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Capital Decanted
S2 | Episode 2: Multi-Strategy Investment Firms—the Future Convergence of Public and Private Offerings with Jenny Johnson and Jean Hynes
01:41:20
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- [00:00]
John Bowman
Foreign welcome to Capital Decanted. In this show, we say goodbye to tired market takes and superficial sound bites. Because here, instead of skimming the surface, we dive into the heart of capital allocation, striking the perfect balance and exposing the subtleties that reveal the topic's true essence. Prepare to have your perspectives challenged as we open up the issues that resonate with the hearts and minds of those shaping capital allocation. We've enlisted the wisdom of visionary leaders in the industry, and just like a meticulously crafted wine, we'll allow their insights to breathe, unfurling their hidden depths and transforming our understanding. This is season two, Episode two of Capital Building Multi Strategy Investment Management Firms. I'm John Bowman. And I'm Kristy Townsend and we are your hosts. First, as always, a huge thank you to our returning title sponsor, Alternatives by Franklin Templeton. And again, we're so grateful they're back to partner with us with over 40 years of alt investing and over 260 billion of AUM. They're specialist investment managers of expertise across six different asset classes, real estate, private equity, private credit, hedge strategies, venture capital and digital assets. And of course, all of them operate with the client first mentality that has always defined Franklin Templeton to help prioritize investment outcomes. So thanks so much. Alternatives by Franklin Templeton. I should mention that it is going to be heavy on Franklin Templeton discussion today. Jenny Johnson will be our guest. We'll get to that in a moment. And we'll be spending some time at halftime with them as well today, so plenty more to talk about in their new war chest of alternatives. Well, today is the first of what you might call two companion episodes this season that we've thought about and crafted where we're going to be examining the rapid evolution of the modern asset management business today. First, we'll attempt to prescribe the composition and the offerings that tomorrow's great investment managers will offer. The sequel the Other side of the coin on the progression and sophistication and the tool set of tomorrow's asset owner will come later this season. So stay tuned for that. So if you were to ask me, Christie, how I would describe today's asset management business, I would say something like it's a race to build out a full suite Turkish bazaar, a stable of thoroughbredge, you might say, of investment strategies. Increasingly, this consists of a spectrum, of course, of long and short public equity and fixed income strategies that, of course, has been the playbook for a long time. But now that also includes offerings across the continuum of private capital, equity, credit secondaries, real estate infrastructure, et cetera. And and this sprint is a mad scramble. I cannot overemphasize how urgent this feels for those to buy or build or partner in order to offer this full array of solutions. The current news flow it seems like I can't keep up. It's admittedly difficult to just follow because it's the equivalent of releasing a bunch of toddlers in the backyard on Easter morning. There might be a little bit of strategy, but it is mostly mayhem and chaos. And that's what I feel like the news feeds have been over the last few years. Now, I want to be clear. M and A mergers and acquisitions are no stranger to financial services or asset management. But what makes this different and the reason we wanted to dedicate an episode here is that what we would call crossover deals from traditional managers with alternative managers have arisen and are picking up steam. There are, you might say, barriers being crossed, product lines being fused, unlikely roommates suddenly living together that are unprecedented, that used to be sacred and distinct. Because for several decades, certainly my whole career, traditional, long only mutual fund shops and institutional firms, they stayed in their lane and idiosyncratic, complex private capital partnerships, they lived in a different world. There was peaceful coexistence and mutual exclusivity, and they did not coexist at the same cocktail parties, let's say. But over the last 10 years, through an explosion of activity and deal flow that we'll pick apart a bit today, those lines have really been obliterated. And in fact, it seems that no one is content any longer to live in their original lane. I just got back from a three week trip in Asia, and the respect for lanes looks less like compliant downtown Singapore these days and more like the anarchy of the moped traffic I recently experienced two weeks ago in Ho Chi Minh. The old rulebooks have faded away, there are folks weaving in and out, and it's hard to cross the street or to know where you belong. Identities and categories and labels have all been thrown out. But why? Why is this happening? Why is the real question. And what does this new age of asset management supermarket, you might say, portend for the industry and for clients? And I'm really excited to pick this apart with Christie, with all of you, and of course with our guests. So here's where that journey will take us today. I want to cover a couple topics in my segment. First, first, a bit of a short history of the development of those distinct lanes that I've described and how a flurry of new activity has really evaporated them and second, some suggestions as to why CEOs are pursuing this strategy with abandon. Really, to get to the more important question, not what's happening, but why is it happening? And then Christie is going to opine on how these changes have impacted investors, including highlighting, in her words, some of the surprising pros and disaggregating common rules of thumb that we as institutional investors have relied upon, have lived with, have assumed for perhaps too long. And she'll of course do that with the proper nuance that we always expect of Kristie. And finally, I'm so pumped and I've already teased this, but to invite our two guests into studio to help us address these topics from the Captain's Chair, these are two of the most respected CEOs in the business, two leaders I've actually personally known and appreciated for a long, long time, and two firms that have been at the center of this transformative phase. And that is, as I already mentioned, Jenny Johnson, CEO of Franklin Templeton and Gene Hines, CEO of Wellington Management. Christie, that's a goosebump level pair. And I just cannot wait to get them in studio. But we've got a little bit of work, a little bit of foundation setting before we invite them in. So Christie, I want to turn to you first. As you think about this flurry, this new evolution, this new chapter of M and A and combinations and partnerships, was there a specific dealer partnership in the last five years or news story that was the inflection point or the revelation that sparked you to realize things were different, that these old ways of categorizing firms are going away for good.
- [06:52]
Kristy Townsend
So the ones that come to mind are weird, but they're somewhat adjacent. But I remember being a brand new baby analyst and being shocked that a certain hedge fund out there was invested in venture capital. And I was like, that can't happen. How does that work? And realizing that just because it's in a bucket doesn't mean that that's how it necessarily functions and that there is a lot of cross pollination that can happen in a single fund, much less within an organization. And I think that my views on this really started to change. My personal beliefs in how this fit into the broader industry started to change. So a few years back when a couple of big pension funds announced that they were basically looking to some large asset management firms as strategic partners, both because of a need, but also just because of the breadth and the depth of what those firms would offer. So I started to take a look at it and think, okay, well maybe this view of Independent firms, single fund, sole proprietorships aren't always the best way to go. And maybe there's this demand for a larger parent organization and umbrella that provides a lot of different offerings. What about you?
- [07:54]
John Bowman
I think mine was probably, and we're going to get to some examples with this, so it would not be the most poignant or the largest or even frankly a acquisition per se, but it was probably Hamilton Lanes deal with Russell because it was just two very opposite ethos and cultures coming together where we're going to take Hamilton Lane private equity capability and push it, distribute it through Russell's client service machinery. And that to me was an epiphany. Wow, here we go. This is the first of many dominoes to fall and I think we've seen that come to fruition. So it was not the biggest or the most prominent. We'll talk about some that have significantly outpaced and outsized that. But it was one that I think changed me. So as we think about history, I'm not going to spend a lot of time going back too far here because some of this is a brief recap from our private credit episode last season, by the way. That was our number one performing episode. That was episode 11. So I'd encourage you to listen to that because there is a bit more context on just the couple minutes I'm going to review here. But after the collapse of the junk bond and levered finance age from the investment banks in the 70s and 80s, the diaspora of talent, which is what I called it back in episode 11, they eventually formed the household mega alternatives partnerships. They all scattered to ends of the earth and started up their own partnerships. So for example, ones that we would know. Well, 1976, Kohlberg, Kravis and Roberts came out of Bear Stearns and formed kkr, obviously their initials to focus on junk bonds and eventually levered buyouts. 1985, Steve Schwarzman and Pete Peterson famously left Lehman Brothers to set up an M and a boutique that was their original intent, called Blackstone, hoping to resuscitate more of the merchant bank model of proprietary capital investing. By the way, the name Blackstone is a combination of the German and Greek renderings of their last names. I never knew that. Fun fact for you today 87 just as we continue to progress five partners perhaps with the most diversified backgrounds of our examples here. One was a lawyer man named David Rubenstein and the rest corporate finance execs from places like Marriott and MCI Communications form Carlyle again pitched as a boutique investment bank and that was Named after the Washington D.C. hotel where they hatched their plan. And then finally, just to round out the big four, as I like to call them, 1990, Leon Black, Josh Harris, Mark Rowan, straight out of, directly out of Michael Milken's coaching tree from Drexel Burnham Lambert formed Apollo Advisors, now of course, Apollo Global Management, with the intent to invest in distressed loans. By the way, I assume this was named after the Greek God, but that was the one. I couldn't find the origin story of the name, so I could keep going on well beyond today's big four. But I really think that's unnecessary as I'm simply trying to make the point represented prominently in these majors that the original intent of these firms, and I hope you heard this in the pattern of the way I described it, was still an extension of their previous work. It was language and phrases like distressed debt financing, structured credit levered buyouts, M and A advisory. These were dealmakers, finance kings, transaction gurus. This was still the age of the barbarians at the gate. It was just a fresh chapter of these cowboy investment bankers. 90% of the capital stack was still subordinated mezzanine like debt in these cases. So the tools that we know today when we think about growth and buyout private equity, like equity itself, significant portions of equity control inserting new management, the idea of operational improvement, these were all very foreign concepts to this phase. And so as such, while they were planting the seeds for the future of the industry, probably unbeknownst to even them, no one thought of these financing instruments or these organizations as asset classes or investment management firms serving in a fiduciary capacity to look after asset owner dollars quite yet. And as a more balanced buyout industry emerged and we approached the global financial crisis, private capital had never been more influential. They were flexing their muscles with bigger and bigger deals, hiring former politicians, George H.W. bush, former Prime Minister John Major, for example, to join the ranks, this idea of celebrity adv advisors started to become in vogue. And with that influence, the old narrative and the prominence of them resuscitated this junk bond age narrative. So David Carey and John Morris in their excellent book on Steve Schwarzman and Blackstone that is called King of Capital, which I would really recommend. It's a great read. They put it this way, about this time in history, quote, the industry had come of age in the heyday of corporate raiders, saber rattling financiers who launched hostile takeover bids and worked to overthrow management. Buyout firms claimed on the other hand to be the more genteel, preferring to strike deals with management before buying the company, but in many cases they swooped in to buy companies that were under siege and once in control, they often laid off workers and broke companies into pieces just like the raiders. Thus they too came to be seen as asset strippers and locusts who attacked companies and feeded on their carcasses, selling off the good assets for a quick profit and leaving just the bones weighed down by a pile of debt. End quote. I love the drama and the poetry there. So of course this caricature was not true and it couldn't be given the sustainability of these brands and these