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Capital Decanted
S2 | Episode 4: The Urgent Rebuild - Distributing Private Capital to Wealth Clients with Shane Clifford and Doug Krupa
01:49:55
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- [00:00]
Aaron Filbeck
Foreign.
- [00:06]
John Bowman
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 four of Capital Building a Wealth Management Solutions Business. I'm John Bowman. And I'm Aaron Filbeck and we are your hosts. First, a huge thank you to our returning title sponsor, Alternatives by Franklin Templeton. We're so grateful again that they're back to partner with us. With over 40 years of alt investing experience and 260 billion of assets under management. Their specialist investment managers have 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 again to Alternatives by Franklin Templeton. Stay tuned to hear more from them at our halftime segment. So listeners, a quick programming note that was obvious just a moment ago is that Kristy Townsend has left Kaya Association. We will certainly miss her, particularly here on Capital Decanted. We wish her well and Aaron has graciously agreed to step into those big shoes mid season for this season two. So Aaron Filbeck, welcome to the co host seat.
- [02:00]
Aaron Filbeck
Good to be here John. Excited to be doing this with you.
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John Bowman
Well, maybe it's a quick introduction and we can continue to learn more about you in the last sip segment. But maybe for the listeners benefit, before we get started, you can give a quick bio on your career and what you're doing now at Kaya.
- [02:16]
Aaron Filbeck
Absolutely. And maybe first of all going back to one of the earlier episodes that you guys put on last year and last season on the wine episode, I'm a big fan of swill, so we'll have a lot to talk about when it comes to the last sip and future episodes. But in all seriousness, I started my career in wealth management so it feels fitting to be joining you for this episode and talking through this evolution of the industry. So I started working for an RIA called the Joseph Group Capital Management out of Columbus, Ohio. Started my career as an investment analyst and was responsible for building out and formalizing our fund selection efforts for the firm. So eventually took on more of a portfolio management responsibility in remit, but also spent a lot of time working with the asset allocation and our client education efforts. So spent a lot of time speaking to clients, plan sponsors up and down the sophistication spectrum. Very challenging as you can imagine, but a rewarding part of the job. So one day you're talking about the difference between a stock and a bond, and the next day you're talking about merger arbitrage spreads. Pretty nerdy stuff on either end of the spectrum. I joined Kai about six years ago, actually one month before John, which I like to remind people of anytime we're together, and spent my time doing a number of things for the association, starting on the curriculum and exams team for the designation, working on creating content for our formal education program, and then shortly after joined forces with you John to build out this multi year thought leadership effort. So about three years ago I stood up our wealth management educational platform that's now known as Unified by Kaya. Again, very relevant to today, which we'll talk more about. And more recently, I'm thrilled to have joined Kaya's leadership team, overseeing our content strategy efforts for the organization, which includes setting our content agenda, speaking on behalf of the association, and of course working with a very talented team to disseminate our thought leadership efforts. Final thing I'll say, John, is my Kaya journey started about 10 years ago. We were heavy allocators to alts at the firm that I worked with. So started as a candidate almost 10 years ago and have engaged with Kaya as a professional, an investment professional, and now as an employee. So excited to be on this podcast with you.
- [04:25]
John Bowman
Well, we're happy to have you. And since you enjoy swill, I will put you and my parents at a separate table next time we go to a restaurant. So we hope to see some growth and some development, some maturity in that palate, as we say as you continue to sit in this seat. So lovely to have you, Aaron. So just one last question. At what point in your childhood did you dream of joining Capital Decanted?
- [04:47]
Aaron Filbeck
This was pretty early on, John. I dreamt it and foresaw that this would happen very, very early on. I've been waiting for this moment for all of my life. So good to be here.
- [04:57]
John Bowman
I figured. I figured. So in all seriousness, serendipity is strong here. As Aaron alluded to this episode topic, which of course we book months in advance, was really designed for Aaron, so I'm just thrilled to have him join me for this particular topic. He'll be, as he does at work every day, carrying me on this episode. Well Decanters despite our intent to create a library of what we typically call evergreen episodes that have long shelf lives here at Capital, decanted periodically, topics and trends are moving and morphing so rapidly that we find it necessary to revisit them. But in those rare cases, we also aim to take a fresh perspective or complimentary lens in how we approach them to avoid duplication of what you've already heard, what we did last time. So as we've come to say just a few times here on this show, this is what you might call a companion episode, in this case to season one, Episode two, where we explored the democratization of alts to the Wealth Channel. And those of you that listened might remember that that episode featured Joan Solitar, who inevitably will make some cameos today, who serves as global head of Private Wealth Solutions at Blackstone, and Fran Kennery, head of Vanguard's Investment Advisory Research Center. So if you're new to this idea of offering private capital to individual investors, you may want to go back and start with that episode. Just as a suggestion, because it was very much a foundational primer, you might say. On that episode we discussed the benefits, perhaps even the societal necessity for every flavor of investor, not just the large institutions having access to all forms of risk, premia, public and private, conventional and alternative, as ultimately it creates a portfolio, we believe that is more likely to achieve goals and investment outcomes over the long term. And we defended that. Fairness or liberty, you might say, with a historical dive into the evolution of private assets and particularly private market structure. But we also exhorted, just as importantly, the benefits of what you might call governors or mechanisms to protect the investor, mechanisms that sorely need modernization but nonetheless are helpful and perhaps as a segue to today. We also made clear that this story is, at least at the time and I think we'd even argue now, isn't fully written yet. The product structure, client sophistication, distribution, machinery were and still are all in their infancy. So it's been 14 months since we dropped that episode and the question is, are we really due for another swing at this? Well, Aaron and I think so, and here's why. First of all, as we discussed at length in this season's episode two, that was with Jenny Johnson and Gene Hines, you might remember, revenue, profitability, the fundamental health of the traditional asset management business is suffering, according to Cerule margins of the industry have halved to now about 8% over the last two decades. Leaders are getting squeezed on both sides. Revenues are declining due to fee compression and the popularity of passive products. And then costs are being pressured due to wage inflation and things like technology spend. It's frankly not a good formula for the old model right now. So leaders are looking for the next proverbial blue ocean. Where is tomorrow's growth coming from? And the answer to that question has clearly been twofold. If you talk to the C suite around the world, number one is private markets, and hence the arms race on the M and A side for both conventional and alternative firms alike that we've talked at length about. And then two, the wealth client as the destination for those asset classes and products given their low current allocations that Aaron will talk about in a few moments. And I would say that the intersection of these two alternatives and wealth is viewed as the holy grail. And the market has unequivocally spoken on enterprise values of those that are sipping from this grail and those that have been left behind. And just to give you a visceral, symbolic picture of yesterday and tomorrow, let's just compare BlackRock and Blackstone. So BlackRock, the largest asset manager in the world, and Blackstone, the largest alts partnership whose histories are intricately connected, as we all know. So our friends over at Ritholts posted a chart recently that compared the assets under management to the market value for these two behemoths. So BlackRock, which has over 11 trillion of AUM versus about 1 trillion for Blackstone. So just to be clear on my Napkin math, that's 11 times bigger, BlackRock is 11 times bigger than Blackstone. But market capitalization, on the other hand, Blackstone at nearly 190 billion versus BlackRock at 141 billion. So investors view the composition and future cash flows obviously of Blackstone's business, 35% higher than the 11 times larger BlackRock. That is a shocking reversal of fortune just from those two simple metrics. And this is of course, why Joan Solitaris, perhaps the most important and influential employee of Blackstone right now. And on the flip side, why Larry Fink, it's no surprise, has spent 3. 30 billion at BlackRock on the three important acquisitions this year to capture that future value. Global infrastructure partners, HPS and Prequen. Now, most organizations of course, do not have blackrock's war chest, but that has not tempered the activity and FOMO that is running rampant through the industry. To position yourself to catch this next wave. So few days go by if you read any of the financial press where an asset manager has not hired a high profile new wealth professional, restructured around wealth or centralize the wealth business if they happen to be running a little late to the game. So in this flurry of musical chairs and capital reallocation, what Aaron and I are interested today in doing is trying to dive below the symbolic bluster to actually understand how you establish these capabilities quite practically. In particular, how does a legacy private capital partnership who has existed and certainly thrives solely however in the institutional drawdown as LP ecosystem, how do they transition to assembling the apparatus to begin distributing those strategies to the individual investor? When client acquisition and conversations, investor sophistication, product design, culture, operational support are all fundamentally different than their comfort zone and their expertise, how do they go about building this? Where do they start? What challenges and pitfalls do they experience along the way? What battle scars and advice can they share with others that are considering the same or are in the early stages themselves? So to kind of sum up the companion relationship here, last season's democratization episode was on the why, and this episode, what we're trying to do, is to provide the how in a very applied and practical manner. So with all that introduction, here's our agenda. First, Aaron is going to ground us with the current market opportunity, both the existing size and attempt to extrapolate on how this might progress and grow. Now, we've addressed this a couple times before on this show, but we simply can't keep up with the trajectory. So I think a refresh before we get started is really important. Second, I'm going to give you some trail markers on the history of this flurry of wealth development. On the alternative side, I want to give you a sense of the mental timeline, at least as best as we can for how this is progressing. And then finally, to wrap up our intro segment, Aaron's going to talk us through using a mosaic of conversations and research, and he alluded to this in his responsibilities that have given him the platform to do this in the previous few years. He's been privy to many, many conversations and exchanges and stages across the world. And he's going to express what some of those common phases are in building such a business. Different approaches, different priorities, and even some missteps that organizations have pursued to build this capability. And of course, we'll test the validity of everything we've just learned and said to that point with the stars of the show, our two guests. So joining us this episode are wealth executives from two of the most iconic private market firms in the world to bring to life their respective journeys as a blueprint perhaps for others to learn from. Those individuals are Doug Krupa, Managing Director and Head of Global Wealth Solutions for the Americas at kkr, and Shane Clifford, Managing Director, Partner and Head of Global wealth for the Carlyle Group. So with that intro, Aaron, let's size this market opportunity to make sure at least that this dangling golden carrot that gets bigger by the day is clear to everyone.
