Bill Kelly (4:05)

Great story and great background and thank you for your service. What branch of the military were you in?

Tom Tull (4:10)

I was in the army. Spent a year in Korea, a year at Fort Bragg and a year in Vietnam.

Bill Kelly (4:16)

Wow, good for you. I think those formative stages in life, and I look at the latter part of our generation and you're probably a little bit ahead of me there, but my parents generation as well, serving in the military was part of growing up and I think we have lost that commitment. Not only joining, but supporting. And if you ask anybody in the Northeast or major cities like Boston, do you know anybody serving, you'd be hard pressed to come up with a single name. It's gotta be a commitment of the country. And I think there's more we can do on that front. But I want to just make note of that and appreciate that service and maybe we could find a way of getting that back into the vernacular of the next generation. But thank you for that.

Tom Tull (4:58)

One item that resonates with the military involvement was how to work with people. You really earn respect. You don't get respect, that's crucial. You're going to have challenges. Patience pays. At the end of the day, you can be successful, but you've got to have a tremendous team, whatever they are, platoon, staff, what have you.

Bill Kelly (5:20)

Well, that's great. So moving on from that, as I said, you and I have bumped into each other a bit on the circuit during your days at ers and more recently at various conferences. And oftentimes we're following each other on the stage. And certainly me and maybe now you, we sit in the chair of the Moderator more than perhaps a panelist, but you probably toggle between both. But one of the taglines, which you've probably heard me say, it's not easy being an allocator. You were in that seat for many years and there's a lot of responsibility you're carrying around, particularly with public pension plan where there are beneficiaries that are expecting a check in the mailbox every couple of weeks or every month. And that comes with responsibility and expectation. And you've got to manage around that yourself too. So is it fair to say it's not easy being an allocator? Or maybe it was a bit of a cakewalk and I just didn't notice it with you?

Tom Tull (6:14)

No way. Some days it was an exercise in futility and other days it was a tremendous accomplishment, but it just keeps giving. I mean, the world continues to change. You have to recognize reality versus the perception of reality in this day and age. Compared to when we came into the business back in 70s and the 80s, the world's definitely changed. In the old days you had a lot of paper to work with. Today you have social media, you have fake news. One of the big things as I was leaving ers that I tried to instill was get away from the Bloombergs, get away from the sound bites, get out and touch base, talk to the companies, talk to the managers, see what and how they do what they do. See if it's a one person shop, see what the business culture is. Just a variety of things where you really can't read about it. You've got to see it.

Bill Kelly (7:08)

If I have the dates right, I think your formative years at ERS were when Kaya was getting wound up. We started in 02 and I think the latter part of that decade may have been when you came on the scene at ers and you could tell me, I think a lot of the exposure was gotten through the public markets and if it wasn't, hedge funds were the name of the game. And if I think about it through the lens of Kaya, our curriculum is largely wired toward the hedge funds and the CTA space. And private credit did not even exist and private equity is again just kind of warming up in the bullpen. So maybe getting your views about the evolution of asset classes that you had to your avail and was it kind of a 60, 40 or equity and fixed income in the public space when you started and then how you got exposure through uncorrelated risk premium?

Tom Tull (7:58)

I was fortunate in my early career to be involved with the corporate side and with that, actually I did my first LBO with Cleveland Cliffs. Oh, geez. It was back in the 70s and building from there. I was also involved in the international markets very early on because of not only my time in the military, but also we had an ERISA plan. And I'm adding some additional points here rather than just ERs, but that was my foundation. I viewed the world as an investable universe rather than just the US and was really trying to be aware of changing ways to make money in the overall economic and business environment. So building on that going forward, when we came into business it was more 80, 20 in terms of equities and fixed income. Then we went through the 60, 40 phase and then over the last several years we've gone more into the 40, 30, 30. And the other 30 is the private side. Hedge funds were one of several levers into looking at the alternative space, but also private equity, also the infrastructure space, real estate, and the complement with hedge funds. And these were all ways by which you could get a tremendous amount of alpha. I don't think a lot of people appreciate the amount of leverage that some of these folks put on, but still you could get some pretty competitive rates return. And that's where I see more attention being given by the DC plans and light looking at more alternatives as we go forward as well as the mainstream. But with ers we had the basic mixes. And one of the reasons I was brought under their investment advisory committee early on was to broaden their perspective in the international markets. And then building on that and having run companies, it seemed a natural to build up the private equity side to get more actively involved in infrastructure. At the same time, continue to add to our private real estate as we went forward. Was it easy? No. A lot of this is education to the board and with the board, a lot of people were concerned over the illiquidity, whether or not you'd have capital when you needed it. It was a moving story, one that developed over time. But by the time I left, we did all together, I want to say at least several billions into the alternative space and at least 150, 200 different companies that we invested in, let's call them investment transactions that we were involved with at ERS before I left, and.