businesses and the growth that they've seen since. A growing body of academic research has also debunked this what I would call intellectual lazy label of strip and flip. But I stress all this because this skewering in the public square continued. It had not abated yet. They had not grown up, as I said, into mature asset management businesses, even as they really exploded shortly before the gfc. So I'm driving home again this point that this separation stigma between private and public largely existed all the way up into the global financial crisis. But this historical height of both hubris and mystery and rancor would be permanently buried in the rubble of the gfc. Almost a third of the existing firms heading into the GFC never raised another fund after that. To underscore my earlier point on this being an extension of the investment banks, the GFC was the death knell for many investment banks to exit the business permanently. Lehman, Baer and Merrill's proprietary PE capabilities would never come back. And many other LBO sponsors, whether they sat within investment banks or they were independent, went bankrupt, they were liquidated or they worked out some of their portfolio companies deal by deal. Even these big four private powerhouses that we really think of as the major players today, they were dancing on a nice point under the sword of democracy. Just to mix metaphors for drama there, this was the epic reset button moment even for those that had established themselves as the major players. And it's this point post GFC that really was the inflection phase page turner where our story really picks up steam and rising from the ashes and bloodbath. Post GFC would be the golden age of private capital and those that survived would begin acquiring other firms, expanding their array of products, and most importantly, positioning their strategies as diversifiers for investors building long term portfolios. As a new bull market began roaring forward, the narrative finally begun to change again. I'm going to quote this King of Capital book quote these firms more explicitly rebranded as private equity in an attempt to cast themselves as corporate craftsmen instead of buyout artists. End quote. And I would also add that while Blackstone was the first to go public in 2007, obviously before the GFC, a parade of these players joined the IPO party shortly after the crash, catapulting I think in the back of people's minds these brands into the Main street vernacular, so they weren't so foreign and scary and other. They were now part of the asset management business. And I want to stress here that certainly institutional LBO funds existed at these firms and others pre gfc, but they were a fraction of the size that they are today. And I would say that they largely consisted of the more creative endowments and the perpetual sovereign wealth funds. The asset allocation commitments at most asset owners, at least by today's standards, was still relatively low in private equity and venture capital, private real estate infrastructure. And of course, as we talked about in that previous episode, dedicated private credit was really not even a thing yet it was in its infancy. But these vintages began producing returns that got everyone's attention as we entered the 2000 teens. And Swensen's endowment model begun to be held up as the epitome of risk return optimization, which was especially enticing to underfunded, heavily 60, 40 anchored public pensions. So what you saw was this move towards policy portfolios shifting dramatically from public to private. And these once high octane highly levered financing factories had reshaped themselves into multi strategy asset managers. So as we entered the mid teens and approached the COVID pandemic, the M and A gun went off. So according to PitchBook data, deal value and the number of deals for alternative asset managers. So acquisitions of alternative asset managers were Fairly steady between 2014 and 2020. On my quick math just looking at this chart again we'll put this in the show notes. Deal value averaged about 8 billion per year consisting of approximately 75 deals about per year. And frankly if you remove the previous high all time deal value record from 2015 which is this huge outlier, in this period which was 19 billion, the average drops to about 6.5 billion. So again you have this big outlier that pulls it up to eight. You pulled that out at six and a half. But let's just take the eight for purposes of this discussion. Since 2021 however, those numbers have reset markedly. Deal value average has doubled to 16 billion per year and that average only includes 2024 numbers. Through July 2024 has already outstripped the aforementioned 2015 previous peak and is at 21 billion and still rising. Deal flow number of deals through July stands at 89, which is on track to easily eclipse the previous record on that metric, which was 2021 of 114 deals. So what are some of these deals? Some larger examples over this full period include Aries, who's been very active purchase of Landmark and of GLP Capital Partners, TPG's acquisition of Angelo Gordon Brookfield nabbing DWS, General Atlantic buying Actis and EQT purchasing bearing private equity but allocator CIOs and private equity shops were not the only ones salivating over the higher returns offered by private capital and the coming of age. Reputationally conventional asset managers. These are the fund titans and the institutional mainstays of the 90s and the 2000s also were paying attention especially to those higher revenues and the retreat of the capital markets ballast from public to private. And understandably they didn't want to be left behind either. So In December of 2021, TRO Price acquired Oak Hill Advisors, a 60 billion alt credit manager. Amundi, the largest European asset manager, picked up Alpha Associates, a multi manager private capital firm. Franklin Templeton, under our guest Jenny Johnson today has made a string of acquisitions in the last five years, spending over 8 billion themselves largely to build, as I said earlier, a war chest of over a quarter of a trillion dollars of Alts Aum. As we say in every introduction of this podcast. You've got real estate with Clarion, hedge funds with K2, private equity secondaries with Lexington and private credit with Benefit Street Partners. And I should mention in that period they've also organically launched digital asset and venture capital capabilities. Our other star of the show today, Wellington Management, also has quietly begun building alternative capabilities. Shockingly, they launched a hedge fund strategy as early as 1994 and in 2014 they begun building and fundraising a homegrown private capital capability across venture and growth equity that is approaching 10 billion itself. And of course the granddaddy of them all. The big reason that that block, as I mentioned earlier, is so high in 2024 BlackRock buying 170 billion global infrastructure partners. Perhaps a sign that Larry Fink regettered ever separating from Blackstone in the first place. And obviously I don't mean that he's done just fine by himself and in the public markets. But it's interesting how time tends to take us full circle. Finally has been this rapid popularity of GP Stakes that has raised another, call it 100 billion US to slosh around towards high performing GPS. You can learn all about the GP Stakes business also last year in episode 10, but even stopping short of full acquisitions. And this was my answer to Christie throwing my question back to me. Or even permanent capital stakes. We've seen an epic harvest of joint ventures, distribution, partnerships, strategic investments between public and private asset management firms, the aforementioned Russell investments in Hamilton Lane Capital Group and kkr, BNY Mellon and cifc, Nico Asset Management and tku, TCW and PNC to offer private credit solutions. And even State street in recent weeks has announced new ETFs in partnership with Apollo and Galaxy Digital assets. So those lines, those lanes that we have discussed have truly melted away and the blur keeps getting stronger. In a recent viral interview and Christy, I want to get your view on this Mark Rowan, CEO of Apollo, talked about what he called a great convergence, the grain of public and private markets that is leading to investors not thinking or taking what he called a binary view any longer. And I'd strongly encourage you to listen to this whole thing. It's only about seven minutes or so, but his main point was that most of the excess return in the public markets are gone. Now we can debate whether he's talking his book a little bit there, but he goes on to say that it's just too competitive in the public markets anymore. And quite boldly, this was the headline of the interview. In my view, a year from now, he says, you won't be able to tell the difference between the issuers, the ratings, the sizes or the liquidity of the public and private markets. The illiquidity premium, he goes on to say, or the opposite of that. The liquidity discount will largely be gone and outsized returns will not depend on which lake you're fishing in per se. But it's going to depend whether private or public, on solid sourcing, due diligence, origination, underwriting, expertise and capability. That is where true alpha will come from. So as us 80s kids like to say, Christie, it is on like Donkey Kong. So with that historical briefing, what did you think of Mark Rowan's point? First of all, and then also I'd love to hear as we transition to the why? Why do you think all this is happening?
- [23:05]
Kristy Townsend
Certainly I have actually thought quite a bit about this quote, just because it is such a bold thing to say. And I will say, as I've said before in previous seasons and in previous episodes, I do believe that an increase or capital inflows tend to basically create price discovery and a more homogenous outlook for different investment markets. And I think that also reduces the key component of alpha generation, particularly for private markets. So I do agree with him that there will be some convergence in public and private, just by virtue of the fact that capital is the sunshine and dark spots. I think somebody said that once. I will say, I think that fixed income markets, where Apollo is largely focused or has been historically, are unique in this case because while issuance has grown over the past 10 to 15 years, given the rate environment over the bulk of that time period, liquidity has actually decreased. And a lot of that is due to this kind of massive decline in dealer inventory, as many of you who were in the industry at the time back in 2008, the top five independent dealers at that time kind of no longer exist in their former capacity. So Lehman failed, Bear Stearns and Merrill lynch were both acquired, I think, and Goldman and Morgan became banks in their own right. So I believe that all of those dealers, you know, all dealers are now subject to Fed stress test and enhanced capital and liquidity requirements. That makes it a lot more difficult for them to hold risk on their balance sheets and lever up the way a dealer might need to. And because of all of this, it can take anywhere now from one to seven days, I believe was the last kind of range given to sell an investment grade corporate bond, depending on its characteristics. So obviously corporate bond markets aren't as liquid as their wrapper products, whether it be ETFs or mutual funds might actually imply. I also agree with something that he says later on in the interview. There's like an 18 minute version where he talks about how public markets are both safe and risky and private markets can be both safe and risky too. There's no longer this public markets are safe and private markets are risky, particularly in credit, because that liquidity there is a bit more friction than the public credit moniker would suggest. The difference to me is still that private markets are going to take a lot more underwriting, they're going to take a degree more time and effort to get comfortable with. Which leads me to actually where I disagree. So he's in my long winded response to him. And that's to say that public and private credit are still very different. So while two assets may have the same rating and the same rate of return, one requires a company to take their cash flows and pay back a rate of return from those cash flows, and the other could be anything from a larger corporate issuance that's very similar to that or some super esoteric structured product, depending on who originated it and where it sits. So I Get the sense that in a liquidity crunch the former would still be more interesting to a wider range of potential buyers versus a holder of that credit being forced to accept some specific predetermined haircut to sell it back to either the originator or to the dealer. The best way to say it is that there's a huge difference between taking one to seven days to get liquidity and taking one to two years to figure out what was in the toxic mortgage backed security tranches back in 08. And I'm not saying that Apollo is ever going to throw that out there into the markets. It's just I do still think that there is an inherent difference between those two things. In terms of the why all of this is happening. I think a lot of his demand push, I do think that part there is an element of there is an embedded growth obligation in public companies in particular to grow for their shareholders. But I do think while that may be a piece of it, I don't think that these organizations are getting bigger just to get bigger. I think that there actually are benefits to it. I think that there's informational benefits like data benefits. I think that there is the ability to aggregate and share back office and reduce costs organization wide I think is a huge benefit. And again I think that one of the biggest things has been just the push from many on the LP side, whether it be pensions looking for a big strategic investor or individual investors looking for alternative access in their personal investments. I'd be curious to hear your take on that though.
