Loading summary
Transcript38 lines
- [00:05]
A
Welcome to Educational Alpha. I'm Bill Kelly, your host, bringing you on the ground conversations with business leaders, educators and industry colleagues from around the globe. Educational Alpha is sponsored by iCapital, the financial technology company with a mission to power the world's alternative investment marketplace. Part innovator, part educator and part navigator of the alternatives industry, iCapital offers intuitive, scalable digital solutions that have transformed how private market and hedge fund investments are bought and sold. With iCapital, financial advisors, wealth managers and asset managers around the world now have access to everything they need to deliver the return and diversification potential of alternatives to high net worth investors. To learn more, visit icapital.com.
- [01:00]
B
In this episode, host Bill Kelly sits down with Matt Cartol to unpack the evolving dynamics between LPs and GPs and what changing investor profiles mean for private markets. Matt shares highlights from his two decade career across firms like Hamilton Lane, MetLife and Allocate, offering key insights on secondary markets, manufactured liquidity, transparency and the future of venture capital investing. They also explore the challenges and opportunities in democratizing access to private markets and how to equip investors with the right tools and education for long term success.
- [01:35]
A
Matt Cociurlo welcome to Educational Alpha.
- [01:38]
B
Thanks Bill, really appreciate the invitation. Glad to be here with you.
- [01:41]
A
My pleasure. And while this is done through a Kaya platform, I don't exclusively try to have Kaya members join, but when I can get two of them myself included inside of one virtual studio, it's a win. So thanks for that membership and I appreciate the commitment to professionalism.
- [01:58]
B
Absolutely. It's been fantastic. I've been a member for over a decade now. It's been fantastic for me.
- [02:04]
A
I'm a late comer to the mix, but very much believe in professionalism and appreciate your early adoption. You've had a very interesting background, a lot of different shops and we're going to get into that in a moment. But I think the bulk of our conversation today is going to be talking about a very, very important intersection, which is one where the LP is approaching the GP and all is not stagnant there either because the LP is changing. It's getting more individual versus institutional. Even though the product offerings may be the same, the wrappers are changing, the underlying is perhaps the same, but we're going to spend a fair amount of time on that subject today. But maybe Matt, as I said, you've had a lot of interesting stations in the course of your career and maybe a bit of a recap there before we get started on the heart of what we're going to talk about.
- [02:50]
B
Absolutely. Bill. Well, so it's now my professional career is stretched now a little over two decades. I grew up in northern Pennsylvania, made my way down to the Philadelphia area after college for my first role. My first role after college was at Hamilton Lane when it was about a 50 person shop. So it was 2004. I'm happy to date myself there, but it's just an amazing opportunity personally to get exposure to an industry that frankly I didn't have a ton of exposure to. In undergrad. I was a finance major, but this was interesting, still developing, and Hamilton Lane was fortunate to be at the forefront of that. So roughly nine months into my joining the firm as a back office analyst, the company really started taking off in terms of adding clients, building portfolios and products internally, growing internationally. So I got to sit in. I always joke I was in rooms that I had no business being in, but it was really fantastic from an educational perspective to be able to see a lot of the development and growth. I was there. I joined the firm's secondary investment team in 2008. So really interesting time to be a part of that, but see a lot of these different aspects of the asset class growing, the firm growing. And if I roll the clock all the way back, it was akin to a startup experience, even though the firm was 10 years old at the time that I joined, but really just growing quickly, getting exposure to a lot of stuff. So fantastic. First station of my career. Then joined an OCIO called Hurdle Callahan here outside of Philadelphia where I'm still based. There we were managing capital for both small institutions, individuals and families. That was a great opportunity too because I got to get the whole breadth of a portfolio. Wasn't just private markets. We were managing the entirety of the asset base for some of these clients. So over time I ended up running our private equity group, but sat on our investment strategy investment policy committee where we focused on what's the right thing to do for clients. How do we think about incremental exposure to different factors to different segments of the market. It was asset class agnostic, but we had around the table some fantastic minds who were shaping that. I also got to do a lot in terms of education. We're going to talk a little bit about that. But private equity was something that was still a bit new to some of these clients. So did a lot in terms of the 101 the what is private markets? How do you invest? All the way down to the granular detail of what are companies doing? How do you create value Manager selection, all those sorts of things. So an eight year run there moved a little bit more upstream or maybe a lot upstream depending on how you measure it. But I spent then the next three years co leading the alternatives group at MetLife. So