Bill Kelly (10:34)

I assume ERS was probably doing this through a fund or were you doing some co investor direct as well?

Tom Tull (10:40)

We did it through a fund primarily, which brought all that with in terms of due diligence, time and effort in making sure that the integrity of the process was intact, but also making sure. That we were comfortable with the legalities. And over time, the legalities have gotten more intense, they've gotten more complex. There's been questions as to where the alignment of interest is, and I think that continues to evolve as well, where now we're seeing a better alignment of interest than when both of us came into the business between the LP and.

Bill Kelly (11:12)

The gp, which I think has to continue to improve. I agree it's moved in the right direction. And some of the work you're doing with AIF we can come back to, because I think, just like ilpa, I think that's a platform for greater transparency. But I'll park that for a moment. So just last evening, and we both do this a lot, we're in sort of the giving back phase. And I do a lot of guest lecturing with students and I love doing that because the students are fearless. They're never afraid of asking a stupid question, and they really do keep you on your toes. And it was an opportunity just last night at the business school at Boston University to remind them about the evolution just in my career in private equity. And I reminded them that Prequin had a chart which I saw in the Economist a couple of years ago, and it reminded me of a fact that was kind of hiding in plain sight. And it showed the number of private equity general partners in the entire world. And when I got out of College in 1982, there were 24 of them in the entire world. So I say to the students or to anybody that cares to listen, back then, private equity was an asset class. 24 very, very smart GPS with 24 funds. And if you wanted to make an allocation to private equity, manager selection maybe mattered, but the asymmetric advantage you had, the illiquidity premium, the complexity premium, off to the races. So if I contrast that to Today, we've got 10,000 funds out there and God knows how many GPs, and if I said to the students that we all agree that you find out in extreme pockets of inefficiency, and I tell you, we've gone from 24 to 10,000, is Alpha the same better or less? And I think most would have to agree with hearing no other facts, it's less. Or maybe another way of putting it is it's become less about allocating to private equity and more about manager selection and finding that right. Manager. So I'd be curious to see from your vantage point, given what you did prior to ers, being in the LBO space so early, and maybe you were almost one of those first 24 in terms of transactions versus where it was when you left and has it become a game of wide dispersion and manager selection and how much of a challenge that evolution was when you were there?

Tom Tull (13:32)

Yes, to all points. I think the environment and the asset class has changed in a variety of ways. And some good, some bad. There have been more challenges given the environment as far as returns. There have been challenges because of the institutional leadership changing by and with a number of these firms. But in addition, there comes a point with every asset class where they get too carried away. I think we've seen that with private equity, they put on too much leverage. It's easy to be a backstop looking in the past and indicating that the future is going to be the same way. The industry has gotten so large that I think there's a lot of players in the industry that have taken advantage of the opportunity. And to that, I mean, we've seen certain continuation funds, we've seen too much leverage in a lot of cases by some of these firms. We've seen NAV loans, we've seen a pullback in terms of distributions due to the business model. But with that, we've also seen a change in what used to just be credit to more opportunistic credit and an opportunity credit that's picking up some of the private equity components whereby they can get equity kickers, they can do structured deals, they can pivot going from one asset class to another. I think some of the money that would have in the past gone into private equity is now finding its way into the more opportunistic credit space. Yes, they're still doing private equity. It's just under another wrapper.