- [26:49]
John Bowman
Well, I think your assessment of Mark's point is right. I think we all agree, look, convergence is happening very quickly and what we didn't mention we talked a bit in the prep room. He prefaced all of this with this idea that the old model that we've talked about at length on this show of three flavors of ice cream, effectively chocolate and vanilla and a little bit of strawberry, meaning equity debt and a little bit of alternatives. That is old thinking that no sophisticated CIO thinks like anymore. So this spread and spectrum and continuum approach that we at Kaya stress is definitely a more fiduciary sound way to construct portfolios, but also the nature of the evolving, I would say dialogue of the business. So I think directionally he's right. The specifics and how quickly we get there I think are a different question on the why. I've spent a lot of time thinking about this and we both did a lot of reading on the why. And I think and you mentioned a couple as pressure as a Public company to grow and data benefits. I think those are all interesting. There are plenty of rational motivations for this. But as I was thinking about how to best approach this for the episode, there's a danger in being exhaustive because that could just leave us with a laundry list diagnosis and shrugging her shoulders. Well, it must be one of these 12. Some of the temporal reasons, in addition to what you cited are succession planning and monetization opportunities. Is that first generation that I walked through, that diaspora as I called it, they are aging into retirement life. They are looking, at least a lot of them are looking for an out, as we talked about at length on the GP Stakes episode. And then of course there's the higher cost of capital the last few years, the fear of slowdown and public market structural returns, operational efficiencies. I think all of these are legitimate, truly. But honestly, cumulatively I think they still fall a bit short. So I'm going to suggest to you, and I want to test these with Gene and with Jenny, that there are three main reasons. Primary reasons, not the only reason, but primary reasons for this acceleration in the M and A race. I don't think they're mutually exclusive. There's likely some combinations of all of these lurking in the minds of the CEOs that are doing these deals. But here you go, reason number one. Strangely, to tell this story or make this point, I should say I want to take you back to April of 1998, speaking of capital sloshing around. So this is early stages, the dot com bubble, telecom hysteria and huge multiples on the public markets, multiples that corporations could parlay into very large stock deals. And no one threw their equity around like Sandy Weil, the mercurial mentor of Jamie Dimon and at the time the CEO of Travelers Group when he orchestrated a merger with Citicorp to create Citigroup, at the time the largest financial services firm in the world. And the story at the time was a perfect marriage between manufacturing and distribution. Wall street and the media called it the first financial supermarket. And Weil imagined a one stop shop for the US consumer, whether you were buying a house, saving for retirement, insuring their car, issuing credit cards, and then they could cross sell brokerage and insurance to the banking customers and vice versa. They could offer everything. He famously had this great quote that they have built, quote, one hell of a candy store. So likewise, I use this metaphor or this analogy. Is there an opportunity to recreate this candy store for the lp? And you kind of alluded to this, Kristi. It could be as simple as convenience, meaning they're under one roof. Or it could get more creative like packaging multi asset class solutions, consolidating due diligence administration, dare I say fees. Could there be an equivalent of the old unified managed account in the mutual fund space for diversified private capital asset classes, a preset package of diversified exposure to private capital? I think this is really interesting. Now I will say that I don't think the average current LP is ready for this as far as their mindset, particularly the pure endowment models that pride themselves on external manager selection. It is a hyper best of breed mentality. But I do think there could be some opportunities in the future for those that don't have significant internal investment expertise, those with fee sensitivity, particularly political fee sensitivity, and maybe for the ocio sleep that we talked about last season as well. So that's number one. Sandy Weil's Financial Supermarket 2.0. Reason number two is a bit more simple. I've quoted these numbers publicly quite a bit, but just to review, kaya's numbers have 150 trillion US of global investable assets with about 15% of that or 22 trillion in alternatives currently. But while only 15% of total assets are allocated this direction, a Boston Consulting group study in 2023 put revenues coming from alternatives at 50%. So let me say that again, 15% of the asset pie is allocated to alts, but 55 of the revenues comes from alts. So naturally this is simply a revenue land grab. If you believe that this trend from public and conventional to private and complex is going to continue as frankly most do, whether you're in a buyer's seat or not, then you want to position yourself to take more share of that wallet. This is a little bit different than a one stop shop for a single LP or a client, but it's rather just broadening your competitiveness with more offerings and as such more revenue. And third, and lastly which I'm going to channel Sandy Weil again, this is about a powerhouse mashup of more diversified manufacturing with robust distribution and this is particularly acute for the traditional fund houses as retail customers and high net worth investors have suddenly an insatiable desire for alternatives. We've written a lot about this. We launched an entire program called UNIFI to take advantage of this so called democratization of alts. Our historical household names of Franklin, Templeton, T. Rowe Price, Vanguard, BlackRock, Russell are getting tremendous pressure to package these asset classes into semi liquid and registered funds for the masses or they risk massive outflows of their core customer base that have been sticky for literally decades. So remember that 15% allocation to alts I quoted a minute ago? This is really interesting. And as we learned in our stats classes, this is the problem with averages, the mathematical methodology of averages, because that 15% consists roughly of 30% or more allocations in most institutions and then low single digits on the high net worth investor space. And the individual asset owner makes up about 50% of that 150 trillion. So you've got 2 to 5% of one half and 30 to 40% of the other half and it just comes out clumsy at 15%. So to follow this math, if the average high net worth investor simply increases their allocation from the current 2 to 5%, let's say of their portfolio to something still fairly modest from an institutional perspective, let's say 7 to 10% of their total portfolio, you're talking about a multitrillion dollar tsunami of capital flowing towards alts and a need of fit for purpose. And that is enticing. It's overwhelming and it requires a significant shift and rebuild of the business model. So which of these is it? As I said, my sense is that it depends on the specific vision of each CEO and board, maybe even each deal. But there's probably a bit of each of these ingredients to justify some of this activity. We're going to let Jenny and Gene tell me how right or wrong I am on that, but that is my take. So Christie, those are my two agenda items, my segment I'd love to hand off to you because I know you've got some ideas on what this really means for the client and the larger industry.
- [34:21]
Kristy Townsend
Thank you for that. And I think that this is an interesting topic because historically there's this idea that institutional investors in particular, as you mentioned, John, and active investors actually shouldn't seriously consider these more platform based asset management companies. I'll expand on the rationale of the reasoning historically behind that in a moment. But I will say on a personal level, I've always thought, or at least more recently thought, that these rules of thumb used to justify their decisions to invest in certain types of companies or certain types of funds and wave away the nuance that's basically embedded in the broader manager selection decision. So this issue has actually become increasingly interesting and difficult based on everything you just mentioned as well, John, just including, I will say the risk that your independent investment fund that you spend so much time and due diligence on is actually going to end up getting rolled up and acquired at some point, as has happened to many of us who have sat on the investment side, I started thinking about some of the reasons for hesitation when it comes to investing and more of a conglomerate or more of a parent investment firm, and why there is a desire or preference for partnering with these smaller independent firms. And I think I'll start off with the one that I hear constantly and that is size is the enemy of returns. And I will say first off, even outside of what I'm about to dive into, that size isn't actually always bad. If I remember correctly, the study that that was based off of was mostly for long short hedge funds and a few other smaller markets and opportunities. So there are instances, for example, I think there's a lot of credit and distressed opportunities where actually having a larger fund is a good thing. But setting that aside, I think that there's the assumption when people say size is the enemy of returns, that there's the assumption that if you get acquired by this financial parent company, that that parent company is always going to be a short term profit maximizing entity, which is not completely irrational, as you mentioned, John, but that that entity will then force the team to focus on asset gathering and AUM gathering and potentially take less of a focus on the actual investment side. And I hear that hilariously from LPs who also invest heavily in GP stakes, which I'm like, okay, well then you're doing that to other LPs. And so I laugh at the idea that it's bad in one instance and good in the other. But again, I can see instances where actually size is a huge benefit, again particularly in credit. And even I can make the case for some equity strategies. But from there I think another big one is that the company then will lack autonomy. It'll increase bureaucratic thinking stuff along that line. And I think it really depends on the firm leadership at the parent and the firm leadership, frankly at the child, it feels weird saying that, but at the child company and the degrees of freedom that are allowed within that partnership. So I will say that you could also see an instance where many of these funds that get acquired benefit from a higher degree of professionalization that actually frees them up to do some other things. So the third problem that I hear a lot too is this. It removes investment focus. So it's the idea that diversifying investment fund offerings is focused on stabilizing the income stream versus actually eating what you kill. But I would say that the caveat to that is in the eat what you kill fund, particularly if it's a single fund, in instances like October of 08 or March 2020. As I have seen firsthand, a fund manager who has a significant amount of their capital in a fund can react very differently when they see their personal assets down 40%. And that is the only thing that they have their future riding on. It makes it much more likely for them to close shop and reopen in the future. So on one hand, yes, technically it would remove focus. It could also create some stability that enables that manager to maybe take on more investment risks or to invest more in line with the actual strategy versus a capital protective strategy. Another one I've heard a lot is just the misaligned compensation. But to me that's less about the money itself and more about maintaining talent and reducing turnover. I think that there are definitely ways that you can align incentives at the parent and the child companies to ensure that you have low turnover, that you have this team, fidelity and a focus on people that I think is incredibly important. And I think the last one that I'll touch on, that I think Swenson even touches on when he expresses his displeasure of this supermarket aspect is just a whole bucket of what I like to call fiduciary problems. And that's who gets communicated to first in the event of a downturn. Which funds get the best deals if you're sourcing across multiple funds? And I think one that always sits with me that I have to think through is can you be a fiduciary if you also have shareholders? So I will point out that a lot of these concerns that have led institutional investors to historically just look for more independent firms or to prefer more independent firms. They're not crazy. Many of these things have been pitfalls in the past and will continue to be pitfalls into the future for some firms out there. But I will say that some firms is a key part of that sentence. I would recommend that investors don't actually completely write them off because, John, as you mentioned, I think that there are a lot of benefits. I think that independent single fund ownership have to be three things to be considered investable. They have to be a good PM slash general partner. So they have to be able to manage fund level capital and positioning. They have to be a good analyst. So they have to be able to underwrite and understand the nuances of the companies they're in. And frankly, they have to be a good operator, they have to be a good leader, they have to have business acumen, they have to be able to manage their financials. And that's really hard to find in one