B (36:57)
Absolutely. And it's funny to think about this evolution being so recent. To your point, there's a lot of discussion and we've been doing this for decades and it reminds me of the long only space as well. You had a lot of long only asset managers that would come into your office and say we've been managing institutional money for 20, 30 years and they're brand new to wealth. So I think there's some parallels that you can certainly learn on the private market side as well. So as John mentioned, I'm going to walk through a couple of things. One, I just want to introduce a couple of different models to approaching private wealth distribution and the business model. And then I'm going to spend most of the time walking through what I've crudely created are the stages of this evolution. So let's start with the models first. There's a lot of different ways you can think about this, John and there's a few different models that have emerged as the industry has matured a little bit more. I will broadly put them into three groups, fully knowing that there's exceptions and lines that are blurred. But I think it's helpful to put some context around the process that I'll walk through. So three categories being one, the extenders. These are typically single asset class firms that really specialize in one asset class and they want to build out their investment capabilities for the private wealth space. You mentioned a few of them, but a couple others might include Starwood Pines on the real estate side. And you mentioned Cliffwater started out as very much a private credit oriented job. Now they've expanded beyond that over time. But single asset class moving into wealth. Second category are the buyers. So these are the organizations that acquire their capabilities through acquisition or partnership. And these are typically your traditional asset managers that take the approach. So this is the blackrock's you mentioned some of those examples of acquisitions this year, Vanguard, Franklin, Templeton. But others like AMG that have a multi manager approach that they're acquiring as part of their business model. More recently, Capital Group may be most known for traditional long only stocks and bonds with their KKR partnership that they announced a couple months ago. But this is where a lot of the traditional players play and then the builders. This is where we're going to focus most of our time walking through that. These are the multi product gps that have a heavy institutional presence and are now trying to move into wealth. I think all three of these have very similar milestones to hit. And again I'm going to focus on third. But you can see some parallels as you look at some of those other categories. And we talked about the buyers in a previous episode on the multi strat side, so I won't belabor that point. And again, this is a product conversation versus a distribution conversation. The buyers are really focused on the product side. They already have distribution. They've got their wealth management wholesalers and staff that are focused on this. They just need the product capabilities. Whereas the builders, the gps that we'll talk about, have the product already. It's more about the business model around wealth. I also want to say that up front that doing this well requires a large investment with a multi year time horizon. So at the end of the day this is almost an entirely new business within the organization, within the larger organization and therefore has a really steep J curve, which of course gps are used to. But it doesn't happen overnight. It's also an evolution as you'll See, these organizations tend to start very small, but have a long term plan from a product perspective, from a staffing perspective, and so on. There's also four main things that these organizations really need to think about as they start to scale up. Product back office capabilities, sales and culture. So I'm going to walk through the stages, but you'll see how each of those four components play throughout and then I'll come back to it here at the end. So without further ado, these are the three stages. Again, crudely named, but I think helpful in explaining that evolution stage number one is the bootstrapping stage, stage number two is the scaling stage, and then the stage number three is the persistence stage. So on the first stage, this is where it all begins. Organizationally, there is a desire to enter the wealth channel and it usually starts with trying to make and take an existing investment capability and offer it to wealth. This may sound easy, but spoiler alert, it's not so simple. The reason why I've dubbed it the bootstrapping phase is because you're asking part of the organization to really split off, gain some momentum and then move into the next phase. So typically you don't have dedicated resources or staff to accomplish this. Typically this starts with identifying a senior sales professional and tasking them with figuring it out. The question is, how do you sell this one product into this new market? There's two separate but related decision trees that need to happen and where a lot of organizations tend to start. One is product fit and then the second is on vehicle selection. So product fit is looking at the existing investment capabilities and thinking whether it makes sense for the clientele that you're going after. You can lean on the capabilities and augment the product. So for example, you may have the best value add or opportunistic real estate fund that institutions love and it works really well. You've got great performance. But the wealth channel today is really focused on income. So how do you augment the product that you're offering to be more core, maybe more stable, and speak to that channel? Private credit is the exact same thing. You might have mezzanine or distress, maybe a little bit more octane in your strategy. But again, income is where the trends are really focused. So this is why you saw direct lending take off over the 2010s. But private credit is much broader than that. So it takes a little bit of market research and of course a little bit of right place and right time. On the vehicle side, the question is what is the most