Bill Kelly (15:05)

You're out of it day to day. But if you were back in your seat today, you're probably experiencing negative distributions to invested capital over the last several years, and that's probably negative for the next few years going out. And this gets to the transparency question, which is you have beneficiaries that want to be paid and that doesn't stop. And while private equity or private capital is an interesting asset class, I think when you make these allocations, there's a certain commitment strategy that goes along with that. If you're making a commitment strategy circa 17 or 18, with certain expectations that if you want to be 25% fully invested, maybe you have to commit 30 or 40. I don't know what the math works out to be. But then when the pipes get clogged and the capital is not coming back, something has to give. And I Think this is maybe where the transparency still needs to evolve a little bit more, because Some of these GPs are back out in the market with fund X plus one. And you're saying, what part of my pain are you not feeling here? And then if some of the same holdings get kicked into the continuation fund and I'm paying a lot of transaction fees to own the same property on the other side, and I'm given 10 days to make that decision, that doesn't sound very LP friendly either. Now, I'm probably using extreme examples because I think, as you said, and I agree with this, I think through ILP and some of the other work the association space has done, I think we're moving in the right direction with transparency. But there seems to be still a bit of a disconnect between what the LP wants and needs versus what the GP is looking to accomplish. And just curious about the state of play from your vantage point.

Tom Tull (16:41)

I think you're absolutely right. It's going to be a catalyst for some of the public funds to share perspective and their alignment, to get more control over the end result. In terms of the infrastructure fees, the side letters, what is LP expense versus GP expense? For example, a jet plane or travel or accommodations. Granted some of that's necessary, but to have a little more control, instead of every time you look at a breakdown of fees, there's more fees going to the LP than the gp.

Bill Kelly (17:19)

Yeah. And it would be great if you had the equivalent of a total expense ratio so you could look at it fully priced. You got to find the jet, I guess, is what it comes down to.

Tom Tull (17:29)

But in all fairness to the asset class, and we've seen this before, there's always growing things, you always do tremendously well given the inefficiency of the market, then you mature, you develop, you redefine and restructure and reinvent the asset class. So I think it's going to change over time. I don't know what the end result is going to be, but I think there will be a time when private equity comes back and will be in vogue and it will become more. More specialized. And we are seeing an increase in deal flow and opportunities, especially under the new environment going forward.

Bill Kelly (18:02)

In many cases with the lp, it's not that they want to need the cash flow, they do, but not just to pay beneficiaries, they want to invest in the next vintage year as well, and all the more challenging. And I think from the GP standpoint, and I've spoken to some of them as well, and they'll rightfully say we're a fiduciary and our responsibility is, is to realize fair value when we think the time is right. And for me to liquidate and take a haircut today, is that the right thing to do? And I think there are trade offs. And it was interesting. Bain had come out with a report, might have been the first half of this year, and by their estimate it was $3 trillion of value locked up inside of these funds representing, I think it was 26 or 28,000 companies. And the average age was four to five years. And I don't think you could have anybody look at you with a straight face and say all that inventory is going to clear at nav. And if I'm an lp, maybe my view is I'd rather take the haircut today than three or four years from now and get it invested at a very good point in the market. So I don't know how that clog in the plumbing gets cleared. I agree with you. It will get cleared. And we talked a little bit before we came on the air about a segment I did recently about the relatively small size of the secondary space. It's only about 1% of the total capital and that's a maturity thing that is in the early phases. And probably we need a more active secondary market. So some of your views on how the plumbing gets cleared in this big $3 trillion clog that's in the pipe.

Tom Tull (19:37)

That's a tremendous point. I think the secondary markets are going to take on a whole new life as we go forward. Secondaries in any of the asset classes, whether it's infrastructure, whether it's private equity, real estate, you name it, we're seeing more secondary activity to that point. It will become more the overall process whereby you get a premium to NAV and you want to cut back a bit, you go into secondary market if you get the right kind of discount or premium. In same sense, when you want to invest in a certain space, if you can do it at a discount to nav, consider the secondary market is another venue.

