Capital Decanted: Episode S2E4 – The Urgent Rebuild - Distributing Private Capital to Wealth Clients with Shane Clifford and Doug Krupa
Podcast Information:
- Title: Capital Decanted
- Host/Author: John Bowman
- Episode: Season 2, Episode 4
- Title of Episode: The Urgent Rebuild - Distributing Private Capital to Wealth Clients with Shane Clifford and Doug Krupa
- Release Date: December 31, 2024
- Description: This episode delves into the intricate process of distributing private capital to wealth clients, moving beyond superficial insights to explore the strategic and operational depths of capital allocation in the wealth management sector.
1. Introduction
John Bowman and Aaron Filbeck open the episode by reaffirming the show's commitment to deep dives into capital allocation topics, steering clear of superficial market takes. They introduce the episode's focus on distributing private capital to wealth clients, positioning it as a companion to their previous episode on the democratization of alternative investments.
Notable Quote:
“Instead of skimming the surface, we dive into the heart of capital allocation...” – John Bowman [00:06]
2. Market Opportunity
Current Size and Growth Projections
Aaron Filbeck provides a comprehensive analysis of the alternative investments (alts) market, estimating the current assets under management (AUM) in alternatives at approximately US$25 trillion. He breaks down this figure into institutional and retail segments, with retail investors accounting for roughly 16% ($4 trillion) of the AUM.
Growth Projections:
- By 2032, alts are projected to grow to US$60 trillion, more than doubling from current levels.
- Retail participation is expected to increase from 16% to 22%, equating to approximately US$13.2 trillion in AUM dedicated to alternatives.
Notable Quote:
“The AUM estimate is roughly US$25 trillion in assets under management...” – Aaron Filbeck [13:23]
Implications for Asset Managers
With traditional asset management revenues declining due to fee compression and rising costs, asset managers are seeking growth in private markets and wealth client allocations. The intersection of these two areas is seen as the "holy grail" for future growth, exemplified by the contrasting market capitalizations of BlackRock and Blackstone despite their different AUM sizes.
Notable Quote:
“The market has unequivocally spoken on enterprise values of those that are sipping from this grail...” – John Bowman [13:23]
3. Historical Evolution of Wealth Distribution in Private Capital
John Bowman provides a historical overview of how private capital distribution to wealth clients has evolved:
- Pre-Global Financial Crisis (GFC): Primarily served institutional clients like endowments and pension funds.
- Post-GFC: Firms began exploring wealth clients as a new source of capital, often organically and without strategic intent.
- Emergence of Dedicated Wealth Units: Blackstone pioneered this with their Private Wealth Solutions (PWS) Group around 2011-2015, followed by others like KKR, Apollo, and Carlyle establishing their own wealth divisions.
Notable Quote:
“The idea of an end-to-end independent private wealth business... a very modern development.” – John Bowman [04:00]
4. Models of Building Wealth Distribution Capabilities
Aaron Filbeck outlines three primary models asset managers adopt to enter the wealth distribution space:
-
Extenders:
- Description: Single asset class firms specializing in one area (e.g., real estate, private credit) expanding into wealth channels.
- Examples: Dean Witter Heinz (real estate), Cliffwater (private credit).
-
Buyers:
- Description: Traditional asset managers acquiring capabilities through mergers or partnerships.
- Examples: BlackRock's acquisitions (e.g., Global Infrastructure Partners, HPS, Preqin).
-
Builders:
- Description: Multi-product General Partners (GPs) with significant institutional presence establishing standalone wealth solutions.
- Focus of Episode: The detailed "how-to" process for this model.
Notable Quote:
“The builders, the GPs that we'll talk about, have the product already. It's more about the business model around wealth.” – Aaron Filbeck [35:40]
5. Stages of Growth: Bootstrapping, Scaling, Persistence
Stage 1: Bootstrapping
- Objective: Initial entry into the wealth channel by adapting existing investment products.
- Challenges: Lack of dedicated resources, need to identify product fit and appropriate vehicle structures.
- Focus: Building operational capabilities to handle investor onboarding, legal registrations, and client service.
Notable Quote:
“The reason why you saw direct lending take off over the 2010s...” – Aaron Filbeck [04:00]
Stage 2: Scaling
- Objective: Expanding distribution channels and introducing additional products.
- Challenges: High fixed investments, hiring distribution staff, developing a multi-product platform.
- Focus: Targeting wirehouses first, then Registered Investment Advisors (RIAs), and finally Independent Broker Dealers (IBDs).
Notable Quote:
“At the end of this phase, you should be filling out the rest of your team with people that might include a dedicated COO for private wealth...” – Aaron Filbeck [35:40]
Stage 3: Persistence
- Objective: Establishing a robust, scalable business unit with comprehensive operational support.
- Challenges: Maintaining client service excellence, managing redemptions, differentiating in a crowded market.
- Focus: Building a specialized team, enhancing legal and operational infrastructure, and developing differentiated marketing strategies.
Notable Quote:
“What to execute exceptionally well on that in perhaps one channel... But you have to balance that.” – Shane Clifford [66:00]
6. Halftime Segment: Educational Challenges with Franklin Templeton's Matt Brancato
Matt Brancato, Head of Alternative Sales at Franklin Templeton, discusses the primary challenges advisors face when allocating to alternatives:
-
Educational Gaps:
- Advisors and clients often lack a unified understanding of what constitutes alternative investments.