Individual, it's hard to find in a team and it's really hard to find those unique skill sets within a group. So I think a lot of people will be like, oh, we found this. But when you really look at it, you start to see some holes in the story almost you'll see where a team spins out of an organization but then struggles to source investments, for example, because that's what their parent has always done for them in the past. So you really have to be aware of that team structure. And I think that one thing that a larger asset management firm provides is regulatory help, operations help, back office help, fundraising help, and actually can free up the investment team to actually focus on what they do best, which is invest. So I think that that's probably one of the biggest benefits that I could see to selecting a fund within a broader organization. I also, as I mentioned to John to you a moment ago, I think that strategies can inform each other. I think that you can have a richer picture when you see what's going on in adjacent markets or on the public side versus the private side, depending on where you sit in the child or in the parent organization as the child. And I think that this is particularly relevant for firms that have been able to blur and blend public and private offerings. And last, I will say that one of the biggest benefits is just that it has adequately met the needs and demands of many of the LPs that they work with. So there are quite a few LPs these days that actually rely on larger asset management firms. Because if you're a small endowment, if you're fee sensitive, there are a number of reasons why it actually makes sense that a one stop or supermarket style setup could be really great. I also think of pensions who need strategic partners who it's impossible for them to write 1 to 5 million checks when you're trying to put a hundred billion to work every year. So I can see where larger organization with a broader asset base would be a huge benefit to them. And I think one of the biggest benefits is just a larger organization has the ability to spin up new strategies quickly on behalf of anchor clients and LPs. I think that that's been a really powerful solutions provider focus that a lot of these organizations have put real dollars behind in terms of meeting what their clients needs were. Within all of this though, how do you underwrite an independent firm versus a fund within a broader organization? And I think of course you're going to focus on people, process philosophy, performance, opportunity, set advantage. Why this opportunity in particular is Compelling and the role in the portfolio. But a couple of things that you will want to add on top of that is what does the ownership structure look like for the child company? Do they still participate in the upside? Do their employees participate in the upside? Do they have control over their future? How does the handover of leaders work? How does compensation work? And do you think that the compensation structure adequately incentivizes teams to perform at their best? I think one of the best ways you can always do this is to actually open up Excel and model out the fees in a underperformance, average performance and outperformance scenario. And then how do those fees and stuff split between the child and the parent? I think it's actually surprising sometimes when you see how much fee consolidation there can be between the underperforming and outperforming outcomes. I think another big thing that John, you hinted at in some of the acquisitions, is there a culture differentiation between the parent company and the underlying organization? Do they agree on philosophy and risk? And then how much autonomy does the team have when it comes to investment fund decisions? Do parent company leaders comprise the majority of the investment committee? That's a huge difference between the fund professionals having autonomy, particularly because consensus can be a real killer of returns, as I have seen so often. And then of course for new offerings like the famous ETF that's sitting out there, where are the private opportunities sourced from? What does liquidity look like? Is the originating organization and advisor to the fund? In the case of the State Street Fund, Apollo is not. That is not a good thing or a bad thing. It is just a thing that you need to understand before you invest. Because I think one of the biggest things is that in the end, I guess I just think differently because I don't think of private versus public markets necessarily in the sense of one is good and one is better, one is bad and one is worse. I also don't think of investing in privates for the sake of investing in privates anymore. I think that there was this 30 year backward looking story of oh, everybody needs to jump in, but as you look forward, are private investments going to be the most compelling? And if you're not sure, do some deep dive and analysis. Because while there is some convergence in the different markets, the two styles of investing are still very different. And if you are an investor who demands or needs that liquidity versus an endowment that has a perpetual time horizon, you really need to understand what you're owning. And I mean of course that's true with any investment, but Particularly because private markets will continue to be more opaque. I mean, they will be more increasingly transparent, but they will still be more opaque relative to public markets. If nothing else, I appreciate that this restructuring in investments makes it more obvious that private equity is its own thing and private credit isn't its own thing. It's a relative range of investments where the broader umbrella is equity. And you can decide within equity if you want something that's more on the public side or more on the private side. So I do like that. At the very least this restructuring has flipped the switch in many investors heads that it's not private or public, it's both. And within that, what are we comfortable with? So with that I will pause.
- [44:34]
John Bowman
I think there's some really good stuff there. Chrissy, I think starting with your very first statement, which size is the enemy of returns? Which is an old adage that is hotly debated. Interestingly, I think what perhaps makes some of these new strategies a little bit different is that unlike the original form of enemies of size of returns, this is not one fund has gotten so big. Can you still source the best alpha opportunities because your check size is too big and you become beta of the market in itself. It's also not that the firm has just gotten so big in its existing product set. So one variation of this is the new pod shops or multi strat hedge funds where it's a capital allocation exercise and add on all these adjacent hedge fund strategies and just capital allocate from the balance sheet where the best opportunities are. But it's all basically one firm and there's a puppeteer or a set of puppeteers pulling the strings and all that. I'm curious to ask Jenny in particular, can we have our cake and eat it too? Can you have the beauty of its own microculture independence, focus on alignment of interest at the child level, to use your words, and still maintain this growth opportunity and diversification for Franklin Templeton as the parent, can you somehow get that cute and strike a balance? And that's what I think these new modern forms are at least attempting to solve for and then perhaps is a good segue. And we're going to get to Jenny and Gene in a moment to unpack much of what you've just described. But you mentioned this idea of knowing what you own, which is one of the things that Kaya cares most about. Part of the reason we exist is to make sure that education, awareness, transparency, client primacy comes before product proliferation and selling to sell, but rather investing on behalf of what clients need and to do that, we've actually put together a special halftime session with Tony Davidow who is a senior strategist of alternatives at Franklin Templeton. And we're going to unpack just that. How do we make sure that requisite education is built in to the culture and the DNA down through the distribution chain before we jump in to all of these idiosyncratic and opaque investments like you've suggested, Christie? So plenty of foundational level information there. I hope you've learned a bit. We certainly did in the study and the conversation and we will leave it there for a moment and move to Halftime with Tony Davidow. Well, welcome back to Halftime at Capital Decanted. As we thought about our use of halftime this season, we spoke with Franklin Templeton, our title sponsor, about examining and exploring and having some dialogue about different sub themes of where the industry is and particularly the trend of democratization, this explosion and rabid appetite of wealth management professionals to seek access to other risk premia, other alternatives, but obviously with the right appropriate education. And it's that last point that we want to examine on this particular episode with my guest and good friend, senior investment strategist at Franklin Templeton, Tony Davidow. Welcome to Capital Decanta, Tony.
- [47:48]
Tony Davidow
Sean, thank you so much for having me.
- [47:50]
John Bowman
Well, I thought I would start perhaps at a high level to level set first of all on just the existential importance of education. Kaya exists for this purpose. You have spent much of your career certainly with different wrappers of corporations around you, but you've spent much of your career educating in different ways. Why is this such a fundamental tenet of an industry like asset management?
- [48:15]
Tony Davidow
I think it's a very basic question, but I think it's so important, especially in the alternative world because of the complexity of it. But at the end of the day, informed investors are going to have better outcomes. But I think we have to obviously consider the fact that alternatives by their bare nature are often opaque and not as well understood. And I think the temptation is to sell product as opposed to educating consumers. So I think one of the rare things in our industry it seems like organizations like Kaya and the asset management industry and even the wealth management community is all understanding that to have a successful outcome for investors and advisors, we need to lead with education. And I think that's an incredibly positive development because at the end of the day, if advisors have good experiences and investors have good experiences, that's going to lead to further and further adoption as this grows as an important component of the overall wealth management ecosystem.
- [49:12]
John Bowman
I heard you say things like understanding and overcoming opacity and the ultimate purpose, the why are we here question. Regardless of where on that value chain, which agency you are role playing within this ecosystem, it should always come back to the client and investor outcomes. And so that ultimately is always our North Star. And perhaps to build on that answer, Tony, as we zoom in on this massive trend that I know Franklin Templeton and you have both written and worked hard to kind of address of moving, as I said in the opening statement, alternatives making them accessible to high net worth investors, perhaps even the populace, retail investors. There is a certain sense with education and product development of a balance, a creative tension, as a fan of Kissinger, a detente. And if those get out of whack, if one gets too ahead of another, we've got problems in the industry. I'd love your thoughts. I'm sure the listeners would benefit Tony, from where you think we are in that balance or not and where we are progressively in the journey of educating the larger high net worth asset owner in the both the benefits but also the risks of alternatives.
- [50:28]
Tony Davidow
Ian, if I could maybe take just a little bit of a step back and say that I think this is a key inflection point for our industry and there are three primary drivers of that. One of them I think the market is demanding a more robust and reliable playbook that's just factual. You need better tools to provide better outcomes. The second one is what I think you refer to and that is these product evolution which is making these products more available to a broader group of investors. But I'd offer the third leverage really is critical and that is you have to have access to world class managers. If you don't have access to world class managers and you deliver those institutional type capabilities, it's really not going to work. It's going to be a failed exercise. Where are we on the journey? I think if we use advisor adoption as a litmus test roughly across the industry we've been about a 5% allocation to alternatives for at least a decade and if directionally we think that number should be 10, 15, 20% because you need to allocate enough to matter to change the complexion of the portfolio and the outcome for individual investors. We're still in the early innings but again I would rather go slow and do it right as opposed to rush to get everyone invested and then have a mismatch in expectations. And John, I think the biggest mismatch in expectation that you and I have talked about quite a bit over the years is this whole notion if we're investing in private markets, they're illiquid investments and individual investors need to think of them as long term investments, even though some of the structures have more liquidity provisions. If I want to capture the illiquidity premium of owning private equity, I need to think of that as a seven to ten year investment. That's changing the mindset of the advisor and in the investor. So again, we're still in the early innings, but I think if we do it the right way, we're going to have a long lasting experience as opposed to doing it the wrong way, selling it as a product where people are going to be disappointed along the way and it won't be a good outcome for anyone.
