← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
Eric Mogelof – KKR’s Pivot to Private Wealth (Private Wealth 3, EP.446)
00:47:14
Eric Mogelof is the head of Global Client Solutions at KKR, one of the world’s leading alternative asset firms with roots in private equity dating back to 1976. KKR currently manages $640 billion in assets, across approximately $250 billion in...
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- [00:02]
Ted Seides
Capital Allocators is brought to you by my friends at WCM Investment Management. To outperform the markets, you have to do something differently from others. In my 30 something years investing in managers, there may be no one I've come across who does that as clearly and as well as wcm. I've seen it up close. As an investor in their international growth strategy for the last five years, WCM is a global equity investment manager majority owned by its employees. They believe that being based on the west coast, away from the influence of Wall street groupthink provides them with the freedom to live out their investment team's core values, think different and get better as advocates of integrating culture research into the investment process and advancing wide moat investing. With the concept of moat trajectory, WCM has delivered differentiated returns while building concentrated portfolios designed to stand out from the crowd. WCM is committed to defying the status qu by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of themselves. To learn more about WCM, visit their website@wcminvest.com and tune into this slot on the show to hear more about WCM all year long.
- [01:27]
Capital Allocators
This testimonial is being provided by Ted Seides and Capital Allocators who have been compensated a flat fee by wcm. This payment was made in connection with Capital Allocators testimonial and production of podcasts and is not depend on the success or level of business generated. The opinions expressed are solely those of Capital Allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle. Past performance is not indicative of future results. Please visit wcminvest.com for WCM's ADB and further information.
- [01:52]
Ted Seides
Capital Allocators is also brought to you by Vesto. If you're managing a lot of bank accounts or cash across multiple entities, listen to this. I want to tell you about a product called Vesto. Vesto is a Treasury management platform that allows you to connect and view all your banking relationships on one screen. If you're juggling cash across banks, entities or even countries, you know how time consuming it is to manually log into each account just to get an accurate picture of your finances. It's inefficient, error prone and wastes time. With Vesto, you can replace bank portals and spreadsheets. Get one real time view of all your financial accounts in one place. Head over to vesto.com, that's V-E-S-T-O.com and mention capital Allocators to get a call with the founder.
- [02:44]
Eric Moguloff
Better.
- [02:51]
Ted Seides
Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access Premium content@capitalallocators.com All opinions expressed by Ted and Podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast. Thirty years ago, institutional investors held most of their assets in stocks and bonds. David Swensen led a movement to an approach to portfolio management that broadened the asset mix to alternative investments, including hedge funds, private equity, venture capital and real assets. These days, almost every institutional portfolio incorporates significant allocations to alternatives to produce better outcomes with similar risks or similar outcomes with lower risk. However, capital in the hands of individuals has not yet followed suit. Private wealth portfolios, particularly the so called mass affluent, typically hold only 2 to 5% of their assets and alternatives, compared to a range of 20 to 50% for institutions. But that's changing quickly. Innovations and structure have allowed individuals to access alternative strategies at lower minimums, with liquidity options not previously available. According to Arctos Partners, the sixth largest private banking and wirehouse platforms committed $110 billion to funds last year, approximately twice the amount invested from the six largest institutional investors in North America. And those flows are just beginning. The potential investment dollars from private wealth to alternatives are staggering. Every 1% asset allocation shift would equate to approximately $500 billion of new investments. The impact of these capital flows will have ramifications for GPs and LPs for decades to come. How will the capital get deployed? What will it do to asset prices? What will it mean for returns and for fees? And who will win and who will lose? This mini series, Private wealth, explores the important questions raised by the accelerating convergence of institutional style investing with private wealth. We'll hear from three of the most influential asset owners, one each from the private banking, wirehouse and RIA channels, and three of the most significant asset managers playing in the space. Just as this channel is in the early innings of changing the investment landscape, so too will this miniseries be just the beginning of our exploration of what it means for you. My guest on the third episode of Private wealth is Eric Moguloff, head of Global Client Solutions at kkr, one of the world's leading alternative asset firms. With roots in private equity dating back to 1976, KKR currently manages $640 billion in assets across approximately $250 billion in credit, $200 billion in private equity and $160 billion in real assets. The firm's objective in Private wealth is to deliver the same strategies, performance and quality of experience to individuals as it does institutions. Our conversation shares how a longstanding brand in private equity has adapted to serve the Wealth Channel in the last five years. We trace Eric's path to KKR after a long run leading private wealth at PIMCO the growing demand for alternatives among individual investors, innovation behind Evergreen Structures and Interval Funds and importance of brand, customized products and advisor education. Eric shares how KKR is investing in marketing, digital engagement and on the ground sales to reach advisors globally and the firm's partnership with Capital Group to expand access for non accredited investors. We also covered the competitive landscape and the opportunities and challenges of making alternatives more accessible to a broader range of investors.