appropriate fun vehicle to select and this is often very underestimated. We tend to talk a lot about advisor and client experience and this was something we talked about in the democratization episode. But what happens on the other side? Organizations actually have to think through this as well. And it comes down to three main things. One is operations. So what's your capacity as an advisor? Your client may hate signing a sub doc, but what if you have to sign a thousand? And that's typically what happens at the organizational level. So getting your operations right to handle those inbound contracts. Second is legal. You might need to do some registrations. There might be implications when you come to registering some of these products. So having a very strong legal culture is important. And then third is client service. Are you actually set up to handle some ongoing service to early investors? And this is important, especially if you don't have brand recognition early on in the game. So from a distribution perspective, this is where you begin to take on some early investors in the wealth channel. You might typically see this happen at the family office level, maybe at the RIA level here in the US but these are people that are willing to take a chance, may not need to rely on an institutional track record, and certainly don't need to rely on a brand. So this is early bootstrapping stage. You're putting a lot of things together and you don't have the resources necessarily to do so. So let's move on to stage two, because this is where some of these things start to bleed in and become even more important. So stage two, the scaling stage, if you will, is keeping the thread on distribution. So let's focus on distribution. As part of stage two, let's assume that you've gained some traction and are ready to begin scaling up. The next question that these organizations really ask themselves is where they go first. So again, we'll use the US as an example, but I think it is relevant in a global context. In the US there's a couple of different options to choose from. You can go to the large wirehouses, the banks as kind of a first category, the registered investment advisors as a second category, or the IBDs, the independent broker dealers. And typically most organizations go in that order. And again, you can learn a lot from the traditional asset management business here to see why. Typically, wirehouses are early adopters. They commit capital faster and real capital. Just given their size, you're typically relying on, well resourced home offices that have due diligence capabilities and resources to go through that extensive due diligence process. And they may be willing to make commitments Based on your historical track record at an institutional level, RAAs are typically slower to adopt, especially if you don't have a track record. And RAAs are very much focused on what other RAAs are doing. So if you don't have other RAs alongside you, they tend to be slower to adopt. But once they do, they tend to be much more sticky money. You also have a significant amount of dispersion in terms of alt adoption and size within the RIA space. You've got large aggregators that are hundreds of billion in US dollars assets under management and then you've got mom and pop shops all around. So there's thousands of RIAs. So really coming up with a strategy of who you attack first is important. And then the ibds, the independent broker dealers, they tend to serve more mass affluent clients relative to the other two. And they're newest to the alt space. Again, going back to what we were talking about before, mass affluent is right around 0% on average. So this is a much longer term strategy to adopting alternatives. They're very new to this space. Additionally, IBDs have very little operational infrastructure to support this. So you can begin to see the order of operations of starting with the wires, getting some traction, getting some aum, getting to the RA space where the money tends to stay longer, it's stickier. And then IBD's, once you've built some scale is where the third leg of the stool. Now this phase is very expensive. It's expensive endeavor. As you try to scale up, you have to hire a lot of distribution staff to sell into your channels and that requires a lot of fixed investment. At the same time, as you're thinking about your distribution strategy, you also have to begin thinking about future products. Again, going from a single product organization, maybe taking that one that you do and making it available to wealth. Well, what's next? What is the next product that you're offering? As you build this business again, you're effectively building out a platform if you want to go multi product and make it a viable business line. As John mentioned, we saw this pioneered by Blackstone in the mid 2010s as B REIT was coming to market, they were already thinking about bcred and now we have BXP more recently. So even as you begin to build momentum on one product, you're creating and starting the conversation on future products. And as you can imagine, building out product and creating a distribution strategy requires a lot of staff. So beyond wholesalers and distribution, again that operations, the legal and client service are increasingly more important, especially as you begin to bring on new investors. So let's move on to stage three, which is the you've made it stage, the persistence stage of the life cycle. So I'll skip ahead and just talk about what a successful business unit looks like. And we'll certainly get into this and the conversation later on. But the sequencing might differ depending on how you roll out product, how you think about hiring and so on. But at the end of this phase, you should be filling out the rest of your team with people that might include dedicated chief operating officer, private wealth, a robust distribution channel, and that might be bi channel. You have people that specialize in the wirehouses versus the RAAs. Again, very different types of advisors and professionals, a robust legal and operations team ahead of marketing that is focused on private wealth. And then of course, strong client service. I want to focus on those last