- [52:19]
John Bowman
I think that's really well said and I think in many ways your opening statement of that answer about a broader palette of options could very much be a slogan for Kaya and very much an amuse bouche to all these episodes. We're trying to expose and I think give investors options to deliver on their hopes and dreams and client goals in a way that gives them a broader tool set to achieve that. And certainly we would echo what you said very well, which is we'd rather go slow and do it right than rush and find that we have to clean up a mess after. So Tony, as always, it's great to check in with you. You always provide a certain very clear sense of wisdom on the importance of the client and education and we're grateful for your time today.
- [53:04]
Tony Davidow
Thank you so much for having me and I enjoyed listening to your program. Keep up the good work there.
- [53:09]
John Bowman
Thank you, Tony. And Decanters, stay tuned. We'll bring our guests into studio next. Well, welcome back to Capital Decanted. And as promised, I'm now here with Gene Hynes, CEO of Wellington Management, and Jenny Johnson, CEO of Franklin Templeton. Welcome to Capital Decanted.
- [53:29]
Jenny Johnson
Great to be here. Thank you.
- [53:31]
Gene Hynes
Great to be here.
- [53:32]
John Bowman
Thanks so much again for taking some time. I know the listeners are in for a real treat. As I've said, as you know, we've spent some time picking apart and teasing out the history of our industry of which all of us have taken part in. And I thought I would start with Jenny as we continue this historical retrospective before we dive in and zoom in on Wellington and FT specifically. But one of the things we spent a lot of time, Jenny in the introduction is talking about this major shift in what I would call the lanes were the lines in which we typically operated pre gfc. I suggested in the intro that Folks that were in a traditional mutual fund camp or institutional equity camp like Wellington largely were content, largely were content to stay in their lane. Public funds stayed in their lane and private equity and hedge funds were these idiosyncratic partnerships that were their own thing. There has been a massive shift post GFC and particularly that's picked up steams in the mid teens and as we've approached Covid in the larger ecosystem that has accelerated this cross pollination, this multi strategy build out race. Were there inflection points or specific triggers in your mind that started the flywheel spinning faster?
- [54:48]
Jenny Johnson
Yeah, I think a couple of things I think Gene would agree. Our core mission hasn't changed. Our job is to help people to achieve whatever their financial goals are. And historically that was much easier to do. I think staying in the lane of the public markets and what happened with the GFC is you had a couple things. You had a real push towards higher capital requirements for banks. So today banks just don't lend like they used to lend and honestly they preserve their capital for their biggest and best clients. So there's been this huge void of ability for businesses, real estate developers, others to go out and get capital from the banks. So that's been filled in by the private credit markets and that's obviously grown dramatically. So if you're looking for fixed income solutions for clients, you have to look in both the public and the private side. And then the second thing I would say is, and it can be from a variety of reasons, whether it was zero interest rates or whatever, but there's much more capital now available in the private markets. So you see companies because the regulatory environment has become more restrictive. You're in times of great technological advances where companies need to invest and sometimes there's pressure as a public company to focus on your quarterly earnings. So you see companies waiting longer to go public. So in 2000 it was three years. They go public. Now it's 10, 12 years before they go public. So those early years of growth appreciation is happening now in the private markets. So you look at that and bring your solutions to clients. You've had to say, gosh, we can't leave out half of America from being able to get those early returns. We should be thinking about how we can bring those to everybody. So I think in order to meet that mission of trying to help people achieve their financial goals, you have to play in both lanes.
- [56:37]
Gene Hynes
And I would add Jenny said the regulation created the private credit market. I think if I go back a little bit earlier, it really was when the SEC rules changed and it made it much more onerous and difficult and costly to be a public company. So it didn't happen right away, but within 10 years it really did shift the landscape, people choosing to keep their companies private much longer.
- [57:00]
Kristy Townsend
Building on both of those comments reminds me of something John and I were talking about before, and that was this recent interview that Mark Rowan at Apollo gave where he talked about this graying of public and private investments and specifically that in a year from now investors won't view these decisions as a binary and he believes that you won't actually be able to tell the difference between issuers, ratings, sizes, liquidity, et cetera. So Jean, what are your thoughts on that sentiment as a forward looking asset manager?
- [57:24]
Gene Hynes
I have listened to his podcast and I agree with parts of it. So if you take it at first principles, more of the economy is in the private market, more companies are in the private market, more debt and lending is in the private market. So if that's the case, it used to be almost entirely in the public market. So you will see a greater percentage of the investing world be in the private market. Whether it's a year from now. I think it might take more time. It's just more complicated. So when you think about all the way people invest and the way companies invest, it's just much more complicated. It won't be as fluid as that in terms of public to private investing because of the much greater increased chances of material non public information, for example, on the private side than in the public side. So all of that will make it more of a linear march towards having it become more fluid. But I do think the direction of travel is that eventually people will say well I want fixed income. And Jenny mentioned this, I want fixed income. It's not going to be what's in their private bucket and what's in their public bucket. It's going to be what's in their fixed income bucket and what's in their equity bucket. And that will happen. I don't think we're seeing that at all yet, but I wouldn't be surprised if you see endowments and if you see eventually, maybe later, you begin to see retirement. Thinking about it that way, Jean, I.
- [58:43]
Jenny Johnson
Couldn'T agree with you more on both the timing comment as well as I think it first happens in fixed income because I actually think you're going to start to see fixed income research teams not delineate themselves as public versus private because it's going to be about what origination. And by the way, in private credit I think most private credit firms would tell you how they handle their underwriting is just as important as their pipeline of origination. Are they in those conversations with the companies early on when they're making a decision around debt? And the conversations will be, do you want to go to the public markets or do you want to go to the private markets? Let's talk about the benefits of each and then that analyst will be in there weighing both. And frankly, today it's so big as far as the private markets. If you don't have knowledge of that space, it's literally like you're managing and trying to do research with half the information. So I think you definitely see that convergence and you see it earlier on the private credit side. I do think that we have to be careful, particularly on the equity side, that we treat it as just a simple bucket of do you want to do private or public? Because the reality is private equity fund, average private equity fund doesn't start paying cash flows out till year 8. They were a 10 year fund. Some of them went 12 years, some are even now having a trail of 15 years. You better be sure in your investment portfolio that you could withstand not having access to that money for 10 years. Now I think what Mark Rowan is also thinking is, well, you're going to have other types of liquidity means that come in. And sure, we as an industry are all committed to trying to create those and be creative on the vehicles, but it doesn't exist today. And let's face it, if you're a financial advisor and you put a client and it's not suitable and their assets are tied up for too long, you're going to have a suitability issue with the regulator. So being really thoughtful and I think it's much more difficult in the equity side than it is in the credit side.
- [60:33]
John Bowman
I'd agree with all that too. I think the spirit is absolutely right. The timing we could quibble about, and I think to be fair to Mark, the larger context just given Apollo's DNA, is that this starts in credit it. And I think the premise of the statement that we're quoting is that it's really hard and I think you can say this about equity too, but it's really hard today to create alpha in public fixed income any longer. It's a lot of beta. So to your very first point, Jenny and Jean, delivering on the retirement promise or on the actuarial outcomes, where are you going to find that return? So I think it's at least a well timed and I think well articulated statement about convergence. Again, the timing of course will be determined how fast we go.
- [61:15]
Jenny Johnson
I can't John, let go by the active versus passive in that one comment. I just have to make a comment on it because I realize it's been really hard in momentum markets. It's so hard for an active manager, especially when you have to deal with things like concentration, risk to actually outperform a momentum market. On the other hand, I have to describe the difference between passive and active. If I said to you, go buy the cheapest car that you can get to get you from point A to point B, and that road was well paved and straight, you'd get a car with no extra whistles. But if your journey includes a mountain pass and a snowstorm, you're sure going to wish you paid up for those extra safety features on a car. And that is what risk adjusted returns are. That's how an active manager is thinking. So usually people's investment journey and savings journey doesn't include always a straight road.
- [62:09]
John Bowman
Well said. Good reminder, Jenny. One of the illustrations I used as we started to unpack the why of all this M and A the why of all this race in the introduction was a story about when I was a very young analyst in the mid-90s and the infamous maybe not as big as AOL and Time Warner, but a close second Citicorp and Travelers and good old Sandy Weil. I'll never forget the financial supermarket story. And he had this great quote, we're going to build one hell of a candy store, which is just so Sandy. But the idea, setting aside the hyperbole of Sandy for a moment, was that you would build out this one stop shop so that LP's for him it was customers. But in this case, thinking about you and Jean's mission for LPs, they have access to a lot more candy and flavors and opportunities. So when you think about the why, and maybe your answer is a bit of both, but when you think about the why, is it that for an individual LP you've made it much more convenient to shop in one single store? Or is it that given where revenues and the industry is going and moving more private, Franklin Templeton just has to be positioned to capture more of the total revenue. Whether it helps an individual LP or not is beside the point. They're not mutually exclusive, but which of those two is more important?
