The Exchanges

Q miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. I'd love to dive into the example of Japan. So you said you looked at it every year, but then about a decade ago, you decided to start investing. What was the reason that you first said now's the time to get involved?

A As a value investor, I've had numerous friends and folks who've gotten excited about different Japanese opportunities once, twice, three times a year. Before FinePoint, I really never had invested in Japan. So we do work on these companies. We generally always found the same problem. Great company, cheap price, poor governance. They were accumulating a lot of money and the money was set in the balance sheet. They weren't reinvesting it. And so they weren't creating value. And also disclosure was difficult. The accounting was difficult. And so it fell into the category of unknowable. So we ended up not investing. So the big change that happened was 2012. When Shinzo Abe came into a second term as prime minister, he started to recognize that when you have these great companies that are generating fat profits and all this money just sits on the balance sheet of these companies, they don't do anything with it. It's actually destructive for the economy. And so he was really ahead of his time. So in 2014, he came up with a corporate stewardship code in 2015, the corporate governance code. So the corporate stewardship code was a roadmap for asset managers to hold companies accountable for better governance. The corporate governance code was telling the companies what they should be doing. It wasn't mandated. It was more, here's some frameworks for what you think you should be doing. S…

AI assessment note: “The big change that happened was 2012. When Shinzo Abe came into a second term”

Q Why don't you take me all the way back to your upbringing?

A I grew up in a small town in Southwest Ohio, Beaver Creek, Ohio. My mother was a teacher. My father drove an oil truck. When I look back at that time, the most formative thing to me was the fact that my parents really believed that we should have jobs. We should be working when we were in school. So if you ever wanted to buy something, you had to make money for yourself. So we were really encouraged to have jobs at a very young age. During that time, I started out as a paper boy when I was 11 years old. I remember The kid that had the paper route was the only kid in the neighborhood who had money, and so when he ended up quitting, I really wanted that job, and so I was 11, you had to be 13, I begged my parents, I begged the paper company to let me do it, because it was a route in the morning, I had to wake up at four 30, I had to deliver newspapers every day, 40 newspapers for an hour, but I was able to convince them to do that, and so as an eleven-year-old, you're running your own business, you're taught responsibility, Whether it rains, or snows, or sleets, or has a blizzard, you have to get up and deliver the newspapers. And then on the weekends, you have to collect for the newspapers. So you buy the newspapers for 65 cents, you sell them for 90 cents. If people don't pay you, that's out of your pocket. I learned early on that I had a brother who was five years younger than …

AI assessment note: “I grew up in a small town in Southwest Ohio, Beaver Creek, Ohio.”

Q What was that early hedge fund experience like right out of college?

A Oh, it was terrific, and you know, because you were there, but I came out in 2002, and it was like drinking from a fire hose. It was just enormous alpha pool. The firm hired accounting professors from business school to teach me accounting when I got there, and I went right in. I still remember the looks on CEOs' faces when a twenty-year-old in a floppy, ill-fitted suit would walk in, So disappointed that they had to meet with me for an hour, but there was no LinkedIn. They didn't know who I was. I took the opportunity. It was like tons of field research. I would show up at annual meetings and harass business executives and board members. I would go to landfill hearings. I would pull court documents, just tons of stuff like that. After the dot-com bubble burst, I got to do distressed debt. I got to do domestic equities, international equities, look at all sorts of different asset classes. It was just really fun, and I was pretty tenacious about figuring out who the best investors were. I would hunt them down, and I would try to figure out what they did and replicate it. I would go back on 13 Fs from three or four or five years lag and say, okay, let's go back to 1999, 2000. Why did this person make this investment? So it was really a great time to learn. My takeaway from that period was you had no talent there. It was early. That's why I got a job. They needed to manufacture yo…

AI assessment note: “Oh, it was terrific, and you know, because you were there, but I came out in 2002”

Q If you had to take one side of the bet, which side would you take?

A I wrote in this piece that I think the chances of private equity average, so the median private equity outperforming S&P's 40%. You can measure out based on today's interest rates, today's credit spreads, how much you think you'd benefit from leverage based on some return. You can look at the historical small cap effect, and those together will make up about 80% of the gap of fees. So that means the average private equity manager has to deliver a hundred or 200 basis points a year to break even. That's not what people sign up for. What people are signing up for is top quartile. And if you get to top quartile, I would definitely bet on the top quartile private equity manager over the S&P, but the median is a tougher comparison.

AI assessment note: “I would definitely bet on the top quartile private equity manager over the S&P”

Q And how do you do the due diligence to figure that out?

A Well, it's quite analytical. So in most cases, we would like a manager with some track record, and we would like to understand the underlying performance data at the asset by asset level. So we would We take the use of debt out, because usually just using more debt gives their LPs more risk and more upside for the manager, but with a lot of downside risk, and we take the market timing out by doing something called a public market equivalent analysis, which is really just saying, if we take the cash flows that go in and out of this private equity account and put them in the equivalent equity market index with the same timing, what would the return have been, and then compare those two things.