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Aaron Filbeck
Great. Thanks John. And there's so many good threads that you just mentioned that will show themselves in some of the later parts of this as well. The one thing I will say is you were talking about the challenges and I remember this on the multi strat episode a couple of episodes ago is just the difference in AUM versus the fee or the revenue that's being generated a lot of these organizations and Boston Consulting Group puts out a really good report annually that looks at the asset management business. And I remember starting at Kaya and there was this whole discussion of when does the ALTS revenue for these businesses pass the 50% mark? I think at the time when I joined it might have been upper 30s, lower 40s. And today we're now at a place where alts are contributing more than half of industry revenues at the asset management level. So there's certainly a lot that is moving in this direction and you can see why this direction is happening. But back to the sizing of the market of alts. So this is a challenging task. As I'm sure you can appreciate, the data is not always readily available. There's lagging marks Doing this every year takes some time and effort to try to 1 get the data, but 2 line it up with end of year stats that are available. That being said, most recently in our Chronicles of An Allocator newsletter that we put out on a monthly basis, I went to task trying to figure out can we do an update on how large this industry really is. And it's a nice round number. Finally, after many many years of doing this, we now measure the alternative investment AUM in our industry to be roughly US$25 trillion in assets under management. Now some of that and actually most of that is in that drawdown LP structure, but there's an increasing portion that is being made available in the evergreen structures, the semi liquid structures and then of course the legacy liquid alternatives structures that you see in the 40 act in UCITS space across the industry. So when it comes time to try to quantify the opportunity. In wealth management, there's two ways you can tackle this little bit of an art versus science because of the breakdown of those different assets. But I'm going to take both in turn and we can certainly have a discussion on either one. So as you're listening to this audience, sharpen your pencils, pull out your pocket protectors, we're going to do some numbers and see how we break this down. But two ways of doing this. One is on the AUM side, so just looking at assets under management in funds. So it's a more closed universe ecosystem, if you will. And then the other way of doing this is to look at allocations and we have information on both and we're going to try to marry those two to make some judgment calls on that growth opportunity. So let's get started on aum. So on the AUM side, there's a lot of estimates in terms of the ALTS breakdown for institutional and retail. Again, that 25 trillion US dollar denominator that I mentioned is the overall universe. But what percentage of that 25 trillion is institutionally driven? So the endowments, pensions, sovereign wealth funds versus the retail channel, the individual investors, the RIAs, the banks and so on. Bain puts out an estimate periodically that looks at this on the AUM side and they estimate that retail investors represent roughly 16% of that 25 trillion. So if you're doing your math, that aum estimate is roughly 4 trillion of the $25 trillion denominator. Now, when you're trying to estimate the opportunity looking forward, there's two levers that you can really pull. One is industry growth. So just how large does that 25 trillion denominator grow over time? And then the second is the retail participation in that aum. So two levers that you can pull in terms of opportunity. Using that same Bain report that they put out, they estimate that alts will be roughly US$60 trillion by 2032. So about seven years from now, more than doubling from today. So going from 25 trillion to 60 trillion, that's the growth of the industry. The other lever is that retail participation, which they estimate will go from 16% to 22% of the 60 trillion. So that puts the retail participation at roughly US$13.2 trillion in AUM over the next seven years or so. And tripling in dollar terms. So again, going from 4 trillion today to 13.2 trillion by 2032.
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John Bowman
I think letting that sit for just a moment, you're talking about 9 trillion, 9 trillion of tsunami level movement from probably publicly traded conventional invested securities from that retail world. This is maybe you would argue with me. I would suggest that most of this is a reallocation, not new wealth creation. I'm sure it's a little bit of both. But the point is, as you think about what we're going to talk about and as you justify with these asset managers and GPs that we're going to explore are moving towards, it really does validate this I think explosive urgency and ROI investment expectation that they have on this. When you've got 9 trillion. Just that 9 trillion. Again maybe to look at it another way, that's almost half of the current alternatives allocation globally. And we might see another 40ish percent of that created to your point in the next five years. The numbers are just staggering.
- [18:48]
Aaron Filbeck
They are staggering. And I think the other thing to think about here is that these are LP primarily types of funds. A lot of these roll off. You've got exits, you've got distributions moving back to the investors. So in addition to just growth in AUM, there's a lot more in commitments than just the $9 trillion growth opportunity between now and the early 2000 and 30s. So on the allocation side there are other ways to look at this beyond aum. And this is where the art really comes into play and that's to look at what percentage of investors wealth are in alternative investments. So while Bain is focused mostly on fund aum, you can access alternatives in a lot of different ways. You can do direct investments, co investments and maybe accessing it through other vehicles that aren't in your traditional drawdown fund structure. The other thing to think about here is that not every investor type is actually eligible or has access to alternatives. Bain estimates that global wealth in households is roughly US$150 trillion. But not all 150 trillion can actually participate in alternatives. So therefore I decided to go to another source to try to hone in a little bit more on who are those participants in the alternative space and where is the opportunity there. I went to Capgemini is a think tank and they put out an annual global wealth report that looks specifically more at the high net worth individual universe. So while I mentioned that 150 trillion of household wealth from Bain, Capgemini actually looks at just those high net worth individuals as part of that 150 trillion. And in their 2024 report they estimate that high net worth individuals sit at roughly 87 trillion of that 150 similar to Bain. So this is where the art comes in. They bucket high net worth individuals into Three categories. First you have the ultra high net worth individuals. So those are with net worths of roughly 30 million or more, very high net worth individuals, which are your typical kind of 5 to 30 million net worth. And then high net worth individuals, which is your 1 to 5 US dollar net worth. Cat Capgemini calls them your millionaires next door, others call them high net worth, but all in that same bucket. The split between those three categories as part of that $87 trillion denominator is roughly 34%, 23% and 43% respectively. So roughly a third are in each of those different categories. Now what about the actual allocations for those different types of investors? So in terms of the breakdown of those three categories and the allocations to alternatives, it's very different. The ultra high net worth again 30 million plus is allocated to on average 19% to alternatives. But then you get into the very high net worth individuals and the high net worth individuals, and those allocations are much smaller. So very high net worth individual, again, 5 to 30 million net worth allocates roughly 3%. And then high net worth allocates about 1% on average. Now you can go further down market to the mass affluent type of categories and that's zero. So we're not going to focus on that at the moment. But if you take the allocations at each of those three categories and you do a weighted average, that's roughly about 7.5% allocated to alts and equates roughly 6.6 trillion dedicated to alternatives. So slightly different than what you saw with Bain's estimation On the fund AUM side, Bain estimates about 4. As I mentioned, this is about 6.6. So that extra 2.6 trillion likely includes other things. Maybe it's direct property investments, maybe it's direct investments in companies, direct loans, but about 6.6 trillion dedicated to alternatives. So what happens to the ALTS opportunity if you were to suddenly increase those allocations tomorrow? For this exercise, I held that top category, the ultra high net worth, constant for a second. And that seems appropriate given that's where a lot of the institutions are. And instead I want to focus on the bottom two categories. And this is where a lot of the focus has been for GPS and asset managers that are building out their alts and wealth capabilities. So it felt appropriate to make some changes there just to see what happens. I made two hypothetical scenarios. One, what if we just double the allocation for those two categories and then two, what if we make a really aggressive move from their current allocation? So as a reminder the very high net worth individual allocation is about 3% and the high net worth is about 1%. If we take the very high net worth individual from 3 to 6 and the high net worth from 1 to 2, it grows the alts dollar amount from about 6.6 trillion to about 7.6 trillion. So about a $1 trillion delta. But what if we do an even more aggressive swing? What if you take that 3% in the very high net worth individual from 3 to 10 and you take the high net worth individual from 1 to 5? Now that might seem like a really big change in the allocation, but I actually think this is pretty reasonable given more of a portfolio context. Still very much below what the institutional investors are doing. And typically this is the range that you see being recommended to allocate to a lot of these different alternative strategies. Well, the math works out that if you just change those two on the more aggressive end, you jump from about six and a half to nine and a half. So a $3 trillion swing. So going back to the Bain report, which had AUM pegged at about 4 trillion, you've more than doubled the dollars allocated to alts overnight. Some of that may still be direct investment, but again, very high net worth and high net worth individuals typically invest in this stuff through funds. They're not doing a lot of direct investments or a lot of esoteric types of investment strategies. So of course this won't happen overnight, nor should it. But you can see why there's such a massive focus on this space, whether it's by fundraising or allocation shifts. The opportunity is massive. And to put it in perspective, going back to what John mentioned, Blackstone has 1 trillion in AUM, so we're talking multiples of that. This is a massive opportunity for a lot of the gps that are out there. John, I'd be curious what your take is on that. That's a lot of numbers. But I think the story is really interesting to see this evolution and the why behind all of it.