that was, I always say, a small sliver of a very big pie. We managed the general account of the insurance company as well as global affiliates and there we were deploying in the billions of dollars a year. So for me it was the first opportunity to be internal, to not have commercial clients and necessarily need to have clients where I needed to interface and have that external exposure. Our client was the insurance company. We had a clear mandate, but we also had a fair amount of autonomy within the firm and flexibility. So we, our team, the investment committee, were able to do things like launch a co investment program, an emerging manager program and also it was my first experience being one of those very large checks in the room. So nearly all of the funds we were invested in, we were on the LP advisory committee, we were in the room. We were able to be catalytic in a lot of situations as well. So that was another great, I always say another arrow in the quiver of sort of learning the expanse of the industry. And I came in at a little bit of a crossroads personally where I said I could. I love being in an organization like this working with a great team, but I also had a bit of an entrepreneurial itch myself. I did not have any novel ideas on my own, but I was approached by a founder of a company called Allocate at the end of 2021 as the company was just getting started to join up and co lead the investment group there. And the premise there was bringing venture capital to the masses. So it was this democratization theme which I think is so prevalent now. But we've had platforms that are serving more of the wirehouses, the large banks, the ultra high net worth folks, and those have tended to be more established firms. At Allocate we were focused on venture capital because that was still today it's a very tough market to get access to as an individual, but it's also about doing it in an efficient way. So we're building the technical infrastructure and the digital infrastructure in the backbone to be able to do it in a user friendly and easy to use way, provide a lot of tooling and that access point. Of course after two and a half years there, I've spent the last year now as an independent consultant. So I work both with gps on how to build their network, their story, how to go to market how to think about LPs and then I work with LPs on how to build programs, how to think about governance, investment committee infrastructure. But then manager search and diligence. How do you underwrite properly? How do you get to the core of what you really need to get to that final decision?
- [08:11]
A
Great summary. And before we take that to the next step, which is this lpgp, maybe a random thing you said, but I just want to come back to it. You talked about your formative years at Hamilton Lane and you mentioned 2008 in the secondary space. And. And the secondary space has gotten a lot of ink of late, but probably a very different marketplace.08 depending on which side of the GFC you might have been. But I would think, and you can correct me or maybe give us more intel. It was probably more of a window for distressed assets, so to speak, where the seller absolutely needed liquidity and the provider of liquidity could probably almost dictate what the market is. So that may or may not be true. But what was the secondary market like back then versus where it's moved toward today?
- [09:00]
B
I find it to be so interesting that in a way we didn't quite have, we were still booked pre gfc, I would call it more regular way. Secondary market was still evolving. You had mostly LP positions and portfolios being traded. Was long before the dawn of the GP LED market that dominates today. But once the GFC hit. You're exactly right, Bill, that was okay. You have a need to unload an unfunded liability. So there were situations where there were assets we could bid on for effectively zero, just to take that obligation off of people's books. So even then you had to consider is this a good value? So the volume picked up. Mostly distressed assets. But your underwriting thresholds were very different.
- [09:44]
A
Right?
- [09:45]
B
So if I can buy something for 10 or 20 cents on the dollar to generate an acceptable secondary return, you think about now, if you look at this history, it's probably at two times multiple and a nice irr. If you're buying something for a dime and you sell it for a quarter, that's your two and a half, right? So you don't have to have that ambitious of goals and targets for where these assets can appreciate. But it was such an uncertain time that you just wondered how far the knife was going to fall and if you were taking undue risk where I think Fast forward almost 15, 20 years now, the amount of capital that's raised, the amount of different complexities and structures and ways that you can access the Secondary market is just so much more efficient. I don't think it's quite as efficient as it needs to be yet, but we've come such a long way where I think then even pre GFC secondaries were looked at as a bit of a negative contraindicator quality of the lp, quality of the gp. If you're selling out of a position, what does that mean to the market? So I think LPs were a little bit reticent. GPS wanted to keep it in the family if they could right. Find an existing LP to take on those positions. Whereas now it's a perfectly acceptable portfolio management tool from the LP side. And the GP LED market has, where there's been a dearth of liquidity, has really been the engine to allow GP's to think about growth exits continuing to hold great assets. So I think we just have a much more robust and accepted marketplace which I think will only continue to grow.
