure that, you know, these headlines have actually probably net net helped to make sure these are sold appropriately.
- [12:43]
Danielle Singer
Something I like to think about is also that as Danielle said, it's less about the liquidity on the back end, it's more about being fully funded on the front end. If I think about one of the biggest challenges that institutions have or sort of a broken clock is right twice a day you're thinking about what kind of allocation do you want to have in alternatives. The drawdown structure is a wonderful but very blunt instrument. And especially if you're an individual that can take essentially a decade to build up to where you want, that is something that these more semi liquid funds really do help solve, which is getting exposure right away. If you think about again, just doubling down on what Danielle said, if you want to kind of achieve the most pro cyclical strategy possible, you can redeem as soon as kind of the market wants to redeem. And I think for us, as we think about education and really kind of investing for the long term, if you don't have a medium to long term horizon, I don't think any of us is as long term as we truly need to be for successful investing. But let's give everybody the benefit of the doubt that they want to be long term. That's something we really would advise people before they invest in alternatives.
- [13:49]
Michael Batnik
Is there a framework that is generally accepted for how advisors should think about where this is appropriate in terms of an investor's liquidity needs, risk tolerance, where they are in their life? And obviously there's investors of all different shapes and sizes. So I don't want to say that it's appropriate for people with $5 million, but not people with $2 million. Like I don't know where that line is, but how do you all think about this?
- [14:19]
Ben Carlson
So I think it is ever changing as there are things that continue to help democratize. But that said, I think what's nice about private markets, just like public markets, is they do exist on a risk return spectrum. So I think it's not saying that every investment just because it's in private markets has to have this very specific segmentation line, but rather thinking about, to your point, the liquidity profile of different underlying investments. Right. What are those strategies going to be able to provide from a risk return perspective and then who is that suitable for? So I think it's very much akin to the exercise that you do with public market investments that also carry a kind of risk return spectrum possibility with them. With that added level of liquidity risk to help discern that. So I think it's a matter of thinking about things that could be on the debt side that could have shorter lockup, shorter duration, maybe arguably more liquidity than something when you go all the way out in the spectrum, like infrastructure equity, which is meant to be 10 years multi decade in nature.
- [15:31]
Danielle Singer
I think if you have to answer for yourself the question, okay, do I want to be tactical in the way I invest and do I need the money at any given point right away? I think if you want to be tactical, then perhaps this is not part of the allocation. I think if you say I need all my cash at once, then it's not part of the allocation. But otherwise it's also just a sizing issue. I think it's going to be, you know, is it a 1% allocation for somebody of a certain age and a 5 to 10% allocation for others? I think it also goes a bit into what we were talking about before, where you really need to look through what does the rest of your portfolio look like? Because I think it's again, very difficult to just take out of context what alt should be in your portfolio. Because I think for us, when we think about, I mean, perhaps even kind of what's in vogue now are these kind of, kind of total. Looking at your total portfolio as opposed to individual asset classes. And we can talk a little bit about that. But I would say just saying what is the right amount of alternatives is a bit of a tricky one to answer.
- [16:34]
Michael Batnik
Yeah, it's interesting because on your alternatives playbook here, you've got all these different asset classes listed, right? Private equity and real assets and private credit and hedge funds and commodities and digital assets. It's a lot like if you wanted to build a real portfolio of diversified private investments, it could be a lot of. It's not just one group, right? There's a lot of different groups. So how do you usually help advisors get started? Is it, hey, we have to be ultra diversified and invest in a bunch of different asset classes? Or is it, no, let's just start with one and build from there? Like, how do you, how do you get that process started?
- [17:05]
Danielle Singer
First and foremost, you have to again go back to like, what does success look like? What are you trying to achieve as an investor? I'd say in general, let's say like the kind of in the bell curve, the standard investors say, I want higher returns relative to a given amount of risk for my exposure. Right now we would say you really do need to be Diversified. What does diversification mean? I mean, it means different things to different people, but from our perspective, we think it's based on kind of asset diversification, underlying manager diversification, really also having fluidity in terms of the asset allocation within a given vehicle. Because again, going back to my comment before about pro cyclicality, you do run into the situation where everybody is in data centers irrespective of what the asset class is. So for us, it's kind of finding that balance between a high degree of diversification across asset classes, across underlying investments, and having some cohesion at the top. So you really do need to kind of have your cake and eat it too, in terms of having exposure across asset classes, but also being heavily diversified.