- [24:57]
John Bowman
Well, I think given the complication of the moving parts, you're right to take a couple shots at it through different methodologies. I think in the end, whether it's 3 to 4 or 7 to 9 of movement, the point is quite the same. It's going to be massive. The revenue opportunities, speaking very commercial, is enormous. And I know I speak for Kaya and our mission in saying this is that the risk and the urgency and the burden around education and care and stewardship for this massive transition is even more critical. So I know we'll be talking a little bit about that today. That's really helpful, Aaron. And I think to your last point on Blackstone, just to keep using them just because they're the largest alts manager in the world, 1 to 1.1 trillion. Joan Salatar just announced that wealth is 250 billion of that, so 25ish percent of their business. My guess is that's far and away bigger than any of their other contemporaries. But I think it will just show you, as I'll explain in a minute, that that they were early and they are exploiting this better than anyone else. So I appreciate it. Aaron. So moving to history here just to continue our journey. I want to give a huge disclaimer here before I get started. This is going to be much less satisfying of a history than most of our retrospective segments. At least it was less satisfying to me. And that's for a couple reasons. Despite the effort in doing the research is one, it's very contemporary, despite what many of these firms want you to think. This is all very, very new and I'll elaborate more in a minute on that as we talk through some of the specific firms. But second, the other reason it's going to be less satisfying is it's really hard to precisely pinpoint the dates and these specific changes and structures and appointments of talent again, even with our efforts to find it, because this has been much more incremental and deliberate versus revolutionary. So as we've covered at length in this show, just to kick it off, the history of private capital in its first few decades of existence included the gunslinging 80s, followed by what you might call adolescence leading up to the global financial crisis. And at that time certainly the large majority of clients were university endowments, foundations, pension plans and sovereign wealth funds, those drawdown funds that Aaron just talked us through. Now as the survivors begun dusting off the ashes of their businesses, at least the ones that were were ready to continue post gfc, they begun to ask where new money, new fundraising, new clients might arise. And this certainly is when you saw footholds begin to emerge in Europe and Asia. Some acquisitions as we've talked about in previous episodes, but also this is when you started to see contributions to new funds being modestly represented by pools of individual investors. Now this was far from strategically source or intended. It might even be called an accident, with all due respect to those that took advantage of this. But frankly, it was largely the wirehouses, the IBDs and the feeder funds pooling their ultra high net worth clients almost exclusively at the time qualified persons at that point and as I said, almost by accident. So these two legged investors, as they're sometimes called, begun to capture, somewhat quietly, more of incremental fundraising. So as a result of these early wins and some raised eyebrows about where is all this two legged money coming from, as the 2010s progressed, the more enterprising and creative sales and investor relations team begun expanding their book to include family offices and as Aaron described, high net worth and ultra high net worth investors a little bit more explicitly to expand the universe in their capital formation process. And this is where my promise of a little cynicism in how I frame this section will need to creep in. If you listen to most of the large private capital firms or even today's heads of wealth for those businesses, you're going to hear things like well we created a global wealth management solutions business 15 years ago or we've been serving high net worth clients for 20 years. And listen, I'm not picking on any of them individually because technically speaking these are probably half or mostly true statements. But if we're honest, these were bootstrapped at best. You using existing resources, they were effectively appendages to the sales and client solutions function. And as I said, far from a strategic objective by any means. The idea of an end to end independent private wealth business that we're examining today, and talking to Doug and Shane about that, had responsibility for strategy, product development, education to advisors, marketing material, data analytics, robust investor services, and of course still sales and client solutions is a very modern development. I would say less than 10 years and in most cases, as you're going to see here, less than five years high net worth servicing prior to that, as I said, was largely in this proto phase. It was an organic extension caused by other forces that the firms are still trying to catch up to. So with that framework, a few breadcrumbs to follow that will help us contextualize the conversation with Doug and Shane on little bit later. So as I've alluded to Blackstone way ahead of the others in devoting human and capital resources to build what they call their private wealth solutions or PWS Group. Now publicly they claim that PWS was born in 2011, but if you read between the lines and interviews and other announcements, I think their true coming of age was frankly when Joan was asked to build a global standalone wealth business and join the firm's management committee. And as best as I can tell that was in the 2014-2015 timeframe. So call it about 10 years. Their first bespoke product targeted to this segment. B REIT Non Traded REIT was famously launched in 2017 and in 2020 they followed that success with BCRED, a perpetual private credit strategy. And then earlier this year 2024 they unveiled their private equity strategy B XPE. So their wealth management business, as I just mentioned to Aaron, just crested a quarter of a trillion dollars of AUM and Joan is a mind blowing 1 trillion goal for just PWS. Remember what I said a moment ago, they're at 1 to 1.1 in total now, so they're talking about doubling that through largely private wealth. So whether you anchor Blackstone's PWS history to 15 or 11, Blackstone is clearly the pioneer here at the majors and Joan is the unqualified trailblazer for today's global heads of wealth. So speaking of Jones diva level influence, as we continue our timeline here, KKR hired one of Joan's deputies away in 2019 to assume the head of Wealth Solutions for the Americas. And that is actually one of our guests today, Doug Krupa. So Doug can correct us if we're wrong here, but it appears to me that KKR seems to still be in transition mode from that proto stage I described towards the end to end phase. Again, as far as I can tell, currently the regional heads of which he is one roll up to a global client solutions and therefore they don't have explicit representation or a standalone division at the executive level. But to give them credit, while KKR rightly claims they've been serving high net worth for a long time, I'm sure that's true. Doug's arrival in 19 with experience and tutelage at Blackstone seems to have kickstarted a new phase of concentration of product development activity for KKR in this space. So I give him a lot of credit. At Apollo, Stephanie Drescher has been a mainstay and a go to internal builder and leader for Mark Rowan and his co founders for 21 years. Now you ask around the industry on who others look to for advice on how to build a PW business and along with Joan, Stephanie's name is always on the top of that list. In 2001 she was promoted to Chief Client and Product Officer and as part of that promotion she was tasked with building a global wealth solutions capability. And just in following the news in the four years since, she's been very aggressive in the marketplace, hiring impressive regional leadership, a head of family office, et cetera. So to round out the big four chronologically, shortly after Harvey Schwartz was appointed CEO of Carlyle in early 23 last year he made the wealth channel a very public strategic priority of his new plan. And just last fall, today's other guest, Shane Clifford, was lured away from Franklin Templeton and asked to wrangle what appeared previously to be three distinct regions of sales and business development only partially focused on high net worth. And Shane has been working hard to create a globally holistic standalone wealth solutions business. Shane is actually on Harvey's leadership committee and has the full value chain of product sales, marketing and education under his scope. So if you were to ask me what feels the most like the standalone Blackstone model, I would say Carlyle, at least at first glance. So those are the big four. But I just want to mention one other I found interesting to further illustrate this accelerating trend and the different flavors or approaches on how to get there. And Aaron, it's one actually we know really well with some individuals that we know very well and that's Aries. So they've been very acquisitive as we know in recent years. And in 2001 they bought a Denver based US real estate investment advisory and distribution business named Black Creek Group. Now this was the same year they bought Landmark and parlayed that into their mighty secondaries business. So to many, including me, the Black Creek one fell a little bit under the radar. But due to Black Creek's historical retail distribution capability, even in their narrow asset class and strategies that they absorbed, the former CEO of Black Creek, Raj Donda and many of his former team members of Black Creek have become the leaders of Aries now global wealth management practice across the full Aries product suite. And that is really why there's this center of excellence for wealth for Aries in Denver, Colorado. Now a more expansive history, just as I finish up, would also cover some of the pure play alternatives firms that are dedicated to the high net worth channel those like Stephen Nesbit's imagination to create Cliffwater, generally believed to have offered the first private credit interval fund back in 2019 and BlueRock who offers real estate and private credit vehicles for individual investors. And that expansive history necessarily would also need to mention the aggregator platforms iCapital, Case, Opto, Moonfair that offer turnkey solutions to small IRAs, broker dealers and tech and administration legal operations due diligence in some cases to get access to alternative product. So we're going to ask Doug and Shane a little bit about some of those initiatives and the competitive landscape, how it's changed as a function of that a bit later, but for now we're going to Stick to our very practical topic at hand, a bit of a how to guide to build these capabilities. So with that, Aaron, I'm going to hand the baton back to you to finish off our intro segment with some thoughts on how do you phase this out? What are the priorities and pathways to build this from scratch?
- [35:40]
Aaron Filbeck
Absolutely. And it's funny to think about this evolution being so recent. To your point, there's a lot of discussion and we've been doing this for decades and it reminds me of the long only space as well. You had a lot of long only asset managers that would come into your office and say we've been managing institutional money for 20, 30 years and they're brand new to wealth. So I think there's some parallels that you can certainly learn on the private market side as well. So as John mentioned, I'm going to walk through a couple of things. One, I just want to introduce a couple of different models to approaching private wealth distribution and the business model. And then I'm going to spend most of the time walking through what I've crudely created are the stages of this evolution. So let's start with the models first. There's a lot of different ways you can think about this, John, and there's a few different models that have emerged as the industry has matured a little bit more. I will broadly put them into three groups, fully knowing that there's exceptions and lines that are blurred. But I think it's helpful to put some context around the process that I'll walk through. So three categories being one, the extenders. These are typically single asset class firms that really specialize in one asset class and they want to build out their investment capabilities for the private wealth space. So you mentioned a few of them, but a couple others might include Starwood Heinz on the real estate side. And you mentioned Cliffwater started out as very much a private credit oriented shop. Now they've expanded beyond that over time. But single asset class moving into wealth. Second category are the buyers. So these are the organizations that acquire their capabilities through acquisition or partnership and these are typically your traditional asset managers that take the approach. So this is the blackrocks you mentioned some of those examples of acquisitions this year, Vanguard, Franklin, Templeton, but others like AMG that have a multi manager approach that they're acquiring as part of their business model. More recently, Capital Group may be most known for traditional long only stocks and bonds with their KKR partnership that they announced a couple months ago. But this is where a lot of the traditional players play and then the Builders, this is where we're going to focus most of our time, walking through that. These are the multi product gps that have a heavy institutional presence and are now trying to move into wealth. I think all three of these have very similar milestones to hit. And again, I'm going to focus on the third, but you can see some parallels as you look at some of those other categories. And we talked about the buyers in a previous episode on the multi strat side, so I won't belabor that point. And again, this is a product conversation versus a distribution conversation. The buyers are really focused on the product side. They already have distribution, they've got their wealth management wholesalers and staff that are focused on this. They just need the product capabilities. Whereas the builders, the gps that we'll talk about, have the product already. It's more about the business model around wealth. I also want to say that upfront that doing this well requires a large investment with a multi year time horizon. So at the end of the day, this is almost an entirely new business within the organization, within the larger organization and therefore has a really steep J curve, which of course gps are used to, but it doesn't happen overnight. It's also an evolution. As you'll see, these organizations tend to start very small but have a long term plan from a product perspective, from a staffing perspective, and so on. There's also four main things that these organizations really need to think about as they start to scale up. Product back office capabilities, sales and culture. So I'm going to walk through the stages, but you'll see how each of those four components play throughout and then I'll come back to it here at the end. So without further ado, these are the three stages. Again crudely named, but I think helpful in explaining that evolution stage number one is the bootstrapping stage, stage number two is the scaling stage, and then the stage number three is the persistence stage. So on the first stage, this is where it all begins. Organizationally, there is a desire to enter the wealth channel and it usually starts with trying to make and take an existing investment capability and offer it to wealth. This may sound easy, but spoiler alert, it's not so simple. The reason why I've dubbed it the bootstrapping phase is because you're asking part of the organization to really split off, gain some momentum and then move into the next phase. So typically you don't have dedicated resources or staff to accomplish this. Typically this starts with identifying a senior sales professional and tasking them with figuring it out. The question Is how do you sell this one product into this new market? There's two separate but related decision trees that need to happen and where a lot of organizations tend to start. One is product fit, and then the second is on vehicle selection. So product fit is looking at the existing investment capabilities and thinking whether it makes sense for the clientele that you're going after. You can lean on the capabilities and augment the product. So for example, you may have the best value add or opportunistic real estate fund that institutions love. And it works really well. You've got great performance. But the wealth channel today is really focused on income. So how do you augment the product that you're offering to be more core, maybe more stable, and speak to that channel? Private credit is the exact same thing. You might have mezzanine or distress, maybe a little bit more octane in your strategy. But again, income is where the trends are really focused. So this is why you saw direct lending take off over the 2010s. But private credit is much broader than that. So it takes a little bit of market research and of course, a little bit of right place and right time. On the vehicle side, the question is, what is the most appropriate, fun vehicle to select? And this is often very