- [11:21]
A
Maybe just to stay on this for a moment, Matt, because this is an area that does interest me and we've talked a little bit about this on this platform before, but maybe not somebody that had your reference point. So from memory, I think the secondary space for all private assets last year according to the ft, although I think many sour would have a similar number, was somewhere about 150 billion. When the denominator private capital, you could pick a number, but let's call it 15 trillion, it was only 1%. And if I make a parallel to say the residential real estate market, which is an illiquid market, but imagine if the sale of homes on an annual basis, only 1% of that stock traded every single year, it would be a very, very thin market and the time to sale would take a long time and bid ask spreads would widen. I think while the bid ask spreads have narrowed as we get into this, not only this next phase of democratization and that has an impact, but where is it ever written that a private equity investment reaches its maturity in seven to 10 years with or without extension, there may be good reason to continue to hold it. So I absolutely believe we need to have a deeper secondary market, full stop. I don't know if you could put a percent on it, but 1% just sounds too thin based on the needs of just institutional LPs. And we haven't even gotten into the 5% liquidity call on interval funds as well.
- [12:46]
B
I think the number is dramatically low. Right. I think we could quadruple Quintel, you could pick a multiplier from here and depending on who you Talk to. If you talk to folks who are in the market raising 10 plus 20 plus billion dollar funds, they're still in a position where that capital is going to be able to be invested at a pretty quick velocity. So I feel like we're not anywhere close to where we need to be. Would 10% surprise me? I don't think at all. I think 10% might be an interesting point to see. Well, I should say we need the infrastructure first to be able to support all that because these are still all privately negotiated transactions. So while we do see some platforms coming out to hopefully facilitate easier use, I still think you have this volume mismatch where LPs I think want to find more liquidity, want to use this as a portfolio management tool. And then the step further, I think GPs like the opportunity to be able to present this at an earlier stage. Because the reality, Bill, is that the timeline for these investments is still 10, 12, 15 years. Right. We talk about a 10 year fund life. Very few funds liquidate in that period, in that natural period. And as LPs are more drawn to semi liquid and evergreen structures, I think the traditional markets have to be open to the fact that these durations can be shortened, not in an unnatural way, but through secondary transactions. I feel like there's still a ton of Runway, but we're not going to see any slowing soon.
- [14:19]
A
And we could debate the value of an illiquidity premium, but I think that's a bit of a Trojan horse when you talk about the benefits of the private markets. And it might have been Howard Marks that made the parallel that if he buys 100 shares of Apple, he owns a stock, he doesn't own a piece of Apple. And unless you're the Norway sovereign wealth fund, your ability to influence the outcome of what that management team is doing is close to zero versus owning a portfolio of private companies where you've got a significant ownership interest. You may be on the lpac, the GP has board seats and they're not reporting earnings on a regular basis. So I think therein drives the value. It's much more complicated than that. But if I'm in an interval fund that has liquidity on the offing at 5% a quarter, 20% a year, most likely that exposure to liquidity is coming through a public market proxy. And it would be nice if there was an active secondary market where you could get some of what I described before and still be kind of fully invested in the private markets. But with the depths currently of the secondary market, I just don't think we're going to get to that promised land today.
- [15:29]
B
I think you're spot on. I think there's still, whether it's mechanical or new products, new structures that need to come out to satisfy that need. I agree. It would be nice to be able to have that come through a private market, a more private market, neutral perspective.
- [15:45]
A
So maybe moving on to the issue at hand, the LPGP construct and the relationship and maybe healthy tension between the two. And healthy may not be the right word. I know you've got a business to run in this space, so you've got to be careful about maybe how specific you are in terms of the realities. But you seem to be a person, Matt, that speaks your mind. What is the state of the union? And I'm going to start with the institutional and we'll talk about democratization. But what's the state of the union between LP and GP relationship around just the very concept of transparency?
