BONUS: Future Standard President & CIO Mike Kelly

Summary

Masters in Business BONUS: Future Standard President & CIO Mike Kelly

Host: Barry Ritholtz (Bloomberg)
Date: August 5, 2026
Guest: Mike Kelly, President & Chief Investment Officer, Future Standard
Episode Theme:
A deep dive into the career of Mike Kelly, his experience building leading hedge funds and alternative asset management firms, and the evolution and democratization of alternative investments—especially private credit—within the wealth management industry.

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Main Theme & Purpose

This episode explores Mike Kelly's fascinating journey from his early days as an aspiring investor to leading major alternative investment firms. The discussion covers key inflection points in his career at places like Salomon Brothers, Omega, Tiger Management, FrontPoint, and Future Standard. Kelly and Ritholtz examine the rise of private credit, the operational and cultural challenges in alternatives, and the ongoing democratization of institutional-grade investments for individual investors and wealth channels.

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Key Discussion Points & Insights

1. Origin Story & Early Career Motives

• Roots & Inspiration: Raised in a working-class, education-focused Irish-American family on the Queens/Long Island border. Early tech enthusiast and aspiring investor.

"When we turned 13...you got up to $300. I got $300 of Apple stock, was my request." – Mike Kelly (03:02)

• First Investments & Disappointments: Parents didn’t know how to buy stock, bought him a savings bond instead. Sparked his lifelong quest to master investing.
• Education: Bachelor's at Cornell; MBA from Stanford; driven to break into the buy side after formative internships.

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2. Breaking Into Hedge Funds – The Cold Call Legend

• Cold Calling the Greats: Used the VAN Hedge Fund Directory to cold call top hedge fund managers from a payphone—emphasizing initiative and grit.

"I am willing to do whatever it takes. I am willing to sleep on my parents couch and work for you for free." – Mike Kelly (07:35)

• Lee Cooperman at Omega: Lee answers directly, hires him for free due to his "Poor, hungry and driven" pitch.
• Day One Moment:

"We go across the street ... and Lee turns to me and says, you're buying. So here I am, day one, and I'm already $30 in the hole, right in my illustrious investment career." – Mike Kelly (08:30)

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3. Tiger Management & Early Lessons in Investment Philosophy

• Cultural Commonalities Across Top Funds: Intense culture, high intellectual curiosity, emphasis on fun and learning.
• Contrasting Value and Growth/Momentum Investing:

"From an investment philosophy standpoint, there was a view that every single day you rebuy your portfolio... that discipline of re-underwriting your holdings every single day is something that's remained with me." – Mike Kelly (12:21)

• Strong Opinions, Loosely Held:

"...if you have disconfirming evidence, don't ignore it, don't double down..." (13:47)

• Variant Perception: You must see the world differently to outperform.

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4. Building FrontPoint – Institutionalizing Hedge Funds

• From Boutique to Institution: Early hedge funds operated like family offices. Kelly and team focused on institutionalizing infrastructure and diversifying strategies.

"I began to reflect on my career that...building an asset management company...could be a pretty robust career." – Mike Kelly (17:36)

• Role Expansion: Head of manager selection → CIO → co-CEO.
• Shift in Asset Management Mindset: Moved from trading and investing to building and overseeing organizations and teams.

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5. Oryx and Strategic Acquisitions

• Global Diversification: Led asset management efforts for Japanese conglomerate Oryx, acquiring key European managers amid crisis-driven divestitures (e.g., Robeco from Rabobank).
• Recognizing Opportunity: Realized the next wave would be democratizing alternatives for broader investor bases, not just family offices and endowments.

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6. Future Standard/Franklin Square Evolution

• From Product to Platform:

"It was like seeing the red envelopes and DVDs but...you could eventually diversify this product base and you could bring in-house capabilities..." – Mike Kelly (22:53)

• Key Inflection Points: Partnerships with KKR, Golden Tree, Rialto; hiring in-house talent; targeted acquisitions.
• Building a True Platform: Emphasis on interwoven teams, shared underwriting and collaboration, creating synergistic insights.

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7. The Next Wealth Frontier – Alternatives for Mass Affluent

• Democratization Arc: From UHNWI, endowments, and institutions to wealth channels, RIAs, and individual investors.
• Adoption Curve Realism:

"...it's still very much in the early days given the dynamics of private companies and their capital needs." – Mike Kelly (31:20)

• Income Strategies Post-GFC: Realized banks would withdraw from direct lending, creating space for asset managers.
• Operational & Educational Barriers:
  • Early days: double fees, paperwork, manual processes, K1s.
  • Improved tech/access: iCapital, Case.
  • Remaining need: Education for advisors and clients.

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8. 2022’s Impact and Private Credit Today

• Inflation and Rates as Catalysts:
  • Long-duration bonds faltered, pushing investors to seek alternative sources of income.
  • Higher rates made cash more attractive, which slowed allocations somewhat.
• Private Credit Not a Bubble:

"If you actually add up the pockets of what we really call private credit...it's grown lockstep with the economy." – Mike Kelly (48:52)

• Platform Illiquidity Gating:
  • Structures like B-REIT and B-CRED offer liquidity gates for practical (not panicky) reasons.
  • Illiquidity is presented as a feature (higher yield) rather than a bug.

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9. Portfolio Construction & The End of 60/40?

• Beyond “Alternatives” as a Label:

"...there's a point in the future where we won't call these strategies alternatives..." – Mike Kelly (60:24)

• Buckets Approach for Portfolios:
  • Growth (public/private equity, venture).
  • Income (bonds, private credit across risk/liquidity).
  • Real Assets (commodities, infrastructure, real estate).
• Forward-Looking Asset Allocation: Emphasizes the fusion of public and private, and the importance of liquidity risk convexity.

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10. Risk, Underwriting, & The Health of Private Credit

• Current Underwriting: Default and interest coverage ratios remain healthy and within historic norms, despite sectoral blips (e.g., software’s exposure to AI).
• No Systemic Risk Detected:

"Defaults today are well within historical ranges and are being well managed." – Mike Kelly (68:24)

• Outlook: Growth and diversification will continue, with private credit comprising a larger slice of the overall credit ecosystem.

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11. Philanthropy & Mentors (74:00+)

• Tiger Foundation: Long-term service fighting poverty in NYC, inspired by Julian Robertson’s early push to give back.
• Spotlight Foundation: Stanford GSB alumni supporting nonprofit entrepreneurs in education.

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Notable Quotes & Memorable Moments

• On Investment Philosophy:

  "Every single day you rebuy your portfolio...that discipline of re-underwriting...is something that's remained with me." – Mike Kelly (12:21)

• On Cold-Calling Hedge Fund Legends:

  "I have the notebook...about stocks and all the things that I would read about investing..." – Mike Kelly (03:58)

• On Building Platforms:

  "A platform...is more interwoven. There's more collaboration, there's shared underwriting, shared origination..." – Mike Kelly (28:09)

• On Private Credit Growth:

  "I consider myself a student of history and calamities...we don't have [a bubble] today." – Mike Kelly (48:31)

• On Career Advice:

  "I believe the greatest definition or criteria of success going forward is going to be adaptation. So learn to adapt." – Mike Kelly (83:51)

• On What He Wishes He’d Known Starting Out:

  "If I could go back and do it all over again, I would have taken far more psychology and philosophy classes...it's far more driven by behavior than it is by math..." – Mike Kelly (85:55)

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Important Segment Timestamps

• 02:42: Kelly’s investing origin story and the family “big gift”
• 05:35: Cold-calling hedge fund legends for a way into the industry
• 08:17: First day at Omega with Lee Cooperman
• 11:22: Lessons learned at Tiger and differences in investing styles
• 17:04-18:39: FrontPoint: Building an institutional hedge fund business
• 21:23: Transition to Franklin Square/Future Standard; vision for democratizing alts
• 26:34-29:30: How Franklin Square grew into a multi-strategy platform
• 32:54: The market and operational challenges in growing private credit for individuals
• 37:32: The “modern investing imperative” and middle market opportunity
• 41:09-43:06: Banks moving upmarket and the emergence of private credit
• 48:31: Dispelling the “private credit bubble” myth
• 52:34: On illiquidity premiums and investor communication
• 57:34: Suitability for alternatives in retirement accounts, 401k adoption
• 60:24: Critique of 60/40 and the evolution toward growth/income/real asset buckets
• 67:40: What to watch in private credit underwriting, defaults, and sectoral risk
• 71:58: The future growth and segmentation of private credit
• 74:13: Philanthropy: Tiger and Spotlight Foundations
• 76:16: Mentors who shaped Mike Kelly’s approach
• 77:41: Favorite books: London Falling and Man’s Search for Meaning
• 79:23: Streaming preferences: Documentaries and music (classic albums, yacht rock)

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Additional Resources, Tone, & Style

• Tone: Open, candid, and intellectually curious with flashes of humor and storytelling.
• Style: Mix of career anecdotes, practical investment insights, historical context, and strong philosophical approach to both markets and management.
• Listener Value: Translates technical and historical lessons into actionable wisdom for investors, aspiring asset managers, and industry observers, making a compelling case for the evolution of alternatives.