underestimated. We tend to talk a lot about advisor and client experience, and this was something we talked about in the democratization episode. But what happens on the other side? Organizations actually have to think through this as well. And it comes down to three main things. One is operations. So what's your capacity as an advisor? Your client may hate signing a sub doc, but what if you have to sign a thousand? And that's typically what happens at the organizational level. So getting your operations right to handle those inbound contracts. Second is legal. You might need to do some registrations. There might be implications when you come to registering some of these products. So having a very strong legal culture is important. And then third is client service. Are you actually set up to handle some ongoing service to early investors? And this is important, especially if you don't have brand recognition early on in the game. So from a distribution perspective, this is where you begin to take on some early investors in the wealth channel. You might typically see this happen at the family office level, maybe at the RIA level here in the US but these are people that are willing to take a chance, may not need to rely on an institutional track record, and certainly don't need to rely on a brand. So this is early bootstrapping stage. You're putting a lot of things together and you don't have the resources necessarily to do so. So let's move on to stage two, because this is where some of these things start to bleed in and become even more important. So stage two, the scaling stage, if you will, is keeping the thread on distribution. So let's focus on distribution. As part of stage two, let's assume that you've gained some traction and are ready to begin scaling up. The next question that these organizations really ask themselves is where they go first. So again, we'll use the US as an example, but I think it is relevant in a global context. In the US there's a couple of different options to choose from. You can go to the large wirehouses, the banks as kind of a first category, the registered investment advisors as a second category, or the IBDs, the independent broker dealers. And typically most organizations go in that order. And again, you can learn a lot from the traditional asset management business here to see why. Typically, wirehouses are early adopters. They commit capital faster and real capital. Just given their size. You're typically relying on well resourced home offices that have due diligence capabilities and resources to go through that extensive due diligence process. And they may be willing to make commitments based on your historical track record. At an institutional level, RAAs are typically slower to adopt, especially if you don't have a track record. And RAAs are very much focused on what other RAAs are doing. So if you don't have other RAs alongside you, they tend to be slower to adopt, but once they do, they tend to be much more sticky money. You also have a significant amount of dispersion in terms of alt adoption and size. Within the RIA space, you've got large aggregators that are hundreds of billion in US dollars assets under management, and then you've got mom and pop shops all around. So there's thousands of RIAs. So really coming up with a strategy of who you attack first is important. And then the ibds, the independent broker dealers, they tend to serve more mass affluent clients relative to the other two. And they're newest to the alt. Again, going back to what we were talking about before, mass affluent is right around 0% on average. So this is a much longer term strategy to adopting alternatives. They're very new to this space. Additionally, IBDs have very little operational infrastructure to support this. So you can begin to see the order of operations of starting with the wires, getting some traction, getting some aum, getting to the RA space where the money tends to stay longer. It's stickier and then IBD is once you've built some scale is where the third leg of the stool. Now this phase is very expensive. It's expensive endeavor. As you try to scale up, you have to hire a lot of distribution staff to sell into your channels and that requires a lot of fixed investment. At the same time, as you're thinking about your distribution strategy, you also have to begin thinking about future products. Again, going from a single product organization, maybe taking that one that you do and making it available to wealth. Well, what's next? What is the next product that you're offering? As you build this business again, you're effectively building out a platform if you want to go multi product to make it a viable business line. As John mentioned, we saw this pioneered by Blackstone in the mid 2010s as B REIT was coming to market. They were already thinking about bcred and now we have BXP more recently. So even as you begin to build momentum on one product, you're creating and starting the conversation on future products. And as you can imagine, building out product and creating a distribution strategy requires a lot of staff. So beyond wholesalers and distribution, again that operations, the legal and client service are increasingly more important, especially as you begin to bring on new investors. So let's move on to stage three, which is the you've made it stage, the persistence stage of the life cycle. So I'll skip ahead and just talk about what a successful business unit looks like and we'll certainly get into this and the conversation later on. But the sequencing might differ depending on how you roll out product, how you think about hiring and so on. But at the end of this phase, you should be filling out the rest of your team with people that might include dedicated chief operating officer, private wealth, a robust distribution channel, and that might be bi channel. You have people that specialize in the wirehouses versus the RAAs. Again, very different types of advisors and professionals. A robust legal and operations team ahead of marketing that is focused on private wealth and then of course strong client service. I want to focus on those last two because we've not really talked about them so much so far. We've talked a little bit about client service on the early stages. But client service is incredibly important, especially post commitment and post investment. To provide a world class product is one thing, but if you don't have the service to back it, it usually reflects very poorly on your brand. The other thing people don't talk about here is redemptions. So it's all good when you're getting commitments and investments. But we've seen a lot of evergreen vehicles hit redemptions over the past couple of years. As investors panic, clients panic, advisors panic. So do you have the ops, the client service people to be on the phones and work with them when they ultimately need their capital back? And then of course, marketing. Marketing is very different. As we've discussed, you're promoting an entirely new channel, new product, maybe a new vehicle. So how you reach these people, present yourselves and talk about yourselves is going to look very different from the institutional model. So the question I had as I was researching this and talking with industry peers and reading articles is what's most important? There's a lot that I just walked through and if you listen to this on first glance, you might think, oh my gosh, this is so overwhelming. There's so many moving parts, so many things to think through, what's most important, plot twist. Everything is important here, unfortunately. Now how you sequence things might differ and how you prioritize things at certain stages might be different. But rather than just saying everything's important, I'd rather talk through those four things that these firms need to think through. Think less about what is most important instead of what should come first and how are they sequenced. So I mentioned those four things. Product, sales, back office and culture. So I want to walk through each of those and really compare institutional versus retail because again, very different types of business models. So on the product side, this one probably doesn't need a ton of belaboring, but I think it's important to restate how important the product fit and vehicle influences the decisions. As a family, office or an institution, investors may be in a position to invest in, again, esoteric or niche strategies. But as you move down market in terms of client size and sophistication, investors tend to be very stylebox driven and seek simplicity. I think that's why you've seen so much activity in places like real estate and private credit. It's simple to explain, provides income, and it's a concept that's familiar to clients. And of course, within this, objectives and constraints are a lot different. That's what drives a lot of your vehicle selection and potential changes in your investment strategy. Again, the investment capabilities drive the value proposition, but that doesn't mean the strategy is exactly the same. Nor does it mean that the wealth channel will gravitate towards it if it doesn't fit into those constraints. So that's product. On the sales side, the conversation is much different than what you see institutionally. You have to remember that this is an intermediary sales process. You're not just trying to convince the investment professional, the Kaya charter holder. You also have to convince the advisor. And the advisor needs to convince the client. An old wholesaler, just as an aside, once told me that institutions spend a lot more time on the strategy itself versus the asset class and that wealth does the exact opposite. So in other words, 90% of your conversations, especially on the early side of the conversation, are providing education around the asset class, how the market works and its place in the portfolio. Then the strategy conversation comes, but it's a much smaller part of that conversation. And that's for two reasons. One, it's new, requires a lot more context, and second, most clients simply don't care about the product story like we might as investment professionals. Then there's the post sale relationship. So once you win the business, you're moving from educating the investment person to the advisor and working through implementation. So it's much more hands on. And then finally I mentioned marketing and the need for differentiated marketing. There's a lot of time creating content and collateral both to educate the advisor and to help the advisor educate the client. So advisors use asset manager marketing collateral. I know I did in my previous role. So GPs need to put themselves in a good position to create things that advisors will ultimately use on the back office side. So again, legal ops and client service, not always talked about, but it's important. Strong legal and operations support the entire business. And there's always a tension between which should come first, distribution or operations. But often they should be scaled together. If you get two offsides on one side or the other, you don't have the infrastructure or you don't have the growth and you can be in trouble. And then of course client service, very important. We talked about this from a redemptions perspective, but also just ongoing conversations with your current investors and prospective investors. And then finally I'll close with culture. One is just the prioritization within the organization. So John mentioned some of the different models that we've seen where some sit at the executive table, others don't. So how does the organization actually view this distribution business? Because ultimately it is a business at the end of the day. So are you fighting for resources or is this part of the strategic plan within the asset management? Second is investment. So this is a long road with a lot of upfront cost and it requires a lot of patience. So the J curve is steep, spends are bigger, timelines are longer and different, and the demands from the investors are also very different. So that's a lot to walk through, but I think it should give you a sense of not only what people and organizations focus on, but the stages of growth that you typically see from a wealth distribution perspective. So, John, a lot to digest, but curious if you have any initial thoughts.
- [52:07]
John Bowman
Massively helpful, Aaron. And I think, obviously reiterating your disclaimer that this is just a generic flow of how we have observed many trying to build this business and the typical challenges that they've had. Obviously every firm is unique and goes about it in different ways for good or for bad. I'll just reiterate what you said at the end because I just think it's the most important thing you started off your segment talking about. You can come at this from two different ways. If you're an asset manager, you've got huge distribution velocity and the skids are greased, if you will. You understand the client, you understand their psyche. Certainly the behavioral aspect of working with an individual family, individual investor, that is fundamentally different. I think the world of institutional sales and capital formation, people. But sometimes we're just way too smart for our own self and it doesn't transition well. So I'll just reiterate, these are typically new hires. It's really hard to transition institutional salespeople. It has happened. But if you look at the case studies of Joan and Stephanie and Shane and Doug, these are typically that are business leaders first of all, that then hire external experts in this space. It doesn't mean you can't do it the other way. But that's not the model that seems to be working. And as a result, you've got this huge absorption of cultural onboarding that I think is way harder than designing a product or hiring a bunch of people and spending some money. And I think we need to press Doug and Shane on that. So we will have to leave our intro segment there. That is, as Aaron said, a lot to digest. I hope it's really helpful foundationally as we think about how to engage with our two examples. That will walk us through whether they followed Aaron's blueprint or where they diverged and what challenges they had along the way. So, listeners, stay tuned for our halftime segment with Franklin Templeton. And then we'll be back with Doug and Shane. Well, welcome back to our halftime segment and I am just delighted to be joined now in studio by Matt Brancato, who is the head of alternative sales at Franklin Templeton. Matt, welcome to Capital Decanted.
- [54:13]
Aaron Filbeck
John, thank you.
- [54:14]
C
Pleasure to be with you today.
- [54:15]
John Bowman
Well, as you know, Matt, and listeners as you know, we've been spending some time with different segments of the Franklin Templeton machinery and I'm actually really looking forward to this one, Matt, because it's going to be a bit of a postcards from the pavement. What are you actually hearing when you're out there talking with real live two legged clients, as we said in the introduction to this episode. So, Matt, maybe I'll start with the proverbial intimidation topic. What is it that you hear most that clients, prospective clients or those that are already allocating to alts are challenged with, are intimidated with these issues that they can't seem to get through?
- [54:52]
C
I've been blessed to work with financial advisors for over 20 years with the goal of helping them build better portfolios through the use of alternative investments. And when I think about the main challenges and roadblocks that many advisors have when it comes to allocating to alternatives, they all center around some form of educational or expectation gap. And these gaps are what I like to call my three lessons learned about these challenges that have been constant throughout my career in alternatives. So lesson one in order to have a productive conversation about alternatives, whether it's sponsor to advisor or advisor to client, you need to be speaking the same language. And I think that's a roadblock. A simple high level conversation on the role and benefits of alternatives in a portfolio can lead to confusion if you're not defining exactly what you're talking about. And at Franklin Templeton we define alternatives of private markets, hedge strategies and digital assets. So you need to have a shared language, I think. Lesson 2 Alternatives are just tools. Like all investments in a portfolio, alternatives are designed to achieve a desired outcome in an asset allocation. So no different than stocks or bonds. Sure, the pathway to the results, John, are a little different with concepts and constraints like illiquidity or the structures may be different like a limited partnership drawdown or a perpetually offered strategy. But hesitancy and intimidation quickly fall away when advisors shift their perspective on alternatives from different asset classes or funds to viewing them as a means to achieve a desired goal. And then lastly, and this isn't necessarily unique to alternative investments, but really the human condition lesson three is people typically allocate to what they wish they would have allocated to 12, 18, 24 months ago. And this is really where the power of alternative investment education plays such an important role in private wealth. In addition, it also stresses the value of partnering with the right asset managers, the right partners so they can help in identifying early cycle opportunities. So those are really the biggest roadblocks the three lessons learned.