- [07:29]
Capital Allocators
Before we get to the interview, a quick announcement. We've set new dates for our Capital Allocators University for Investor Relations and Business Development Professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post AGM season, travel starts to wind down, it's right before the holiday crunch time and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBD is a closed door gathering for capital raisers to connect with peers, learn from Allocators and other experts and really share in best practices with each other. You can learn more@capitalallocators.com University. Thanks so much for spreading the word about Capital Allocators University for Investor Relations and Business Development professionals.
- [08:18]
Ted Seides
Please enjoy my conversation with Eric Moguloff.
- [08:23]
Eric, thanks so much for joining me.
- [08:24]
Eric Moguloff
Oh Ted, thank you very much for having me.
- [08:26]
Ted Seides
I'd love to have you take me through your path to getting into private wealth.
- [08:32]
Eric Moguloff
Absolutely. It was a little bit of a longer journey for me. Out of college I went to work on Wall Street. I went to work in investment banking and then private equity and the things I really liked about both was the engagement with clients and so I headed back to business school and when I tried to figure out quote What I was going to do with my life. I decided, hey, I want to work with clients. And I ended up joining PIMCO as a relationship manager. And at first I started out on the institutional side, covering pension plans, foundations, endowments and insurance companies. And I got to learn about how institutional investors think and act, asset allocation and portfolio construction. And over time I migrated from that role to another role, but eventually ended up leading wealth in the US for pimco. And that's where I really got to learn about the wealth business. And it was probably my favorite job I had at the firm.
- [09:26]
Ted Seides
What years was that when you started focusing on wealth?
- [09:29]
Eric Moguloff
I came back from Asia in 2017 and was there for about three or four years leading wealth for Pimco.
- [09:37]
Ted Seides
How did you define what that landscape looked like eight years ago?
- [09:41]
Eric Moguloff
It's interesting, when people say wealth, it means something different to different people. In my book, there are really three components to the wealth market. There is what I would call the ultra, ultra high net worth family office component. Those are typically professional buyers of investment solutions. They tend to have their own infrastructure, their own CIOs and in a lot of ways make decisions like institutional investors. The second category that we think about in wealth is the wealth that's financially intermediated. So we think of those individual investors that utilize financial advisors or financial consultants or some type of platform to help with investment management. And then the third category that I would consider is a self directed individual investor. So those investors don't use any formal financial advice. Obviously in the asset management business, for the most part, the focus is usually on the first two categories. But over time you might see different people focusing on different parts of that market.
- [10:48]
Ted Seides
What did you see about how to address particularly the second two? Because I think institutional market looks a lot like the ultra high net worth market.
- [10:55]
Eric Moguloff
Sure. One of the reasons why I really loved getting into the wealth market was because at the time I moved over to lead wealth, the market was really changing. There was this real important inflection point. We talk sometimes about this idea of wealth going from 1.0 to 2.0, but the intermediaries and financial advisors all started to become much more sophisticated when it comes to portfolio construction and asset allocation. Also at the time we started to see this real transition of financial advisor business models. If you think about it, years ago, most financial advisors were really portfolio managers. They would develop portfolios for their individual clients. Usually it incorporated individual equities, individual bonds, and they were really portfolio builders. If you fast forward, we're really seeing business models change Dramatically, Financial advisors now have a much broader value proposition that they are holding out to their investors. Sure, they're building portfolios, but they're also providing financial advice and planning tax perspectives. Sometimes they're a financial concierge, sometimes a financial referee, an educator, an advisor, a therapist. And so for an advisor to be able to do all of those things, they really need to evolve the way they do the first part of that job, which is to build portfolios there. They're starting to rely much more on model portfolios, advice and support. That was one really big change that we started to see five, ten plus years ago. The second change really relates to how asset managers engage with the financial advisors and financial intermediaries. In the US there's over 300,000 financial advisors. It's unlikely that any asset manager is going to build a sales team that could touch every single one of those advisors. All of a sudden, data analytics and marketing became much more important in figuring out how to engage with advisors and how to support advisors. And so that was some of the reasons why I started to get pretty excited about the wealth market.
- [13:06]
Ted Seides
What happened as you dove into that that led you to move from Pimco to KKR?
