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- [00:00]
A
This episode is brought to you by Portrait. It's the AI research system that I used to prepare for today's episode and for all business breakdowns episodes. Portrait was built by former buy side investors and they understand great investing isn't just about having more information from low quality sources. It's about having the right information organized the right way. And if you listen to the show, you appreciate Diligence consists of many things Diving into the history of a business, framing the nuanced competitive dynamics, tracking key signposts around your thesis. And historically that would take up material time that you do not have. But Portrait is basically like adding an army of analysts to your team. It's powered by an AI system specifically designed for investment research workflows so you get nuanced idea generation. Portrait assesses the same types of qualitative attributes that we discuss on this show and that can help identify businesses which fit your frameworks. Portrait also customizes research report generation and I used Portrait to generate a primer and lay out bold bear cases ahead of today's episode to help frame the conversation. And third, there's intelligent thesis monitoring. And that's where Portrait assesses thousands of data points across value chains each day, extracting the insights driving the business again. All this work would typically take hours and hours and hours. It's at your fingertips now. Visit portraitresearch.com to start your free trial today.
- [01:46]
B
This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you. To find more episodes of breakdowns, check out joincolas.com all opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
- [02:35]
A
This is Matt Russell and today we are back to talk about increased access to alternative investing. My guest is Josh Clarkson, Managing Director at Proceq Partners, and you may remember Josh joined us last year in our Primer series on Private Credit. He is back today to cover what this development and the momentum here could mean for all of the various counterparties involved. So we put some numbers around the opportunity, cover what asset managers might be best positioned to capture it, the strategies that would most naturally fit, and some of the risks to the investor base. It's an incredibly interesting theme that I expect to continue to get pushed with momentum. So please enjoy this breakdown with Josh Clarkson. Josh, it is great to have you back. Your last appearance ended up being quoted by an SEC commissioner in her speech several times. So you've set a high bar from yourself. But I think we have an equally important theme in the market to discuss that's that increasing access that we might have to alternative investments, expanding the universe of who can invest in these things. It's a relevant topic for individuals from their personal standpoint, but also a lot of the businesses in the space. We'll pull on all the threads, but I thought the best place to start was at the highest level. If you can scope out what this opportunity could mean in terms of any numbers you can put around it or why it's garnering so much attention beyond the retail client base having access.
- [04:16]
C
My pleasure, Matt, and thrilled to be back here again. $4 trillion is a pretty big number. It's the GDP of Japan actually. And it's also where Morgan Stanley analysts put the opportunity for the large alternative asset managers in terms of a growth over the next few years. If the retail private wealth, however you want to define that channel, expands their holdings of alternatives to be anywhere close to where institutions are now. For reference, institutions are 20 to 30% plus. Individuals are currently at 2 to 5% depending on what you look at and how you define it. So if they could get closer to a 15 to 20%, that's $4 trillion in a um. Using round numbers for a lot of the big alts managers to divvy up $4 trillion is also the shortfall that at least one think tank has out there between what Americans have saved for retirement and what they need for a comfortable retirement. And the goal of introducing these new assets and investment strategies in to those people's investing menus is so that they can better meet that shortfall and they can have a better retirement through access to better investment strategies and better assets.
- [05:25]
A
I think I've read a wham of alternative managers is somewhere around 20 to low 20 trillion today. Just that represents a material step up in terms of what the AUM base could be. You can understand why those businesses are interested from the investor standpoint and getting this access. It's worth mentioning we're here in October 2025. There's been some headlines out there in the market that naturally would lead one to say if they're fear mongering, oh it's coming right when we have a canary in the coal mine. Maybe you want to just touch on the headlines that are out there, what they mean in the system, how you would go against someone or support someone. That said, right when we have the signals that the bad things are finally starting to play out, this is when we're going to bring it to the rest of the world and the retail investor.
- [06:16]
C
These are really important points that matter for a lot of people and definitely want to confront them head on. Taking a bit of a step back, it's important to bear in mind that individual investors have had access to many of these strategies, such as private credit for quite a long time. Publicly listed BDCs have outperformed liquid benchmarks for since the financial crisis and you've had private semi liquid alternatives available in the private wealth channel for five or six years now at real scale and that's gone generally pretty well now. Recently, coinciding with this greater move to expand the aperture of that retail base to get these into 401k plans, you've had a few idiosyncratic situations. An auto parts supplier named First Brands, a subprime auto lender named Tricolor, two of the biggest. There have been a few others that some commentators have positioned as private markets deals gone bad or canaries in the coal mine of private markets. However, what's really important to bear in mind is that neither of these companies were PE owned and neither of them were primarily financed by private credit. They both primarily raised financing, especially at the corporate level in the liquid markets. First Brands was a massive BSL issuer. In fact when they went to refinance and there was potentially going to be some private credit involvement in the second lien, those were who were pushing for the quality of earnings as well as other funds that were potentially going to be involved. It wasn't all private credit, but it was many private credit firms pushing for greater transparency and deeper diligence that brought the house of cards down, so to speak. While these are bad idiosyncratic situations that according to a lot of the reporting likely involve fraud, it's really important to understand that delineation between liquid and private markets and that just because these used a little more off the run financing structures or didn't issue regular way bonds, that doesn't make it a private markets issue. And I'd say if anything, especially in the area of credit, this only makes the case stronger that to access sub investment grade corporate credit and the high single digit low double digit yields that can deliver for an income seeking investor. Direct lending and private credit is a far better, far safer way to do it than the liquid markets.