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Summary Table: Career Timeline

| Period | Role & Firm | Major Focus | |----------------|---------------------------|------------------------------------------------| | Early 90s | Salomon Brothers | Investment banking, exposure to trading/markets| | Late 90s | Omega Advisors | Value-oriented hedge fund, Lee Cooperman | | Late 90s/2000s | Tiger Management | Momentum/growth, Julian Robertson | | Early 2000s | FrontPoint | Institutionalizing hedge funds, building teams | | Post-2008 | Oryx Asset Management | Global, multi-strategy asset management | | 2014-Present | Franklin Square / Future Standard | Building a $90B multi-strategy alt manager|

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Closing Thoughts

Mike Kelly’s journey illustrates the critical blend of grit, adaptability, and intellectual humility necessary for success in alternatives. His philosophy—strong opinions, loosely held; perpetual re-underwriting; understanding competitive advantage; and caring deeply about culture and team talent—offers playbooks for investors and asset management builders alike. He dispels myths about private credit while sharing optimism about its continuing role in diversified, modern portfolios.

Transcript

[Vanguard Representative]

Today's show is brought to you by Vanguard Advisors. Your clients count on bonds for income and stability, not unwanted surprises. That's why Vanguard builds Institutional Quality Bond Funds. They're designed to help portfolios remain steady when markets don't. Whether index or active, Vanguard aims for consistent bond performance with a low cost edge, which helps clients earn returns that compound over time. A rigorous approach to risk management holds it all together. The goal? Keeping income instability in and unwelcome surprises out because fixed income shouldn't feel like a rollercoaster. Explore Institutional Quality Bond Funds from Vanguard. Learn [e-mail] audio that's vanguard.com/audio all investing is subject to risk. Vanguard Marketing Corporation distributor AI is entering

[Mike Kelly]

its most consequential phase, where scale, safety and sovereignty will determine who leads and who lags. Join Bloomberg Tech in London on November 2nd and 3rd as global leaders across business, finance and policy examine the defining trade offs shaping the future of AI. Thank you to our presenting sponsor, Salesforce and supporting sponsors Ida Ireland and Schneider Electric. Learn more at Bloomberg.

[Bloomberg Announcer]

Bloomberg Audio Studios Podcasts Radio News this is Masters in Business with Barry Ritholtz on Bloomberg Radio.

[Barry Ritholtz]

This week on the podcast, an extra special guest Mike Kelly has an absolutely fascinating career from Omega to Tiger. Currently President and Chief Investment Officer at Future Standard. Really about as knowledgeable and individual as you'll find, covering private credit infrastructures and the Wealth Channel and what the future of what we broadly call alternatives look like. I thought this was fascinating and I think you will also. With no further ado, my conversation with Mike Kelly.

[Vanguard Representative]

Mike Kelly, welcome to Bloomberg.

[Mike Kelly]

Thanks Barry. It's great to be here.

[Barry Ritholtz]

So I'm fascinated by both your background and your career path, which is really, really interesting. But let's roll back a little bit. Bachelor's at Cornell, MBA from Stanford. What was the original career plan?

[Mike Kelly]

So taking a step back, I grew up on the border of Queens and Long Island. My dad was an NYPD cop in the South Bronx and Queens. Mom raised the five of us kids in a traditional Irish American household and valued education. I knew from a pretty early part of my life that I wanted to go into investing. I'll tell you a little story. So when we turned 13, in my family you got the big gift. And at the time I was a nerdy kid. I was into computers. My dad would drop me off at the Queens Village Public Library and I would, you know, learn how to program on this Apple Computer. They had just got the Apple Iie in and for my 13th birthday I asked my parents for you got up to $300. I got $300 of Apple stock, was my request.

[Barry Ritholtz]

Really? Wow.

[Mike Kelly]

And the big day came. They gave me the envelope, was really excited. I opened it up, and it was a savings bond for a local bank. And my parents noted the disappointment in my face and said, you know what, Michael, we're sorry. We don't know how to buy stock.

[Barry Ritholtz]

And this is like late 80s.

[Mike Kelly]

This is 83.

[Barry Ritholtz]

83, okay.

[Mike Kelly]

So I said then and there, I am going to teach myself how to do this, how to invest in these companies. And I set out. I still have it. I have the notebook over here. I actually brought it with me about stocks and all the things that I would read about investing and investing in the stock market. And so from an early part of my life, I wanted to go into investing. And so throughout the years at Cornell, at the time, I did some great internships. One at a boiler room, they made a movie about that one for Steve Wynn at the Mirage, which was exciting. And then I studied in Japan, studying the banking system there for one summer. And as I was coming back, the only firm that actually would interview me was Salomon Brothers. And so I wound up, fortunately, getting a job at Salomon Brothers.

[Barry Ritholtz]

What capacity?

[Mike Kelly]

Yeah, in the financial institutions banking group.

[Barry Ritholtz]

Okay, so you start as an I

[Mike Kelly]

banker, then started as an I banker, loved Salomon Brothers. Went up going to the 42nd floor of 7 World Trade center, which is where my Michael Lewis wrote the book Liars Poker. So I wound up going to the fixed income trading floor for my third year and really got bit by the bug of markets. I knew I wanted to make the transition from investment banking over to the buy side. So as I headed off to Stanford Business School, that was my mission, was to find my way into the buy side.

[Barry Ritholtz]

So there's a sort of urban legend that you kind of cold called your way from Solomon Brothers into an internship with hedge fund legend Lee Cooperman at. At Omega. Is that first of all, is that a true story? And if it is, walk us through that call.

[Mike Kelly]

Right. So I was at Stanford, and I knew I wanted to make this transition into the buy side. And in looking at the careers of what I was looking at, the. The greatest minds in investing, they all seem to be relegated to this corner of the market of hedge funds and private equity firms. You know, we're talking about the. The mid-90s here, when people didn't have a lot of understanding of what these firms actually did. But it struck me as an incredibly intense and exciting career Path. Many of the people were very young and seemingly making a lot of money doing it and really working on some dynamic investing strategies. And so I had a directory, it was called the VAN Hedge Fund Directory. It was a printed out piece of paper, like from a fax machine. And it had the names and addresses of at the time, the top 25 hedge funds. So it had, you know, Bruce Kovner in there and Paul Tudor Jones and George Soros. And so I went through this directory and literally called from a payphone, these

[Barry Ritholtz]

individuals, come on, hey, Druckenmiller, it's Mike Kelly. Like that, that sort of call.

[Mike Kelly]

Now, the disadvantage is most people were screening their calls. Their assistants were like, yeah, he'll never call you back. The advantage for me was one of those individuals, Lee Cooperman, often didn't use an assistant and answered his own phone.

[Barry Ritholtz]

He's there five in the morning, he's there at eight at night.

[Mike Kelly]

Absolutely.

[Barry Ritholtz]

If you call outside of business hours, Lee's the only guy in the room.

[Mike Kelly]

And he picks up and goes, Lee. And that's how he starts the conversation. Mr. Cooper, man, you know, I'm a kid from the boroughs like you. I just want to break into the industry. You know, I've worked at Salomon, but I've never been an investor before. I am willing to do whatever it takes. I am willing to sleep on my parents couch and work for you for free. And he said, I only hire PhDs.

[Barry Ritholtz]

Really?

[Mike Kelly]

And I said, well, I'm getting my MBA right now. And he said, no, Poor, hungry and driven. And I was like, well, I'm all three of those. I checked those boxes. And he said, well, I'm a value investor and I like the price. You can come work for me for free.

[Barry Ritholtz]

No kidding. I like the price. Oh, my God.

[Mike Kelly]

I show up day one at Omega and Lee comes to me and says, let's go to breakfast. And I thought, this is amazing.

[Barry Ritholtz]

I'm in heaven.

[Mike Kelly]

First day, and I'm going to breakfast with the legendary Lee Cooperman. So we go across the street. It's 100 Wall Street. We go across the street to an obon pan for breakfast. And we get to the counter, we order, and Lee turns to me and says, you're buying. So here I am, day one, and I'm already $30 in the hole, right in my illustrious investment career. But it turned out okay. And that was how I got my start in the investment business, and in particular in hedge funds and the alternative investment.

[Barry Ritholtz]

That's unbelievable. So after Omega, you leap from Lee Cooperman to working under Julian Robertson at Tiger Management. How did that come about?