- [16:18]
B
I would say we're still evolving in there. If I think back to the start of my career in the industry, it's about as opaque as you can get, right? Technology was not even a component of this. It was you got your physical statements, you downloaded them from a portal, printed them out, filed them away and you thought about that was there was an annual meeting, there was quarterly reporting. That was kind of the level in terms of where LPs had access. Of course you had some groups with more, some groups with less. But I'd say the reality is as technology has advanced, as GPs have evolved, as LP demands have increased in terms of what they expect from partnerships. That's the word I'm going to come back to. We've seen more and more transparency and I think more and more ways to address that, whether that be structurally with hey, you have on demand access to information via a portal which is updated through feeds from the underlying companies that builds up that gives LPs a lot more transparency into how things are going. That's always been a challenge if you're managing a multi asset portfolio is I have these quarterly marked assets. What do I do with them in the interim? How do I think about them? So that's definitely been a catalyst for more transparency. I also think GPs have thought more about other ways to interact with LPs rather than just, I would say 20 years ago, a regular way. LP commitment was pretty much the only way that you had exposure to these LPs. You had a four year fundraising cycle, you engaged as needed and that was the expectation. Now a lot more on demand A lot more ways that LPs want to think about their relationship, their partnership with GPS. That's information sharing, that's education, that's co investments in deal flow that could be owning a share of the GP and really influencing the management of the firm. So you have all these different avenues for different types of LPs to engage with GPS. I'd say the LPs pushed for it, the GPS have responded. So we continue to get better and push that envelope. I don't think we ever get to that. Perfect healthy tension, I think is a fair way to characterize it. There's always going to be a bigger ask from LPs than GPs are willing to come. So I think you have this back and forth of where are we going to ultimately get to where both sides are happy. But I think we're in a much better place through the benefit of technology and the expectations being met for a lot of LPs. And this is certainly on the institutional end.
- [18:54]
A
So a couple of thoughts on that, Matt. So one, obviously when you're talking about institutional LPs, you're talking about pretty smart and sophisticated investors and GPS, same category. And if they're consultants or somebody like you in the middle, a lot of smart, hopefully kind of members sitting around the table. So with eyes wide open leading up to 2021 and interest rates being very low, it probably was foreseeable, with foresight, definitely with hindsight, that the backside of this was going to be a bit of a clogged plumbing system. Whether people thought about that or not. I think it's pretty clear now that it was obvious back then, but we are where we are and associating blame and I'm not suggesting anybody's doing that about is the LP's fault, the GP's fault, could we have done anything different? Capitalists do what they're going to do and I'm a capitalist too. I'm not here to besmirch capitalism. So I think we've got to figure out what is the next move from here. And I think the short answer is it's going to take time. And I think maybe one of the struggles is that the LPs get this, but they have pensioners that need to get paid and they can't do that with negative dpi and they can't send an IOU in the paycheck every two weeks to the retiree. So I think part of the tension is for them is that they've been living this negative DPI for quite a few years. They May want to invest in the next vintage even, and they don't have the ability to do that. The GPS are coming out with their next fund, but then they're trying to meet the LP's interest by more of manufactured liquidity as opposed to garden variety liquidity. So NAV based loans or continuation funds and LPs are now doing their own version of continuation funds as well. GP stakes and, and I think that these are probably all maybe the invention of necessity about where we are and I think we lean on one of these levers a little bit too much, maybe less good. But I think if you poll the LPs and I've seen some of these surveys, I think their attitude might be, you know what, I'd rather take the loss today and get some cash back, figure out where I'm going to reinvest and don't come knocking on my door with fund X plus one. I simply don't have the appetite to be taking anything down right now. Now. So less of a question, more of a big picture observation. But maybe some of your thoughts on that.