- [63:27]
Jenny Johnson
So look, I think from the institutional channel, they're actually used to shopping manager by manager and they don't do the supermarket type shopping as much. So our approach we have both organic alternatives. Our venture business is totally organic. I think, Jean, your privates is organically grown, so that works great too. And we also have acquired some which we think we had an opportunity to acquire best in breed managers. So on the institutional side, a lot of those relationships stay one to one, and there definitely is a benefit to being able to talk at the house with a broader book, but there's still going to be shopping more broadly or more one to one in the wealth channel. You definitely see distributors reducing the number of firms that they're working with. And they like the idea of being able to have more capabilities and still work with fewer managers. So I think that that's a strength. But I think the most important component of this is the fact that in a time, just take AI, the amount of expertise in trying to hire people who are AI specialists, as well as the data that's required. It's going to be a scale game. And it will be harder for smaller boutique managers, honestly to compete because one is the amount of money we as an industry spend on just external data. I think people would be shocked. And then the ability to train your own models on your internal data. You need just a massive amount of data to do that. So one of the benefits and comments, actually the CEO of our Benefit Street Partners, which is our private credit business, made, he said, when Franklin Templeton acquired us, I thought we'd get the benefit of broader distribution. But now, now I see we could never compete with what is required to be able to compete within AI. So I think there's a lot of different benefits to it. But I think both organic and inorganic can work, provided you have cultures that mix.
- [65:12]
Gene Hynes
I do agree with that, but I also maybe have a nuance or a caveat that in the end, particularly on the alternatives, both on the hedge funds and in privates, because the fees are higher, you have to deliver returns. So I think technology, AI, all of that is going to help you deliver returns. And then there's a part of it where scale is not a benefit. I often think of the analogy of the industry that I covered for my career, the pharmaceutical and biotechnology industry. Half of innovation happens with small companies because there's no scale to innovation. In some ways, I think the same thing. There's definitely scale to marketing, there's definitely scale to. You need a certain amount of R and D to compete, you need access to capital to compete. But in the end, I think it's very similar on the private side and the alternative side, small boutiques, which are part of what we have have as good of a chance to generate those returns as big companies. And perhaps if you're not organized, which I think both Wellington and Franklin Templeton are organized this way, if you're not organized in a way that allows the teams to create those outcomes in alpha, then it's going to be really hard to have anyone, no matter what your scale is.
- [66:23]
Jenny Johnson
So I would agree. Our approach is that the investment team stays independent. So that's where you're getting that boutique innovation. But Gene, even for your alts business, I'm guessing as you guys are doing more in AI, you're a very large manager, your ability to go buy data is going to benefit them outside versus their size. So that's more of what I mean. I totally agree with you. Keeping that the boutique independent mindset of the investment team is very important. Important because there is an entrepreneurial component of it, but on a broader platform to be able to provide resources honestly, including just technology investment too, I think is going to be really important. And that's going to play to the managers that have more scale.
- [67:02]
Gene Hynes
Totally agree on that.
- [67:03]
Kristy Townsend
And Jean, I would actually love to build on that and take a deeper dive on your specific approach because I get the sense, having experience in the industry that people often think of Wellington as the pinnacle of a fundamental long term disciplined equity analysis specifically. So it may be surprising to many to learn that you actually launched a hedge fund in 1994 and as Ginny mentioned, you actually built out PE capabilities, I believe back in 2014. So why did you make the decision to build internally versus buy and how has that approach really played out?
- [67:32]
Gene Hynes
So one of the things, if you look at Wellington in 2024, we have long equity, long fixed income, long short equity credit, macro and now private equity and private credit. So I think the hallmark of Wellington, we used to be known as an equity shop. When I started in 1991, we were known as a US value equity shop. So we were pretty narrow. And I think over the decades we expanded into all kinds of equity. In the 90s and in the 2000 we expanded into fixed income. Half our assets now are in fixed income. So that might surprise many of our listeners. We're pretty balanced now and then as you said, two things. One, we launched our first hedge fund 30 years ago. I actually ran long short money for 20 years as an investor. And over the last five years we've been really deliberate in our hedge fund business and bringing it from good to great, really making sure. And this goes back to Jennie's scale Making sure that we have the technology, the risk, all of those things that help you deliver great hedge fund returns. And we're doing it in our own way, so making sure we have all of those capabilities and then hiring investors across those disciplines. So we've been in the business for 30 years and shifting and trying to bring it from good to great. On the private side, I'll tell you a story. It all started from a growth investor recognizing that companies were staying private longer. As Jenny mentioned before, they weren't coming into his universe to buy them. Now that's so obvious now. It was not obvious when we began this journey in 2012 and 13. And he really approached our CEO at the time. I think he got a no at first and then he kept going back and was very persistent and got money from people like myself to launch it as well, the partners and retired partners. And we launched the first private Equity portfolio in 2014. It turned out with quite a number of two flagship clients that helped us launch that. So I would say for the first five years it was really delivering the returns on that flagship late stage private equity fund. And then we began to expand into areas that were adjacent. So we have a biotech private fund, we have a climate technology fund. And we think about on our private equity side, where does Wellington's advantages make a difference? And that would be, I would say, anything where you can value a security. I don't think we're going to go into buyout. It doesn't really make sense for us. We don't manage companies, so we invest in companies. We're really, really good at that. Based on that fundamental research, we have a roadmap of where we could expand over time if we can attract great investors in those areas, in those sectors. And then a few years ago, we began to embark on expanding into private credit as well for the same reasons that Jenny mentioned. We were getting asked by our clients and there was a greater percentage of the market that was going into the private credit side. So similarly to equity, there are many parts of the private credit market that are just so adjacent to our business. I would say investment grade private placement, venture debt, which is very adjacent to our private equity business. And we have a roadmap of real estate debt and real estate equity and infrastructure debt, all those things are very adjacent. So the two big categories, direct lending and private equity buyout, I don't think that's where our skill set lies, but there are lots of parts of the market that are just so adjacent to our public business where we think we can both attract the talent and generate really good returns for our clients. And in those areas, we are very deliberately either bringing in a lead person, bringing in a small team to continue to build out those capabilities.
- [71:11]
Jenny Johnson
I didn't realize the history on that stuff. We had a similar thing. It was actually our Franklin Equity Group, which is located in Silicon Valley, and was there that the team was saying, gosh, we used to get these IPO kickers, but companies are waiting so long to go public, we really should do Late Stage venture, because that's where the equivalent of those initial IPOs were. And it was about 11 years ago. It was hard, I mean, Gene, to take some of these guys. And in that case, we actually were putting it in the mutual funds and you had to figure out how you're going to value them in a case where you're doing an NAV every day. And compensation. The team actually sits as part of the Franklin Equity Group. So they started to do Late Stage Venture in some of the mutual funds. And then they actually had clients come to them and saying, hey, we like the deals that you're doing. And honestly, I think some of the really good things that they did were the deals they didn't do because they had a discipline of saying, wow, the VCs are valuing this at X. We're looking at the US public company equivalents in that sector. We can't justify that we're going to stay out of those deals. So that was kind of unique is to be able to sit in a public and private team. But anyway, they had clients come to them and said, hey, like what you're doing, will you launch a fund? And that's how we ultimately decided to get into having individual venture funds as well as providing Late stage into our traditional growth equity portfolios.
- [72:29]
Gene Hynes
Something that Jenny just said back in 21, when the peak of the venture returns in our fund, we actually crystallized returns, I think 90% of everything that could be crystallized, which is very different than the industry. And I think that's that public market discipline and being part of Wellington, help them make those decisions.
- [72:48]
John Bowman
So, Jenny, I think you might know we talked to Bobby in the venture area on this show and we've talked to Roger, who's internally built your digital assets business as well. That said, I think largely you would agree, you've taken a very different approach, much more acquisitive over the last, well, in your tenure, six years. But even before you took this CEO seat, Jensen Huang, by the way, CEO of Nvidia, has this really Cool metaphor where he says, you know the job of the CEO to use an apple tree as an illustration. You're never going to be under every apple that falls. No one's that good. But you got to be in the general area so that when an apple falls, you can dive and catch it. You've picked a lot of apples. You've not waited to dive. You've picked a lot of apples. I think it's 8 billion for something like 10 acquisitions in that time frame. Tell us why the acquisition route was the right one for ft.
- [73:39]
Jenny Johnson
So we acquired Legg Mason. Our approach on acquisitions has been okay, where do we think there's secular changes? Where do we think we have gaps in our product capability and let's see if we can acquire them. And acquiring the asset management business can be tough. Our approach all the way back to Franklin acquiring Templeton in 1992 was if you're acquiring people in the asset management business, you're acquiring people in their investment process. Don't destroy value by going and messing with that. So then add value at the platform level. So that has been our approach. So in the case of Mason, we were able to get core plus fixed income and we were able to get Clarion Partners. The beauty was we got this $82 billion real estate manager tucked into multiples that were really traditional asset management multiple. So that ended up being a huge benefit to us. And then we had already bought private credit in 2018 because again, we had seen that trend. And then private equity was tougher for us with the multiples, but we were able to get secondary pe and as it turned out, we could not have timed that better. So we bought Lexington Partners. Really, because you've had $6 trillion deployed in private equity, about 150 billion deployed in secondaries. Not that many big, big funds out there. And a need right now. We thought it was just a 2022 issue, but what's happening is these funds are not able to monetize the tail. The LPs sitting there and they haven't gotten the same distributions and realizations historically. And the manager wants to launch another fund, they don't want to lose Apple because there's such a divergence between top performing alts managers and bottom quartile performing that if you're in a top performing alts manager, chances are they're oversubscribed. So you've got to be able to participate in every fund or you're left out. So what happens is they come to Lexington Partners. This is a real transaction. State pension Said, I need a billion dollars out of my portfolio in 30 days. So you need to have somebody who's aware of all of the holdings can go in and essentially say, I'll take Apollo Fund 4, Silver Lake Fund 5, whatever they are, and pick their portfolio and be able to negotiate a discount and close it. And so because of the Dynamics of both 2022 and the slowdown in realizations, it's just been phenomenal for us as far as Lexington. That would have been incredibly difficult for us to build on our own. And if you didn't do these things early on, then you sort of miss that. It'd be hard, I think, to compete today. Gene was doing it years ago. Our venture team got into it years ago in places that we didn't build it. I think it would be hard for us to actually get scale and compete in the market today. And I do think we're in a funky phenomenon right now where you probably have, I'll call them, zombie PE firms who are just not going to be able to raise money. Oh, by the way, it was hard not to perform when cash was zero. So now cash is not zero. And if you're holding these companies longer and you have any leverage on them, it's tough to be able to compete. And yet it's a business that kicks off cash flow, so you survive for a while. But I do think we're going to have a dynamic where you're going to see over the next five years of flushing out of those who can't really add value.