[Mike Kelly]

So I had worked full time after business school for Lee and for Omega Advisors. I received a phone call a few years later by Tiger Management. They were looking for someone in their macro trading and analyst group. And at that time, you know, getting a call from Tiger was like getting a call from the New York Yankees. It was like the illustrious, you know, incredible firm was very honored and flattered, interviewed there.

[Barry Ritholtz]

Let me interrupt you a second just to remind listeners that the 1980s and 1990s were peak hedge fund years. They were masters of the universe. They put up the best numbers. They were the hardest for any investor that wanted to allocate to them. It was not easy to get into any of those funds. The world changed after the financial crisis, but that was the golden era of hedge funds, wasn't it?

[Mike Kelly]

Most definitely. I think what I appreciated the most about those first few firms I worked at, Solomon Omega Advisors, Tiger Management. There was a commonality of culture in that these were very intense work environments with very intellectually curious individuals who were super smart but like to have fun and were a joy to be around and learn from. And so I really enjoyed, you know, the aspects of the culture of the environments in my early career and really got a lot out of it. And it really appealed to kind of my personality of kind of an obsessive, intense personality. So I really enjoyed that. But going to Tiger was incredible. A very young group of people who have obviously gone on to do great things in their investment careers. A really intellectually challenging place to work. But I learned a ton about investing from Lee and from Julian and from the other individuals that I worked with and sort of shaped my investment philosophy as time went on.

[Barry Ritholtz]

I'm curious because there are obviously such different styles. Lee is deep value guy. Tiger's known as momentum and growth and just a whole and technology in a very, very different opportunity set. What did you learn from each of those? How different were Julian's and Lee's approaches?

[Mike Kelly]

Well, I think Julian and Lee, the inception of that both had a very value oriented approach. I think within Tiger there was an evolution over time and an adaptation with even with some of the Tiger cubs of adopting a more growth oriented strategy. But it was a time when doing real intense work could uncover really great long and short opportunities. I do think years later, decades later, it became much more difficult with indexation and ETFs and the market structure changed. But back then, I would say from an investment philosophy standpoint, there was a View that every single day you rebuy your portfolio. It doesn't matter if you're losing money or you're in the money, you've made a double already. If you own it, think about it and re underwrite it as if you just bought it today. And are you as excited from a long and short perspective about that opportunity in the go forward period. And I think that discipline of re underwriting your holdings every single day is something that's remained with me. I think secondly, I would say what I would call a variant perception, or what is called a variant perception, something that Michael Steinhardt popularized of when you make an investment, how is your view different from the market? Because if you want to outperform the market, you can't just agree with the thesis that's already embedded in the price or value of an investment. And so that variant perception of how do you look at it different? You're either more bullish about that opportunity or, or you think that opportunity is overdone. And so you're either selling or you're shorting or what have you. And so I think that variant perception is really, really an important aspect of the philosophy having investment. Conviction is another principle. You know, go all in, do your work, get to a high conviction thesis, but loosely hold it like, hold on loosely, like this.

[Barry Ritholtz]

Strong opinions. Loosely held is the expression I heard years ago.

[Mike Kelly]

That's exactly right. Because if you have disconfirming erro evidence, don't ignore it, don't double down with your escalation of commitment. You know, re underwrite it and ask yourself, well, maybe I have to change my mind. The greatest investors in my mind, someone like a Stanley Druckenmiller is willing to change his mind all the time, you know, based on new information. And so I think these principles form an investment philosophy that if, if you don't know what your competitive advantage is in making an investment, whether you're a private market investor or a public market investor, you probably don't have a reason to be in that investment in the first place.

[Barry Ritholtz]

That's exactly right. I love the concept of re underwriting. So many new investors and I started on a trading desk. Any position you had, you had to justify every moment you owned it.

[Vanguard Representative]

Hey, this is capital.

[Barry Ritholtz]

I can turn this into capital in a millisecond. Would you buy this if this was back as cash and not as a holding where you bought it? Whether you're underwater or ahead is totally irrelevant. Would you continue to re underwrite that? That's a, that's a Great way to describe that. I'm really impressed with that. So, so from Tiger, you go to FrontPoint Partners and help turn it into a truly institutionalized hedge fund. Tell us a little bit about FrontPoint.

[Mike Kelly]

So I got a call from the two original founders of FrontPoint and they asked me to look at the business plan and to give them a critique and which I did. I thought it was fascinating. At the time, a lot of hedge funds were frankly run as almost like family offices. As a business.

[Barry Ritholtz]

A third of the capital was the founders half the time anyway.

[Mike Kelly]

Right. And most of the investment capital came from ultra high net worth and family offices like Memphis Mafia and others. And so there was a view that institutions would begin to embrace alternative strategies. And for them to embrace alternative strategies, the firms they would allocate capital to would need to look like the institutional asset managers they were used to, like in the traditional mutual fund business. But a lot of hedge funds didn't look and feel that way. They were run more like family offices. And so we had a view that by forming a real institutional quality asset management firm that would house diversified strategies and managers who could provide absolute return strategies to these institutional clients that, that would be embraced. It would be embraced because of the excellence of the investment teams, but also by the world class investment asset management infrastructure that we would build with frontpoint. And so that was the thesis. You're going back to 2000 now and to be invited to join a firm. And these guys were in their 50s. I was, you know, 29, 30 years old. To build a company was an exciting thing for me at the time. I still wanted to become Paul Tudor Jones. I wanted to be a macro investor, I wanted to be an investment manager. But I thought I'll start by helping these individuals help build this firm and then I'll go back to running a fund probably at FrontPoint.

[Barry Ritholtz]

And didn't you begin at FrontPoint as CIO and eventually became co CEO?

[Mike Kelly]

I was the head of manager selection and overseeing the investment teams. Then I became chief investment officer and head of the multi strategy and then I became co CEO of the firm. So it was an evolution over time and. But at the outset, you know, hiring the investment teams, overseeing what they were doing, picking and selecting them was a fascinating job for me. I loved learning about different approaches, you know, market wizards, stock market wizards, all the different ways you could skin a cat with investing. So it was like a kid in a candy store. And, and I began to reflect on my career at that time in that everyone goes into the investment business. With the mindset of I want to become a great investor, I want to become Warren Buffett, I want to become Julian Robertson, I want to become Paul Tudor Jones. I was no different. That is a very crowded pond and a lot of luck and things have to go your way to conspire to result that way to become one of the top decile quartile managers out there. And I thought at the time, you know, building an asset management company like this, like I'm doing with my partners at FrontPoint, you know, I'm a young guy, I have my whole career ahead of me. I thought, you know, actually if I spent my career building asset management companies and managing them, that could be a pretty, you know, robust career. I could really enjoy myself. And it's a pond no one seems to be fishing in. And maybe 20 years from now this might result in something. And so it was at that moment, you know, within frontpoint that I began to move away from investing professionally in the markets and more, building investment organizations and overseeing investment managers and strategies.

[Barry Ritholtz]

So the next step along your career path, you join Oryx asset management as CEO.

[Mike Kelly]

Right. So we had sold FrontPoint to, to Morgan Stanley. I'd run it with my partner there for a few years. I was hired away from Oryx to be the CEO of their asset management unit. It's a Japanese holding company. They were looking to diversify their holdings into the US and into various industries, one of them being asset management. They had a lot of capital to deploy and a low cost of capital being a Japanese holding company. And I thought I could exceed that hurdle and build something here. So it was back in 2012 and it was during the PIGS crisis and thinking about where could we acquire compelling asset management.

[Barry Ritholtz]

Let me interrupt you for the people who might not have been trading through Brexit, Grexit, whatever the PIGS crisis was. Portugal, Italy, Greece, Spain. Is that right?

[Mike Kelly]

That's correct, that's correct. And at that time the European Central bank and some of the local national banks of these European countries were encouraging financial parties to divest of their non core holdings. And so as we were thinking about, you know, where in the world could we deploy capital to acquire asset management capabilities? Europe seemed a logical place because there was a force selling happening. And so there was a jewel in the crown of Robo Bank's holdings, Private bank in the Netherlands. And they needed to divest of Robico, which had been around for, which was giant back then, $300 billion plus. And they had purchased that historically and had owned it, but it was Non core to their, to their private bank. And so we positioned ourselves as an advantageous buyer to them. We purchased it at a very attractive valuation, was the largest in Oryx's history. We acquired that capability and you know, at the time it was exciting to get that deal done. We had bought another stakes in other managers in the alternative space. But really I wanted to do something more entrepreneurial again. And so I began to look at what is the next business within asset management like frontpoint that I could set my career out to build. And that is how the inception of coming across what was then Franklin Square now future standard came about.

[Barry Ritholtz]

So when you joined, did you join as CIO or president or what was the initial role?