- [13:12]
Eric Moguloff
Gosh, I had been at Pimco for 17 years, I never thought I was ever going to leave. But I got a call to meet some of the folks here at kkr. Part of my decision making process was this idea that within the asset management and specifically within the wealth space, the demand for alternative investment solutions was only going up. So having an opportunity to work at a pure play asset manager that focused on alternatives was pretty exciting. Also what was really exciting was if you looked at KKR five years ago, the firm really had built out world class private equity infrastructure, real estate and credit investment capabilities. But the firm really hadn't built out distribution to really take those investment solutions and deliver them to a broad array of investors. The opportunity was to come here and really help build out distribution, which included wealth management. It was pretty exciting to come here. The people here are exceptional, just really amazing culture, collaboration and just some really talented folks here.
- [14:15]
Ted Seides
How do you think about how big this opportunity is? This movement of private wealth assets into alternatives?
- [14:23]
Eric Moguloff
There are so many numbers that are painted out in the marketplace in terms of what the opportunity set could look at. Here at KKR we're really focused on just delivering investment solutions to our clients. We don't measure success like in AUM perspectives, but if you were to try and size the market. Here's the way I think about it. If you look at the typical institutional investor, you can see that they are allocated to alternatives and private markets anywhere from 20 to 30 to even 50% of their portfolios. If you look at the wealth market today, that number is 2 to 3%. Maybe there are some good reasons why on average it's not going to reach 50%. But most individual investors can give up some liquidity. And for those investors that have longer horizons, they should be able to benefit from exposure to private markets. Based upon our conversations with wealth platforms and advisors, we think that 2 to 3% should ultimately be 10, 15 plus percent. And if you were to do the numbers, that just means that there's literally trillions of dollars of money that's in motion and that doesn't even incorporate some of the other pockets of wealth that you might see. For example, in defined contribution and 401k space. Hard to put a number on it, but I would tell you that it's an enormous opportunity over the next five to 10 years as you look at.
- [15:48]
Ted Seides
Trying to service that client base. You mentioned the intermediaries and then self directed two can be very different decision making units. How do you think about putting that together and trying to figure out what they want and need?
- [16:01]
Eric Moguloff
Today our focus is on the intermediary part of the market. So we don't engage directly with investors. There are a lot of really great companies that have built out direct to investor models. We want to participate in that by simply having our investment solutions available on those platforms. But in terms of us at KKR engaging directly with individual investors, it's just not our value proposition that we can deliver. Our focus really is on that intermediary part of the market. To be successful in that part of the market, you really need five things you need to have a brand. Make no mistake, brand's important no matter where you are. But within the wealth space, brand is really important. At the end of the day, that financial advisor is going to be sitting across the table with an individual investor and he or she needs to understand all the different things that are in his or her portfolio. And so brand matters. The second thing is it's really important to have real quality investment solutions that are customized for wealth. Historically, this industry had taken some of the institutional investment strategies and just plugged them into the wealth channels and that's okay. And for some individual investors, those drawdown or institutional vehicles might make sense. But for the large majority of individual investors and the financial advisors with whom they work, you really need a customized wealth product. The third thing that I think you need are real relationships with home office platforms. At the end of the day, you need to have relationships with some of the intermediaries that are curating what is going to be available on a platform. But then once you have that, you also need to have boots on the ground. Sales professionals that are engaging individually with advisors to help them understand the investment solutions and how they fit into portfolios. And then the last thing is you actually need real thought leadership and education. One of the biggest challenges that the industry will have over time is ensuring that advisors and investors understand how alternatives can be incorporated into portfolios and importantly, the risks and benefits that those investment strategies offer. We've been investing in all five of those areas.
- [18:14]
Ted Seides
Let's walk through each one and walk through what you saw when you got here and how it's changed since. So just start with brand.
- [18:21]
Eric Moguloff
One of the things that attracted me to KKR was the incredible brand that we have here at the firm. We've been operating for close to 50 years as an investment manager that's focused on multi asset alternative investment solutions and we have a time tested investment process that we've been delivering out to the market. While I would argue that perhaps we weren't as well known among wealth investors, we have the background, the experience and the high quality investment solutions that it takes to be really credible as a wealth provider. So what we've been doing at KKR is really investing in taking that brand and making sure that the wealth market fully understands what we can deliver to them. That was one area where I would say it had big green check mark at KKR in terms of the brand that we can have and offer to the marketplace.
- [19:14]
Ted Seides
How do you go about doing that? Making sure you're not a tree falling in the forest?
- [19:17]
Eric Moguloff
When I first got here about five years ago, we actually didn't have a marketing department. I remember I got here and was really excited to be on the ground and meeting lots of my new colleagues. And I remember asking someone, hey, can you introduce me to someone in our marketing department? And they turned to me, they said, isn't that you? And I said, well yes, we are sales and product strategy, but no, we need to build out a skill set around digital marketing, channel marketing, product marketing, brand. So the firm said, hey, if we need it, let's go build it. And so we ended up building out a fully staffed marketing effort. And through that effort we are engaging in so many different ways to connect and reach out to advisors and ultimately make sure that the KKR value proposition is well known in the Marketplace. We've got about 25 people here at KKR that are dedicated to focusing on engaging and delivering that broader client experience.