- [08:27]
A
It's a fair rebuttal. It points to the idea of the diligence that actually does go and happen with these firms and they don't last for long if they're not doing some of that. Let's just step back and capture some of the dynamics with the regulation changes and what is happening you mentioned this isn't a completely new phenomenon. There's been increasing access. Can you just provide some type of background backstory to how we've led up to this point?
- [08:57]
C
Let's get out of the way. The elephant in the room, if you will, of the most notable recent regulatory step, which is President Trump's executive order mandating that ERISA look into adding private markets into 401k and DC plans and facilitating that change. That was the big bang recently that really set a lot of this off and that countermanded a Biden executive order that said they were probably not a fit because there had been attempts at this before. But the Trump executive order, which had been long anticipated, is certainly viewed as the largest, biggest change recently that opens a whole new market. Now beyond that, there have been other more recent regulatory changes such as no action letters around marketing rules and and some changes about how many illiquid assets certain types of funds like interval funds and closed end funds can hold. I think some of those are more around the edges. But if you go back much further, the beginning of the United States securities regulation as we know it today was really in response to the Great Depression. And in the Great Depression and the run up that preceded it in the 20s you did have lots of these investment trusts that were leveraged investment vehicles investing in the hot stocks that performed very poorly. And so the SEC was very focused on regulating what types of commingled investment products could be brought to market for the retail market. And they created the world of registered securities, which means both individual securities as well as mutual funds. And over time certain exemptions to that evolved, certain private markets exemptions, certain other type of structures.
- [10:22]
A
Yeah, and maybe you can elaborate on some of the products that did become available to retail investors and how some of those played out. Maybe they can instruct what's going to happen in the future.
- [10:33]
C
Call it in the pre 2020era, pre 2015era, there were private markets available for retail in a variety of structures. There were certainly non traded REITs that have been around for a while, not necessarily brought to market by top tier operators, not necessarily with the most shareholder friendly structures. There have been various ETFs that tried to mimic alternative asset management returns. There had also been reinsurers set up by some big name hedge funds where the investment portion would be handled by that big name hedge fund and you were supposed to be able to get that exposure. Bill Ackman certainly has a well known closed end fund listed in Amsterdam. But these had all been relatively niche products. Where you really saw real momentum get behind this in the private wealth channel was when B REIT and B CRED were rolled out by Blackstone about five or six years ago now. And then many other top tier alternative asset management firms have brought out similar products that are non traded BDCs, non traded REITs and interval funds are the three main categories. That's kind of what turned on the modern semi liquid wealth channel private markets experience if you will. And generally it's proceeded pretty well. Investors have enjoyed really strong returns, really strong downside protection. And when there have been issues such as b rate in 2022, the managers have stepped in to structure transactions like what they did with UC Regents to ensure that investors were able to get access to the liquidity that they were promised. Which generally speaking is about 5% of NAV a quarter can vary a little bit by fund. Investor education is a really important part of this. The alts managers are doing a great job of being very clear about this. They're sometimes dependent on that intermediary being clear about it. But I do think it's very important that the investors in these products acknowledge that they are essentially illiquid compared to an ETF that you could sell your entire position in in a minute and should think about that appropriately in their liquidity needs and their financial portfolio.
- [12:35]
A
Do you have a quick summary on B REIT of how that played out? And you don't have to get into the nitty gritty details, but how it worked through the system. That is an example of what happens when you have in theory illiquid security dealing with some type of issue around it and how investors are treated or what their options are in that type of situation.