two because we've not really talked about them so much so far. We've talked a little bit about client service on the early stages, but client service is incredibly important, especially post commitment and post investment. To provide a world class product is one thing, but if you don't have the service to back it, it usually reflects very poorly on your brand. The other thing people don't talk about here is redemptions. So it's all good when you're getting commitments and investments, but we've seen a lot of evergreen vehicles hit redemptions over the past couple of years as investors panic, clients panic, advisors panic. So do you have the ops, the client service people to be on the phones and work with them when they ultimately need their capital back? And then of course, marketing. So marketing is very different. As we've discussed, you're promoting an entirely new channel, new product, maybe a new vehicle. So how you reach these people, present yourselves and talk about yourselves, is going to look very different from the institutional model. So the question I had as I was researching this and talking with industry peers and reading articles is what's most important. There's a lot that I just walked through and if you listen to this on first glance, you might think, oh my gosh, this is so overwhelming. There's so many moving parts, so many things to think through. What's most important plot twist. Everything is important here, unfortunately. Now how you sequence things might differ and how you prioritize things at certain stages might be different. But rather than just saying everything's important, I'd rather talk through those four things that these firms need to think through. Think less about what is most important instead of what should come first. And how are they sequenced. So I mentioned those four things, product, sales, back office and culture. So I want to walk through each of those and really compare institutional versus retail because again, very different types of business models. So on the product side, this one probably doesn't need a ton of belaboring, but I think it's important to restate how important the product fit and vehicle influences the decisions. As a family, office or an institution, investors may be in a position to invest in again, esoteric or niche strategies. But as you move down market in terms of client size and sophistication, investors tend to be very stylebox driven and seek simplicity. I think that's why you've seen so much activity in places like real estate and private credit. It's simple to explain, provides income and it's a concept that's familiar to clients. And of course, within this objectives and constraints are a lot different. That's what drives a lot of your vehicle selection and potential changes in your investment strategy. Again, the investment capabilities drive the value proposition, but that doesn't mean the strategy is exactly the same. Nor does it mean that the wealth channel will gravitate towards it if it doesn't fit into those constraints. So that's product. On the sales side, the conversation is much different than what you see institutionally. You have to remember that this is an intermediary sales process. You're not just trying to convince the investment professional, the Kaya charter holder. You also have to convince the advisor. And the advisor needs to convince the client. An old wholesaler, just as an aside, once told me that institutions spend a lot more time on the strategy itself versus the asset class and that wealth does the exact opposite. So in other words, 90% of your conversations, especially on the early side of the conversation, are providing education around the asset class, how the market works and its place in the portfolio. Then the strategy conversation comes, but it's a much smaller part of that conversation. And that's for two reasons. One, it's new, requires a lot more context, and second, most clients simply don't care about the product story like we might as investment professionals. Then there's the post sale relationship. So once you win the business, you're moving from educating the investment person to the advisor and working through implementation. So it's much more hands on. And then finally, I mentioned marketing and the need for differentiated marketing. There's a lot of time creating content and collateral both to educate the advisor and to help the advisor educate the client. So advisors use asset manager marketing collateral. I know I did in my previous role. So GPs need to put themselves in a good position to create things that advisors will ultimately use on the back office side. So again, legal ops and client service, not always talked about, but it's important. Strong legal and operations support the entire business. And there's always a tension between which to come first, distribution or operations. But often they should be scaled together. If you get two offsides on one side or the other, you don't have the infrastructure or you don't have the growth and you can be in trouble. And then of course, client service, very important. We talked about this from a redemptions perspective, but also just ongoing conversations with your current investors and prospective investors. And then finally I'll close with culture. One is just the prioritization within the organization. So John mentioned some of the different models that we've seen where some sit at the executive table, others don't. So how does the organization actually view this distribution business? Because ultimately it is a business at the end of the day. So are you fighting for resources or is this part of the strategic plan within the asset management? Second is investment. So this is a long road with a lot of upfront cost and it requires a lot of patience. So the J curve is steep, spends are bigger, timelines are longer and different, and the demands from the investors are also very different. So that's a lot to walk through, but I think it should give you a sense of not only what people and organizations focus on, but the stages of growth that you typically see from a wealth distribution perspective. So John, a lot to digest, but curious if you have any initial thoughts.