Bill Kelly (20:12)

If the US tomorrow decided to set up a sovereign wealth fund and somehow scrape together a trillion dollars and off whose balance sheet that's going to come from, I don't know. Because the fiscal outlook in the US is not very good in terms of that liability. But if they put a trillion dollars aside, it was all in cash whiteboard. And they came to Tom Toll and said, we want you to be a cio, I would say that would be awesome because I think this is a Tough time to be an investor in the private markets. But if you're lugging around $1 trillion liquidity and you could be a price maker on a lot of this inventory, it could be an awesome time to be entering the market.

Tom Tull (20:51)

I agree. Make me the offer and I'll be more than happy to consider. I think it would be a good time to definitely allocate assets into the areas that are just called under duress. Real estate would be one, definitely. Another would be continuation of emphasis on infrastructure. Private equity, I'd probably hold off, but I definitely consider credit. And to that end it's more a function of the fact that we are living beyond our means as a country. We are going to have more inflation, debt, GDP is probably about 130% versus 60% after World War II. We're going to see different effects on the dollar going forward. Given that the dollar, even though it's a reserve currency and that's not going to go away, it is being reduced by a number of different countries as far as its exposure. So that would be the other area I'd consider and that's international markets. A lot of people hate them. Some of the emerging markets we've seen economic deregulation, financial liberalization, better demographics and with that some tremendous investment opportunities.

Bill Kelly (21:58)

I agree with all that. And we were last together, as I said, at Global Arc and this was in middle part of October, so before the presidential election. We know the outcome and not a political statement, but I think there's a lot of discussion that neither candidate was talking about the size of the debt and the annual deficit. Might have been on one of your panels, Tom, that you were one of the speakers who reminded us that we're spending more on debt service than we are in defense. That's not a sustainable outcome.

Tom Tull (22:29)

It's really scary.

Bill Kelly (22:30)

But your thoughts on some of these markets outside the US and one thing I'm sort of watching, and for the listeners, this is not investment advice at all, but having been in the UK recently, they are trying to to some degree mimic the Maple model out of Canada. They've got a lot of small to medium sized public pension plans that have big infrastructures in terms of people and staff and they're trying to consolidate them, but then also recognizing that each one of these plans are underinvested in UK equities. Now there's a word called fiduciary where you can't force them to invest. But they've also set up an infrastructure bank that's going to try to be the first dollar in logistics and some of the ports and some of the renewable energy conversion processes, both public and private. And that could be a very interesting play that if you've got a lot of institutional dollars coming into a market, it could be interesting. But I think if you see anything that's sort of out of favor, I'm not saying it's an automatic investment thesis, but if I think about Alpha, it's going to happen when nobody else is paying attention to that part of the market. I don't know if you've heard this UK phenomenon. It was under the Mansion House reform. I don't think they're calling it that anymore. But it seems like an interesting developing story.

Tom Tull (23:47)

That's fascinating. I'm definitely going to look into that. I wasn't aware of that. There's a lot of building of assets outside of the US for example, and the Middle east in particular. We're seeing some tremendous amounts of capital from not only the Saudis, but also Adi and a lot of the family offices in that space. And I think that's going to change some of the complexion and the demand supply for capital and investments as we go forward. With everybody moving out of Hong Kong, which is an old story now, into Singapore, that's going to be one of the newer financial centers, China, it's anybody's guess. I think the test there will be when we see full convertibility of the Hong Kong dollar into the renminbi. And that will be the sign that they're really going forward. And that's when we see the Hong Kong market probably move to Shanghai. But a lot of changes going forward and I think definitely demographics are going to have part of this as to where we end up. And right now in the US and a lot of European countries were behind the ball, Asian and particularly the emerging markets are ahead of the game. That's where a lot of the growth in the world's going to be coming from as we go forward.