- [12:58]
C
I'm not terribly close to that situation. I was not directly involved in it. I only know what I read. So I do want to caveat all of this. My recollection is that in 2022, when rates were going up, maybe it was early 23, Bureit received redemptions in excess of that 5% NAV that they generally distribute. My understanding is that the majority of those redemptions were from leveraged Asian private bank clients that were holding this on margin, which nobody really does with these instruments anymore. It's not done with interval funds. I have not read any story of a widow orphan parent who suffered harm due to be redistributing assets as it always said it would. Some people referred to it as gating. I think that was a bit unfair because it just did what it said on the tin. And they then struck a deal with UC regents. I'll admit I don't recall the specifics of it, but that essentially ensured they had plenty of liquidity to meet those investor redemption requests. And they've done so. Performance has been improving, net flows have been improving. So while certainly the media made a big storm of it, it really did exactly what it was supposed to do. Now again, it's important investors realize that these are less liqu structures. I would counterpoise that to an incident that happened quite a few years before now. I think this was in the 2000 and tens where a firm called Third Avenue had set up what was essentially a distressed debt fund in a mutual fund wrapper that would have daily liquidity. Even if these were liquid securities, they were generally pretty thinly traded because if you're in the middle of a bankruptcy for a midsize capital structure, those loans or bonds are not trading very frequently. They're certainly not trading in any size without moving the price. And when they got a lot of redemptions, they did have to gate the fund in a way that if not had never been contemplated, certainly had not been as broadly advertised to potential investors as being possible. And that did lead to some really unfortunate outcomes for investors who did take quite a while to get their investments back. The products you see today largely solve for that type of risk by having limited liquidity, by maintaining liquidity sleeves in many cases so that they can be sure they always meet that liquidity. But it's very important that investors understand that you are trading liquidity for lower downside risk, potentially better returns, and that that is a trade off you're making. And it needs to be viewed in the context of an entire portfolio that has plenty of liquidity for your near term needs. But if you have some money that you can put aside and think about a little less liquidly, then it opens up an opportunity to have potentially much more attractive consistent returns, limited volatility and in many cases very strong income distributions. And those yield oriented investments is where we've seen a lot of the initial interest in these alts for the private wealth channel, I predict. Want to caveat that a lot here Because I certainly don't have a crystal ball. You would see most of the initial interest in a defined contribution market in 401ks. I'll tell you right now that if I could invest in a private credit or silo equity option in my daughter Emma's 529 plan, I'd do it in a heartbeat. It's tax sheltered, it's long term. It's really the perfect home for investment that produces very high ordinary income yields.
- [16:19]
A
The 3rd Avenue example feels like a design problem where you're offering daily liquidity connected to highly illiquid distressed bonds. Whereas investor education around the liquidity dynamics here with these funds in theory, if the design is set up right and then the education is provided, you can have much cleaner process and outcomes. To your last point, having these in retirement accounts. There is a natural friction in retirement accounts to actually withdrawing it because of the penalties that you would face. Therefore I can understand why there's almost a built in barrier protection against liquidity pulls like that. And you mentioned some of the changes around marketing rules or potential changes around marketing rules. It does feel like we are seeing a bit of a push now on the marketing side or things are changing a bit. So can you get into that and what the developments have been there and maybe what some of the impact could in theory be. Why are people out there marketing? What's the interest in marketing? Talk a little bit more about that.
- [17:24]
D
I do think it's worth exploring that a little further as we use related to some of the things that we're going to talk about here in terms of how winners will establish themselves in this market and the importance of brand and profile and media engagement and those types of tools in winning in the welfare retail market. So specifically that change was regarding 506B and 506C as their calling or two off use exemptions to the registration requirement for funds that firms avail themselves of to avoid registration. And in exchange they will only solicit investments and only allow investments from accredited investors. Now 506 has historically been the one that was most often used, but that bars general solicitation. So that's kind of the famous reason why you often hear a fund can't disclose its referrings or its specific investments or otherwise has to be rather tight lipped. 506 C allows general solicitation. So that means you can announce the launch of a fund not just closing. You can talk about the fund while it's in market in deep levels of detail. And now historically 506C was viewed as having additional burdens in terms of verifying investors accredited status. But this no action letter that was issued in March of this year greatly leveled the playing field between B and C in terms of what what's needed to verify someone is accredited and what manager can rely on making that determination safely within the bounds of the law. So that in turn makes it much easier for manager those so choose to use 506C and in turn be able to communicate that they've launched this fund new private credit fund, a new asset based fund, a new private equity fund, a new structured credit fund, a new real estate or intra fund, whatever it may be. So it lets them talk about that, it creates opportunities to engage with the media and other external stakeholders and it allows them to talk about that as it's in market with a lot of specificity. Now that fund itself may be one that's pursuing investors in the wealth channel, for example, a new evergreen fund or the like. Or also that fund itself could be more institutionally focused, but the strategy is very similar to what they're raising money for on the wealth side. And it gives them a way to talk about that strategy out there in the world they otherwise wouldn't be able to. And we will talk about this more.
- [19:43]
C
Later about what will separate winners from.