- Solution: Establish a shared language and comprehensive education around alts.
-
Perception of Alternatives as Tools:
- Alternatives should be viewed as means to achieve desired portfolio outcomes, not just as distinct asset classes.
- Solution: Shift the focus from product specifications to portfolio fit and purpose.
-
Timing and Regret:
- Clients tend to regret not allocating to alternatives earlier, emphasizing the importance of early cycle opportunities.
- Solution: Foster proactive engagement and leverage timely educational initiatives.
Notable Quotes:
“Alternatives are just tools... designed to achieve a desired outcome in an asset allocation.” – Matt Brancato [54:52]
“People typically allocate to what they wish they would have allocated to 12, 18, 24 months ago.” – Matt Brancato [57:00]
7. Guest Insights: Shane Clifford and Doug Krupa on Building Wealth Distribution at Carlyle and KKR
Shane Clifford – Carlyle Group
Background: Shane Clifford, Managing Director and Head of Global Wealth at the Carlyle Group, discusses Carlyle's strategic shift towards dedicated wealth solutions under new leadership.
Key Points:
- Catalyst: CEO Harvey Schwartz's strategic vision for expanding into the wealth business.
- Approach: Focus on evergreen vehicles alongside traditional drawdown funds, leveraging Carlyle’s extensive deal flow.
- Product Launches: Introduced a variety of structures (e.g., interval funds, REITs, BDCs) to cater to accredited investors.
- Team Building: Emphasized hiring a balanced team with both relationship-driven and technical experts.
- Education Initiatives: Launched Carlyle Connect Edge, focusing on advisor education to drive adoption.
Notable Quote:
“We really wanted to get down at the accredited investor level. Ten times as many households are accredited and qualified.” – Shane Clifford [84:50]
Doug Krupa – KKR
Background: Doug Krupa, Managing Director and Head of Global Wealth Solutions for the Americas at KKR, shares his journey from Blackstone to KKR, emphasizing the replication of Blackstone’s successful wealth distribution model.
Key Points:
- Experience at Blackstone: Learned the importance of educational initiatives and building structured, investor-friendly products.
- Building at KKR: Started with a small team, focusing on operational excellence and strategic hiring to support wealth distribution.
- Product Development: Emphasized creating diverse, customizable solutions to meet different investor needs.
- Operational Focus: Prioritized robust legal and operational frameworks to support scalable growth.
- Collaboration with Aggregators: Utilized platforms like iCapital and Case to expand distribution reach and streamline access.
Notable Quote:
“We migrated from just serving institutions to making our investment solutions accessible to wealth clients through advisors.” – Doug Krupa [64:59]
8. Key Lessons and Practical Advice
From Doug Krupa:
- Utility Player Mentality: Sales professionals must navigate a broad spectrum of client sophistication.
- Triumphs of Partnering: Leveraging relationships with aggregators enhances distribution capabilities.
- Stay Educated: Continuous education is crucial for both internal teams and external advisors.
Notable Quote:
“Successful distribution... you have to be a utility player. You have to be able to go up and down in terms of sophistication.” – Doug Krupa [80:02]
From Shane Clifford:
- Simplicity in Execution: "Keep it simple, stupid" – focus on manageable, high-impact strategies.
- Client-Centered Approach: Prioritize understanding and meeting client needs over product proliferation.
- Relationship Building: Cultivate strong, meaningful relationships within the industry to support growth.
Notable Quotes:
“Don't try to be all things to all people.” – Shane Clifford [85:00]
“Build evergreen solutions that complement your institutional mandates.” – Shane Clifford [84:50]
From Hosts (John Bowman & Aaron Filbeck):
- Importance of a Unified Vision: Ensuring top-level buy-in and strategic alignment is critical for success.
- Operational Excellence: Robust back-office capabilities and client service are essential for sustaining growth.
- Adaptability: Be prepared to pivot and refine strategies based on market feedback and internal learnings.
Notable Quote:
“You're not going to have a great strategy if you don't have the right operational support.” – Aaron Filbeck [74:49]
9. Personal Traditions and Closing Remarks
In the closing segment, John Bowman and Aaron Filbeck share personal holiday traditions, adding a human touch to the episode. Bowman recounts a past leg-wrestling competition turned unintended injury, highlighting the competitive spirit within his household. Filbeck shares a humorous tradition involving his brother Grant repeatedly attempting the cinnamon challenge, much to his mother's irritation.
Notable Quote:
“We are unbelievably competitive. There is not a game that we don't say, oh yeah, let's go.” – John Bowman [106:12]
Conclusion
This episode of Capital Decanted offers a deep dive into the strategic and operational facets of distributing private capital to wealth clients. Through comprehensive market analysis, historical context, and in-depth insights from industry leaders Shane Clifford and Doug Krupa, listeners gain a nuanced understanding of the challenges and opportunities in this evolving landscape. The episode underscores the importance of education, relationship-building, operational excellence, and a client-centered approach in successfully navigating the complexities of wealth distribution in private capital.
Final Notable Quote:
“Stay small, be the best, don't lose money.” – Shane Clifford [99:39]
Stay Tuned: The episode concludes with warm holiday wishes and a promise of more insightful discussions in the coming year, wrapped up with engaging personal anecdotes from the hosts.