- [76:42]
John Bowman
And Gene, you used the word adjacency a couple times to talk about the evolution, the justification as to why it made complete sense for you in 2012, 2013. On paper, however, I would just suggest that I think when most people look at the cultural challenges, the sourcing talent, sourcing deals, underwriting process, the network that you have to have in order to make it happen. When you think of our old world in the 90s of public equity, long only versus a private equity team. I know Michael Carman and his team have made that as smooth as possible, but that's usually a very different world and sea that you're playing in. How did that team make that transition and overcome some of those hurdles?
- [77:27]
Gene Hynes
So I would say, well, we had great leadership on the team. Michael Carmen is the one who built it. We started off, actually, everyone that worked on that. The one decision we did make is that any private investments we were going to make were going to be made in private vehicles and not in the mutual funds that we manage. We did at the first, but then we made that decision. I think that was a good decision for us. That helped us focus. But at the beginning it was investors that had come from the public investing and they did a little bit of both public and private investing. And we also then made the decision a few years later that anyone who was going to be in the private investing was going to be dedicated to private. So people had to choose, did they want to be dedicated to the public market or do they want to be dedicated to the private markets? And people actually chose both. Some stayed in public and some went to private. And just over time, we began to hire and build the capabilities we needed, both on the investment side as well as on the client specialist and as well as on the operational side. So I would say we built it as we went along. I'm going to give you an interesting. We've studied our investors a lot. Most investors at Wellington, and I think it's probably true of a lot of public investing, are pretty analytical and pretty introverted. I'm an unusual investor at Wellington and I think generally in the market, I think if you want to be a successful investor on the private side, you have to have two skills, not only the deep analytical skills to understand and analyze fundamentals and companies and both the financials, but you also have to be a networker. So that EQ part of it, because in order to get deals, you need to have a certain level of EQ for the companies to trust you to want to partner with them. You don't need that skill on the public side. So I think that's probably been the biggest surprise, is that you have a group of people on the private side that have those two different skill sets. So I just think it's fascinating from a psychology and human perspective of how people have navigated or found their ways to these different parts of the investing world. So that's how we've built it. We've built it organically. We've gone to areas where we have real strength. I'm going to tell you another story. And then we've gone out and hired either a small team or one person or built around them. But I'll tell you, we hired a investment grid private placement team and I was sitting down sometime earlier this year and just asking, how's the transition been to Wellington? And they really interact well with our public credit. But the thing that surprised me the most was, wow, your global industry analysts on the equity side are gems. I never had this much information before. I never had so Much depth to be able to do my job. There is a real benefit to the broad ecosystem of the deep. I think Christy said it first. We are a deep researcher. So we're organized around investment content. And if I had to put it even down a level, we're organized around research. And that's been our heritage and will continue to be where we focus on. And it's interesting how much both the public and the private part of our business benefit from that.
- [80:23]
Kristy Townsend
And Jenny, when it comes to acquisitions at Franklin Templeton, it seems pretty clear that you basically want to leave leadership and the brand to do their thing and not overly interfere. And yet, as we've talked about, there are some synergies to distribution and technology. And those are basically an enormous part of the merits of the deal ultimately. So how have you balanced these factors?
- [80:43]
Jenny Johnson
So there's no question, I think people get the whole distribution. As I said, we built the distribution model where there's a central distribution. But within each of what we call the sims of specialized investment management, they have expertise either who support, say, our wealth channel or have direct relationships with institutions. And on the technology side, we've announced a single platform across our investment team so that there's some benefits there. But what gets me really excited and Gene touched on it a bit, is the synergies between investment people. And the only way, and I agree there, a lot of investment people are introverts, so you have to create these opportunities for them to get together. So we've been doing a CIO form and actually all the CIOs are part of my executive committee. So we get together probably three or four times a year. And it's been so interesting as they've gotten to know each other over the years, because we just had a great debate watching the Franklin Growth CIO defend Nvidia and the Mutual series Deep Value CIO looking at him like there's no way you can sustain. It's almost like they have different personalities that come to that make you a growth or a value guy. So being in the room. But it takes being comfortable with each other and building that rapport, honestly, over a couple years that you get that benefit. And I'll give you what really is exciting to me. It's when they actually come up with new ideas. So Benefit Street Partners, our private credit manager, has about $10 billion in real estate debt. So they're like, gosh, if we end up foreclosing on a property, the best we can do because we don't manage properties is we just have to Go sell it. And now you're just going to get whatever the market liquidation price is. We should talk to Clarion Partners who manages properties and just talk about ideas of how we should think about that. So they started to have these meetings and they both were finding value because Clarion was getting more insights into the credit of how the real estate market is right now. Because it's obviously been a challenge, particularly in office. And in that they identified that hey, most of the real estate development has been happening at the regional banks. They were the big lenders. But post SVB and post office, which has been a real challenge, they're not able to lend like they were lending. So there's become this real dearth in real estate loans. And to give you an idea of how bad this is on the office side, heard about a transaction where the firm bought it in Chicago 2019 for $400 million, put $50 million in tenant improvements, borrowed $300 million from a bank, handed the keys back to the bank and the bank sold it for $105 million. So just think about that. So banks don't really have to market as long as the keys aren't hand back, they just have to reserve. So a lot of banks are saying, no, no, no, let me roll the credits over. But that means there isn't the same capital available for new credits. So they looked at this and they said, all right, this is an interesting opportunity. We should talk about creating a real estate debt fund which they think can yield 10 to 14%. And then they went to our multi asset manager in our traditional business and said, you're trying to yield a 7% return, maybe you should do an allocation here. He negotiated a fee holiday, so it's great for his clients and allocated $500 million. So we're going out with a brand new strategy with $500 million completely organically came out of the CIOs just getting to know each other. No product person was involved. So there are synergies that I think firms who are able to get that 360 degree view of the capital markets are going to benefit both in the information as well as product opportunities.
- [84:07]
John Bowman
Well, I have to tell you Gene, you've just given me a huge relief and an excuse as to why I wasn't a very good analyst because I'm way too extroverted for that. At State street they must have been like, can we make this kid tell stories, get him away from the models. It ain't working. So I appreciate that, Gene. I want to start this with you, perhaps counterintuitively, I'm sure Jenny will have some things to say about this. But. But given your institutional ethos, I'm curious how you've thought or how the partners have thought about this huge democratization trend towards the wealth management area. On most studies the average high net worth investor, as you probably know, is 2 to 4% alts versus 30 to 40 on the institutional side. So when we think about the next 10 trillion of alts that will be flowing towards capital opportunities and needing new types of semi liquid products and registered opportunities, that tsunami is enormous. Is Wellington thinking or positioning themselves for that onslaught?
- [85:02]
Gene Hynes
So John, I'd make a few points. I think you're right about the fact that right now, first of all I'll say our privates business in particular as well as our hedge fund business, we've always sold to the wealth channel. But it's really been like you said, at the high net worth and the ultra high net worth. I think I've read a statistic recently that says only 6% of advisors have all of that, 2 to 4%. So I'd say the wealth market is just beginning in terms of allocating privates to the hundreds of millions to billions of people around the world that invest to save for retirement. So I think it's the very, very early days and there will need to be new vehicles and education to really open up the market for privates in the wealth market around the globe. So I think we're very, very early days. So yes, we are like many looking for ways that are innovative to create vehicles that will be the vehicle of choice. I think it has to be simple, can't be as complex as the tax forms that need to be filled out now in order to really expand the market. Jenny did say this, I think in the very first question. When you think about 20, 30 years ago, almost everyone around the world had access to the economy to invest and that's not the case today. It's not the case today because so much as we've said of the market is in private investing, both on the credit side as well as on the equity side. So when you think about fairness to people who are trying to save for retirement and their ability to have returns, I think that it's going to be inevitable that everyone should have access to private. But I think you have the vehicles and then fees will have to change over time. So how all that will happen will be determined. But I think the trend will happen that more of this private investing will go into the wealth market around the globe.
- [86:59]
John Bowman
Janie, I know you've been busy on product proliferation recently on that front, do you want to just quickly talk a little bit about that?
- [87:05]
Jenny Johnson
Yeah, and Jeet's absolutely right, which is it's not the broad breadth of advisors who are allocated the 5%. It's a concentrated number of advisors are comfortable and allocating. And what you hear is most people think that that number will move up to about 15% but some clients should be 0 and some maybe should be 40% of their portfolio. And that's why we're big believers in supporting the advisor in that role. Because this is one of those kind of running with scissors. If you don't understand the risks of the private markets, you could really end up in the wrong place. So one is making sure that advisor is well educated. Kaya does has great programs on that. We've done some things a lot of the managers are understanding that's a really important need. So it's that education so that there's appropriate suitability. A lot of work on the vehicles. So you've got these perpetual funds. But the reality is the underlying asset is not liquid. So we can't fool ourselves to believing you're suddenly going to become liquid because it's not so being appropriate in there. I love the 401 space for it because you always have cash flows flowing in. You have ability for people to borrow against their hardship borrowing. So I think that's a great way to bring it to the masses and we have to do it now. Here's my worry on the fee question. The top quartile over a 20 year period private equity manager outperformed by 20% a year versus bottom quartile. Top quartile real estate manager, it was 10% a year versus bottom quartile. Top quartile private credit 5% a year. Who goes on sale? It's the bottom quartile guys who can't raise the money. And I worry particularly in the retirement place we've trained people just focusing on fees that the ones that are on sale are going to be underperforming and you're better off staying in the public markets than to go with an underperforming private market manager. So that's just something I think from the education side it's going to be very important. But it is something. And I described the story that when my grandfather got in this business the average person could couldn't access the equity markets until the innovation of a mutual fund. We are at that same point today where we have to come up with innovative vehicles to be able to responsibly deliver the access completely.
- [89:10]
Kristy Townsend
Agreed. I think that was very well said. I will say, Ginny, back to the acquisition side. It does appear as though the broader industry has been increasingly acquisitive since you started your own acquisition spree into alternatives. We now regularly see news stories about purchases, mergers, joint ventures and the like. And that's before we even get into GP stakes, firms that are in the hunt as well. How has this crowded market changed your acquisition hunting approach and views on the market space?