[Mike Kelly]

Yeah, so I was introduced to Michael Foreman, the founder of Franklin Square, through a headhunter friend of mine, Scott Fletcher. And I was also introduced by Bennett Goodman and Doug Ostrower at, at GSO Blackstone. And they had encouraged me to go meet with their partner who they had partnered with. As I was describing, what I thought the next big thing in asset management would be would be the arc of history of bringing alternatives from family offices and ultra high net worth throughout the 80s and 90s. And then the endowment model with David Swensen. Eventually institutions began adopting it. The one constituency that was still left out were the individual investors below ultra high net worth and family offices. And so I had a view that at some point that would change and I wanted to help effectuate that change. And that is where I was introduced to Michael Foreman and his vision for what he was doing with Franklin Square and had been doing. And he had built this incredible chassis around productizing and distributing income strategies and convinced me to join up with him as president, to go join him and, and you know, be the chief investment officer, help build out the asset management capability. Now at the time Franklin Square was a product and distribution firm. So they were creating the wrappers and distributing them. But other external parties at the time, Blackstone were the ones sub advising and providing all of the investment acumen. And as I would describe it today, and I use this analogy of Netflix, it was like seeing the red envelopes and DVDs but. But Michael had created this incredible distribution engine, 100 million person mailing list type of, you know, distribution capability. And just like Netflix figured out how to digitize their business and create their own in house TV and movie studio, you know, that was my pitch to Michael is you could eventually diversify this product base and you could bring in house capabilities so long as the quality is still very high, you can put it through these channels and offer them to private wealth clients. And so that's what we set out to do.

[Barry Ritholtz]

Really, really fascinating. Coming up, we continue our conversation with Mike Kelly, Chief Investment Officer and president of Future Standard, discussing how he helped build the company into a $90 billion

[Vanguard Representative]

multi strategy platform for wealth management clients.

[Barry Ritholtz]

I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

[Vanguard Representative]

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[Barry Ritholtz]

I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Mike Kelly. He's President and Chief Investment Officer of Future Standard. They are an alternatives manager focused on the wealth channel, running over $90 billion in client assets. You know, when you joined what was Franklin Square before it became Future Standard FS Investments, they effectively had one credit strategy plus whatever they were reselling on behalf of other people. A little over $10 billion. You're almost 10 times the size now with a full multi strategy platform. How did that evolution come about? What were the key inflection points? Was that a tough sale to get everybody in house to accept that, hey, we have a nice little business here, Mike. Why do you want to mess with it?

[Mike Kelly]

Well, there was a nice business there and change comes with resistance. But I think we've had a fortuitous progress of change over the last 12 years. And I would say it started out with forming multiple partnerships with various outside firms that Michael and I had relationships with the likes of KKR and Golden Tree, Rialto in real estate, eig, Magnetar Wilshire in order to create some diversified strategies that we could offer to clients with best of breed managers. Across various disciplines. And so that was the first stage of evolution, was moving into more of a multi manager architecture. Concurrent to that, I began to hire internal talent, which is something similar to what I had done at frontpoint and brought in individuals like Andrew Beckman and helped him build out his internal private credit team. We made some acquisitions as well in Chiron Asset management, portfolio advisors, post road group in various disciplines. And so it was a combination of and an evolution of external partnerships in house hiring and talent and development and growing those and acquisitions, sort of inorganic acquisitions of capabilities and managers to bring on. And I'd say starting from this inception of packaging and distribution, we then evolved into a diversified asset manager. And then after this series of in house capabilities and acquisitions, we adapted the firm into what I would call a true alternative platform. You know, a platform and I'll distinguish a platform from a diversified asset management because I do think they are different. Diversified asset manager. You have different strategies that you offer to clients, but those strategies don't have to interrelate at all with one another. And there may be no shared set of relationships or gleaned insights or what have you. A platform, as I would call it, is more interwoven. There's more collaboration, there's shared underwriting, there's shared origination and relationships for deal flow, there's an exchange of insights and specializations, all with the intention of improving outcomes for clients. And that evolution, if you will. You know, it's easy to whiteboard that out and describe we're going to do this. To your point, it's really hard to actually execute on that.

[Barry Ritholtz]

So. So there's a underlying thesis in this. Once this full platform is built out, hey, there is a giant wealth channel that a lot of alts are not tapping into. It's the next great frontier, high net worth, mass affluent wants the same sort of access to strategies that they see foundations, endowments, institutions having access to. Tell us a little bit about how you see that opportunity, how large is it, how much has already been captured? Where are we in the cycle of this? Getting pushed out to mom and pop investors.

[Mike Kelly]

So backing up to when Michael first started Franklin Square, this is now back in 07 08, launched the fund in January of 09. So auspicious, great timing for a credit strategy and delivering income to individual investors through the independent broker dealer channel. And if you remember that time you had this declining yield environment and the Fed cutting rates over that course of time. And so there was a search for income, particularly for retirement accounts. And so in the early Days, a lot of our offerings were income strategies, income oriented, whether it's middle market lending, closing offering, real estate lending strategies and so forth, so generating income. And I think we saw that post, great post the great financial crisis, banks would begin to withdraw from those lending activities and seed those over to asset managers and direct lenders like ourselves. But also that private wealth and individual investors would begin to embrace these strategies to pick up income sources. And so those two trends I think we got, we got correct. What we probably didn't foresee was the adoption curve. I think we probably assumed it would be more linear than it actually turned out to be. It took longer. You think about it, this is now going back. I mean, Franklin Square was started almost 20 years ago. It's very topical today and we've seen a lot of flows in the last five plus years. But it has been more recent that adoption picking up and being spoken about across the entire industry. So I do think there's been this arc of evolution and adoption. But I would tell you Barry, it's still very much in the early days given the dynamics of private companies and their capital needs.

[Barry Ritholtz]

So let's put that into a little context. The 2010s, you not only had zero interest rate policy or ZIRP, you had QE, you had operation Twist. Like the Fed did everything it could do to make cash trash and force people off the sidelines. Hence Tina There is no Alternative became popular. In hindsight, it's kind of surprising that it took private credit as long as it did to really find a bid. Like you would think in that era of zero interest rates, hey, we're going to give you 7%, but it's variable. If the Fed raises rates, we should see a bump up in yields. What was it like building out into that environment as a. Not just as an executor, but also as an investor as a CEO?

[Mike Kelly]

Yeah, I would say two things. One's a market backdrop issue and one's more of an operational issue. On the market backdrop issue, I define this golden era of investing as post Volcker, like 1987 up until 2021 as we're coming out of COVID And if you look at a chart of spectacular US stocks and bond prices, 6040 made incredible sense. You had disinflationary forces, you had benign demographics, you had globalization. And it was great to set it and forget it with a 6040 mix.

[Barry Ritholtz]

That era was a 35 year bull market in bonds that there are long stretches where fixed income is outperforming equity. In that Run, Right.

[Mike Kelly]

So why do you need an alternative. Right. If the music sounds great? You don't need alternative music. When the music is all crap. Nirvana comes along. And so I think the experience that investors had was prove to me I need something else. And it hasn't really been, you know, particularly with fixed income. Right. When you think about the experience of the last six years or so where high duration fixed income has not been great at all, that's 40% of your traditional portfolio. That's just stopped working overnight. And so that catalyzed a lot more inquiry into diversified sources of private market income, private returns and so forth. The other issue that slowed the adoption curve is on the operational infrastructure side. And it's something that the likes of Lawrence at iCapital and Matt at Case have been solving for. But it was really clunky in the early days. You had, you know, double layers of fees, you had feeder funds, you had high loads, K1s, K1s. It's just not something that the individual investor and their advisors wanted to embrace, understandably, because you had to fill out by hand a sub doc for every single investor. And so both the market backdrop changing and morphing and opening up people's minds as well as access and operational infrastructure. And we'll get to this. But education, which we're clumsily getting our way to, educating these strategies, how they work, these structures, how to embrace them, how to incorporate them into portfolio, that took time. It just took time for the whole industry to get there. And I feel like we're finally at the point where we're arriving. But as I said earlier, I still look at this adoption and penetration from these investors as very early.

[Barry Ritholtz]

How much of an accelerant was 2022 with the, what was it, 550 basis points of rate hikes? If you're long duration, well, that's going to really leave a mark. What did that year do to acceptance of alternatives from that wealth channel?