- [57:01]
John Bowman
Yeah, those are fantastic. Matt, you certainly are preaching to the choir here on a couple things. We've been very vocal about leading with purpose and portfolio fit instead of product wrapper or product design. I think many will miss the point and that conversation typically goes south when you're talking about the product specs as if they're on a used car lot and you're trying to explain this air conditioning versus this upgrade versus this package. And instead what are you trying to accomplish by actually potentially including this in your portfolio? So obviously education is our bread and butter. So love that you're leading with that and I know we've been a part of that as well. Well Matt, maybe the other side of this you talked about 12 to 18 months out, they're starting to get a little bit of backward looking desire to have chosen a little bit earlier. So in your conversations now, what are they jazzed about? That in 18 months those that don't choose are going to be coming back to you and saying, man, I wish I would have allocated back then.
- [58:00]
C
This is really where my passion and my team's passion comes to the forefront. We want to help advisors with early cycle opportunities and I think that the tenor in the industry is changing because advisors are rallying around this concept of early cycle opportunities. So at Franklin Templeton we're seeing excitement around asset classes like private equity and how to simplify that access for private wealth investors. So things like private equity secondaries, we're starting to see the environment shift to private real estate debt lending into real estate assets, things like private equity co investments and digital assets. And while at first glance those are all very different asset classes, I think John, the common thread is they all have long term structural shifts in these particular areas of private markets and they're paired with something that I've seen over time. There's an immediate supply, demand imbalance of the opportunity set and the capital that's available to take advantage of it. I think that's what we're most excited about and I think it's being well received by advisors. They're getting excited about it.
- [59:10]
John Bowman
Well, good to hear. Certainly the product proliferation is happening at a frantic pace and it's good to hear that the dialogues are much more focused on fit and bespoke need and purpose as we talked about earlier. So Matt, so thankful for your brief time with us and keep it up. We love the angle and the approach and the anchor to making sure the clients interests are put first. Thanks for joining. Capital decanted and listeners stay Tuned for our guest segment. Well, welcome back to Capital Decanted. And as promised, we are now joined in studio by Shane Clifford, partner and head of Global wealth at the Carlyle Group, and Doug Krupa, managing director and head of Global Wealth Solutions for the Americas at kkr. Gentlemen, welcome to Capital Decanted.
- [59:57]
D
Delighted to be here. I thought I was going to be on an episode of Conan O'Brien needs a friend, but I'm here with Doug, so that's always a good thing.
- [60:04]
E
Great to be here. Thanks for having us, guys.
- [60:06]
John Bowman
Yes, Shane, we have upgraded you. You've done well in recent media appearances, so Conan was willing to just push you up the chain, as we say.
- [60:13]
D
Appreciate that.
- [60:15]
John Bowman
Appreciate you guys spending some time with us. As I think you know, we have walked the listeners or the listeners have bear with us, depending on how you look at this, on describing a little bit of the history, short history I might add, at least in a dedicated strategic way of big gps, private capital gps like yourself, experimenting, building out, investing it and eventually cordoning off and creating standalone wealth businesses. And this episode is much more focused on the tools and the applied practical lessons that each of you have learned. Each of you have built these businesses at KKR and at Carlyle, respectively. So we're just delighted to learn from you both the challenges, the pitfalls and the accomplishments that you've had as you've built this business. So I thought I would start to level set before we get into some specifics, if each of you maybe could take this one and give us a sense. And maybe I'll start with you, Shane, because you're the newer of the two to your current seat at Carlisle. But what were the circumstances, the catalysts upon, in your case, Carlisle and Doug, I'll come to you in a minute where they took that next step to create this standalone unit and really dedicate strategic time and dollars to putting a wind in its sail, if you will.
- [61:28]
D
I think from a Carlyle perspective, it was quite straightforward. The firm has been in the wealth business for a very long time, since the early 2000s in a very reasonable manner. It had been getting after the wealth business globally, but specifically in a drawdown format where it was bringing some of its institutional funds on an episodic basis to various banking platforms over the years and was successful at that. But I think the firm didn't have two feet in on the wealth business at that time. And I think what you had was with Harvey Schwartz coming in as CEO and really with a transformation of the C suite, you had a engagement on the wealth business that I think Carlyle hasn't just generally had in the past. So that was really the impetus of what brought me here as well, was part of Harvey's vision for what we could do both in terms of evergreen vehicles alongside a very robust drawdown business that we have today in the Wealth Channel.
- [62:27]
John Bowman
And Doug, I know we're going to want to spend some time thinking through the lessons you learned by sharing the Captain's chair and partnering with Joan over at Blackstone before you came here. But before we rewind a little bit, tell us a little bit about the inflection point at kkr. When did that happen?
- [62:42]
E
Yeah, there's a similar story to what Shane shared. We've been on the higher end of the market in the private bank type channels. We've been offering episodic funds to ultra high net worth investors for some time. I don't think quite as early as Shane said there, although I learned recently that one big private bank was apparently in KKR1, which is a fund that probably is older than I am. So it's been a long time and I think five or six, probably more like six years ago, the firm had an aha moment and they recognized that they've really been managing money on behalf of individual investors for 47, 48 years because our largest LPs were defined benefit plans. But defined benefit plans are, they might still be slightly rising tide, might be increasing the AUM there, but no one's creating new defined benefit plans. And everyone is really self directing their financial destinies. And I think we saw the intermediary model as not just private banks. And we leaned in and we'll come back to all of this. But important for us to really deliver that same investment content, investment experience to individual investors that work with advisors here in the Americas. And that's pretty much the model globally. I came here because they show their absolute commitment. We had four or five people that were dabbling. It was a hobby when I got here and now it's north of 100 folks and they put two plus billion dollars in the balance sheet into standing up a bunch of different solutions and now we're much further along. But there was that recognition that again we have to take what we were doing indirectly on behalf of individuals and now make it available to everyone who works with an advisor. And that was that jumping off point for us.
- [64:14]
Aaron Filbeck
So Doug, I want to stick with you. And both you and Shane mentioned this, of being in this business for a long time. But then at the same time you have the bootstrapping, if you will, as part of this, where you've been in wealth, but it may have been more ad hoc to some degree. When we were talking about the evolution of wealth and this business line within a lot of these organizations. This is a more recent phenomenon. It seems like starting with Blackstone, where you came from in the early 2010s, mid 2010s. So I'd be curious, when you join KKR for Blackstone, having worked under Joan, what were some of the things that you took away from that experience? And maybe more importantly, where did you start when you start to build out this business at kkr? Because there's a lot of moving pieces to actually make this a standalone business unit within the organization.
- [65:00]
E
I think a couple things there. Thanks for the great question, Aaron. Blackstone was obviously an amazing nine years or so that I spent there really as a pioneer in building out private wealth at the direct GP or sponsor level. They've done a phenomenal job in that seat and I think it's probably worth spending a minute on. When we all got to Blackstone, yes, they wanted to do this, but no one really knew exactly how much broken glass it would take. The notion of I had the bug from even a predecessor role on democratizing and having solutions that were fully drawn just to increase adoption in this industry. And that was such a hard concept to bring all the stakeholders along on at Blackstone. And we started there with the easiest solutions where there were structures that were conducive to private markets, a fully drawn wrapper. In fact, we started a little bit before that on like fund of hedge funds and things that were even easier to drop in. But then things like B read and credit came along and certainly executed on a. Well, the firm really believed in the wealth mission. Certainly there were credible investors that turned around in some cases or prior attempts were not client first. It was remarkable to see even before I left there and then continuing on what the segment has become private wealth and alternatives. It's probably become what almost everybody on the street is doing now. I never knew it would catch fire like that, but it ties into why I left Blackstone to change Jerseys and come to kkr. At least when I left there. I think they've since evolved a bit. There wasn't an interest and maybe it was the interest rate environment. But looking beyond yielding products, that's only a portion of the private markets. And I think everyone on the street thinks of KKR as private equity. First, when I was going through the interview process, I made it very abundantly clear. Is that off limits? Do we have access to your crown jewel? Can we do it in things like infrastructure and private equity where the rest of the industry isn't or wasn't then? I think everyone is caught up now and is launching solutions across this continuum. But that's what really excited me was help build this business which was four or five people when I got here. Have the support of the balance sheet, have senior leadership buy in and then do it from a standing start. But build evergreen direct access vehicles. And our model is to really invest in everything we're doing institutionally. We had this philosophical debate do we do white space or do we co co opt in what we're doing institutionally? That was what the founders said we had to do because that's the only way we're going to give the same experience. Maybe Kennedy, they didn't want to grow the investment teams too much but that was the conclusion we came to and that got me over here and I think lessons learned. Blackstone did a lot of things right out of the gate and we replicated that here. Who do you hire first? What channels do you focus on? For us the Wirehouse channel is a huge opportunity. We're now in every channel but that's where we started. Already has some good relationships on the wirehouse private bank side. Hiring a COO or head of investor services to make sure that you have a good investor experience. Whether that's just simple things like order entry and making sure FAs get their trailers on time. That was the first hire I had and it was strategic accounts, then it was some rms and all the while building Evergreen solutions concurrently. And we did that really fast. Recession, we can come back to that. There was a little bit of almost self cannibalization from launching so much so fast. But we knew this thrust was coming. And I think since we stood all this up, we've seen a lot of great peers of ours building awesome solutions with hopefully delivering great outcomes to investors. But that was what we learned and also education. We started almost as soon as we got here doing KKR Academies, our versions of due diligence events where advisors, both prospects and existing users of ALTS can look under the hood, meet senior leadership, ask us questions, get to know us, hear from our thought leadership, which is much more than just investment solutions. And that really has helped forge very strong relationships. And we've built out other education modules and programs that aren't just bringing 100 advisors at a time into 30 Hudson Yards here. But that was something Blackstone did well, we did well. And you have to do that early because that's still one of the reasons that adoption is where it is is advisors only allocate to what they're comfortable allocating to and can easily explain to their clients.
- [68:56]
John Bowman
I'm sure it sounds like it was a rich training ground that has paid great dividends both in what to apply or maybe what to tweak and pivot on. As I said, as you've had that front row seat for many years over at Blackstone, Shane, I'm going to end with the same question, which is what did you learn and where did you start? But I'm going to preface it very differently because you came from a very different place. I mean if this is maybe a little bit of a dramatization, but unlike Doug, who came from a similar organization, you came from a more conventional, larger asset manager that had distribution, had experience, client servicing what you might call the two legged individual investor. It had those skids and that network and really it was trying to figure out how to match alternatives product and in some cases acquire alternatives product to then push through that established network. Now you're in this large private capital gp. How do you shift your own mindset and worldview and get up the curve to be able to build this business at Carlyle?
- [69:53]
D
There's a lot to unpack there. And I like when you say a lot of years. I don't know Doug, if they're referring to our vintage at this point they're being very polite. There's no ageism yet going on.
- [70:02]
E
Where's what we realized at this point?