- [21:20]
B
I think it's. You used the phrase I, I use a lot of manufactured dpi. Right. That's not the emergence of the secondary market with all the components that you just mentioned are absolutely on the table and I think readily accepted. They still have to be used in the appropriate way. Where if I'm investing in the asset class as an institution, let's take an insurance company, you know, the seat I sat in and MetLife. The role of alternatives in that portfolio has a very specific need. We are maximizing outcome. We're not driving towards dpi. We of course want that dpi, but we want to maximize the multiple of capital there. So do we really want our managers to be thinking about cycling that capital back to us at potentially a lower return? I'm sure there are other investors, let's take other investors who are paid, who are compensated, their bonuses are tied to IRR higher DPI earlier in the life. We know how the math works and it's not perfect, but that could be another driver. So you have these tensions between even different LP groups in terms of what they expect from the GPS and what that ultimate end of day return is supposed to drive for them. So I think that's part of it as well, Bill, where you don't necessarily campaign it with a broad brush. But GPs have to be attuned to what their LPs are asking for and utilizing the tools in the toolkit in the most appropriate way possible. Every LP today would embrace getting capital back in close to par in a way that you know you can just move on and start thinking about those commitments because in 2023 was a brutal fundraising year. 2024 not materially better LPs, we know how cash flow planning works. You have to keep feeding the beast, right? And that's you do need the distributions to come back. But once that does open up, if you sat on your hands for two vintage years, you're going to potentially face a shortfall if things go back to the normalized pattern. So that is I think the dynamic that we're in. Yes, it'd be great to have some DPI back to be able to keep reinvesting that, but also do it in a way that still helps the LP achieve their goals.
- [23:30]
A
So one area I want to drill back down on that is the continuation funds. And I saw something in the FT just a handful of weeks ago and I put this under maybe a couple of headings. One is that things that occur in times of crisis are not necessarily crisis based tools. They serve a purpose once the crisis is done. And I'll come back to why I'm throwing this in as well. But Warren Buffett is famously quoted as saying his favorite holding period is forever. So with that as an intro, this FT article talked about these continuation funds in the first half of 2025, 41 billion of exits which is plus 19% of all sales in first half of 2025. But it's plus 60% versus a year ago. So these continuation funds are a big part of the liquidity quotient. And I think we talked about this just before we hit the record button. Where is it mandated that full value is achieved inside of a 7 year fund life or with normal extensions to 10? And there are a lot of these and I want to talk about VC in a moment too. But there are a lot of these VC general partners that are holding their assets for a much longer period of time because why should they, and more importantly the clients they serve, not try to eke as much realistic value out of the orange as possible as opposed to saying well, seven years are up, I got to sell it. So I think there is a home for continuation holding. I don't know if a fund is the right word. What do you see as the construct going forward? Is it going to be a different fund window? It will still be a graduation to continuation funds. I know there's evergreen funds out there, but what are your views on that?
- [25:16]
B
I think with the introduction of all of These different options, and my personal view is every LP with continuation vehicles, every existing LP gets a choice, right to roll or to take liquidity to potentially add more dollars. All of them have nuance to them, but the LP will make the right decision for their portfolio. I think the gp, you have to look under the table too to see what fees are being generated, how much carry is getting rolled into new deals, motivations, incentives, all those things, and of course the advisors and intermediaries that play a role in this market. So I do think the current construct of a continuation vehicle makes sense because in a tender offer structure it does allow LPs to opt in or opt out. I still, I think we can get a lot more, we can get a lot more creative around what that could look like if an asset is compounding at a rate higher than what you could get in the public markets. That's the old argument around irr. You're looking at this as though the asset is continuing to compound before and after the holding period. If you're generating liquidity from an asset, the LP has to figure out a place to reinvest and get that same return. So the continuation vehicle and the structure around that, holding a high quality asset for longer if it is compounding at a higher rate than what alternatives might be. It's hard to determine for the GP of what that might be. But I see that being a construct that can continue to persist and I guarantee it will. I think that number that you quoted in 1H25 will probably grow over time or at least stay steady. I don't see any sign of it going down, but what shape that takes I think is still tbd. The efficiency of those, the secondary market and the capital being raised is going into support those future vehicles which may come with different return expectations. There's an LP class think in this way. There may be an LP who owns a direct position in a fund and then also might be an LP in the secondary fund that's coming in and buying the continuation. So you have both of those sides to weigh on exposures and return expectations. So I think there's a lot of nuance and understanding of back to goals and what you're trying to achieve. But I think there is plenty of availability to flex and be creative around this.
- [27:39]
A
So maybe slightly turning the page, Matt, and this maybe not so much part of your current remit, but certainly when you talked about your stint at Allocate, and now I'm talking about democratization and a different quote unquote LP and It might be more of a shareholder in an interval fund, but I've had this discussion with a lot of folks and Certainly in Washington D.C. and any other place, it's hard to get a one word answer from a witness. But if somebody had a gun to my head and said it's got to be yes or no, full stop, and the question was democratization of access, is that a good thing? I would say yes. I would try to quickly add the but. But if it was only yes or no, it would be yes. So curious what your visceral answer is. And then you can expand on what your buts would be.