- [19:46]
D
Users in this market and the importance of establishing and building a brand and a positive profile and being viewed as an expert in your space, someone that somebody's going to entrust their capital with. And one of the lowest costs, easiest ways to do that is media engagement. There's all this great owned content you can develop and the like, but just engaging with the media bring news out when you have good things happen. Being an expert voice on relevant trends, that's a relatively light lift compared to some of these other things, but can pay huge dividends in terms of positive name recognition across a really broad audience.
- [20:20]
C
And if you're now able to talk.
- [20:21]
D
About your fund when it launches, that's a really low lift way to get some really positive narrative points out there in the market. And so I do think that more managers will avail themselves of 506C and you'll see more people out there talking about funds that they are launching or while they're in market because not only will it benefit the fundraising campaigns of that specific fund, but it can do an absolute ton in terms of elevating.
- [20:44]
C
The firm overall, which is really going.
- [20:46]
D
To be the name of the game. To ensure that you're in a position to win this market.
- [20:50]
A
I want to dive a Little bit deeper into that point about the vehicles that in theory would be best fits or most naturally suited to benefit from a potential wave of demand. You have a pretty good perspective on the broader private landscape. How would you isolate between whether it's the different asset classes, the different strategies, whatever it might be, what fits, and the puts and takes to the relative strategies.
- [21:18]
C
Really glad to go a little bit more in depth with this because I do think a lot of what you hear and read about it glosses over it as this homogenous category of alts or private markets for retail. And it's really important to make those distinctions now. First of all, with the 401k market, what's really important to bear in mind is that everybody I've seen discussing this in any level of detail is really talking about adding these to target date funds. I don't think there's anybody out there who's pushing really aggressively to have standalone options for PE and private credit in your 401k. Most of the focus right now, which I think is entirely appropriate, is on creating Target Date fund. And fund may be a bit of a misnomer because in many cases it would probably be an SMA or collective investment trust, especially in larger 401k providers, larger corporations, larger retirement plans that have the ability to do custom glide paths where you can build that private market exposure into that target date fund in a way that you have good forecast ability to those cash flows. And the vast majority of the portfolio will remain in liquid assets. So you shouldn't really have that risk of somebody wanting all their money back and you not being able to very easily give it to them. Shifting gears a little bit into some of the products and asset classes that have long been and are gaining momentum in that private wealth retail channel. Outside of the retirement plan context, asset class Wise credit has been the strongest grower, the one that has the most product in many ways. That's because it really makes the most sense for a lot of high net worth mass affluent investors who are looking for high current income as they are in or approaching retirement want to minimize volatility and are willing to trade that liquidity for that potential higher income. Importantly those products. Also, by having that yield focus naturally throw off regular distributions, which is somewhat de risking the investment and preventing a big liquidity squeeze because you have contractual interest payments and maturities that allow the manager to sync that up with the assets they have and give the investor what they want in the form of continuous liquidity. And at the same time there are also more liquid classes of credit such as syndicated loans, structured credit that don't suffer from too much of a return drag compared to that core direct lending offering and and can be maintained in that fund alongside it to provide that liquidity sleeve in a way that has very liquid instruments and also doesn't pose too much of a return drag compared to the core strategy of the fund. Other areas have been infrastructure which is gaining a lot of steam right now. Also that yield oriented camp real estate was one of the first to take off as the whole asset class hit some rough patches. You saw some declining interest there, I would say. What's been interesting now is as you've seen real estate markets rebound and our mutual friend on Twitter Elliot often points this out, you've seen the private markets rebounding much more strongly than the public REIT asset class. There is an argument there that if you want that real estate exposure, you should at least be thinking about it from both sides of the coin. Don't just buy REITs, look into non traded or semi liquid REIT structures which have begun delivering positive performance in recent quarters. Whereas I think the REITs generally have been pretty rangebound. P E is kind of the emerging new frontier, if you will, of these semi liquid products for retail and you've seen them rolling out, you've seen them get a lot of strong initial interest, you see them deliver really strong performance out of the gate. Mid to high teens I think for some of the better performing ones. And I think you've seen B XP cross a billion in sales in a month. Now I have to double check that. But the general point is that they're getting pretty strong adoption and again I do think that is with that higher into ultra high net worth type of investor. I know many of the PE products started out being available to a qualified purchaser, which not to interject this in the middle of the product discussion, but just to level set there's a thing called the Accredited Investor Standard which applies to many of these products, which is that you have a $200,000 a year income or a net worth excluding your primary residence of $1 million, or you're a financial professional of some kind. Now functionally, given the fact that those standards were set a long time ago and not indexed to inflation, it basically captures most of the American public that invests in stock markets today in a substantial way. Above that is the qualified purchaser standard, which is 5 million in investable assets. So certainly a higher tier of wealth, presumably less liquidity needs now that they've rolled them out in