- [70:04]
D
Shane so look, I think the first thing any of us do in seats that Doug or myself are fortunate to have is you've got to get out and actually hear from clients. Now you can define what you mean by a client and I've got to do this globally. So I have to spend an awful amount of time out on the road meeting with actual end investors, end LPs that we are fortunate enough to have today at Carlyle. But I also spend a lot of time with the home office folks at the various distribution banking partners that we work with globally. And then there's different things that different platforms are trying to solve for on behalf of end investors. And there's different levels of sophistication as you go around the world. So everyone's on a journey here. It just depends on when did your train leave the station and the US Market. The train left the station earlier than the others. And I could give you views and thoughts on various geographic regions and where they are in that respect. So I spent a lot of time thinking about that and what end investors were trying to do and then coming back in house and seeing what are the core investment capabilities of Carlyle, good news was spoiled for choice in that regard. And then it's a matter of figuring out. I always say that I'm vehicle agnostic. I think as well, we sometimes in this industry, in many respects we do this thing where we love to simplify things by oh, drawdowns. Oh, it's just evergreens, it's BDCs, it's Rick's, it's this, it's that the reality is when you're talking to end clients or if you're talking to an advisor, they're just trying to solve for a particular client's need. So one observation I would have is that we're going to continue to be in the drawdown business. We think it's a good business to be in. And for the top 20% of any advisor's book, that QP part of the book, there's plenty to be done there globally, quite frankly. And then alongside that, it's having the right suite of evergreen products that I think complement what you're doing vis a vis your institutional mandates. And I ultimately think that firms like KKR have done a great job at that. Doug is probably known as probably one of the best in terms of product innovation and being at the vanguard of that. I think if you look back, whether it be the success of BlackRock or now the success at KKR, a lot of it's down to Doug. Now I can say it because I don't have to pay Doug's bonus. So hopefully his bosses are listening to this podcast. But I think there's a lot to be said for spending time out in the market and then bringing that in house for the firm that you're working at. And I think any one of the listeners today, if you start from that angle, you're going to have a lot more success. I've unfortunately been the beneficiary in my career and I'm sure you guys have not experienced this, but where a really smart portfolio manager, a really smart fund head will come in and they'll come in with a completely thought out idea and they'll have the whole thing done, the portfolio, everything will be done. They'll be like, now you should just take this to the market and it's going to do fantastic. And there's this awkward moment. There's actually no Demand or need doesn't mean that it's not from an investment perspective. A good thesis, but I'm sure Doug, you've seen this and you're like, these are incredibly bright, smart folks, but there may be no actual demand in the market for what they are proposing to offer out. So I always think the number one thing is get out of the ivory tower and spend time in the field because that's where you're going to learn the most. And I think when it comes to the education side as well, and I know John and Aaron, you two do an exceptional job in terms of education. That's also where you realize how early on we still are on all of this. And I think that the more the merrier in terms of us all investing in education, it just benefits everyone in the business. So I'm all for all of the efforts. Whether it's a due diligence event I'm hosting or Doug or any of our other peers anywhere in the world today, that's fantastic news for all of us. I think ultimately it's great news for end clients.
- [74:00]
E
It's incumbent on all of us about education piece and I think we all recognize that. Aaron, you and John as well.
- [74:06]
Aaron Filbeck
I think there's so many things you both have just said. I think it really comes back down to this is a business within the organization and you can have a great strategy at the end of the day, a great investment philosophy at the end of the day. But then there's all this other stuff that comes around at distribution, staff, talent, operations. Doug, you mentioned the COO being dedicated to. Well, so maybe Doug, I'll direct this to you. But as you think about all these different competing priorities, so you've got product, you've got distribution, marketing, talent, all of which is very different from the institutional business. How do you navigate building this up as you're trying to scale up at the same time as educate even internally, your organization's to understand this is a completely different side of the business.
- [74:50]
E
It's a great question. I think there's a little bit of just looking back here now that we've gone to architecting to actual capital formation, having some good success, I think I probably took it more upon myself and my deputies to do the internal stakeholder piece of it. And even though we needed to leverage everyone in all those different functional areas to do their roles, we really worked on educating the organization here. It helped again that really the decision to do this business was at the very top, but everyone in all the support areas, investing, accounting, Valuation, legal compliance, you had to bring that entire apparatus along. And we spent a lot of time while we were building easier products that were at least easier to understand at the same time we were building the team and I think the team. Shane, you've built a phenomenal team. You always start with sharing your vision and you want people that they're probably attracted to brand, but they're equally excited about what your vision is. And you're in a startup mode. People are going to work extraordinarily hard. I think this alternatives business or private market business, we're grinding even harder than other parts of finance, especially in the rapid rate of change that we're going through now. And I intentionally built the team in almost all roles and all the same roles that any traditional asset manager exists when you're doing this wealth thing at gps. But a mix of folks who are really good on the relationship side and a mix of folks who are really good at the technicals and a couple of folks who are good at both, but those are the exceptions. And again, the model is phenomenal. No one here competes with each other. They have their own territories that don't overlap. They encourages sharing what is resonating in the field, passing the feedback on. As Shane, you talked about how important it is to go on tour and Hear from your LPs, your platforms, all that got funneled back into this central hub. And we used that to help convince the organization at times. We used it to make sure we were hiring people that were very culture fits and figure out where else we needed to add resources. And I think we just benefited a little bit. I don't want people to read into this, but we tried not to miss a beat when Covid came around because not long after I got here, the world was turned upside down. And I remember right before, like February 2020, you can hire all these folks. And it crossed my mind, I'm like, how do I hire all these people when I can't meet them? And they're like, they're going to be remote anyway, just get on zoom and figure out how great they are. And we did that. In some cases. I actually met people like outside under heat lamps in February, March 2020. But all came together. Not only do I have technical relationship people, we intentionally mix people who had traditional public equity, public fixed income backgrounds with those at Alts. Because relationships are probably even more important than educating folks on what our business is that you can do in probably a year to 18 months building a Rolodex of advisors and RIAs and bankers. That's something that takes a lot longer to compile. So we probably over indexed our relationships and actually the traditional side and complemented it with again more technical alternative folks. But that made for a really well balanced team, I think.
- [77:37]
D
Doug, you bring up a great point there on the hiring from the traditional side. I think at times there may be a perception out there that private market firms only hire from private market firms. The reality is the pool of talent is not big enough. Practically speaking, one is doing a combination of those two things. You're picking up some folks from other private market firms, but you're also leaning heavily into traditional managers. So to any of your listeners out there on that side, I think there is plenty of opportunity because I know folks like Doug and myself absolutely appreciate relationships and understand the value of that. And then also on the operational side of life, there's certain nuances to the wealth business that a private markets firm that's historically done a lot of institutional money management just doesn't get, doesn't understand share classes. They scratch their head. Something as simple as shared classes and they're like what do you mean that firm needs its own shared class. So there's really practical stuff that I think there's a bunch of folks on the traditional side that are just better equipped and quite frankly have had a career doing that. So to listeners out there, be aware of that is what I would say.
- [78:49]
E
That's really well said, Shane. I do think a this business you said at the onset, I think John, you said it. This business hasn't been around for that long alternatives in private wealth. So you're not going to find somebody who's a career sales professional because that maybe dates back 12 years. So you have to tap into other parts of the business. I think if you wanted to be a deal person in private equity, you're probably coming from a certain background. But for what we're doing on the distribution side, we're going to over index. I think Shane agrees. As you said, relationships and the fact that this business has become more, but not exclusively. Shane, you said that well before Evergreen. That also looks and feels more like what folks have done in the traditional public markets. At least it rhymes. We're getting rid of some of that terminology drawdown capital calls irr moics. You needed to probably be around that to be very comfortable with it for a while. But some of that stuff is slowly but surely getting retired or going to the high end of the market where we're still doing episodic type business. And for our model. We need both to coexist because we're sharing the same deal flow. We want to participate during the value creation phase and exit when we're exiting on the institutional side. So we definitely are in the maybe the bumper sticker that says coexist camp despite it pivoting quickly. I think the industry this year our numbers were 75 to 80% evergreen where two years ago was the opposite. But they need to again be draft off of one another.
- [80:02]
John Bowman
I think those are great comments, Shane. Maybe I could just push or double click a bit on what you said a little earlier. This is maybe unfair, but I have to imagine if you were shifting a sophisticated salesperson within Carlyle from one private capital strategy to another, I don't know, private credit to a real estate strategy. You're still talking to make this simple to a future Fund or a CalSTR. It's a similar level, highly sophisticated, similar pathway, similar muscle memory. If you're suddenly asking that person to walk onto High Street Limerick. I don't know if there is a High street in Limerick, but managing your family office on High Street Limerick, that's a completely different conversation with different questions. So maybe address how you've crossed that chasm. But then also we talked a little bit in the green room about other avenues or tools in the tool belt that might help you accelerate this. Whether it's placement agents or some of these new aggregators like iCapital or Case, has car Carlyle taken advantage of any of these other pathways to accelerate that?
- [81:01]
D
So look, I've spent probably as much time on the institutional side as I have on the wealth side of the business and I've not learned many things. But here's a couple of things that I have learned. I will tell you that there is a broad spectrum of folks on the institutional side in terms of LPs, in terms of level of sophistication. So even on the institutional side of the business, one could have a public pension fund, a Taft Hartley client, a corporate and an insurance client. And they're all very different flavors. I always refer to flavors of ice cream. They're very different. So I think if you're going to be successful in distribution, generally speaking, as a sales individual, you have to be a utility player. So you have to be able to have a dial and you have to be able to go up and down in terms of sophistication, very similar on the wealth side where there are corner office advisors at a large global bank and those teams are running multibillion dollar books, they have Large due diligence, internal teams actually sitting on their own dime and their own P and L. They're very sophisticated investors. They're doing a lot of co investments. They're doing a lot of stuff that's even off run that some of our more high end institutional money or family office money would be doing. On the other end, you have some folks that are far earlier in the journey that are only beginning to discover what is direct lending, what are the benefits of secondaries. So I think the sweet spot for me is trying to find individuals that can play that utility role. It's hard to find them, but when you do, you hold onto them. Would be my advice to folks out there because they're really good at what they do and I think that's what all of us need to do. Because you're not going to be fortunate enough because we're still in the early innings here. You ultimately are going to have to deal with a spectrum of clients that have various levels of sophistication. And that's something that we all have to be comfortable with. To your second point, John, on the icapitals and cases of the world, all great firms, I do a lot of business with these firms. We use these firms in terms of their connectivity, their platforms. There's certain partners that we work with that like to do a feeder fund, for example, through their structuring, we're more than happy when we sit across the table from somebody and they say, hey, we work with X or we like to do business with Y. I think my immediate response wants to be absolutely, we have a great working relationship there and we're more than happy to facilitate that being the path forward for us. So I see them as great partners in the business. They add something to us and for us because as we all continue to try and scale. You talk about the size of these teams. Most teams in the business are probably at your average size. From the low end they're probably at 50 and on the high end probably 250 is the range. There's a bunch of us around 100 to 150, but you can't cover everything. You can't be all thing to all people. So I think these folks do a great job of being additive to our efforts and I love working with them.