- [28:28]
B
It's a yes for me for sure. When we think about just the existing construct around qualified purchasers and accredited investors, right. We're assuming that wealth is an indicator of risk taking, of sophistication, of a lot of these things. We always had that, you know, what's the smart money? What's the dumb money? And I don't think any money is dumb. Everybody's got their own motivations of why they're doing it. But the idea that because you don't meet a certain wealth threshold, you shouldn't be able to invest in these assets, to me is just fundamentally flawed, especially when they've been the highest returning asset class for pick your interval, maybe not the last 10 years relative to the QS, but I think you definitely have outperformance that you can see manifest through the allocations for endowments who've had higher privates, through pensions, through institutional investors. So we've effectively locked out for many years the ability for the individual investor. I'm not talking about this being in a Robinhood context where you can buy and trade private positions on your phone, but I do think bringing more folks into the fold is absolutely a positive. But it has to be done in a constructive way where you think about what we've talked about now with the 401k market and a lot of the conversations of how the management of that could be. In my estimation, there's probably not a better place if you're a young professional, to park your capital for 30 or 40 years in your retirement account into some blend of private market assets. So I feel like there are tons of opportunities in that space. Making sure that people understand this educational test or thinking about do people know what they're getting into? There's no guarantee of that. But having that acumen threshold rather than a wealth requirement, I think is a necessary change. And then making sure everything is transparent. That is the other piece of this not to undermine the access and exposure. These are still going to be private companies, and that's important, but making sure the investors have as much as much understanding as they would buying a mutual fund.
- [30:38]
A
And it's very easy to have a black and white test around net worth or income. And I get that. But I think some of this comes back to maybe a big part of it comes back to the fact, Matt, that are we working in a very interesting and complicated industry or are we working in a profession? And I would absolutely dismiss that this is a profession because there are no professional standards like we see in law or medicine or even plumbing as an example. So I think to go after the more individual asset owner and ascribe levels of net worth and levels of income, I think it's a fool's errand for many, many reasons. But I look at the advisor who's basically the dentist, the doctor, the plumber who's doing work on our behalf. They have got to be the ones that can prove that they are ready, willing and able and well educated. And maybe with a Kaya, maybe with a cfp, that they know what they're doing. And I think that's gotta be the line of defense. And somebody has got to act as a clearinghouse. And there'll be bad actors in there, clearly. But if I could know that I'm hiring a trusted advisor, it's just like hiring a plumber or a dentist. I assume they know what they're doing, but I'm taking a lot on faith. And when it comes to investing that if they do something that's maybe not in my best interest, it may take me decades to figure that out. And by that point I'm sunk. I don't think the average person's ever going to be able to understand maybe even the risks and volatilities of a 6040 setup versus others. And actually on that process, I just wrote a blog post. It hasn't gone live yet, but I keyed this off something I read in the Economist. And they looked at the 60 40, if you retired in the year 2000 and over the next 20 years, so 2000 to 2020, the 6040 compounded at 5.6%. And if you withdrew 5% 60 basis points less every single year by 2019, you have no money left because your withdrawals are moving in a straight line. But Mr. And Mrs. Market is very volatile. There's drawdowns and if you're coming out at negative periods, it's going to be upside down. And then if you Throw alternatives into the mix for the average investor. And this is just a simple problem that I think most people can understand that if I've got a big chunk of illiquidity in there, a 4% rule doesn't necessarily apply to that slug. I've got required minimum distributions that I can't take out of the illiquid part. And it can get very, very complicated very, very quickly. And I just drill down in one little vertical. But it is so very complex and I think to have rules specifically, and I say for people like you and I, I think both of us are more sophisticated than the average person on the street. I just think it's an unfair hurdle to try to put in place.
- [33:41]
B
I think all of that is very true.
- [33:42]
A
Right.