Bill Kelly (24:56)

I absolutely agree with that. And I'm going to be in Riyadh right after the Thanksgiving holiday, so I'll report back to you. I was there twice last year and between March and October I saw a dramatic change. And I think what's happened since I was last there is pif, the big sovereign wealth fund there, was actively allocating outside of the kingdom. And now I think they're saying to capital, you've got to come into the kingdom and I'm willing to invest side by side with you. And they are aggressively trying to rid their dependency on oil as the centerpiece of that local economy and there's a lot of capital behind it. So I think that's an interesting investment thesis and I think sometimes alpha is in these blind spots. So I think you raise a very good point. So, Tom, I want to talk about democratization, some of the work you're doing with finra. But before we leave the institutional side, I know a little bit about aif. I've met Brandt a couple of times and I've gone to some of his events and he gets world class and not just the us a world class set of allocators together. I don't know enough about that platform, but can you describe a little bit what AIF is all about?

Tom Tull (26:05)

It's a combination of not only the institutional community but also the practitioners, including a variety of the consultants and so forth. But it's an opportunity to get folks together to talk about different asset classes in different forums, but also state of the art what are new technologies, new developments, whether it's getting more women actively involved in the field, the investment field, diversity, inclusion. But also what I mentioned very early on, new ways of doing old things. By bringing not only the consultants but also the practitioners and just as important the academics into the overall mold, it helps contribute and provide perspective and updated information as to what is the new reality. How can you make money? What should you be aware of? How can you be more social conscious and continue to develop the industry as we go forward?

Bill Kelly (27:00)

It's a great platform and I'm sure they benefit mightily from your gravitas. So thank you for staying involved there. We did talk about some of the work you're doing with finra and the end investor does need protection when that investor is the average Jane or John Doe on the street. But it's a two sided coin to a very large degree because if you and I, and maybe Les, you, I don't know if you're a beneficiary of the retirement system anywhere in Texas, but I don't have a defined benefit plan and most people coming up in this industry or coming up in this country don't. And the retirement is up to them. They've got to sock money away in a 403 or 401k. And the investment options largely are index funds or maybe actively managed equity or bond funds in the public space. I'm not dismissing that. That's okay. And we need to make sure that the younger you are, the more equity exposure you have. And the power of compounding is very, very powerful. So that's on the one side of the coin, on the other side, the public equity markets are shrinking. Capital formation is happening more and more in the private markets and companies are staying public in some cases forever. And when they go public they're going dpo, sometimes not even ipo. So they're just basically selling out and looking to raise zero new capital. And it's maybe an okay entry point, maybe not. But a lot of the action happened in the decades before they went public. And if I think about the small cap space as I grew up in this industry, it used to be a pocket of inefficiency, a pocket of innovation and a place where you could get a very good return. But a lot of the innovation is now moved to the earlier stage VC space as well. So that's on the equity side. In Bondland you've got the private debt space which was non existent coming out of the GFC. It's probably by most measures $2 trillion on its way to three or four in the next couple of years. And even some of these big gps are talking about getting into the syndicated loan market and they have balance sheet that is not getting crushed by regulators and Basel 3 or whatever number we're up to. It's very, very hard for the banks to compete. So back to the average investor. If the home of capital formation is private equity and the home of yield is private debt, but I can't get access to it, that doesn't sound very attractive. So how do we get the individual who's responsible for investment risk, longevity risk, geopolitical risk list goes on and on. How do we get them access to the innovation and the yield part of the market where today it's very, very hard to near impossible for that to happen?

Tom Tull (29:38)

That's a tough question and it's one that is evolving as we go forward. FINRA space is more as a regulatory authority, with that goes education of the prospective investor or the current investor. And there are so many different fronts that they're providing insight perspective to the sec. But it's also based on brokers that are regulated by FINRA that are also, whether they're small firms, mid sized firms or large firms, and having certain rules of engagement and rules of obligation that these firms are required to keep up to date and adhere to certain principles of ethics and also responsibility and doing what's right given the regulatory environment for the client. And to that end there's several fronts. One, there's a lot of work being done to provide guidance, insight broker checks for the individual so that they have a Resource to evaluate different things that are being thrown at them, but at the same time, education for the elderly, environment, education for the younger generations. And to that point there's more attention being given to social media educating through that venue as so many people use social media. They're on LinkedIn, they're on ones that I've never heard of before. So evaluating ones that are in the process of gaining more attention and control going forward, like TikTok and so forth. I think this is a journey, it's going to take time, but they're trying to do everything they can to educate the investing public, but also have a means by which individuals feel that there's a problem, there's an issue that they're comfortable going to so it can be investigated and controlled going forward.