- [84:00]
John Bowman
That's great, Doug. I want to maybe move on from culture and talent and distribution to product rollout and blueprint. As Shane said, you really have been a model for a lot of your contemporaries in the industry. You had a couple phrases earlier that I just want to bring back up one was wrapper agnostic which I think is the right way to think about this and I maybe we'll connect the dots where I hope you intended to which another phrase you used was client centrality meaning you shouldn't be so dogmatic about the wrapper that you miss what clients really need and want. And I assume that dot connect is what you and what KKR more broadly would say with that kind of preface in mind. When you got there in 19 how did you think about your decision trees on what to launch asset class wrapper distribution strategy? How did you even get to a decision point?
- [84:50]
E
It was all part of again the stakeholder conversations we had. I mentioned in terms of one of the catalysts for changing Jerseys was to go beyond sort of yielding strategies. We had first mover advantage in because no one had at least direct from sponsor done a PE solution that wasn't at least a qualified person purchaser product that really was only the very high of the market. Nobody done private infrastructure in any format and I wanted to sort of launch those first but also knew we needed to cut our teeth with stuff that was probably a little easier to effectuate. So we did quickly do a 40 act public private hybrid type credit interval fund. We did a 40 act REIT so it's technically a rick that could do control real estate and still had REIT taxation. And then once we had the confidence so we did those very quickly the degree of complexity went up because again the founders and senior leadership called G4, George, Henry, Scott and Joe, they wanted us to not only do the same deal flow without having a third party advisor and they joined me for some of these meetings from key investing partners and platforms and banks and intermediaries was we really wanted to get down at the accredited investor level. Ten times as many households are accredited and qualified. I don't know what the exact difference is in total addressable market but it's a multiple and if you're dealing with the higher end, the corner office that we have great relationships with, Carl has great relationships with they have multi generational clients and why do something different for the patriarch or matriarch than for the children. This sort of allowed long term compounding of these private market asset classes. So we had to figure that out. That took us some time. Again, no one had done accredited private equity from their own deal flow previously. We stumbled on it. I didn't taste anything just to be clear, but I was looking at a run of all the deals we had done since 76 and for some reason, there was a column in there and it was like, what percentage control we had of that deal. In the 90s and 2000s, there were club deals. Now we have capital markets that can help us co invest and other vehicles like Liquid K series that invest alongside. So there's not really club deals anymore, but we had a huge, huge preponderance of deals that were control oriented. So if we're control, like, they're not securities per se, they're true portfolio companies. And I was north of 80% in private equity. Similar number on the infrastructure side. So again, why can't this be a Berkshire Hathaway? And then do we want it listed? But that has beta? Do we want it unlisted? And there were a couple pressing examples out there. There's a listed Brookfield infrastructure vehicle. So I was like, take that. Evolve that next level, that white knight, that whatever terminology you want. And that's what we did. And in the interim, we were building easier structures that were a bit more intuitive. But behind the scenes, we had to figure out the waterfalls. How do you value this every month? Because we weren't doing that previously. And lots of puzzle pieces are put Humpty Dumpty back together once you go like Evergreen here. And that's what we did. And we move very quickly, as fast as possible. Still wasn't very quick to be clear on PE and infra, because we knew the market share is going to be a little bit higher if you're someone with a lot of credibility, experience and good results in that investment vertical. And you're an earlier first mover. So we ran as hard as we could. We sequenced things a little bit differently than probably I originally envisioned. I think we actually closed with private credit. A lot of people did private credit earlier, but we only launched so many of these at once and build a syndicate around and get good fundraising results from. They're all great solutions that, again, hopefully create great outcomes. But that's what we did. And again, we had to figure out the structures. We are definitely structurally agnostic because we have tender for interval funds, REITs, BDCs and unlisted operating companies. And we do some Lux UCI Part 2s overseas, which I just pretend to sound smart by throwing it out there. I don't exactly know what that is. Shane's Irish. Maybe he can help. You're not Lux, though, so I don't know. But that's what we did globally and we actually did do local structures because I think for certain regions, just doing Cayman is less appealing than having Something that's domiciled and actually investing from not just the United States. So that was another conscious decision we made but that was the journey and kind of did in that order because motivated by first mover had to cut her teeth first. Figure out some stuff behind the scene and figure out the right structure and deliver this in a way that unlimited retirement, accredited investor and shares in the same deal flow which we kind of had to do is sharing control and making this not a fund but doing these as operating companies with a certain amount of control for at least the harder asset classes. And it was pretty cool looking back five years to see what we pulled off here. It was the vision, but it certainly felt at times was there a solution that really works for this kind of dream wish list. But again we stumbled upon it and ran as hard as we could.
- [89:03]
D
I think Doug makes it sound incredibly easy. What they achieved over that five year period is incredibly commendable. The devil is in the detail as they say. And overcoming and I think the conglomerate structure for example that you guys did is something that a lot of us in the business look at and scratch our heads and. And so kudos to you in terms of doing that because it's one thing to say on a podcast over 3, 4 minutes quickly outline that but there's an awful lot that went into that. And I think the good news for folks like myself is that there are roadmaps out there, there are paths forward. And I would say to anyone listening that because the ongoing expansion of just this private wealth market I would advise people to complement as opposed to compete. I think a lot of the time I've seen a lot of me too products arrive. I saw a ton of them arrive on the credit BDC side and honestly at a certain point it's very hard to tell them apart. So how does an advisor or how does an end client do it? Good luck to you. So I think you need to be smart and thoughtful and compliment as opposed to compete. And then if you're investing on the education side like we are in Carlyle Connect Edge then I think you're starting to put the pieces of the puzzle together and you sprinkle the right talent in. That snowball effect will start for you but it's going to be a journey for you.
- [90:22]
E
Well said. And I do think these are big rivers again now that we're starting to get away from following this alternatives with its own weighting. These are complements to what you're doing in equities on the public side and credit and Real assets. And these are big enough rivers that you should have more than one solution. And finding we're really focused these days. I think you're doing the same, Shane, when we're in meetings, not just saying how we're different but, but what kind of strategy do we pair best with? Because that's become increasingly important. The firms that are probably going to win the next round, that needs to be the mentality they have. And I think, by the way, I was very motivated. It was really hard those four years of development. But during the four years of development, when you're building these, you're the mad scientist, but when you're done, you're the architect. So I just wanted to get to that architect phase. That's what people now call me. For years I was a mad scientist, but now I've been bestowed architect, which is pretty exciting.
- [91:06]
Aaron Filbeck
Doug and Shane, you both hit on this time horizon. So five years is a long time. But, but within those five years there's a lot of investment that takes place and requires a lot of patience, but I think even more so. And Shannon, I want to ask you this. A seat at the leadership table. We talked a lot about in the previous comments between John and myself, the importance of having buy in from the top and having this be a strategic priority for the organization. So maybe just talk through on Carlile's side, that seat at the table, what you guys did to actually create some buy in, maybe some things that you did beyond just the leadership level, but even getting further down into the rest of the organization to create that sense of patience and buy in as you built this out over many, many years.
- [91:48]
D
First of all, on the timeline aspect of this, yes, it's a three to five year journey that you're going to be on. But that being said, you do need some tactical wins along the way to prove or to earn some internal political capital as well as you bring people along here. So I would advise folks that as you think about your business planning, both long term and let's call that over the next three years, there's a tactical element over the next 12 as to what you're going to achieve because you need to have some test cases that prove that you're more than a mad scientist and that you are an architect of an overall strategy. And when you're at a publicly traded company like I am, for example, at the end of the day, we do report on a quarterly basis out to the analyst community. We have to be conscious of what we're going to do over the next 12 months. So you have to balance that. I think ultimately, if my CEO Harvey Schwartz were on this call, he would tell you that it's a long term play for us. So his view is over the next five to 10 and that's where he really sees the opportunity. And that's across the banking channel. We'll just call that in a very generic sense. Alongside that, you've got insurance, you've got the 401k market, and then you've got some other interesting things going on in the hybrid space that I know Doug is knees deep in at the moment. All of that is going to play out and that is over the next five to 10 years. In terms of bringing C suite level folks along. You absolutely need it. Because it's one thing if your CEO throws it up as a bullet point on a PowerPoint slide that they're presenting out, they're saying we're committed to the wealth space and then you never hear from them for the rest of the year. Well, that's great. I think ultimately where you see the commitment is by one, where they place the wealth effort on the leadership team. So you do have to have a seat at the table and I have that seat at the table in terms of being a member of the management committee at the firm. And then you're right, there is an internal need to then bring some folks along with you who perhaps have always done quite well on the institutional side and they can sometimes just be a little apprehensive or there's a little bit of the unknown for them as well. So it's a lot of just sitting down as well and just talking them through the vision, the plan you're going to be doing. So I would say you've got internal stakeholders that you have to bring along with you if you have the engagement of. For me, I have the engagement of the founders of the firm, in particular, David Rubenstein, who is just a fantastic human being to get to work with every day. And you couple that with the C suite, with Harvey and team, it becomes quite easy for me ultimately. But that's a process and that's a multi year process for any firm. All of these firms I've worked at several. We are all quirky in our own ways. We all have unique cultures, we all have nuances. We are these dysfunctional families that ultimately have great investment performance outcomes for our clients and we hopefully deliver them on a consistent basis. But we're not perfect. We try really, really hard every day when we come in to focus on performance and clients. But ultimately, this is something that you're going to have good days and bad days. You're going to need your leadership team to be there with you and lock arms with you. And you're also going to need them to get out in the field. And actually, to Doug's point, they're going to need to actually get out in front of advisors globally and speak to end clients and attend a lot of diligence meetings, meet a lot of home office folks, talk to a lot of the heads of the private banks. So there's a level of commitment that is needed. It's not a, oh, I think there's money to be had there. Let me hire three folks and they'll go grab it. If you try that, you're going to fail.
- [95:24]
John Bowman
Only a family member can call the rest of the family dysfunctional. So we'll just let that stick with you.
- [95:30]
E
I do think, and you've seen it probably already, Shane, again, that light bulb going off moment is when you talk about a large piece of wealth. And we do like modeling around this. But I remember my first meeting with Henry and George on some balance sheet committee. What's the biggest regret you have in this business? Like giving the money back every 10 years? And now what we're doing is we can build hopefully generational wealth, maybe multi generational wealth, but keeping folks invested in these investment capabilities that we've been so good at for so long on the Carlyle and KKR side and compounding that and deliver these really high multiples over 20 years or more. And that got everybody energized here. It wasn't just again, speaking at a financial services conference saying, we're doing this, but that made it all sort of click as we went on tour when I got here in 2019, Carlyle and.
- [96:12]
D
KKR are brands that resonate out in the market and they resonate with end investors. But with that comes a responsibility. If you're in Doug's seat, you're in my seat. Because at the end of the day, the founders and your C suite, the integrity and the reputation that's been built up in the brand today is incredibly important. So we don't take that lightly. It has to perform, it has to operationally work. So there is that flip side to this as well, where these firms, KKOR and Carlyle, have built incredible franchises over decades. And yes, we have now come in to help the expansion of that in the wealth business. But that doesn't come without its own responsibilities as well. And that's something that I know Doug and myself really would agree on the fact that that's a big piece of the puzzle, that you always want to make sure that you're working with great partners in that regard. And I will give up a piece of business rather than do anything that could potentially have any harm to the brand.