[Mike Kelly]

So two things. One was positive and one was more of a challenge. The positive side of things was with the, with the backup of duration of the long yields that began to challenge the traditional fixed income side of the portfolio. So if you think about the traditional fixed income portfolio, I think about credit fixed income risk in three ways. Liquidity, credit risk and duration. And so most people had very long duration, highly liquid, low credit risk investments in treasuries and agency bonds and mortgage securities, municipal securities that began to fail them and not provide the ballast against equities it had been. And it didn't provide the income because duration was working against you. So that was a positive force for. Let's find something else. The negative force was going from 0 to 5%. People went from not earning anything on their cash and needing to deploy it to make any money to oh wait a minute, I haven't made money on my cash in a long time. 5% sounds pretty good.

[Barry Ritholtz]

Money market 5. And change was great. It was actually when you hadn't had

[Mike Kelly]

that for a long time.

[Barry Ritholtz]

Yeah, yeah.

[Mike Kelly]

And so you began to see some hoarding of cash balances that only began to be deployed as the Fed started to cut those rates again.

[Barry Ritholtz]

I would imagine the inverted yield curve around that time was problematic also. Why do I want to tie up money if liquid money market is yielding even more?

[Mike Kelly]

Most definitely.

[Barry Ritholtz]

Huh. Really interesting. So you've described the current environment as having created a new investing imperative, focused research, flexibility to change course, conviction. Tell us about what you see as the modern investing imperative around alternatives.

[Mike Kelly]

Right. So we all know about the decline in the number of publicly traded companies. If we were coming out of college, it was 9,000 today, you know, barely 4,000. Both the number of private companies and the size of private companies has exploded and the opportunity to invest in these private companies has increased dramatically as well as the access and the availability and those companies taking advantage of access to private equity and direct lending sources of financing. And that allows for a much broader palette for investors to build portfolios with by accessing those companies. And I would say, Barry, increasingly in order to get diversification, only build diversification, you do have to look outside of public stocks and bonds. The stock market is becoming less and less representative of the total economy as it used to be. It's very concentrated right now in AI infrastructure in the MAG7 and the build out there. And you have myriad number of private companies of small to mid size and some larger size that provide you access to what's really driving the US economy. We call that the middle market. And the middle market are a couple hundred thousand plus companies that drive the US economy that are not publicly traded. We define the middle market as companies of a billion dollars of enterprise value and down. So sort of lower and core middle market. And these are businesses that you know, frankly are fast growing, they're fragmented ecosystem, they're hard to find. But if you can navigate and invest directly in these businesses or lend to these businesses, it's a very attractive access for investors.

[Barry Ritholtz]

So let's talk a little bit about that. I like to step back and take the 30,000 foot view to kind of get a sense of how this evolved. My general sense was yet a lot of consolidation with big money center banks following the financial crisis. Even the decade leading up to and it felt like much of Wall street, much of the giant banks just kept moving up market and left these huge swaths of billion dollar companies behind. Because let's be honest, what's a billion dollar company, it's small change to them is that the what created the opening for all of this Private credit, real estate, financing, private debt. There's like this whole world that used to be traditional banks. Like explain that transition a little bit.

[Mike Kelly]

So as I spoke about earlier, I started my career at Salomon and Fig banking and we would talk about merging banks and we had these old CDs that you would take with bank information and merge the banking world and pitch banks on why they should consolidate. Well, they did. Throughout the 80s, 90s and 2000s the banking world became much more consolidated into these four mega banks that hoovered up a number of regional banks. So that was, you know, this is a confluence of factors. That was one factor. The great financial crisis and Dodd Frank and Redcap rules was another big factor of driving higher capital requirements for banks and their activities. You also had banks increasingly looking towards generating fee income versus making loans on their balance sheet. In other words, they wanted to be in the moving business, not the storage business because that's what their publicly traded shareholders were valuing. And so they answered that call. And so increasingly they began to step back from those lending activities, particularly to mid sized private companies and real estate activities. And that allowed for asset management companies who and I would estimate have, you know, very attractive asset liability matches within their lending activities to step into that opportunity and provide that financing capital through closed end funds, through BDCs, through different structures to be able to lend and provide access to the individual investor to generate income off those lending activities. And so I think all of those things provided the opening and it's been a market share shift from the banking system to the direct lending and asset management world and private lending.

[Barry Ritholtz]

Really interesting last question on the evolution of future standard. You've served roles both as Chief Investment Officer and CEO, co CEO. As cio, you think about generating returns. As a CEO you have to think about so many everything else but people, infrastructure, clients, culture, systems.

[Mike Kelly]

Right.

[Barry Ritholtz]

How do you integrate those two very different sets of responsibilities?

[Mike Kelly]

Right. So in terms of thinking about the role, overseeing the investment teams and investment strategies is a big part of what I do as Chief Investment Officer. I like to use the analogy of like, I like to be the Rick Rubin in the room of really talented professionals, provide an environment by which they can do their best work and then get the hell out of the way. And so you have to identify the talent you help to work and develop them. You have to work with their process, how and why they make decisions as individuals and teams of individuals. Make sure that their priorities align with our clients and the firm overall. Give them all the resources that they need to do their job and increasingly their more sophisticated resource requests like around AI deployment and things of that nature and then get out of their way, allow them to do their best work. And you pointed out, you know, designing incentives, designing culture, reinforcing behavior is a big part of all of that. So that's one big part of my job. You know, also interfacing with clients, both private wealth clients and institutional clients. Strategy for the firm, internal strategy, corporate development, but also M and A and new deployment of acquisitions. Acquisition of different strategies, products and launching new products and new extensions of existing products is a big part of my role. And then reinforcing the culture overall of what we're trying to build.

[Barry Ritholtz]

And you mentioned earlier you were. I'm going to say that again. Earlier you mentioned that the firm was selling into the broker dealer networks that seems to have evolved into more of an RIA networks. Even the big shops like UBS and Morgan Stanley have kind of pivoted away from transactions more, more to fees. How has that transition affected who you're selling products to?

[Mike Kelly]

So over the last, you know, 15 plus years, there has been an evolution and a broadening of the types of platforms that have been embracing private market strategies, alternative investment strategies. You know, there's the wirehouses, so the big four names, Morgan Stanley, UBS, Merrill Lynch, Wells Fargo. There are the large RAAs like Rockefeller and Serity that are building out their capabilities for independent advisors and growing quite tremendously. And then you have the independent broker dealer channel, the LPLs of the world. And so there's an ecosystem of wealth platforms just here in the US that, you know, oversee 300,000 financial advisors and brokers in the United States. And all of those channels are increasingly embracing and hosting onto their platforms access to these types of strategies through various, you know, phases of development within those platforms. I would say there's a real spectrum of adoption. You know, you know, when I started at what was then Franklin Square, you know, talking to a big wirehouse like Morgan Stanley, they would tell you that a very small group of their advisors were doing the vast majority of alternatives business now across, you know, 15,000 plus advisors, there's a much broader and wider democratization of adoption of alternatives across theirs and other people's platforms. But there's still a lot of individual investors and advisors who are still at 0% allocated to something other than a stock, bond or cash. And that evolution is that's why I think we're still in the very early really, really interesting.

[Barry Ritholtz]

Coming up, we continue our conversation with Mike Kelly, President and Chief Investment Officer of Future Standard, discussing the state of alternatives today. I'm Barry Ritholtz. You're listening to Mass in Business on Bloomberg Radio.

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[Barry Ritholtz]

right now are elf ears.

[Mike Kelly]

Elf ears?

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Yes. People are getting injections to enhance their ears. I really don't need anything else to learn to be self conscious about. But this is not something I needed to have on my radar. The Bloomberg this Weekend podcast. Subscribe today on Apple, Spotify or wherever you listen.

[Barry Ritholtz]

I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Mike Kelly. He is president and Chief Investment Officer of Future Standard. They are a $90 billion alternative platform focusing on private credit, private equity, real estate, infrastructure and multi asset strategies. So it's hard not to look at private credit today and not think this is becoming a juggernaut. Is that a sign of maturity or is this, you know, just a lot of capital chasing, not a lot of loans.

[Mike Kelly]

So I'd start by saying that there is a misconception that private credit generally is becoming a bubble. And I consider myself a student of history and calamities. And I try to think about and if you look at the build of what we call private credit, the asset management's direct lending to private companies matching up against, you know, various, you know, situations in the past where we had true bubbles, you had an outgrowth of capital versus the economic driver of activity. We don't have that today. If you actually add up the pockets of what we really call private credit, which is not just direct lending but high yield strategies, broadly syndicated loans and bank CNI loans, that's private credit provision. It's grown lockstep with the economy. The economy had gone from 1213 billion before the great financial crisis, it's 30 trillion today. And so it's grown in lockstep. It's just the market share has shifted to direct lenders and asset management away from banks, high yield and broadly syndicated loans. And so the opportunity in private credit is not outgrowing the underlying opportunities these private companies are making themselves. They're availing themselves of this private form of financing from asset management companies. And there's a lot more of these private companies demanding this capital. So there is a balance between the supply and demand of this capital for the opportunity. Now having said that, in this search for yield that we talked about, there was an outgrowth of evergreen strategies and selling to the private wealth community, particularly within private credit strategies in this a demand for income. And we did see an explosion in concentration and crowdedness in particular funds and pockets of large cap lending that did result in, you know, very tight spreads, covenants being loosened, an increase in paying kind or pick over cash financing. And we also saw a concentration of lending to software companies as rates were being cut and distributions were being cut within BDCs and private credit. We began to see that coupled with the concerns about software exposure begin to result in some redemptions. And that is where a lot of the headlines have been focused on private credit and negative sentiment around private credit trying to get out of these structures when they're having difficulty doing so. I think the backdrop though is private credit is still a very valuable and value enhancing component for most portfolios to generate income, despite some of the indigestion and negative headlines that I've been developing.