- [20:09]
Ted Seides
What are some of the ways you've done that differently? Clearly hadn't been done in the past.
- [20:13]
Eric Moguloff
There are lots of different ways. One of the ways is we've built out a real robust digital marketing effort. There are 300,000 financial advisors. The sales team can never touch every single one of them. But if we can take some of the content that we have and we could package it and leverage digital marketing to reach at scale a number of different individual financial advisors, that's one great way. The second thing that we've done is we've really elevated the client events and client experience that we offer. For example, we do a KKR Academy where we bring advisors to KKR and we talk to them about our capabilities and our investment solutions. The marketing component of that is really important. It's the brand. It's elevating the experience that advisors have. And then there is all kinds of other marketing techniques, paid search, and all these other ways that we can really elevate kkr. One last thing that we're super proud of is that we've created a digital education experience. It's called Alternatives Unlocked. And that's a fully multimedia digital experience that advisors could come on, get continuing education credit. It's accessible also to individual investors as well. And we think that's a really great way for us not only to help educate the market, but also elevate the brand.
- [21:29]
Ted Seides
Have you thought about the top of the funnel? Pure advertising?
- [21:34]
Eric Moguloff
We don't do a whole lot of pure advertising. We do a little bit of it. And the reality is that we will do things on LinkedIn and other social media and we will try and target, but the reality is we don't do a whole lot of it today. But that might change over time.
- [21:50]
Ted Seides
Let's turn to this concept of customization. What's changed from the traditional structure that private equity had been delivered to institutions to make it more accessible for private wealth?
- [22:04]
Eric Moguloff
I think it's a combination of two things that have happened. It's a combination of innovation on the vehicle front and then also technology. If you think about it, these historical drawdown vehicles, number one, they're only eligible to qualified buyers. So there's a limited universe of investors that would even be eligible to invest. The second part is it's a very challenging administrative burden to actually allocate capital to a drawdown vehicle. The subscription documentation process is pretty extensive and there's a Lot of hoops that individual investors would need to go through. If you're a large sovereign wealth fund or public pension plan that is used to doing these things and obviously an eligible investor, no problem. But if all of a sudden you're a financial advisor and you work with 300 clients and maybe only a couple of them are eligible and they've got lots of accounts and it's complicated, all of a sudden, that's a pretty huge barrier to allocate to an alternative investment solution. Over the last several years, however, innovation in vehicles has really made a huge difference through whether it's an interval fund, a tender off for fun, a non traded bdc, an operating company, there are now a number of new vehicles that asset managers can utilize which really widen the aperture for investors to invest. And that includes not just qualified buyers, but also accredited investors. And then for some vehicles, all the way down to the non accredited investor. The other thing is technology has also played a part of this. Even these evergreen investment solutions, some of them do require subscription docs. But through simplified docs as well as a technology solution, onboarding these into an advisor's client base is a whole lot easier. Both of those things have lowered the barriers for advisors to allocate client portfolios to alternatives.
- [23:57]
Ted Seides
If you look across the different strategies that you offer, private equity credit infrastructure, what's changed that goes into these vehicles compared to what you delivered in the past?
- [24:11]
Eric Moguloff
That's a really important question. Every asset manager has approached their wealth effort differently. I can speak to what we do at kkr. All of our evergreen investment solutions have the same investments that you would find in our drawdown vehicles. And that's a really important differentiator. When we decided five plus years ago to really build a wealth effort, we had two options. Option one was to go and create investment solutions that invest in things other than what we have already been doing, or go through the really complicated challenge of structuring these vehicles, both the drawdown vehicles and the wealth vehicles so that they can invest peri passu. And we said, look, we've had this time tested investment process for five decades. We would love to be able to offer the investment capabilities that we built and honed to our wealth investors. So we went ahead on all of the investment solutions we offer. They all essentially share deals and share transactions with the institutional vehicles.
- [25:20]
Ted Seides
I'd love you to walk me through an example of how to make it work.
- [25:25]
Eric Moguloff
Sure. If you were to look in many alternative firms, especially in private equity and infrastructure, they typically follow a waterfall approach where you may have a flagship strategy that is first in the waterfall and then second in the waterfall. Maybe there are other strategies that could participate in a deal and then maybe third in the waterfall you could offer co investment. Most alternative firms, their first in the waterfall is always just their institutional vehicle. We have created in our documentation that first in the waterfall to have an allocation to our wealth vehicles as well. And that takes a lot of forethought because if you think about it, when you launch your drawdown vehicles in the documentation, it will stipulate that waterfall and that priority. So years and years ago we said, hey, we want to make sure that we can carve out some allocation for our wealth investment solutions. That's one example of what we've done to make sure that we can share that priority.