that channel they've been making the PE product available to a broader set of folks. The flip side of that is the structure that they use. The real estate ones pretty obviously go in a REIT that's non traded REIT that's pretty well established. The PE ones on the other side use a variety of structures from LLCs to tender offer funds. And it is more of a fund by fund and strategy by strategy. Decision in the credit universe is where there's two very compelling products that are a bit different, which is the semi liquid non traded BDC on the one hand and the interval fund on the other. The differences between them are that the non traded BDC is a BDC which if anybody wants to listen to the prior episode or happens to know this, generally needs to invest 70% of its assets in private loans to U.S. companies with a 30% non qualifying basket, which in these structures is most often used for that liquidity sleeve, but also can take its leverage up to 2x. Now pretty much nobody levers these things 2x but 1.25 is a pretty normal top end and many of the private or the non traded ones are still ramping to that, whereas the public ones sit there pretty comfortably. Interval funds on the other hand are 40 ACT registered funds. They can trade with a ticker not in the sense that you can buy them publicly, but in the sense of an RIA without the huge back office needed to process some of the paperwork for a non traded REIT can more easily buy them on their screen from Schwab or Fidelity or whatever service they use to manage their RIA practice. They also importantly can invest in a broader range of assets than BDCs including structured credit, less liquid bonds, whatever it may be. You usually see the interval funds having a broader range of credit exposure. They'll often be called a multi asset credit fund or a tactical allocation credit fund. They also can't be levered as much for down the middle senior direct lending. Very, very safe assets. It might not be the best fit because those assets are very leverageable. They have a very long history of being levered 1.25 times and doing quite well. Whereas in that more diverse portfolio they can be somewhat leveraged, but you're going to use a little less leverage more diverse pool of assets. Also, one little difference is that for the non traded REITs and the non traded BDCs, that 5% liquidity can be in an emergency and I doubt any of the big managers would ever do this. But in theory the board could limit that Whereas in interval funds, because they are registered funds, that is an absolutely mandatory thing that cannot be exempted from by the board or anything like that. So I know that was a really deep dive into a bunch of different assets and products, but I hope that gave a pretty good and pretty efficient overview of what's what out there in the world of retail alternatives.
- [29:01]
A
My sense from that takeaway is based on some projection but also some precedent. Where this would naturally show up most is in those yield based vehicles, whether it's credit or real estate, and slightly less so when it relates to private equity and then particularly venture capital where you're moving out on the risk spectrum. When I first hear this, I think of a bunch of retail people getting exposure to venture funds where you can have zeros or very little at the end of the day. And it feels like based on that response, the positioning that we've historically seen or the precedent suggests that the push will be more towards those products that you were referencing.
- [29:47]
C
I think that's fair. Another way I might say it is those have been the initial primary focus and I think will continue to be most investors initial on ramp to the space. I think some of the fastest growth may actually be in those more PE focused vehicles which are just newer to the market, so naturally have more of a growth Runway as they're newer. VC is an interesting one and I'm glad you mentioned it. It is certainly a bit of a different case than regular cash flow pe. I'm not talking about some SPV that you get cold emailed about to buy 200% marked up OpenAI shares. There's a firm out there called P10 for example. They have a subsidiary called Trubridge that has long worked with private wealth platforms and other institutions that aren't especially large to get them access to a fund of funds of top tier vc. Again, that's for a much higher wealth audience than somebody who's going to put 10k in a non traded BDC. A much more sophisticated audience. Other firms also have versions of this, some that combine PE and VC in one fund, but where you have that fund of funds approach. So you do have more manager diversity exposure to more situations. Again to reduce that lottery ticket dynamic that a multi hundred billion dollar pension plan may be very well positioned to bear. But even a very affluent individual may not really want that much exposure to or maybe shouldn't have that much exposure to. There are also platforms that make these more directly available to the retail market because traditionally many of these things I'm referring to, they're sold through an advisor channel. There are also firms such as Willow wealth, which was the old Yield street. They recently rebranded and they interact more directly with the retail consumer. And I think they're pivoting to a model where they're more going to distribute those funds from other people, but in a way that if you just want to pay fees to get access to that fund and not have a manager manage your whole portfolio, you can do that. And I would actually note that they were one of the only folks that anybody found documented retail exposure to the first brand's asset based finance, part of the capital structure where a lot of the supposed issues were. However, then Yield street had successfully invested in that and exited well over a year before any of the issues or disruption arose. So they actually did exactly what they were supposed to do. They got their investors access to an 8 to 10% return stream. They kept a really close eye on it and when they saw certain metrics evolving in a way they didn't like, they exited it. So I do think that's actually a case of the guardrails working well for that retail investor.
- [32:31]
A
Looking at the landscape, the other thing to consider is there's a broader menu of options now. What is on that menu when you think about access? And we could take this from the lens of the alternative asset managers that would theoretically benefit the most here. Who's best positioned and most interested in capturing the opportunity from the signals that you've seen. Where is that going to come from?