- [18:07]
Ben Carlson
And this is not just a retail investor problem. I would say all but some of the largest institutional investors out there struggle with having the capacity, the tools, the access to have a truly diversified solution and optimal allocation to private markets without some support. And that's why you do see a lot of them utilizing, whether it's outsourced CIO platforms, whether it's multi strategy, multi asset, multi manager. Right. Some sort of core holding that can allow them to diversify away from some of the negative risk consequences of those concentrations that Ben was touching on. And then you can also still satellite around that with some of maybe your favorite asset classes you want to lean into or some of your favorite managers. But this is a phenomenon that we see upmarket all the way through mid tier institutions.
- [19:05]
Michael Batnik
You know what grinds my gears? I'll tell you. When people talk about diversification benefits of private equity without explicitly stating what the diversification benefits are in terms of where they're investing, geographically, sector wise, or a third item that I can't think of right now, but equity is equity. Now I'm not, I'm not saying that private equity is not potentially diversifying, but you got to do better than it's a diversifier. Like in other words, I guess maybe this, maybe this is me projecting, but when I hear that, my mind goes to what happens in a bear market. And in a bear market, I'm pretty sure that equity is equity. Now, perhaps the illiquid nature of these investments will be better off for the end investor because they can't panic, which I think there's merit to that. But at the underlying level, we got to do better than just diversification. What do you guys think?
- [19:59]
Ben Carlson
Michael, you're speaking our language. The role of private equity in a portfolio is growth. The role of public equity in a portfolio is growth. They are not likely perfectly correlated, but they still have high levels of correlation for exactly the reasons you stated. So it doesn't mean that there aren't benefits to owning things that additionally are not perfectly correlated. But you're right, they are not meant to be diversifiers in the portfolio. If you want diversifiers, add in some real assets, add in some hedge funds. But we would say if you're looking to invest in private equity, you fund it from public equity because they're like for like in terms of those goals. So I think you could be helping our educational platform with exactly what you said.
- [20:42]
Danielle Singer
You're getting access to different types of companies. I think it's not fungible in terms of being able to say that you're going to access a specialty glass manufacturer in the Netherlands through the public market markets. That's not. You could then ask yourself, do I need to be invested in a specialty glass manufacturer in the Netherlands? But if the fact is eventually that company is going to be acquired by a European leader and a global leader and then that's going to ipo, you've now been along for the ride. So I'd say there inherently is not necessarily diversification from public markets in that it's providing some sort of de correlation. It's different exposure.
- [21:18]
Michael Batnik
So do you think we're going to see a lot more trying to have different fund products and trying to get more liquidity into this space, even though it is inherently an illiquid part of the market? Do you think there's going to be more funds that try different things in the future? Where are we heading next, I guess is what I'm asking.
- [21:36]
Ben Carlson
I think you have to still recognize that if your point is accessing an illiquidity premium, there's no trade off there. There's no free lunch now. We could see a future where do things like blockchain technology or other create ways to better access or better divide exposure to these assets to make them have an easier way to trade potentially. But I don't think inherently we're trying to erode the illiquidity premium and create the and make these become purely liquid assets or vehicles. So from that perspective, no, I think it's about educating why it may be beneficial to Ben's point to have access to different parts of the market and a trade off might be less liquidity.
- [22:26]
Michael Batnik
So I give us credit because we made it almost 20 minutes and we haven't even gone over the private credit headlines yet. This is something Michael and I have been talking about for a while now. I'M sure you've gotten questions from advisors about this because I think the craziest thing to me is just like how much growth there was in the space. And as working in wealth management, Michael and I were getting, you know, emailed constantly about private credit deals and private credit funds. And obviously the fast growth is one of the things that maybe caught up to it. But like, how do you try to put what the headlines have been saying into context for your clients?