AI assessment note: “we take the market timing out by doing something called a public market equivalent analysis”

Q What was the attractiveness of doing this at Invesco?

A It starts with big institution. At the time, we were a mere trillion dollar asset manager. Today, we're approaching two. We had a really large private credit platform. The private credit platform had been in existence for 20, 25 years. We were known in the industry. Invesco has great brand recognition, and importantly, the infrastructure was in place. When I thought about what it would take for me to build a successful direct lending platform, one of the key things that I believe you must have is sector expertise. The beauty of this platform that had been built was they had one of the largest private side sector teams in the market. We have 22 dedicated sector research analysts who focus within their dedicated sector on everything today from distressed to liquid to direct. As I thought about coming in, I could build the origination execution team We could leverage off this built-in wealth of knowledge, IP, via existing portfolio companies and experience across all the sectors. I came on board. I brought a handful of my partners from RBS, all of whom are with me today. Great sponsor coverage folks with tremendous credit skills. We put the business in place as if we'd never stopped working together, and we called up all of our old relationships and picked up the business right where we left off.

AI assessment note: “It starts with big institution. At the time, we were a mere trillion dollar”

Q You mentioned that when you came here, there was within Invesco these sector coverage with deep expertise, and you had to build out the origination. How have you built out the sourcing of these opportunities in the private markets?

A First component is I brought with me my three senior partners that I'd worked with for the past 20 years. Between the four of us, we had built Businesses together on banking platforms and non-banking platforms. Not only do we know how to do this, but we had a fairly broad base of core sponsors that we knew we could rely upon. This was the other attractive dynamic as relates to our coming onto the Invesco platform. Across the Invesco private credit platform, we have over twenty five billion dollars of capital invested in the portfolio companies of more than 200 private equity firms. There was already More than just name recognition, tremendous connectivity with a wide swath of private equity firms, many of whom crossed both broadly syndicated and what we were doing in the middle market. In many cases, the name partner at these private equity firms was an associate when we were associates, 25 years ago, so there's history there, and as long as you treat these relationships like partnerships and understand their needs and can address those, you should have an annuity of opportunities across a fairly wide base of them.

AI assessment note: “First component is I brought with me my three senior partners”

Q I'd love to take a step back and talk some about direct lending as an asset class. Hear a lot more about it now. You've been at it really for the whole time. What are some of the things you've seen in changes and evolution of this sub part of the market?

A I often get asked, this is a pretty new asset class. How do you think it's going to perform with the market cycles, things like that? To that, I always say, this is not a new asset class. What has changed is the constituency that provide those capital solutions. If you go back before the GFC, middle market finance was the purview of banks. They dominated it. They were great at it. They had tremendous relationships. Post the GFC, the OCC leveraged lending guidelines came in place, and Basel III was put in place. The intent of those regulations Was to make it more difficult and more expensive for banks to participate in that asset class. So what you saw happen was simply a shift in the providers of that capital from the regulated banking side to the non-regulated private capital providers. The reason for that is when you think about the world we live in today, the volatility in the markets, this is an asset class that across cycles has demonstrated stability, consistency, low default experience. Initially was treated as a nice asset hedge for investors across a, or a liquid portfolio, but as the asset has grown, it's become just a key component in many individuals and many entities' portfolios.

AI assessment note: “what you saw happen was simply a shift in the providers of that capital”

Q So you bring all these forces together, you have to set out an investment strategy. Where did you come out and say, okay, this is a strategy that we're going to pursue here in your building?

A So when I joined Invesco, I put a lot of thought behind this, because when I joined We were in a benign interest rate environment. Skies were blue. Nothing was going wrong. Lenders were being fairly aggressive in terms of how they were approaching opportunities. We looked at the investor base at Invesco. We looked at what Invesco had done across the private credit platform. We decided out of the blocks to skew very much towards the conservative end of direct lending. It starts with structure. Everything we're going to do is going to be senior secure. First lien, Unitrons. Second lien, we're not doing mezzanine. We're gonna be top of the cap stack. We're gonna have our money attached to dollar .1. We're gonna have full collateral, and all the hard assets, all the IP of the businesses we lend to. So structurally, that's how we thought about it. The second piece of it was, we said everything we're gonna do, we're gonna do with private equity. We want partners, folks we know, folks who are putting significant risk capital in these businesses in front of us. That's a way to mitigate risk. And then we thought about, from a sector perspective, myself, my partners, we've spent our careers in the middle market. It didn't even occur to us to think about going up market. This is the market we knew. This is where we knew we could generate compelling returns. So we focused on the middle mar…

AI assessment note: “We decided out of the blocks to skew very much towards the conservative end”

Q And when you look at side by side, taxable investor, tax exempt investor, what are the big differences in the asset allocation or the investment strategies that you pursue for a tax exempt investor because of the tax inefficiency for a taxable investor?