- [26:27]
Ted Seides
How do you think about the potential for dilution of the quality of return when if in fact all of this money does come in, you have that much more money you have to put to work across these different pools?
- [26:40]
Eric Moguloff
First and foremost, we're focused on delivering investment performance to our clients. The minute you start to dilute that is the minute that you no longer are consistent with your brand, you're no longer consistent with your value proposition. I think first and foremost, asset managers always need to make sure they're delivering what they promise they're delivering in terms of the potential risk as more and more assets move into these markets. The reality is private markets are growing by leaps and bounds. And if you think about it, even in the equity space, more and more companies are staying private for much, much longer. So it's early, early days before we worry or get concerned about our ability not to be able to deliver returns. That's pretty consistent with what our clients are seeing. We've got a lot of time before all of a sudden there's going to be some type of challenge for us to deliver.
- [27:30]
Ted Seides
Let's turn to that next leg, which is relationships and boots on the ground. What have you had to do to be able to reach as much of this market as you can?
- [27:39]
Eric Moguloff
When it comes to boots on the ground, we've had to hire a number of people. When I started here at kkr, we had five people that were focused on wealth globally. All of those individuals were really just focused on engaging with the home office platforms. Today we have a whole sales team in the US that is out in the field that are wholesalers. We've got external wholesalers, internal wholesalers. We have folks that focus on the wire channel, the IBD channel, the RA channel. We have folks sitting In London, in Zurich, in Hong Kong, Singapore, Tokyo, Australia. We've really had to build out an on the ground sales team and their goal. Each of them wake up every day engaging with advisors and meeting with them, oftentimes one on one in small groups. It's a really important effort. At the end of the day, advisors want to hear from their asset manager and their relationship manager coverage. If you look across kkr, roughly a third of all of the folks that are in distribution are focused on our wealth business. And that includes a home office coverage team, that includes a wire sales team, an independent broker dealer sales team, an RIA sales team, and it also includes individuals that are in Europe and in Asia on the ground covering clients. So it's gone from being a very small part of our overall distribution effort to being frankly one of the biggest groups that we've got within overall sales.
- [29:04]
Ted Seides
As that team is having conversations with all these advisors, what are you hearing about what solutions they're looking for in three broad categories?
- [29:14]
Eric Moguloff
We hear some advisors that say, hey, I'm really trying to deliver a more resilient income stream. Some advisors say my clients really want to diversify and dampen volatility. And then we've got other clients that say, look, we're really trying to enhance returns overall. Once we understand what that advisor is looking for, we can customize the investment solutions. If someone's really focused on enhancing yield, enhancing income, we'll talk a lot more about credit and real estate. If they're really focused on maximizing returns, we'll talk a lot more about our private equity solution. We're really trying to figure out what outcome they're trying to generate and then deliver investment performance. Investment solutions back. Another real important theme we hear all the time is how do alternatives work? For many advisors, alternatives are really new to them. So explaining to them how the vehicles work, how the liquidity works, where they fit in a portfolio construction is really important because we not only want to make sure the advisors understand, but we want to make sure the advisors are equipped to then turn around and have conversations with their clients on it.
- [30:19]
Ted Seides
That leads into this whole concept of education. You mentioned the academy. There's a couple examples there. What level of sophistication do you find the advisors have when you're trying to make sure you're educating them properly about this fit in their portfolios?
- [30:35]
Eric Moguloff
Yeah, Ted, that is one of the things that I love about wealth is that there is such a wide range of advisors. We work with some advisors that I think are more sophisticated than some of the big sovereign wealth funds and pension plans we work with. On the flip side, we work with some advisors that have never allocated to anything other than public equity and public fixed income. The knowledge difference is wide, but that's great because what we've done is we've developed content that supports each of those different levels. We'll have content and education that talks about what is private equity, how does it work, why would you invest in private equity? We also have content that goes much deeper, that talks about the J curve. It talks about what the difference between gaining exposure to private equity in a drawdown vehicle versus an evergreen vehicle. And then we have a whole series about, okay, well, how do we add value in private equity? And we take clients through our value creation toolkit. And so we really try and meet advisors where they're at. But what I would say is this. Advisors are building knowledge. We're seeing it every single day. That's one of the reasons why the allocations to alternatives are going up. Because more and more advisors are getting more comfortable with the asset class, with private markets and understanding the role and the potential benefit within portfolios.
- [31:55]
Ted Seides
I'd love to dive into evergreen structures. Generally, it seems like whether it's from ease of subscription or liquidity, that is the vehicle that a lot of the wealth channel is exploding into. How should investor think about the differences between the two?