[Barry Ritholtz]

Let's talk about those retentions because they always crack me up. We saw this a couple of years ago with B, REIT and bcred, which is which part of five year lockup is confusing to you? I don't, I don't understand. And for the listener, a lot of these illiquid alternatives have a tiny gate of 5% gait which is really there as an accommodation when, you know, I call it the widows and orphans clause.

[Mike Kelly]

Right.

[Barry Ritholtz]

If, you know, if, if the surgeon is hit by a bus and he leaves behind wife and kids, they perhaps shouldn't be in an illiquid alternative in those circumstances.

[Vanguard Representative]

But given that, let's talk a little

[Barry Ritholtz]

bit about the illiquidity premium which some people look at as a bug, but I think is a feature of, of the, this sort of investment. Tell us a little bit about how you think about illiquidity and how do you communicate illiquidity or liquidity issues to potential investors?

[Mike Kelly]

Well, I'd start by saying investing is all about trade offs. There's no right or wrong, no black or white. You know, alternatives aren't better than traditional forms of investing. There's just trade offs and the trade offs within private Market strategies and the structures that offer them is that you have the advantages of the potential for enhanced return through an illiquidity premium or enhanced diversification from your public holdings. The trade off of that is these are ill liquid strategies. They are complex and they are higher fees than public market strategies, ETFs and indices and things of that nature. And so you have to balance those before determining whether or not the trade offs make sense for you, for your clients, for an institution, what have you. And I really mentioned the illiquid, the illiquid part of it, because these strategies are illiquid evergreen structures as wrappers around these illiquid underlying strategies did not make an illiquid private asset class liquid. It was just an access point that provides its own advantages of continuous compounding and no capital calls and 1099s and so forth. But it didn't turn an illiquid asset class into liquid. I never understood the term semi liquid, which implies half liquid, which it's not. These are not half liquid private investments. And so that as a backdrop, you know, a lot of it comes down to managing the expectations of what the trade offs are. Going back to the advantages you are providing capital. And in our case at future standard, we're providing capital to a very fragmented ecosystem. We cherry pick, you know, a handful of the best middle market mid sized private businesses and we provide them with capital either through equity capital or through loans that we make to these companies. These companies are not massive in size and they can't dictate final terms. And so we can lend to them at very advantageous prices that work for them because they're growing businesses. They need capital to grow, to acquire new businesses, to fund their operations. And so they're not going to negotiate to the final basis point on spread. So we can provide a very attractive form of financing to them and pass along that income to individual investors through the private wealth community. And so it works for both sides. And you know, that form of income is, you know, does come with an expectation of higher returns than what you'll be able to replicate in the sort of mega cap market or in the, the public fixed income market.

[Barry Ritholtz]

Makes a lot of sense. Back in the day this was thought of as an institutional product and a family office product. It began migrating downstream to ultra high net worth and then high net worth. Now the question is, is this going to be marketed to mass affluent 401ks, things like that? Who do you see as, as appropriate buyers of a variety of private credit products?

[Mike Kelly]

So I'll start By saying, you know, one of the reasons at future standard why we like working with advisors is nobody has a better finger on the pulse of suitability than the advisor to their clients. They will know for their client base, risk preferences, liquidity preferences, their ability to understand these strategies and have them incorporated into their portfolio. We say that if you're going to allocate to a private market strategy like the ones we offer, if you're not looking to allocate for at least the next four or five years or beyond, don't make the allocation. If you need the liquidity in the next few years, there is no guarantee to our earlier point that you'll be availed of that liquidity. And so the determination of suitability is at the advisor level. And I think that's where it sits. You could make the argument that this should be relegated to those with net worth or income of a certain bracket of level. The regulators have, you know, have their policies on that. But when it gets a little bit fuzzy where someone is accredited but may or may not be suitable, I think the advisor is most positioned to be able to. And we would rather have fewer but more suitable investors as our client base than more and less suitable investors as our client base. You asked the question about retirement accounts. I think there's been a lot of, you know, headlines written about the big numbers that are being thrown around, you know, 12 to 15 trillion of DC 401k plans. This in my view should be among the least controversial of places to think about incorporating less liquid private market strategies.

[Barry Ritholtz]

You're not tapping it for years, you

[Mike Kelly]

don't need it for decades. Usually for a young person in the retirement account, I think about my little brother who's a schoolteacher in Queens, and if he has a 30 year horizon or a 20 year horizon, why shouldn't he have some allocation incorporated in say a target date fund, two long duration investments that might pick up an illiquidity premium if he doesn't need the capital for a very long time.

[Barry Ritholtz]

And that's a couple hundred basis points over treasury easily assumption easily.

[Mike Kelly]

And also, let's face it, a lot of the best investors in the world are still occupied in this world we call alternatives. And so why not avail yourself of the best investment minds and teams and firms that are out there and their capability sets. And so I do think there will be incorporation of private market strategies into retirement plans, into DC 401k plans. I think it's going to be a much longer evolution than maybe some would like. It will also only Be a subset of the 12 to 15 trillion out there, because you have to get the plan sponsors comfortable and other constituents and players up to speed and comfortable with the risks and the fees and the liabilities and so forth. And so it's going to be a small allocation, say 15% of a target date fund, and that's going to be a subset of all of the capital out there. So in the end it's an opportunity long term. It will be something that people can elect to have or not have the qdia. It may be a qualified default, they may elect in or so forth. That will evolve over time. But I do think the headlines are getting a little bit ahead of themselves that there's this wave of trillions of dollars that are about to go into alternatives.

[Barry Ritholtz]

So you mentioned 60, 40 earlier. I'm kind of hearing, hey, 6040 is going to be changing over the next decade to something that's maybe 60, 25, 15. Is that sort of a reasonable number set?

[Mike Kelly]

So this will now get into my view on portfolios and portfolio allocation generally, which I have a view that doesn't match up with those numbers.

[Barry Ritholtz]

Can I, can I. Before you say something, I always get into trouble when I say this, but hey, if you're 20, 30, 40 and you have a reasonable risk tolerance, what the hell do you need bonds for? Like people don't like hearing that, but 60, 40, how about 90, 10 if you're, you have 50 year time horizon, you just have to not mess it up at the worst possible moment. Where are you going with your pushback to 60, 40?

[Mike Kelly]

So even though I've used the term alternatives throughout the discussion here, I don't really like it. I think there's a point in the future where we won't call these strategies

[Barry Ritholtz]

alternatives because they're not all the same. There's a broad dispersion of risk and returns there.

[Mike Kelly]

That's exactly right. And to use that other analogy, when everyone's wearing a Nirvana T shirt, it's no longer alternative music, right? And let's face it, there's a much broader embrace of these strategies. Although it's early, 88% of advisors surveyed have indicated that they plan to allocate capital for their clients to private market strategies. So this is not a niche embrace, this is a broad embrace. And so it's becoming more mainstream. And the reason I don't like the numbers of 60, 40 versus 50, 30, 20 is when you think about alternatives as just this little peg, like a Trivial Pursuit peg on a circle. It doesn't match up with how I think about portfolios. So if you think about private equity, private equity rhymes and looks a lot more from a risk standpoint like stocks than it does real estate credit.

[Barry Ritholtz]

It's right there in the name.

[Mike Kelly]

And so yeah, right, it's equity, it's for growth. And so. And yet we relegate private equity into a bucket with things like real estate credit, even though they do very, very different things for your portfolio. So the way I like to look at it is there's a part of your portfolio for growth and those are all forms of equity, from public stocks and stock indices through to private equity and private company access through to venture capital and other forms of growth equity. You have your income portfolio and that's your lower risk, high duration, high liquidity treasuries and agency bonds through to other forms of income like less liquid private credit, you know, in other shorter duration, higher credit risk investment strategies. And then you have what I think is probably an introduction of something that we haven't had to think about since the 70s, like a real asset category and commodities base and precious metals, you know, raw land and real estate and things that in a more inflationary world and a world where you need more diversification of sources of income, you probably need a real asset infrastructure would be another example of that real asset category. And within each of those three buckets of a portfolio, you have a spectrum of illiquidity and risk profile. And so for each allocator they will need to determine within their growth bucket how much liquidity they need to generate the kind of growth and how much risk they're willing to bear into private equity and venture capital to build that growth bucket. And the same thing for their fixed income bucket with degrees of credit risk, liquidity, duration and then within their real asset bucket. And so I do believe, even though the world doesn't really look at it that way, that we will eventually get to that point and no longer talk about the term alternatives.

