Podcast Summary: E128: iCapital CEO Lawrence Calcano on the New $145 Trillion Entering Private Markets

Podcast Information:

• Title: How I Invest with David Weisburd
• Host: David Weisburd
• Episode: E128: iCapital CEO Lawrence Calcano on the New $145 Trillion Entering Private Markets
• Release Date: January 10, 2025

1. The Massive Opportunity in Private Markets

Lawrence Calcano, CEO of iCapital, opens the discussion by highlighting a groundbreaking estimate from a Bain study. According to Calcano, "Every year they do a study of the wealth market. And the 23 study had an estimate of about $145 trillion that was owned by retail on a global basis" (00:00). This figure rivals the size of the institutional market, presenting a colossal opportunity for alternative investments. Calcano emphasizes that even a small percentage allocation to alternative assets within this $145 trillion could represent a significant market for investors and financial advisors alike.

2. Founding Story and Mission of iCapital

Delving into the origins of iCapital, Calcano shares his transition from Goldman Sachs to founding the company in 2013 (01:14). At Goldman Sachs, he led tech banking, focusing on taking companies public, managing mergers and acquisitions, and making strategic investments. The idea for iCapital emerged from a shared vision among a group of like-minded individuals to bring automation into the alternative investment space. The mission, as Calcano articulates, is twofold:

• Creating Access: "To create opportunities and access for financial advisors to be able to invest in the highest quality alternative products" (00:37).
• Assisting General Partners (GPs): Helping GPs navigate the fragmented wealth management market.

As of the interview, iCapital manages approximately $205 billion in assets on its platform, including $170 billion in structured notes and nearly half a trillion dollars in data assets (00:37).

3. Tapping into the Wealth Channel

Calcano underscores the significance of the wealth channel in private equity. Referencing the Bain study again, he notes that this channel is "very large and it's also stickier than I think a lot of people assumed" (03:52). Historically, GPs have primarily raised funds from institutional investors, but the revelation of the $145 trillion retail wealth presents a foundational component for future fundraising strategies. This shift has encouraged GPs to incorporate the wealth channel into their long-term plans, recognizing its vast potential.

4. Overcoming Initial Challenges

Building iCapital was not without its hurdles. Calcano discusses the classic "chicken or the egg" dilemma faced when establishing a platform that requires both financial advisors and fund managers to join simultaneously. "[...] building that or managing that chicken or the egg problem, so both sides of the equation [...] was really the critical challenge that we were able to overcome throughout the last decade" (04:03). The solution lay in gradually growing both the advisors and the managers on the platform, ensuring mutual value and collaboration.

5. High Net Worth Investors vs. Traditional Institutions

One of the surprising insights Calcano shares is the differing comfort levels with illiquidity between high net worth individuals and traditional institutions. While institutions are accustomed to long-term, illiquid investments to fund liabilities, individual investors often find illiquidity a less comfortable subject (05:02). Despite this, Calcano asserts that "illiquidity is not a bug, it's a feature" (05:57). He explains that the illiquidity premium is a key driver for outperformance in alternative assets, and emphasizes the active role asset managers play in enhancing portfolio companies' value over time.

6. Shifting Investment Preferences: From Credit to Equity

Calcano observes a notable shift in investment preferences among high net worth individuals from private credit back to private equity. Initially, in 2022, rising interest rates made private credit appealing due to its floating rate structures, providing a hedge against rate hikes. However, as interest rates began to stabilize and even decline, there was a "reopening" of interest in private equity (07:43). By the third quarter, equity flows had surged to nearly 50%, reversing the earlier trend (08:03). This dynamic shift indicates a responsive and adaptive investment environment that iCapital is well-positioned to navigate.

7. The Future of the Alternatives Industry

Looking ahead, Calcano is optimistic about the growth potential within the alternatives sector. He points out a significant gap between the "suggested allocation" to alternatives by wealth manager CIOs (ranging from 15% to 40%) and the actual allocations currently in place (low to mid single digits) (10:32). This discrepancy presents ample room for growth as both participation rates and allocation rates increase. Calcano believes that as education and access improve, allocations to alternative assets will align more closely with institutional best practices.

8. Ensuring Quality and Mitigating Adverse Selection

Addressing concerns about adverse selection within the wealth channel, Calcano emphasizes the importance of partnering with top-tier managers. He notes that "the difference between the top performing manager and the fourth quartile could be over a thousand basis points, 10 plus percent" (14:45). iCapital combats this by curating a robust set of managers and providing standardized due diligence reports. This approach helps financial advisors make informed decisions, ensuring that only high-quality managers are part of the platform.

9. Technological Innovations and Platform Development

iCapital's success is deeply intertwined with its technological advancements. Calcano outlines several key areas where technology plays a pivotal role:

• Decision Making: Enhancing the ability of advisors and investors to make informed choices.
• Data Collection: Aggregating and standardizing vast amounts of data from diverse sources (34:49).
• Ecosystem Connection: Utilizing distributed ledger technology and APIs to streamline interactions between managers, administrators, and other stakeholders (35:38).

By leveraging AI and distributed ledgers, iCapital aims to minimize manual reconciliation processes and reduce errors, thereby improving the overall efficiency and reliability of the platform.

10. Cultivating a Cohesive Company Culture

A significant portion of the conversation revolves around the importance of company culture in scaling iCapital. Calcano draws from his experience at Goldman Sachs, emphasizing that "our client's interests always come first" (28:03). At iCapital, he fosters a culture of teamwork and client-centricity by:

• Writing weekly company letters to communicate goals and updates.
• Ensuring that every action taken by employees aligns with client success and collaborative efforts.

Calcano believes that a strong, consistent culture is essential for retention, recruitment, and overall organizational success, especially as the company grows beyond 1,700 employees.

11. Vision for iCapital in 2030

Looking to the future, Calcano envisions iCapital as the "operating system" for global wealth and asset managers. By 2030, he anticipates that iCapital will have built comprehensive infrastructure facilitating the scaling of large businesses in the private assets space across various strategies (32:35). The goal is to enable seamless learning, buying, selling, and management of alternative assets, akin to how major stock exchanges operate for equities.

12. Navigating Regulatory Changes and Investor Accreditation

In the final segments, Calcano discusses the evolving landscape of investor accreditation. He acknowledges initiatives aimed at allowing more individuals to qualify as accredited investors, stressing the importance of understanding over mere wealth (37:21). Calcano advocates for regulations that prioritize investor education and comprehension of investment products, ensuring that even those without traditional wealth benchmarks can participate knowledgeably.

Key Takeaways:

• Massive Market Potential: The global retail wealth market of $145 trillion presents a significant opportunity for alternative investments.
• Technology as a Cornerstone: iCapital's platform emphasizes automation, data standardization, and ecosystem connectivity to streamline alternative investing.
• Educational Imperative: Bridging the gap between suggested and actual allocations to alternatives hinges on comprehensive education for financial advisors and investors.
• Quality Over Quantity: Ensuring access to top-performing managers is crucial to mitigate adverse selection and drive superior investment outcomes.
• Cultural Foundations: A strong, client-centric company culture is vital for scaling and maintaining organizational integrity.

Notable Quotes:

• "Illiquidity is not a bug, it's a feature." — Lawrence Calcano (05:57)
• "Everything we do has to help our clients succeed." — Lawrence Calcano (28:03)
• "We want to create a platform for people to be able to learn about, buy and sell and manage alternative assets of all different strategies." — Lawrence Calcano (32:35)

Timestamp Reference:

• All timestamps correspond to the transcript sections provided, indicating where each topic or quote occurs within the conversation.