- [32:59]
C
You mentioned that stat earlier. About 20 trillion ish aum in alts, which sounds right to me. I do think the winners here though will not be evenly distributed across that 20 trillion. It will be the bigger scaled firms, the Blue Owls, the arises, the Apollo's, the Blackstones of the world who have the breadth and scale to both offer top tier products across a range of functions and build out those sales forces to really go after that opportunity in a really concerted way. Take a firm like Oaktree for example, which while primarily being focused on the institutional channel for many years has built a very strong public brand anchored in their founder Howard Marks and his memos and his thought leadership. But that has percolated through the firm and they really have a much higher level of public awareness than many other similarly sized, institutionally oriented, credit focused managers do. And that's certainly a huge asset to them and their partners at Brookfield. And as they're building that business out for the retail channel, there's going to be an important role for managers that are really good at a certain thing like a Kennedy Lewis in non sponsor lending, something like that, where you're bringing something that is complementary and different to the table. I do think there's a role for that as well, especially with the more sophisticated consumer who maybe already got their initial direct lending exposure, is looking for more private credit exposure, but not the same exact return streams. Terribly niche strategies and smaller non scalable strategies are not amenable to this treatment and very often the firms that invest that way are not going to have the scale to really build that out. And this has been a continuing trend for a while in the private markets and alternative space that the big keep getting bigger. For lack of a better word, I think that will continue. You've also seen a lot of partnerships struck between traditional asset managers who have the distribution footprint and in many cases, the 401k platform and the alternative asset managers who have that private markets investing capability. Now a lot of those are pretty early days and we haven't really seen the results. If I had to guess, I think you'll probably see a dispersion there in terms of who really gets it humming and delivers the right product to the right people with the right performance and gets scale and who maybe for whatever reason it doesn't flow that well. The incentives aren't perfectly aligned. There's some stuff that's done through the partnership, there's some stuff that is done x the partnership and that might gum up the works. Some of those will certainly be successful, some of them may not be. But it's really too early to pick winners and losers there as they're all very nascent right now. If you're a long only or traditional active manager that doesn't have that scale, this is just one more headwind you're facing. I think in many ways it exacerbates or amplifies a lot of the trends that were only going on of returns accruing to scale. Similarly, even on the RIA platform side, the bigger more scaled wirehouses and RIA platforms are going to have better access to this product, better ability to suss out all the back office stuff that needs to happen. So the client has a seamless experience investing in this product in a way that the one to two person solo practitioner financial advisor who is on independent BD platform or the like or even a smaller platform or just doesn't use a platform use like a schwab or something, it's going to be harder for them to do that. So I think that's going to be another one of those, the bigger get this product and get more access to it, get more diversified offerings and have the scale to do it right. And the smaller ones, if they're going to do it, it's going to be a much bigger relative lift for them in terms of commitment of their resources. Hopefully. The end winner here is the investor who now has access to a better, more diverse range of investment options. And I'd say in many cases has access to the same investment options that defined benefit retail investors. You don't think of them as investors because they're not picking and choosing what happens. They're just getting their pension check. That was the start of alternative asset management. They've benefited from this for decades. A lot of people should benefit here, but there will be folks who see the headwinds that are already facing their business amplified by not being able to capitalize on this opportunity or solving the.
- [37:22]
A
Inequality issue at the individual level, but maybe worsening the inequality issue at the alternative manager level.
- [37:29]
C
A lot of it is also brand, because when you're marketing in this channel, you need brand in a way that you don't in the institutional channel. And the institutional channel, as long as the right few hundred people or few thousand people in the allocator world think well of you and your performance is good, that can build an absolutely incredible business. Whereas in this channel, you do need people to know and recognize and trust your brand, you need to build up that brand. I mean, Blackstone's been very loud about this. They have TV ads now. They speak about this at length on their earnings calls. And I think most of the rest of the large public managers are doing this as well. Blue Owl has certainly done an amazing job with this out of the gate for some of those more specialized firms who are real specialists in a sector have the performance that might be better than the big guys, but aren't really terribly well known outside of the allocators, sponsor coverage bankers and people like me and you that are very close to the markets, they need to find smart ways to invest in that because they're not going to have the same budget that Blackstone does. So they need to find the right spots to build that overall brand. So people know you and think, oh, good, manager of money, but then also build that reputation in that niche, those offerings that you're selectively going to pursue and explain the story of why you are better positioned to deliver it than more of a private market supermarket.