- [97:11]
John Bowman
There you go. I think that's well said. Perhaps a quick close and I'll bookend where we started, which is asking for both your views with this quick, brief close is that we've spent a lot of time talking through what has worked, what you've done, how you've approached it, how you prioritized, how you transitioned. We've also used words like patience and vigilance and forbearance. This is not an overnight great thing. I'd love to know for those that are listening outside of KKR and Carlisle and Joan at Blackstone and Stephanie, who I know you both think highly of over at Apollo, for those that are just getting started outside of these big four great brands as you've described, is there anything you look back on that you would have done slightly differently or that you underestimated, that you had to pivot on, that you would give as advice to someone thinking about standing this up? Maybe I'll start with you, Doug, and.
- [97:59]
E
Finish with you have to have that mentality of I don't want to oversimplify here, but Rome wasn't built in a day. You've got to figure out what's going to showcase your firm the best you probably need these days, which I think some firms maybe are taking more seriously. It took us a lot of right size, but what's the size of the team you need? What channels are you going to operate in? If you're not in certain channels, it may not make sense to start there on your journey. And then what capabilities can you package without sacrificing investment integrity or potentially having a brand negative impact? You got to figure all that out before you take the plunge. Not that anyone can't do sort of five asset classes in five years, but that's the best case scenario. Or having just a lot of serendipity because I think that played a pretty big role here and a lot of sweat equity. But you've got to have reasonable expectations and something that with more and more entrants that distinguishes you in the marketplace. It probably doesn't make sense to be the 17th flavor. Getting close to Baskin Robin numbers there of something that's already in the marketplace, especially in a category where the top and bottom quartile pe There's a huge range but other parts of private markets a lot more constrained. It's yield less the false times recovery like how do you distinguish yourself and quickly carve a name. You'll need that to attract talent and you'll need to figure out what channels to traffic in. There's a lot of pieces there. I probably did more with that. But this is multidimensional and I do think you need to think through those points and have Shane said it best. Some tactical wins along the way. Know what those are before you get started. You got to put points on the board five years later, especially if you're at a public enterprise, you don't have five years. You in particular the trigger person do not have five years. Your organization might. So that's what I'd probably end with. John, good question.
- [99:35]
John Bowman
No, I think it's great wisdom. And Shane, I'll give you the last word. What advice would you give to those listening?
- [99:40]
D
Be careful, give the Irish guy the last word. Here's what I'll tell you. I'll give you two things. One, I cut my teeth late 90s. I began my career at Merrill lynch, had a boss, my Immediate boss, Jack McDonald said to me very early on in my career, keep it simple, stupid. And I was stupid and I would offer that up and I think it lines up with what Doug is saying is bite off something that you can actually chew here, figure out where is there demand in the market, that there is a gap and something that you have the in house expertise that could fill that gap and then execute exceptionally well on that in perhaps one channel and that could be the IBD channel, it could be the RIA channel, it could be the wirehouses, it could be in Japan, whatever it is. But don't try to be all thing to all people. What will happen is your senior leadership might come in and say oh my God, we need to be doing this, we need to do that. And they have a lot of thoughts about a lot of great things. They're all valid thoughts in and of themselves. But you have to be practical because you're going to have a budget, you're going to have X amount of headcount and Y to spend on product. And I would say keep it simple, stupid. So, so that's one thing that I think folks in this business always need to think about. And then I would also say that it's always good to maintain your relationships across the industry because it is a small business, it is a small industry that we're in. You do have friends out there if you want to reach out and just have a conversation about it. And I know Aaron and John, you guys are networked and know basically everyone in this business, quite frankly, probably more than Doug and I do. But. But I think there's lots of great people out there that will help you and you can. Perhaps to this day I'll call up some folks that I know are good friends in the business and say, hey, am I crazy to think about doing the following? Those are great people for you to have in your network and don't discount those folks as well because they'll provide feedback for you that will save you a lot of money, a lot of time and a lot of effort.
- [101:36]
John Bowman
I think remembering who you are and not strain from that expertise is the thread I heard in both of those answers in different forums. Aaron's heard me quote George Lucas, one of my favorite directors. But when he was a young aspiring producer and director, before we ever knew, of course, his Star wars and Indiana Jones fame, he said something to the effect of stay small, be the best, don't lose money. Meaning specialize in what you've got great gifts and talent in. And don't try, to your point, Shane and to your point, Doug, to be all things to all people, focus on how to differentiate. So really great way to end Shane and Doug. That was outstanding listeners. I know that you felt that was a masterclass and a blueprint and to use Doug's word, architecting a business that is still fairly new in its infancy as we heard today. So I hope you enjoyed it as much as we did and stay tuned for the Last Sip. Well, welcome back to the Last Sip, Aaron. That was a long one. I'm sure that listeners are now agreeing with us. Having sat through, you're probably at the two hour mark. This could be a record. But, but I think given the practical hands on nature of this, the stories, the applications, the anecdotes, they're really rich and important. So I hope that that was enjoyable and helpful. But Aaron, anything that jumped out to you that either reinforced or changed your mind as this journey and particularly this conversation with these two took shape.
- [102:59]
Aaron Filbeck
First of all, we should have gone for three hours on this episode. That'd be great. No, in all seriousness, I think this just really reinforced the whole channelization discussion. I know in the early part of the segment we walk through all those decision processes that take place early on. When you're deciding where do you go, what channel do you choose, where do you hire? And I think we heard from both Shane and Doug, keeping it small, keeping it simple, both on the product side but also on the channel side. Don't overthink this and don't scattershot across a lot of different opportunities. Just start simple and keep it small to begin. So that was my biggest takeaway. More of a reinforcement than anything.
- [103:38]
John Bowman
Yeah, I have to imagine the temptation is if you're listening to this and you're, and I don't mean any offense by this, but you're not one of the big four, you're a secondary player or a tertiary player and you're trying to build this out that it is really tempting, having watched what they've accomplished, to suddenly just get out there with as many rappers on every one of your asset classes as possible and see what sticks and see what sells and gains traction. And I think you heard loud and clear, even with those that have the luxury of all those options, meaning some of the largest firms in the world, that's not the way to go about this successfully. So I think that's well said. Mine was more of a tempering or a slight shift in my views. I think Shane was really helpful in reminding me sensitively that it's easy to stereotype sophisticated institutional and non sophisticated high net worth. And it's not necessarily that that's a conscience effort by most of us, but I think we automatically assume, oh well, this conversation is going to be harder because you are starting at a baseline level and when in reality, as he said, I think his words were a corner office, large global private bank that could be much more sophisticated than a lot of small endowments, small foundations, asset owners on the institutional side. And frankly, you could have a large pension that is less sophisticated than a really sophisticated RIA depending on where they are. So I think it really is about going up and downstream as he really articulated it well. And that doesn't really matter what the shape and size and how many legs the client has, but it really is just a matter of meeting the client where they are, regardless of what type of money or corpus that they're managing. So really, really helpful there as well.
- [105:16]
Aaron Filbeck
I would agree. And when you look at some of the wealth firms that are out there, sometimes they get described as many institutions just given the sophistication and the assets and the client base that they manage. So not thinking of it as a binary decision of well, you've got sophisticated institutions over here and then wealth is not sophisticated or however you want to divide those worlds up, I think is important. It was interesting to hear him talk about vehicles as well. We tend to bucket these things into, well, you've got Evergreen and Drawdown, and for both of them it was, well, I'm agnostic to vehicle. It's just what are you trying to accomplish from a client's perspective? And think of it less in terms of the type of investor that you're dealing with.
- [105:56]
John Bowman
That takes a lot of self control organizationally though, to your point, which I give them a lot of credit for because again, they probably have the resources and are compelled to roll all these out at the same time. But I think they sit back and they listen and really apply what's going to be the best fit for the client and their needs as far as their investment outcomes. So I think I give them a ton of credit based on how they pursued that a bit more deliberately. So, Aaron, the personal question that we agreed on for this particular episode, this episode, if you're listening, it means that this has dropped in between Christmas and New Year's. So I thought it would be interesting to ask the Philbeck household, are there any unique, strange, weird, pick your modifier there. Holiday traditions that have become commonplace during the holidays at your household?
- [106:45]
Aaron Filbeck
Well, John, it may not surprise you, or if any listeners know me, to know that there are several weird things that we do over the course of the holidays, but I will highlight one. And I don't know if my youngest brother, Grant will be listening to this episode unless he's really interested in private wealth. But probably about seven or eight years ago when the cinnamon challenge was a really popular trend, I think it might have been Vine, So maybe even longer than that. That was a moment for Grant where he got some Internet fame. And I remember recording him doing the cinnamon challenge in the mid 2010s, and every single year he does it again. So it's not popular anymore. No one cares about the cinnamon challenge except for Grant. And I've got this archive of videos of him doing it as he's gotten older and older over time. And my mom gets more and more irritated every year because all the cinnamon that gets gets spit all over the kitchen. So extremely weird, extremely hilarious, and I look forward to it every year. How about yourself?
- [107:46]
John Bowman
I don't think you were completely truthful. You care a lot because I've seen one of these videos and your giggle is as enjoyable as Grant's response and regurgitation. Let's just say we're in. By the way, on the cinnamon challenge, that is a new addition to the Bowman holiday tradition. Based upon that archive of Grant, mine is probably Just as weird, maybe not as gross. But if you know anything about our household, we are unbelievably competitive. Crazy competitive. There is not a game that we don't say, oh yeah, let's go. So years ago, when all the cousins on both sides were young and we'd all get together, the adults, meaning my generation, would have a large bracket, single elimination bracket of leg wrestling, which is where you lay on the floor hip to hip and similar to arm wrestling, your legs try to basically roll the other person over. It is dangerous as you get older and when there's holiday drinks involved and let's just say appendages get dangly and out of control. There was one point where my brother in law, my wife's youngest brother and I in the semifinals, instead of locking muscles to try to push one or the other, our heels collided and I think both heels just shattered, which was a fun er, trip. So needless to say that bracket was never finished. I'm still a semifinalist. I'm not sure we've ever done it again actually after that one. So leg wrestling championship in the Bowman house. That would be my answer. You should try it.
- [109:12]
Aaron Filbeck
I think we should try it at our next Kaya all staff team building exercise. I wonder how that would go over with hr, but that sounds awesome.
- [109:20]
John Bowman
Probably not. Well, so there you go. I'm sure that was entertaining. Disturbing all at once. Decanters. Listen, I hope as I said, this will drop in the midst of some time off with family and friends. A little bit of a mental reset. We wish you and your families a wonderful holiday season. Thanks for your support. Thanks for your patience in listening, especially to this episode. And we can't wait to spend some more time with you in 2025.
- [109:46]
Aaron Filbeck
Take.