[Barry Ritholtz]

It's going to be different types of income producing properties and growth.

[Mike Kelly]

That's exactly right.

[Barry Ritholtz]

Makes a lot of sense. You mentioned earlier we saw a big uptick in interest rates, which suddenly is a double edged sword. You're getting yield. We now have a new Fed chair who seems to have surprised everybody by being a little bit hawkish in the current environment of oil prices and tariffs and hopefully the end of war. But how do you think about the role of rates and the Fed? How does that impact the, the yield producing portion of the alternative portfolios?

[Mike Kelly]

Well, as I said earlier, I do think we've exited this golden era that ended, you know, roughly five years ago into a more inflationary, deglobalized, less benign demographic backdrop. It will result in a higher resting heart rate for inflation. I'm not suggesting we're going back to the 70s by any means, but there's a dozen or so factors that will keep inflation more elevated, particularly in this deglobalized, localized world of supply chain breakdowns, post GFC0 rates.

[Barry Ritholtz]

That's it for our lifetime. Nobody really expects to see that again.

[Mike Kelly]

I don't expect to see that anytime

[Barry Ritholtz]

soon, barring meteor from outer space. Right, so, so what does that mean for the potential for various types of private credit to generate?

[Mike Kelly]

Right. In that backdrop, you're going to have higher rate uncertainty, higher volatility, and a need to look for other forms of income, other forms of floating rate exposure. Right. If rates go up, floating rate exposure pays you more. It works against you with high duration investments. You begin to lose money on those and so it does act as a balance to your traditional fixed income sources. You will need diversification just generally in the world, given this economic backdrop and the need for obtaining resources and how you build out a diversified portfolio. And so these types of income strategies and private equity strategies and real asset, real estate and infrastructure strategies are again a broader palette to paint from in a different environment than the one in which 60:40 was the perfect answer and a simplified answer of set it and forget it and be able to have diversified low volatility outcomes. And so I do think the role of the Fed is trying to navigate this tug of war between the inflationary forces and perhaps the deflationary forces that AI may introduce to pockets of that economy. And so it's a tougher job for Kevin Warshe wants to go back potentially to less disclosure, maybe more Alan Greenspan like communication style, where we have to divine the tea leaves a little bit more and try to anticipate what's going to happen. And that makes it trickier. And if you're building portfolios for the long term, incorporating these strategies in a diversified way, you will have countervailing balance within your portfolio. It won't matter if the Fed's going to raise or lower interest rates by 25 or 50 basis points. If you built a truly diversified portfolio

[Barry Ritholtz]

makes a lot of sense. You mentioned some of the headline risk and we've had a couple of minor blow ups over the past year or so. Some people look at that as the first cockroach. I don't know if that's the right metaphor. I'm curious, what data points do you look at to just keep an eye on the health of private credit underwriting?

[Mike Kelly]

So when you're looking at private credit underwriting, you're looking at default rates versus history. You're looking at, you know, the situations where there are defaults and what losses ensue post those defaults. You're looking at interest rate coverage ratios. So to the extent that the businesses that you're underwriting in a diversified portfolio can cover their interest payments. So you're watching all of these metrics, you look at the value of the collateral underlying those businesses. Businesses. And I would say we. There is no systemic crisis broad based within private credit today. We're not seeing that there are idiosyncratic stories. And when you have hundreds and hundreds of credits being underwritten, you're always going to have individual circumstances of companies that are going bad or undertaking one normal default fraud, normal default rate. And it doesn't, by the way, just because a company defaults doesn't mean you lose money. I mean historically, if you had a default rate of, you know, 2 or 3% and you lose half your money on that, you can do the math and how much your actual losses will translate over a period of time against the income that you're generating in return. And so if you might factor in the loss of 50 or 100 basis points of loss against the ability to generate 9 or 10% returns, you can do the math as what that on a net basis will return for you. Defaults today are well within historical ranges and are being well managed. Interest rate coverage ratios are well within historical ranges and are in a healthy range. Today what we are seeing are pockets of weakness in pockets of vulnerability. And again, over the course of. We haven't had an economic cycle since the great financial crisis. I don't even count Covid because it wasn't an economic cycle.

[Barry Ritholtz]

Even 2022, kind of barely a blip.

[Mike Kelly]

And and yet we're always going to have some areas that are experiencing some disruption or some indigestion. Right now you have software, which is, you know, an issue that AI is disrupting. But you have to sort through that. And healthcare services, there are some labor and reimbursement issues that have hit certain healthcare companies. Within software. No one knows, no one knows what the true impact of AI is going to be on software. My view is most companies will be fine and adapt and evolve their business models. There will be a subset of those companies that will be truly disrupted. And where Your collateral will not be worth very much. But again, if you look at a mega cap or large cap private credit portfolio and you said 20% is allocated to software and you thought 15% of that was going to have disruption and trouble, so now you're relegating this down to about 3% of your portfolio. And even if that all went to zero and there was no collateral value and no recovery on any of those, that's going to ensue over the next three to five years. Three points of loss. So assume a straight line amortization of those losses about a point a year or less than a point a year off of a portfolio that generates 9%, 10%. So instead of 9 or 10, it's 8 or 9. If all of that gets disrupted as expected, in other words, this is not a catastrophe. This is a normal course of business with a pocket of sector weakness. I think the private credit industry is still healthy. It still provides very attractive general returns. And this is all assumptions based and assumptions can change in the course. But as I look at the fundamental health of the private credit business, it's still very much intact.

[Barry Ritholtz]

Really, really interesting. I have one or two more questions before we get to our favorites. And I have to ask you a 30,000 foot view, step back and look at the private credit landscape. Three years, five years, ten years from now. What does it look like in terms of ongoing growth? How much do you think this is going to penetrate into the wealth channels? What does the industry look like out a couple of years?

[Mike Kelly]

So when we talk about private credit, and often when you read about private credit in the press, it seems like one monolithic category within private credit. There are a Baskin Robbins series of flavors that all get defined as private credit. And so you have senior credit, junior debt, mes, you have close, you have sponsored non sponsored opportunistic credit, you have asset backed finance, you have royalties and so forth. And so there are many different forms of credit to private entities and companies that we call private credit. My expectation is those flavors will develop, they will begin to grow in size. The demands for that capital by those companies and entities will increase. We're seeing the entrance of insurance capital and an investment grade. Most of what we call private credit is non investment grade. But there's the investment grade demand for private capital for these companies that is exploding in size. And Mark talks about that at Apollo. And you know, there is all of this that's developing over time and I expect that to continue. And then on the demand side, I expect that private wealth will continue to demand income, they will continue to struggle with traditional forms of fixed income and high duration assets. If my view on the macro world transpires as I think it will, they will continue to need to search for income through different sources. That's both corporate income and real estate income and other forms of asset backed income. And so those demand, that supply and demand will continue to grow lockstep with one another and we will have a much larger ecosystem of what we call private credit in the future.

[Barry Ritholtz]

So you were a trustee at the Stanford Graduate School of Business. You're currently a trustee of the Tiger foundation as well as a board member at the Spotlight Foundation. Tell us a little bit about the work you do with these foundations.

[Mike Kelly]

Yeah, so one of the things that Julian Robertson imparted on all of us at TIGER from a young age was give back as much as you can as early as you can. Don't wait until you know you're about to die. And so I joined the Tiger foundation, you know, probably over 20 years ago, which was Julian's foundation at Tiger Management that funds not for profit initiatives in New York City to fight poverty. And have been doing that now for Tiger foundation has been around at least 25 years or more. And so that's been an exciting legacy for Julian and for all of us that work together at tiger and a trustee on that and work hand in hand with the other trustees in undertaking funding those initiatives. The Spotlight foundation was a group of Stanford Business School friends of ours. After we graduated, we decided to memorialize our friendship through a foundation that would fund, not for profit entrepreneurs that were funding education initiatives, seeing how important education was in all of our lives, personally wanting to impact those people that didn't have the same advantages and opportunities that we had. And so we fund a lot of education initiatives, particularly in less advantaged communities. And we fund the entrepreneurs, the ones who are doing earlier stage startups that could become the next kipp, you know, charter schools of the world, or, you know, we've funded the Seattle Girls School to bring science initiatives to girls within the inner city Seattle community. And so that's something that, you know, is very near and dear to my heart.