- [38:47]
A
It certainly makes me revisit some of those marketing initiatives, which I admittedly scratch my head a bit when they were going on. I talked myself into them becoming bigger and needing to have more connective points into the business people of the world. But now I think you could see exactly what was going on there on the earlier point that you made just around positioning. If I step back and kind of evaluate what you were saying there, it feels like the credit franchise for any of these big alternative asset managers is really one of the biggest things here. If you're to take a huge alternative asset manager without a strong credit franchise, they could be left a bit behind just in terms of positioning or they're not as well positioned. Is that a fair conclusion from what you were saying?
- [39:37]
C
I think it's a very fair conclusion. That is true in the broader world of institutions as well as credit has just become a bigger part of the private markets mix. Having the best vehicle for wealth is one of many reasons why having a really strong credit arm is essential to being a multi strategy private markets manager today. But I'd say it isn't necessarily the only or primary one. You'd be hard pressed to find what most people would consider a mega fund private markets operator. That doesn't just from my public observations, you saw TPG go public and then very quickly add top tier credit capability in Angela Gordon and that integration seems to be going very well. You've even seen folks like Blue Owl who came to market with a really strong direct lending offering. That was their calling card. That remains their forte. Add those other pieces of the credit puzzle such as digital infrastructure asset based to really deliver the comprehensive credit offering that you need today. So I definitely think it's true that you need a top tier multifaceted credit offering to be a large diversified you can still be a very successful business without one. But to really hit on all cylinders, I do think you need that. Most of them have that and have seen that writing on the wall for some time.
- [40:53]
A
As it relates to that earlier comment just in terms of the offering and how it will be provided, whether it's some direct linkage, whether it's through a brokerage platform or whoever is managing your 401k for the end investor, do you have any sense of what that could mean to fees? Because I think you brought up in your earlier point some of the democratized access to private markets now is just higher prices marked up with a ton of fees mixed on top of it. And not all, but certainly some that I see. What's your expectation or what are the early signals around that these are going to be higher?
- [41:31]
C
Full stop. These are more expensive businesses to run. If you compare direct lending to a liquid bond fund, in direct lending you need an army of originators going out there and covering the sponsors, covering the non sponsored borrowers and finding you those direct deals. In a liquid credit fund, the bank does all that work for you and you just trade with the bank desk. So there's like a whole half of your business operation that you just don't need. Similarly, you're structuring all the deals in house, you're negotiating all the deals in house. So you need way more in house legal and structuring expertise than a liquid credit fund does. Where they're going to maybe have some to evaluate the legal documents of what they're investing in, the good ones do, but they don't need the resources to negotiate the document themselves necessarily. And that costs more money. There are higher fees charged for these products because they cost more to run. These managers do run very attractive fre margins. I'm not going to elide that fact, but I do think that most folks who are experienced in investing in alternatives, because in many cases there is a wider band of outcomes, or at least the band of outcomes is more attributable to skill than to market factors beyond your control. There's much more of a focus on net of fee performance than there may be in the retail channel for liquid market investments. Most private market managers have a proven track record of beating the liquid alternative in their sector. Obviously the indexes for private markets are imprecise sometimes, but in direct lending you have cliffwater prequentized PE data, I think. So there's stuff out there and there are quartiles that are assigned for different vintages. Most of the operations that you see bringing these funds to market that have reached that scale, having that level of higher performance than the market has kind of been a requisite of them getting to the scale where they can do this. So there's already almost been like a natural filtering of to get that big, you had to do something pretty good. Generally, investors in the space, and I would hope advisors who are working with retail on the space hone in more on the net of fee performance. Certainly it's important to understand the fees of what you're investing in. I'm not trying to minimize that at all. And certainly if you're looking at two funds that have generally similar performance and one of them charges 1.0 and 12 over a 7 and the other one charges 1.5 and 17.5 over a 6, sure, you should definitely consider that pretty heavily and this information should be made available to people like it's not buried. It's not harder to find. But I don't think the right calculus for people to take is this costs XYZ more than the BSL etf. So long as when you look at the net performance, the alternative option, the private markets option is delivering on that versus the cheaper liquid option.
- [44:28]
A
It's not new. I can remember looking at my 401k options and there would be the mutual funds and their fees that they offer and the ETFs and in the public markets that outperformance didn't necessarily match. Therefore the ETFs were often the better option with significantly less fees associated with them. On the broader point of disclosure, education, do you have any sense of if that's a piece of the regulatory push? Because it does feel incredibly important. Because even if you set up something where it's capped at 5% of NAV each quarter and it might be clearly disclosed, but there can be an uproar even if that is the case, do you have any sense of if that's a big push that's coming along with the regulatory changes?