- [33:43]
B
I think there's also the perceived versus actual volatility of private markets. Right. When you look at vintage by vintage, if you have a basket, if you buy the entire segment of the market, it rarely loses money. Right. Now that's not to say that's a reason to invest or to allocate there, but I think building it into models has always been a challenge because if you have an optimizer and you put historical returns, return and volume, you put the Sharpe ratio in here, private market is going to take 100% of your allocation. So you have to exhibit some level of discretion around what is the risk in private markets. Is it illiquidity? You're not going to have access to the capital, it shouldn't be capital impairment, you shouldn't think about it in that way. But it could be the risk of not achieving that goal, which I think is the most relevant risk there and for each individual. I completely agree that having advisors who are well versed in this space for individuals, it was part of our role at Allocate. I mean, we were working with high net worth individuals with RIAs directly and with family offices. So all folks who had a level of capital to be able to invest in the space, but such a widespread of sophistication understanding. So it was incumbent on us to educate across the spectrum. So we're educating the advisor who's then educating or the investment team at an RIA who's educating the advisor, who's educating the end client, the family office, we're having direct conversations about their goals and where things fit into the mold and then with the individual really understanding what the risk profile is. So I think it's incumbent on whoever is the provider of this access, depending on how broadly we open it up and through what avenues that Education piece becomes the central focus in my mind to making sure people I use the phrase can confidently invest. It's not just being able down to having access to it. It's to go into something, understanding what you're buying, understanding what your expectations are and making sure that you kind of know what's happening there. And it can be in the context of a target date fund. If you understand that as today, the black box that it is, obviously you have transparency into that. If alternatives are a component of that, that's a fantastic way for an individual to get exposure.
- [36:03]
A
I agree. And at the last point in this I want to turn the page to VC and selling my own book. Perhaps in the same blog post it's interesting when you talk about target date funds. We accumulate wealth inside typically a defined contribution plan. There are menus of options and matching contributions. And if I can't handle the asset allocation myself, there is a target date fund. And I agree that's probably the perfect home for illiquids because we don't touch those as much. But then the moment you retire, you roll out your 401k plan and you're decumulating in this vast unknown all by yourself. There's no menu of products and I think we need an inverse TDF to help retirees. So maybe as you think about your book of consulting business, I think there's a wide swath of opportunity there that maybe somebody like you can step in.
- [36:56]
B
I hadn't thought about it in that context, but it absolutely is necessary.
- [37:00]
A
Yeah. So maybe you're 2.0 and maybe you can hire me. So last thing I do want to cover, you mentioned early on the VC space, Matt, and this is a space that interests me a lot from a couple of different reasons. I just find that there's a lot of innovation around quantum computing, AI solving for healthcare, reshoring, supply chains, data centers, et cetera, et cetera. I've argued on this podcast in the past that the small cap space as I once knew it does not exist anymore. It's all gone private. And if somebody said to me I'm going to give you as an individual access to the private markets and let me tell you about pick the bulge bracket GP firm. Their next the LBO fund that holds very, very little interest to me. Not to besmirch that model, but that's a very efficient space and performance dispersion is very, very wide and the likelihood I'm get something that's meaningfully above the public market proxy that I could get one or Two basis points is low. Now I know there's a lot of risk in the VC space and you're hitting singles or striking out and occasional home runs, but that is an area where, especially if you're a young investor, having access to the VC space I think could be so, so very interesting. And I don't know if some of this is tied to what you did at Allocate or some recent observations, but be great to close with some of your views on the VC space.