[Barry Ritholtz]

Sounds really interesting. All right, let's jump to our favorite questions we ask all of our guests, starting with, tell us about your mentors who helped shape your career.

[Mike Kelly]

Yeah, well, you know, I've had various mentors over the, over time certainly would put, you know, Lee and Julian in that category, not as a personal mentorship, but more as individuals I observed and admired as investors but also, you know, you're looking at someone like Julian, how philanthropic he was and giving and the way he treated people. I really admired that about him. There was another individual who's a mentor to me to this day, Gil Caffrey. Gil was a partner at Tiger. He was my partner at FrontPoint as we built that firm. And Gil is an incredible human being. He's smart and he has the highest integrity. He always treated everyone with respect. He was a direct individual, but, you know, or is a direct individual, but he was never emotional. He just showed you how to treat clients with respect, how to treat your co workers with respect. And it's just somebody who mentored me personally and who I try to emulate every day.

[Barry Ritholtz]

Really, really good answer. Let's talk about books. What are some of your favorites? What are you reading currently?

[Mike Kelly]

Book I'm reading currently. London Falling by Patrick Radden Keefe, who wrote Empire Pain and say Nothing. He's an incredible investigative journalist writing this wild story, a true story about a boy and a family within London in the 80s and 90s and in the backdrop of London undergoing the changes it had. It is a fascinating piece of work. It's one of the best books I've read and I try to read a lot in the last five years, and so I've really enjoyed that. Best book all time, I would say. Man. Search for Meaning. I read it in high school.

[Barry Ritholtz]

Victor.

[Mike Kelly]

Victor Frankl. I read it in high school. I reread it every year. Just. It has. It's amazing that Victor had the ability to have the mind frame he had through the horrors he faced and how that mindset and your sort of ability to attach meaning to what goes on in your life and you can't control what happens to you, but you can control how you respond to it. You know, I love all things stoicism.

[Barry Ritholtz]

I was going to say classic Marcus.

[Mike Kelly]

Marcus Aurelius. Yeah, sure. But Viktor Frankl's writing. I still have the torn pages of my high school copy with my pen marks and I reread it every year. It's an amazing book.

[Barry Ritholtz]

Really, really interesting. What are you streaming these days? Tell us what sort of podcasts or Netflix Amazon prime you're watching.

[Mike Kelly]

So my wife and I love documentaries. We are watching the Dark wizard right now about Dean Potter, who was an extreme climber and extreme athlete. I love watching depictions of obsessive personalities. I think probably because I see some of that in myself, but I. I like watching based on people who are in other fields. So whether they're athletes or Extreme athletes or musicians or chefs, like Hero Dreams of Sushi, the Bears coming Back Out. You know, Last Dance. I love Kobe Bryant and Michael Jordan. Just people who pour themselves into what they do because I always learn something about how they think about the world and pour themselves into what they do as it applies to what I do and what I love to do. And so, you know, I love. It's one of the reasons I love watching some of these documentaries.

[Barry Ritholtz]

So I have a couple of things I have to share with you. Have you ever read the book Endurance, about the Shackleton journey?

[Mike Kelly]

Absolutely.

[Barry Ritholtz]

Like, it reads like it's fiction. It's just so one of the best. And I'm drawing a blank. I think it was called Open Andre Agassiz.

[Mike Kelly]

Also one of the best sports biographies or autobiographies ever written.

[Barry Ritholtz]

Just really, really interesting. And then I have to slip over to music because you mentioned Nirvana twice. You mentioned Rick Rubin.

[Mike Kelly]

Yes.

[Barry Ritholtz]

You're a big music fan, I assume. Yes. What. What genres? Where do you. Where do you. What. What ponds do you fish?

[Mike Kelly]

When I was younger, I was really into heavy metal. I still am. But Rush and heavy metal and bands like that.

[Barry Ritholtz]

Yeah.

[Mike Kelly]

And I. And I played bass in a band. And nowadays it's really, you know, I'll listen to Miles Davis. I'll listen to, you know, Burning Spear and reggae. I'll listen to Radiohead. I listen to. Why I just finished Michael McDonald's autobiography.

[Barry Ritholtz]

I know what you're about to say. Did you see. It's on hbo.

[Mike Kelly]

Yacht Rock Yachumentary or something they call it.

[Barry Ritholtz]

It's just a yacht rock documentary.

[Mike Kelly]

I love yacht music. Yacht Rock.

[Vanguard Representative]

It was so surprisingly good.

[Barry Ritholtz]

I'm a big Steely Dan fan, so I expected to hate it. And there's a brilliant line where he gets Donald Fagan on the phone and he's just like.

[Mike Kelly]

And he hated the fact that he called him yacht rock. And he hung up on. On them. But, like, in the. In the Michael McDonald autobiography, he talks about Steely Dan and their process. They were super obsessive. You know, they every note counted. They would do take after take after take. It was very sort of Beatles, Beach Boys. There's certain musicians, you know, Miles Davis probably, you know, who were just so intense about the process of creating music. And I love seeing that, and I love learning from that.

[Barry Ritholtz]

So there's a YouTube series or it's a series that ended up on YouTube called Classic Albums and the Making of Steely Dan Asia is insane.

[Mike Kelly]

Okay.

[Barry Ritholtz]

But they also give you a little history and show you. Hey, you like my old school? Here's the 43 different guitar solos before they. And then they didn't just take one, they patched 12 of them together. Yeah, it's pretty amazing. I think it's called classic albums and you can find a bunch of other stuff, but I thought the steely dance stuff was, was, was really, was really interesting.

[Mike Kelly]

Solo on Kid Charlemagne every time.

[Barry Ritholtz]

And I have a couple of years on you, but I'll. I'll make you a tiny little bit jealous. I was in, I want to say, high school. I saw Black Sabbath at Madison Square Garden, and this unknown band opened for them named Van Halen.

[Mike Kelly]

Oh, gosh.

[Barry Ritholtz]

And it was insane. I'm not exaggerating.

[Mike Kelly]

You did make me jealous.

[Barry Ritholtz]

Is this what every concert is supposed to be like? I want to say I was 14. Something like that. Head blown. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either alternative investments, private credit, what have you?

[Mike Kelly]

So, in my view, and I have two young sons, well, 20 and 17, and it's kind of the advice that I've given them. I believe the greatest definition or criteria of success going forward is going to be adaptation. So learn to adapt. Everything is being disrupted. Jobs are being disrupted, not replaced. They're being disrupted. Careers, the world, your ability to try and fail and get up again. You know, as the Japanese say, you know, rise eight, fall seven, you know, nanakorobi, yaoki. You're actually supposed to. To put yourself out there and be resilient and adapt. And you're going to need to, I think, in the future. That's a really important, I think, mindset to have in the world we're entering into and is going to transpire. Obsess about what you do as much as you can. Read everything you can get your hands on. Network to what every extent you can meet people. Put yourself out there and do it in person. Don't do it over. Zoom. Get out there and immerse yourself in whatever it is that you're doing. And then finally, I would say be the man or woman in the arena. You know, I think there's an over fixation on likes and the comment section. Forget the comment section. Forget the number of likes you have. Put yourself in the arena. There are always going to be weak critics sitting in the stands throwing rocks at you. Ignore them.

[Barry Ritholtz]

That's the famous quote from Theodore Roosevelt. Teddy, right? Yeah, that's right. The man in the arena. And our final question, what do you know about the world of alternative investments and private credit today might have been helpful when you were First Getting started 30 or so years ago.

[Mike Kelly]

So when I was starting out in the business, I viewed the markets as this giant puzzle that needed to be solved. And I like puzzles. So, you know, I thought, all right, I'll take all of the classes and read all of the books on cracking the code and, you know, quantitative finance and derivative math and all of these things. And yes, over the years I, I've used those. But if I could go back and do it all over again, I would have taken far more psychology and philosophy classes and maybe fewer, you know, classes on building DCF models. Because as I think about my career and how it's evolved and my daily interactions and even observing the markets, it's far more driven by behavior than it is by math, at least the world I've occupied. I don't work at rentech, but it's irrationality and incentives behavior, for better or worse, that creates opportunities, that creates management challenges, what have you. But I would have studied more of the psychology and philosophy.

[Barry Ritholtz]

Really, really interesting answer. Thank you, Mike, for being so generous with your time. We have been speaking with Mike Kelly, President and Chief Investment officer at Future Standard. If you enjoy this conversation, well, check out any of the 649 we've done over the past 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. I would be remiss if I didn't thank our crack staff that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer. I'm Barry Robert Haltz.

[Vanguard Representative]

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[Mike Kelly]

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[Mike Kelly]

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