- [32:11]
Eric Moguloff
There are meaningful differences, but if we go back to client needs, the evergreen vehicles solve a number of different problems. The first is you don't have to wait for the next fund launch before you can gain exposure to the market. And for advisors that are constantly growing their own businesses, imagine they're trying to build portfolios for their clients and they have to wait until the next drawdown vintage for them to be able to allocate. That's one big difference. The second really important difference is the accessibility. All of those drawdown vehicles are really for qualified buyers only. Whereas, for example, our private equity solution is for also accredited investors. So now imagine that you're a financial advisor. You want to learn about private equity, you want to understand the benefits of it. You spend a lot of time learning about this and you're ready to start incorporating into client portfolios. Can you imagine you spend all this time and of your 300 clients, only 8% of them actually are eligible to invest in a drawdown vehicle where maybe 40 or 50% are eligible to invest in the accredited investor product. So that's another really important difference. Tax reporting is going to maybe be complicated regardless, but our evergreen investment Solution has more of a simplified K1. So it's a little bit easier, but it's still a little bit challenging. But I think another important difference is that it does provide some liquidity. There is a limit to liquidity in different market environments. But at the end of the day, individual investors have the ability to get some liquidity. But I think the best difference, which works very well for individual investors, is that they don't need to manage cash flows. If you look at the most sophisticated institutional investors, they may target a 20% exposure to private equity. They may utilize lots of different drawdown vehicles, and they're constantly matching distributions and new capital commitments. Individual investors and advisors, that is a very big challenge. So being able to stay fully invested and get invested day one is a huge benefit. And frankly one that just fits so much better in the wealth market. If you ask me. I think the drawdown vehicles serve a very important purpose for institutional investors. But over time, I would expect 80 plus percent of all wealth flows to go into these evergreen investment solutions.
- [34:38]
Ted Seides
So you get all these benefits, get liquidity, you get ease of access, ease of tax treatment. What are the trade offs?
- [34:45]
Eric Moguloff
Investors need to understand that these vehicles typically have quarterly liquidity up to a certain maximum threshold. There's never a get without a give. So if you want to benefit from the illiquidity premium, you have to be willing to give up some liquidity. There is some complexity from a tax reporting perspective. There is some time that advisors need to take to understand the investment solutions. Most advisors that are new to this, they have to understand what's in the portfolio, the risks, how the vehicles are structured, and they have to spend the time and explain it to investors. Once you understand the liquidity and you understand the risk profile of the investment and how it could play into a portfolio, I think there are a lot of really strong benefits.
- [35:26]
Ted Seides
How do you think about the costs of access? And that's from two perspectives. So yours is a business delivering two different solutions with two different fee streams. And then the advisors and the investors and the costs that they incur in investing in strategy like this.
- [35:42]
Eric Moguloff
To start with the second question, the alternative market and private markets is a different fee profile than public markets. I'd also tell you that the value add is much more significant whether it's in credit or infrastructure, real estate, there's anywhere from a couple hundred to hundreds of basis points of excess returns that you can generate relative to public benchmarks. And we always encourage advisors to think about performance and think about returns net of fees. That's where it's really important to think about the manager that you're utilizing. Because what we have seen in private markets is a very, very wide range between first quartile and fourth quartile managers. There I would say if you're a fourth quartile manager, you're probably not delivering value above your fees. If you're consistently a first or second quartile manager, then your net fee performance really makes sense. In terms of us as a business, I would say two things. We believe in having a diversified business. We encourage our investors to think about diversifying portfolios. We do the same and we diversify by the asset classes that we manage. We diversify by the pools of capital that we manage for. We're thrilled to be able to have a very well balanced business across our institutional insurance, family capital and wealth efforts.
- [37:00]
Ted Seides
In the drawdown structure. Everything's historically been measured by IRR evergreens. It sounds like it's more of a time weighted compounding type return. How do you think about making sure people understand the differences between the two?
- [37:13]
Eric Moguloff
You're right. All else equal, you would see the IRR of one of our private equity drawdown vehicles, for example, higher than the expected IRR that you'd find in an evergreen private equity solution. Having said that, because you're investing fully invested day one, your multiple of money is going to be higher. There are good reasons why an investor who is eligible to have both might include both. But our goal is to make sure investors understand what the return expectations should be and whatever metric they want to measure it against, they understand what the expectations should look like.
- [37:48]
Ted Seides
When you do so much yourselves. Really curious about external partnerships, most notably.