- [22:59]
Ben Carlson
I've tried to take a bit of a half glass, full approach with this in that there's a lesson to be learned through these headlines which is a good understanding of what people are getting into and what the different rappers mean, what the consequences are of having limited or intermittent liquidity. I think that the industry by and large has proven that this is not a systemic issue. It's not an underwriting issue. I think it's more of an educational issue. And it has presented an opportunity also for folks to recognize. And I think this goes to the points Ben was making earlier about risk concentrations that if you are overloaded in a single asset class or sub asset class, in this case, maybe it was direct lending, there are opportunities to diversify that. So thinking about ways to diversify your corporate credit risk with things like asset backed finance, for example, I think another
- [23:54]
Danielle Singer
thing to mention there would be going back to the. I think people need to have humility about what they as general partners, as managers can deliver for clients. But also investors need to really be thinking about what do they want to get out of the asset class and not expect too much. That's not to say they should give managers a break for doing the wrong thing, but rather focus less on kind of an absolute target return. And again, think about more of a kind of a risk based approach to investing, especially in an asset class like credit, where really downside is what matters. The upside is not there, it's not a growth asset. So I think there you really need to think about collateral quality. You want to avoid kind of pressure to deploy capital because then all of a sudden the tail's wagging the dog. So for us also thinking about a very flexible approach, not all credit is created equal, not all ways of investing in credit are created equal. That can and should change. And sometimes it's okay to say no if you're not getting paid the appropriate spread for kind of the given unit of risk.
- [24:55]
Michael Batnik
So we kind of talked about the people who shouldn't be investing in private assets, right? People who don't understand the illiquidity, mismatch people who just don't understand them are too complicated. Like who are the advisors that are coming to you that are like who are the people that should be invested in this stuff?
- [25:07]
Ben Carlson
I think we're actually seeing advisors almost of all shapes and sizes these days coming to us. And that's where the education comes in play. I think again there is segmentation to be done, but the ability to access these really unique and interesting parts of the market through vehicles that are familiar, that can run on that 40 act chassis do make it at least an interesting conversation point. That said, what advisors aren't coming to us and saying is Danielle, Ben, give me private markets. What they're saying is I have an outcome that I need to meet for my client and that might be total return, it might be income focused, what have you. And they want to know what they can do to construct a portfolio that has the highest chance of meeting that goal through good net a fee, risk adjusted returns. And that's where we're starting to introduce private markets where they make sense to showing how they can meet that goal. So I think it's much less about a conversation of I need to do, I need to have private markets and more how can I think about broad portfolio construction inclusive of all capital markets to meet XYZ need?
- [26:21]
Michael Batnik
Right. So if someone comes to you and says listen, I have a client who's really aggressive and they want a 10% yield on their fixed income, you would say listen, you're probably not going to find that in the public markets you can find in the private market. So that's how those conversations are going essentially.
- [26:33]
Ben Carlson
And then what are the trade offs? Right. And but you could have that same conversation as they're thinking about emerging market debt, as they're thinking about high yield. Right. There are things that are inherently risky in public markets as well, right. Single name high Yields can take 260 plus trading days to get out of in certain stress situations. So I think it's really about having that very, very thoughtful conversation about the needs, about the risk tolerances of the client, the time horizon, like Ben said of when they need to make those, you know, clip those coupons by et cetera.
- [27:10]
Michael Batnik
Gotcha. So if we want advisors or investors to learn more about your alternative playbook, where do we send them?
- [27:15]
Ben Carlson
They can find it on Invesco's website and type in alternatives Playbook.
- [27:20]
Michael Batnik
Cool. Ben, Danielle, thanks so much.
- [27:22]
Ben Carlson
Thank you.
- [27:23]
Danielle Singer
Thanks very much.
- [27:26]
Michael Batnik
Okay, thank you to Danielle and Ben. Remember, check out Invesco.com to learn more. Email us animalspiritscompoundnews.com.