Bill Kelly (31:31)

And ultimately, I don't know what the answer is, but I think the headline is we need more common sense regulation. And I think again, there's two sides to this coin in that the regulation has got to be enough to protect the investor, but also protect not by rinsing out the value proposition completely, but providing education so the end investor understands what they're buying in the first place. I fear that I don't think we've gotten the killer app in terms of a wrapper. The 40 act fund has a lot of constraints on it. The Interval Fund has leaky quarterly windows. So I don't think we found the magic formula yet. But I think ultimately I think we have to teach the investor that they've got to think about their balance sheet in terms of verticals. And the vertical furthest out is the money they're not going to touch for a very, very long time. And they should be thinking that that is not something I have to worry about liquidating. And I think we've shown over long periods of time and Warren Buffett says this, his favorite investment period is forever. I think we could teach investors that forever is a good thing, we're good to go. But I think that the tendency with, as you say, social media and Robinhood and TikTok and Kramer and CNBC that there's so much news cascading us at once. I think every time we try to convince investors it's long term game, we're giving them reasons to market time their way out probably at the worst times.

Tom Tull (32:58)

I think one of the most important things, I would hope that in the current generation and generations to come that there's more opportunity for financial literacy in the educational establishment, whether it starts in high school or even before that. The difference between wants and needs, developing some background as to personal finance, stocks, bonds, return on investment, these kind of things that are introduced early on in individuals, educational, career and background. And is that going to happen? I know there's been a lot of efforts made by of course definitely KAYA and CFA organizations to try and get more interaction with the different legislatures to bring this into the curriculums, the school programs in conjunction with funding. Is it going to happen overnight? No, it's probably going to continue to get worse for a while until there's an event and then there will be a response to the event and that will be ingrained and introduced and developed and so forth.

Bill Kelly (34:00)

It's gotta be foundational and early. I agree with that. So Tom, last question and a little bit of a selfish one because I'm trying to figure out my next act. But when does Tom Toll rest? When are you done done or is that not in your vocabulary right now? I don't think it's in mine either. But you seem to repot yourself into the next thing, the next thing, and you're certainly not sitting down and watching soap operas during the day. So is there an actual retirement plan for Tom to Most people know that.

Tom Tull (34:28)

This is my third retirement and this time around I'm dividing it between philanthropic and investments. For me, investing is really the fun relaxation and the other is wanting to give back but the rest recuperation. Keeping up to me, as I'm sure you will be the same and you'll probably be worse is staying involved and staying engaged in the investment business because it is stimulating, demanding, exciting and rewarding.

Bill Kelly (34:58)

Well, I think all very good attributes to define a business that you and I have been in for decades that I love a lot and I very much believe it's going to change and change for the better. But I do look at the pace of change in innovation over the last couple years and I sort of look out through tokenization of any asset, the power of blockchain using generative AI. We're just warming up with this change and once we figure it out it's going to be game changers to how product is bought and sold, how the investment process works. And in some respects I'm glad I'm not in it day to day and could be more of a commentator on it. But I think you and I will continue to have our informed views and we can be agitators, which is not a bad title at this stage of our careers.

Tom Tull (35:41)

Absolutely. I'm going to follow your example. How's that Bill?

Bill Kelly (35:44)

Absolutely. Thanks for joining me. It's always great seeing you and I'm sure I'll see you at a stage not too far into the future. Once again, looking forward to the next stage and you've modeled it so well. So I do appreciate that too.

Tom Tull (35:57)

Well, appreciate that. Appreciate your time. Look forward to it.

Bill Kelly (35:59)

Thanks, Tom.

Tom Tull (36:00)

Thank you.

Bill Kelly (36:02)

Thank you for listening to Educational Alpha. I'm your host, Bill Kelly. Learn more about the Kai association and subscribe to the show@caia.org that's C A I A dot org. See you next time.