- [45:13]
C
I'm not so sure it's being taken on by the regulators. It possibly should be. That's a very good debate to be had. But I do think the managers themselves, I mean you've seen this in the Alts Academy from Bose, the Apollo University, or maybe it's Blackstone University. I'm sorry, I can't remember all the matches. But the big managers have brought to bear these very comprehensive education platforms aimed at the advisor mostly, not so much the individual, but where the advisors need to get continuing education credit, they get it from these. It's a very formalized thing and certainly there's an element of you're being educated by somebody who is looking to sell you a product. But these are really serious educational things because they want to forestall that crisis. Exactly what you just said. It's not in the manager's interest to have any of these things, Ms. Soldier, because they're going to have to pay for it on the back end when somebody doesn't get the experience they expected. So I think the managers have taken a lot of that mantle on and invested huge sums in building those ed. It's partly because the advisors just need to know what they're doing to effectively provide the client counsel on them. A lot of them just really don't know it. I heard that there was a poll recently relatively well off investors. They were asked to Name three top private markets firms and the most common answer was that nobody could. I'd have to check exactly who they were surveying. I think it was a bay in survey. I'd have to double check who the respondents were, but I think it was higher end investors. There is a lot of education to be done here. The advisors are I think for the foreseeable future going to be the conduit of much of that. I wish that every single individual investors would listen to this podcast and all your wonderful podcasts and read more about private credit like I do. I don't think that's necessarily something we can expect of your average mass affluent consumer, but their advisor needs to get smart on it. The enforcement factor for that is FINRA has a very vibrant arbitration process and I do think if advisors are miss selling these products, investors should have every right of recourse against that advisor as if they were miss sold any other product and they should avail themselves of that. And advisors who missell these things or fall down on the job of educating the investor, they should be penalized for that. I fully supportive of that.
- [47:23]
A
Anytime you see evolution in financialization of markets or unique structures, you are always going to have people who push the limits and you can hope that the system is able to weed that out and not make it a bigger problem for the market.
- [47:40]
C
While these things sound complicated and whatnot, at their heart they're really not. Direct lending, you are raising some equity, you're borrowing some money. On top of that equity you have a cost of capital, you are lending money out to people the same way a bank would and you are collecting a net interest margin. And now when you consider that the other primary alternative yield vehicle for many of these mass affluent folks is a structured note that a large money center bank has sold to their advisor with all kinds of options involved in Greek letters. To me, the direct lending business model is a lot easier for me to understand than a Matt Levine column on structured notes. That's just my $0.02 is that once you get past the initial wall of this is private, this is alternative, this is something I don't know. It's actually way more intuitive than if you have an advisor recommending you single stocks and they're recommending single name semiconductor stocks, I can tell you right now you're gonna have a much easier time understanding the concept of we buy a company, we make it better and then we sell it. Then you are advanced DRAM packaging or whatever that company may do. But I do totally get it that there's a big need for education out there and that should be something that's continued to be invested in.
- [48:57]
A
You're spot on seeing it up close. Its actual operation is no more complex and arguably very similar and more detailed. The challenge comes from the liquidity, but that is something that we've addressed. It's been fascinating. You've actually spelled out some questions that I had and I think painted a pretty clear picture in terms of how the this could evolve. If we were to summarize the true winners, whether you want to put them in order or who stands out the most, what would you highlight? Just as an expectation, it can be based on what we've seen thus far or as you look into the future, who wins across the ecosystem?
- [49:35]
C
The alternative asset managers that manage to play this right, certainly the large ones have a natural advantage. There's also a lot of people would call them mid sized, but in many cases we're talking 50 billion AUM firms that manage to bring the right complementary products to market. They will be very large beneficiaries of this and I think that investors who get access to better investment products will also be the really large beneficiaries of this. Not going to mince words about the alternative asset management sector and private markets. They have probably reached close to saturation in the institutional channel. So most of the moves there are like share gain. I'm no expert on cpg, but toothpaste. There aren't a lot of people left in America that are net new to toothpaste. It's more of a share battle between Crest and Colgate Private label. Higher end bougie stuff I bought for $250 a 12 pack off Instagram, but I do think actually works and makes my gums better. That's a different conversation. The institutional channel. There's still some institutions that have room to grow that, but it's generally pretty well covered. This definitely is the greenfield opportunity for these managers to add new clients, add new assets and expand the pie for all of them.
- [50:48]
A
Well Josh, this was equally as enjoyable as our first go around. Thank you again for sharing the knowledge.
- [50:55]
C
It was absolutely my pleasure to be here. It's an area I'm super passionate about and that I think has a lot of benefit for everyday investors to have a better retirement, have a better financial portfolio. And I just love talking about this stuff and I love talking with you. It's my favorite podcast cast. We can leave it there to find.
- [51:12]
B
More episodes of breakdowns ranging from Costco to Visa to Moderna or to sign up for our weekly summary. Check out joincolosis.
- [51:19]
C
Com.
- [51:20]
B
That's j o I n c o l o s s u s.