- [38:28]
B
Having been multi asset across alternatives most of my career, Allocate was a first opportunity. I got to really focus in on venture and admittedly in prior roles I was skeptical because in most places we didn't have access to some of the top managers or some of the top innovations. As we developed that, the relationships that we had at Allocate was fantastic. So really getting to see and understand innovation is not market dependent. Right. I think that's the beauty of innovation. You're always going to have smart and I would say now even smarter people coming with new ideas, being able to build companies without the need of buying servers and we're AWS and the iPhone, that's only 15, 18 years ago, but those were huge innovations and now we have the next step function with AI. So if you don't get excited by that, the opportunities across all the vectors you mentioned, plus when we think about space and deep tech and robotics and all of those different areas, that this is the only asset class where you're building something from nothing. Everything else is a transaction is a trade of some sort. This is really net new businesses being created and I feel like that gets me very excited from the investor mindset. There's still massive risk, right? I think the number of startups that never reach a financing round, there's some great data from Carta. They have initially started with cap tables and do fund admin work, but all of the data that they have on company formations and then really never raising a seed round or being acquired before that, the failure rate companies that just die on the vine, 50, 60% of all investments in early stage funds go to zero or have a negligible return. So going investing into that certainly is. You have to understand the risk profile of that. However, the outcomes on the upside just continue to get bigger and bigger and bigger. We could argue if the valuations of SpaceX and OpenAI and Anthropic are rooted in fundamentals because they're not. Anyone with a Kaya, with a CFA with any certification is going to scratch their head on Thinking about how that valuation works out, but the ability for these companies to continue to scale and grow. We see users and we see revenue really growing at such accelerated rates. It just gets me very excited. And I think as a portfolio manager, kind of bringing it all together, Investing in venture gives you a lens into the future. We think about technology and how it's being expressed across all these different areas. Those companies grow, they move up the chain, they impact how other folks do business. When you think about mature companies, companies you can lend to, how you build, think about data centers as a component of an investment portfolio. Now, it's all driven by this wave of technology and it of course has ripple effects into the public markets. I feel like this space is one of the most important cornerstones of a portfolio. You have to take that with a grain of salt because there's more volatility and dispersion, there's more dispersion of outcomes when you're investing in particular companies and funds. But thinking about it in a portfolio context, it has much more positive influence and skew than you would think in other ways.
- [41:52]
A
And I don't know if it's fair, but you would have informed views on this. To compare it to the advent of the Internet in the late 90s before the tech bubble finally did burst. Good, better and different reasons. As an individual investor, I could be in that game in the public markets. And if you got in early and owned some of the right names for the long term, you did very, very well. And we've all seen these studies. The time from private formation to IPO is very, very tight. And now it's decade plus, or maybe forever. So while the risks maybe were different in the tech bubble, the loss of principle was very much in play. And many people did get rinsed out when that tech bubble did burst post 2000. But at least I could be in the game now. It seems like as an individual investor, it's closed off to me. And now I don't know if that's the right solution either.
- [42:46]
B
I think it goes back to the true democratization concept. Where is it okay for folks, the folks who lost money during the bubble that was, that was very short lived for a lot of folks, right? Dollars in dollars to zero dollars completely evaporated, I think. Now how do you construct a portfolio for the individual investor? Because I don't think what we've seen is a trend towards SPV single asset vehicles, particularly for these later stage companies that are getting traded around. And I bet you or I could probably call somebody up and buy a share of SpaceX or OpenAI. These are now as close to freely traded on a secondary market in the private context as they might be in the public markets. But you could argue is that the right place to put capital? So I think there's still the investor mindset of what types of exposure do I want, what types of outcomes do I expect from that? I think the best way to think about it is in a portfolio context, a slug of this rather than taking those individual bites. Being a company picker, being a stock picker is hard in the public markets. Being a fund investor in the private markets has just as much dispersion. So think about trying to write an angel check or invest in an SPV of one single company. Invest with caution. Understand that that loss of principle is always on the table. But invest in things where you do have of passion and insight in a prudent way. I feel like that's something that you have to introduce, especially for an individual investor. Buffett always used to say invest in what you know. Now that's I think you or I probably would say quantum computing is probably outside of our purview, but very interesting and you can understand the trends. So being able to find ways to express that in your own portfolio I think is a net positive.
- [44:37]
A
Those last few words from you, Matt, were truly Educational Alpha, hence the name of the program. And I've said this before, at the end of these podcasts, that constitutes a mic drop moment. So I think it's maybe good to go out with a win. But I appreciate you coming on and thank you again for your commitment to professionalism. It doesn't have to be through Kaya, although when it comes to alts, I very much believe not only the Clubhouse Leader, but an organization that's very innovative and curious as well. And change is a constant in our industry and to not be part of that game on a continuous basis, you're swimming against a very strong tide. So thanks for all of that and I really did enjoy the conversation.
- [45:16]
B
Absolutely. Likewise Bill. Really enjoyed it. Thanks again.
- [45:20]
A
Thank you for listening to Educational Alpha. I'm your host Bill Kelly. Learn more about the Kai association and subscribe to the show@kaia.org that's C A I A dot org. See you next time.
- [45:34]
B
Sam.