- [89:34]
Jenny Johnson
Our view has always been on the acquisition side to fill in needs and I think our plate is very, very full. The only place that we would potentially have described still being open is infrastructure, because I think that's going to be a big area. We actually have a team that we just brought in to do infrastructure debt. So we'll also try to grow it organically and that may be the best way to do it. But I think it's hard. I think kudos to Wellington as a partnership for seeing this early on because I think that in the absence, if you don't have a currency to go acquire, you do partnerships and you don't get the same synergies that Jean's sort of talking about between her team and the public equity team. That just creates value and insight in a partnership that's sort of an arranged marriage. And again, I go back to that scale question. I think it's the boutique manager on a large platform that's going to have the advantage because of the needs to make investments in technology, AI and other things that's going to be the winner in the long run.
- [90:31]
John Bowman
I have to imagine though, that you're relatively more of a price taker than maybe in 1819 when there just weren't a lot of predators hunting the same prey. So it is a different GP stakes. We did a whole episode on GP stakes. 100 billion chasing the same things you are now.
- [90:47]
Jenny Johnson
I got to tell you, honestly, I don't know how some of the traditional managers who haven't already done this are going to be able to do it just because of the price differential. When we got Benefit Street Partners, it wasn't a beauty contest. They had a deal. They thought, well, maybe it'd be interesting to be with Franklin for distribution. They said, if you meet this price, you can have it. So we were able to get that. I already mentioned Clarion came embedded in Lake Mason and then Lexington. We certainly paid full price. But I got to tell you, because of the perfect timing of it, it's actually brought the acquisition multiple down to a really, really nice level. So. So I think it's very hard if you haven't been on this journey already for some years to actually be able to catch up now.
- [91:27]
John Bowman
Well, Global Infrastructure Partners was there for the taking, Jenny.
- [91:30]
Jenny Johnson
Yeah, that was a bigger bite than we certainly could take.
- [91:33]
John Bowman
Well, I think Jenny just answered this, Gene, but maybe as to close, I was going to do a fun just poll for each of you if you're comfortable answering which is as you look out five to 10 years, are there gaps, are there asset class or product gaps that if you could wave a magic wand at the right price or build organically that you still feel like you need at Wellington. Anything come to mind?
- [91:53]
Gene Hynes
I would say a couple of things. Jenny mentioned it. I think secondaries is an area that is very adjacent. It's about valuing even buyout or securities and I hope we can build it and be competitive. I think we can. I think we'll build that organically and we could do that across many parts of the secondaries market. And Jenny mentioned it, I think it was $150 billion market. You just have to believe if privates are going to go democratize, the secondaries market is going to grow a lot. So that's an area that's of great interest to us. It's such an adjacency. And then I would say maybe outside of private. I think you mentioned it John earlier or someone did about the concentration in the markets. When you think about if our clients have 30% in US equities and it's passive and it's really in seven stocks, it's really diversified portfolio anymore. The passive is not diversified. And then we have a 140 franchise that's again based on our research platform. That should be another way to diversify and have exposure to the public markets in a way that really is a way to overcome the concentration that exists in the market. Those might be three areas that I'm very focused on.
- [93:06]
John Bowman
Outstanding. Well listen Gene and Jenny, I've known both of you a long time and even before you sat in the C suite, especially the CEO seat, you've always been inspiring pioneering leaders. So I couldn't be more thankful for you helping us and all of our listeners think through where the future of this industry is going. I appreciate you deeply, both of you and thanks for just sharing your time and your wisdom with our listeners.
- [93:30]
Jenny Johnson
Thank you. It's great to participate in this and Gene, great to see you.
- [93:33]
Gene Hynes
Great to see you too. Jenny. And thank you, John and Christy.
- [93:36]
John Bowman
Listeners, stay tuned for the last step. Well, welcome back listeners. We're here for the last sip. Christy, that was so much fun. I think I said in the very beginning of the intro that it is a goosebump level roster we had. I have known both of them a long time, so needless to say is they've always been special influences and friends and now again because of their influence, they've just been wonderful mentors and I'm grateful for that opportunity. They were awesome.
- [94:07]
Kristy Townsend
They really were. I was just saying post production as we started this, that I pinch myself sometimes when I see who our guests are going to be. And this was definitely. I think we have wonderful guests across the board, but in particular this one I was very excited about. So really enjoyed their thoughts.
- [94:21]
John Bowman
Yeah, well, other than the celebrity love, what were the big aha moments for you?
- [94:26]
Kristy Townsend
Just that there is an actual realization and focus on the benefits of having all of these different types of groups under one umbrella. That there is a focus on getting everyone together and getting to know other so that you do get again the benefits of having your credit team know what's going on in equities and having your real estate team know what's going on the real estate debt side. Because I think that so much of what we want from AI and all of these other technologies is to get that lightning in a bottle. And as great as technology is, I still think that the best way to do it is to just get people to work with each other and to get comfortable with one another. I think that ultimately this industry will always be about the people in the teams. So I really enjoyed that both of them had a lightning focus on that.
- [95:09]
John Bowman
I agree every time I listen to either of them, I always learn something. But I think what Gene said about fairness around access to the economy compared to 20 plus years ago I think is so pointed and correct. This is not just about juicing returns where I think we get tied around the axle in debates in the industry. This is not just about the idiosyncratic dark corners of finding new alpha opportunities. This is simply about fairness in the retirement promise and in the return promise for beneficiaries of just having access to the global economy. And I think people forget that this is to some degree it's a beta play on the global economy and you can no longer access that in public markets. Nowhere near access that like many of us started in our 401k at the beginning of our career. So I think she put a really nice cherry on top of what we've talked about on this show. But I think she said it very well. The other thing that was quite funny and I teased her about it, but the serious side of her introvert extrovert point I think does bring the point home that these are challenging adjacencies to create synergies out of. They are different. Your network, as I said in my question, your network, the compensation structure, the types of talent, the types of background and even the personality of who they are requires different skill sets. So it might sound easy if you are in small cap to launch a late stage venture fund, but the reality is you've got to, as Jean has learned and as she articulated well, she's had to hire new talent in even to subsidize what was already a really strong foundation. So I think that was really helpful to think about. It's a different journey and challenge than Jenny's gone through, which is incorporating new microcultures and trying to create synergies. They're both hard, but they're hard for different reasons.
- [96:55]
Kristy Townsend
As an introvert, I really love that. I think I drive people nuts sometimes because I love to go into my little hole and think very deeply about stuff for a couple of weeks and then I come out with my tablets from the mountaintop. And I think that that has always served me well on the investment side. But to your point, I can definitely see where it would be a struggle from a management perspective to have to think through how to get different people to really work together in that way. So I really enjoyed that part.
- [97:16]
John Bowman
Great. Well, the question we agreed upon for this particular episode, we've done books, we've done movies, and I thought we would ask and you can't say capital to can't say. But what is the most influential or best or helpful podcast episode you've listened to over let's call it the last year?
- [97:36]
Kristy Townsend
Well, I would say capital decanted, but as John and I have joked repeatedly, it is very hard, dear listeners, to listen to your own voice for an hour or two. It really is. So beyond that, I'm actually in the process of finishing up a blog post or a deep thought piece on artificial intelligence and finance. And within the past couple of days the BG2 with Bill Gurley and Brad Gerstner came out and it's a hour and a half conversation with follow up with the CEO of Nvidia and it's actually really interesting and I think one of my favorite takeaways is that there's this discussion around how AI is going to basically take away everybody's job. But the reality is, is that in addition to the tech, the CEO of Nvidia is talking about how they plan to increase headcount by 25%. So there's this disconnect almost between the reality of how AI is going to be used going forward from the people who are sitting in the center of all of this. This versus how it's being positioned by scaremongers and media and such. So I really enjoy the podcast. I highly recommend it. There are parts of it that are technical, which also, if you're intellectually curious, could lead you down a couple of different rabbit holes, as it has for me. But I thought that it was very well done and very interesting.
- [98:39]
John Bowman
Well, what a trifecta. Those three, that must be a really good one. I've heard all of them speak, but not that one together. I was thinking about this. I have a few podcasts that are on streaming that I rarely miss an episode, and one of them is founders. It's David Senra, and he basically reads biographies, mostly biographies, and actually the one I'm going to mention is one of the few exceptions. And he gives a audio summary and it's just outstanding. And he's read so many of these that his connections and the similarities over the years, even across generations of founders, are just so enlightening. So this one in particular, as I said, was not technically a biography. He's read a ton of Steve Jobs biography, but he read or reviewed rather, a book called Insanely simple the Obsession that Drives Apple's Success. I actually read this book about eight years ago, but I listened to his summary, which was in May, and it was just so timely for me. As this CEO transition picks up and we start to think about new strategic plan, new marketing campaign, new or variations of slogans and identity and ethos, to use an earlier word, his obsession and intensity with breaking messaging down to the very essence. And if there's any fluff, any excess, eliminating it that no one can handle, customers that is, can handle more than one simple message at a time. And frankly, employees can't either. He talks a lot about how this also defined the way he would communicate with subordinates. Now, he wasn't exactly the warmest leader, so that part of the podcast was less interesting to me. But as far as the way he thought about his ads, which as we know, were iconic and perhaps some of the best, most recognizable of a generation, just really, really strong. Henry Ford said something similar. He said the most beautiful things in the world are when all excess weight has been eliminated. And I think some of the great founders and leaders and product designers just are driven rigorously by this idea of I need to get everything else out of the way. Elon Musk talks about first principles. Can I eliminate that part? That part? That part. Get that feature out of there. You're complicating your language. What are you trying to say? And I think it was a really good lesson, really good reminder. This is the second time I listened to that same episode, so I highly recommend that again. Founders in May.
- [100:56]
Kristy Townsend
I just added it.
- [100:57]
John Bowman
There you go.
- [100:58]
Kristy Townsend
Gonna be listening to once we drop off. That's awesome.
- [101:01]
John Bowman
All right, friends, decanters. Great being with you. Hopefully you learned a lot as we did, and we will see you next time on Capital. Decant.