- [37:54]
Eric Moguloff
With Capital Group, it's interesting. We are super excited about the Capital Group partnership for a couple of reasons. But if you were to look at where we have focused the majority of our time within the wealth space, it's with those accredited investors and above. We've built out a sales team and we're super proud of it, but it's not the size of potentially some of the other traditional asset manager sales teams that are out there. Capital Group actually approached us and they had their own business strategy around deciding to want to partner with an alternative manager. And it was just such a perfect fit. They have this really strong business, especially in the independent broker dealer channel, but frankly with wires and RIAs and in partnership with them we're building these investment solutions that are available for the non accredited investor that to us was completely orthogonal to what we were doing. So that partnership enables us to Deliver private markets to even a larger number of investors. In one of the first meetings we had with Capital Group, I was probably one of the most excited people in the room and I talked about my mom. My mom is a retired New York City school teacher. She taught in the city for 36 years and she is not an accredited investor. She would love to invest in KKR investment products, but the reality is for her, a dedicated KKR evergreen investment solution just doesn't make sense. But the investment solutions that we're creating in partnership with the Capital Group would be perfect for her. And so that is one of the reasons why we're super excited about partnering with the Capital Group. They're a world class investment management firm as well, and just a lot of cultural overlaps too.
- [39:37]
Ted Seides
So there are other ways your mother could access what you're doing, most notably KKR stock. So how do you think about that is a potential solution for this channel?
- [39:47]
Eric Moguloff
Anyone could buy our stock, which is certainly one way to get exposure to some of these investments. But if you think about it, the investment in KKR stock trades at a multiple to earnings and reflects the number of things that we do here at kkr, which includes asset management. It also includes the insurance company that we own, Global Atlantic. It would not be as a pure play exposure to say private equity or infrastructure or real estate or credit. And obviously as an investor, you're customizing your portfolio based upon your goals and objectives. So for my mom, she'd probably be allocating more to say private credit or real estate than likely a larger exposure to pe.
- [40:28]
Ted Seides
As you look at this space from a sense of competitive landscape, how do you think about who the winners and losers are likely to be? On the manager side, there are these.
- [40:39]
Eric Moguloff
Five things you need to do really well. Brand, customized products, platform relationships, sales team, and then marketing and analytics and data. It's interesting. When I got here to kkr, we had a really great brand and we had these really great investment capabilities. We did not have a huge investment in platform relationships or sales or marketing. But my view was is that the harder things are brand and investment capabilities and products. My gut tells me that over time it's the alternative managers that have brand and have real investment capabilities that are willing to and are going to invest in the other three areas that are likely going to win. The other thing is this larger alternative firms that have multiple investment solutions have a greater ability to build out the capabilities on the distribution front to win. For example, we have a sales team that goes out to the market and we've built out a team that is going out and spending time with a financial advisor. The advisors are called all the time by asset managers, by wholesalers, and they're going to pick and choose which investment managers they're going to spend time with. If you're an asset manager like kkr, that has capabilities across PE infra real estate credit, we also have capabilities across macro thought leadership and asset allocation and portfolio construction. The value that we can deliver to an advisor is a whole lot more than a value that maybe a single asset manager that has one specific capability can deliver. My gut tells me that there actually won't be a lot of winners. There'll be a handful of winners in each of the asset classes and they'll likely be the larger, well branded alternative firms.
- [42:22]
Ted Seides
How do you think about risk in the space? The one that people raise a lot is how do you bring liquidity when underlying assets are less liquid?
- [42:31]
Eric Moguloff
The reality is this. There's no magical wand that you can wave over a private market investment and make it liquid. That's the reason why, in my mind, the wealth solutions that take advantage of these limited liquidity vehicles are the way to get exposure. The interval fund, the tender offer fund, the operating company. There are parts of the market that are contemplating trying to wrap private markets in daily liquid, whether it's a mutual fund or an etf. If you're going to do that, then you need to have some liquidity function. And that always is going to come at a cost. It could be an explicit cost, it could be an implicit cost. But at the end of the day, you can't magically say something that's illiquid is liquid. And if it does become liquid, then the illiquidity premium likely is going to go down or go away.
- [43:25]
Ted Seides
That leads to this question of the implications of all of this innovation to bring alternative strategies to the private wealth channel and all the money that could come in, what does it mean for future returns for institutions that are already in the space watching this happen?
- [43:43]
Eric Moguloff
A couple of things. More capital available will create more opportunities for companies to participate and raise capital in the private markets. We saw during the recent Covid crisis a tremendous number of borrowers shift from the public debt market to the private market. It's just going to give companies a lot more flexibility and opportunity to finance themselves in the ways that make sense for them, their business model and what they're trying to achieve. In my mind, these markets are huge and there's a lot of opportunity. And so I don't worry about diminishing future returns. It will require the asset manager to make sure they stick to their discipline and their time tested process. And sometimes you'll get asset managers, as they grow their businesses, they ease their underwriting standards or they ease their expected return profiles. That, by the way, could happen to anybody. So the importance of it is to have a manager that you trust that you know is going to deliver on their value proposition. And if it's in private equity, it's value creation. If it's in credit, it's maintaining a very high level of underwriting standards. But we have a long way to go before we're all of a sudden sitting here to say, hey, we can't deliver on our expected returns that we're engaging with with our investors.
- [45:04]
Ted Seides
From the seat you're sitting in, with all of this activity happening and you see it accelerating and fund flows, what could go wrong?
- [45:12]
Eric Moguloff
I think the biggest thing that could go wrong is that these products are not sold appropriately. We saw a little bit of that in the past. But I think the biggest risk here is that advisors don't spend the time to fully understand the liquidity profile, the risk profile of these investments, so that in some type of more challenging market environment, investors expect liquidity when they shouldn't. Having said that, I do think that we as an industry have come a long way in educating investors on how these vehicles work. But nonetheless, it's really important for us to all make sure we're constantly reminding the intermediaries, advisors and the advisors are engaging proactively with their individual investors to fully understand the liquidity profile of these vehicles.
- [46:01]
Ted Seides
As a public company, you often make projections. I'm curious publicly what you've said about the growth that you see coming for KKR in this channel.
- [46:12]
Eric Moguloff
Sure. I think our co CEO Scott Nuttall was on the record saying that over time we would envision that 30 to 50% of our capital that we're raising is coming from the wealth channels. It's an exciting part of the market and it's one where the demand for what we deliver is only going up. And so I just see a lot of opportunity for us to help our clients.
- [46:31]
Ted Seides
All right, Eric, a couple last questions here. What's your favorite hobby or activity outside of work and family?
- [46:37]
Eric Moguloff
I grew up playing chess. I love playing. I wish I were better, but it is an amazing game. And then another hobby I have is I love to run. It's great for the mind, it's great for the body. I do it with my kids. Although it's getting a little Bit harder for me to keep up with them, but both of those things I love to do.
- [46:53]
Ted Seides
What was your first paid job and what did you learn from it?
- [46:56]
Eric Moguloff
Growing up as a kid, I was really into computer science and I started a little tiny company, basically setting up individual personal computers for individuals and teaching them how to use it. That was my first real client experience, and it was actually really fun. I learned a lot about how to engage with clients.
- [47:14]
Ted Seides
What did you learn from?
- [47:15]
Eric Moguloff
I learned that you really need to meet your client where they're at. There were some clients I worked with. I'll never forget one of them, Irving Best. And he was probably in his late 60s and he really wanted to learn how to use the personal computer. His knowledge base was pretty much zero. And so patience, understanding, that was a really good lesson for me.
- [47:37]
Ted Seides
How's your life turned out differently from how you expected it to?
- [47:41]
Eric Moguloff
I grew up on Long Island. I never left the Eastern Seaboard until I was, I think, a junior in college. And if you had told me, hey, Eric, you're going to travel around the world, you're going to live in Asia for a number of years, I would say, no way. But that is definitely one thing that I would not have expected, but I'm grateful for. I mean, my life has totally changed. Given the experiences that I and my family have had outside the US What's.
- [48:07]
Ted Seides
A mystery that you wonder about?
- [48:09]
Eric Moguloff
My mom never allowed pets in the house growing up, but during COVID the Mogulof family broke down and we got a Covid puppy. And he has become one of the most important members of the Mogulof family. And I will tell you, I would love to know what that guy is thinking about how he's feeling, and importantly, how in the world does he know to come and hang out with me at just the moment that I need him?
- [48:31]
Ted Seides
All right, Eric, last one. If the next five years are a chapter in your life, what's that chapter about?
- [48:37]
Eric Moguloff
I'll give you personal and professional. On the personal side, I've got three kids and the next five years is about really launching them. I've got a freshman in college who will be entering the workforce. I've got a junior in high school that's going to head off to college, and even my seventh grader will be in that five year window out of the house. So my wife and I are really focused on advising them in their next chapters of their own lives. Professionally, I'm really focused on developing talent. I am so fortunate to be here at a company where we have so many amazing professionals. And so one of my most important goals over the next five years is to really help them grow in their roles and achieve the greatest impact. To support our clients and support the firm. I hope this is a chapter where our alternatives business becomes even more accessible and my mom can invest.
- [49:25]
Ted Seides
Eric, thanks so much for taking the time.
- [49:27]
Eric Moguloff
Ted, thank you very much for the opportunity.
- [49:31]
Ted Seides
Thanks for listening to the show. To learn more, hop on our website@capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast, transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.