A The biggest ones are not in illiquids, because if you look at endowments, this is where the issue is. They've actually been pretty tax efficient. The big Ivy League endowments haven't been huge private credit owners. They've done a lot of Growth equity in VC, it's actually pretty tax efficient, and they've done a lot of public equity that's not been high turnover. The places where you're going to see bigger hits are on the multi-manager pod hedge funds, which are incredibly tax inefficient, but have been a good source of risk-adjusted returns for some of the larger tax-exempt allocators. That's where I think the bigger difference is going to be if those allocators are in a foundation or an endowment where taxes are going to matter.

AI assessment note: “The places where you're going to see bigger hits are on the multi-manager pod hedge funds”

Q avenues or the IPO market hasn't been around for a long time in mass, strategics have tremendous uncertainty in the economic environment. You're left with the sponsor to sponsor activity. If you're a GP looking to buy a business, you're a GP looking to sell a business, there's this feeling of a gap in the bid ask spread. How is that playing out in the deals that are getting done?

A It's playing out in a lot of different ways. The sponsor-to-sponsor activity was up in twenty-twenty-four. I take that as a good sign. The bid-ask spread problems are getting a little better, meaning interest rates have come down a bit. We've had two years of non-recessionary GDP growth. That means EBITDA has gone up a little bit, and the more of those things kind of happen, the less the spread is an issue. We've also seen that deals that are faster growing companies where debt has been less of a Percentage of the capital structure. So a lot of fast growing businesses may only have 30% debt on the capital structure and 70% equity. So the bid ask spread issue is less of an issue. Some of those software businesses that are doing really well are able to trade at good amounts. Some things in healthcare that are growing really rapidly are able to trade. So if you have less debt in your capital structure, it's easier to get a deal done two years down the road from when interest rates really spiked up over those 18 months by 500 basis points. But it's in those kinds of industries where people have comfort That we're not going to see a recession that will impact it, or we're not going to see macro issues. It will be a problem. And we're seeing the kind of balance sheet EBITDA growth movement that will allow us to refinance a deal and make the numbers work for the seller and the buyer. …

AI assessment note: “The bid-ask spread problems are getting a little better, meaning interest rates have come down”

Q If you look at some of the types of deals that you would think would lend themselves to that operational improvement, more value buys than growth buys, carve outs, things like that. What's the history shown of the success of those types of deals over the last decade?

A Over the last decade, the data's not as good as it was in the decades before. Part of that is the competition for a lot of these deals has gone up. Over time. So carve outs is a good example. The average carve out prior to about 20 12 was a two X deal because the industry had figured out that unloved businesses that weren't part of somebody else's core, but were good businesses in and of themselves could be invested in and you could get revenue growth, margin expansion, and multiple expansion on the back end of the deal. The problem is when everybody figures that out and everybody starts looking for carve outs, then the prices go up and a lot of that you have to pay for before you even get the asset. Now in the last decade or so, the average carve out is earning more like one and a half times and trailing the rest of the industry. It used to be the best source of deals in terms of value. Now it's one of the more challenging sources simply because it's known as a source and you have to pay for some of that. I also think that this question of really generating operating leverage for growing assets is a big challenge as well. You can see that the asset's going to grow. You can see that you need to invest for that growth, but How to really create operating leverage while you're doing that is not something that a large part of the industry is familiar with as an investment thesis, a…

AI assessment note: “Over the last decade, the data's not as good as it was in the decades before.”

Q If you turn and look at the business of RIAs, and maybe go back the six or seven years when you first came into Hightower, how did you think about the evolution of the business model and what you wanted to do when you took over?

A I think for Hightower go back even further than me. The firm was started in 2008 coming out of the crisis. The whole idea from the founders was there's these great advisors sitting in these big firms and these are brokerage businesses operating in a brokerage model, but they're really fiduciary minded, meaning they're fee based. They think like a fiduciary and there's an opportunity to give them a different way to serve their clients. We sometimes refer to that as Hightower one dot O or the first chapter. It was all about flexibility and choice. Come to Hightower and we're going to give you a platform that's got national scale, but allows you to choose where you want to custody assets, what type of portfolio accounting system you want to use, how you want to invest money. So a lot of flexibility. When I got here six and a half years ago, we started to evolve in a couple of different ways. One, we wanted to create much more of a holistic firm where we could create a little bit more consistency and conformity and commonality of how we do business. Always giving the advisor flexibility where we think it matters most, but having unlimited choice of where you custody assets doesn't necessarily create value. We decided to tighten that up a little bit, and we also shifted our focus from Lifting out advisors from the full service firms to doing registered investment advisor business ac…

AI assessment note: “When I got here six and a half years ago, we started to evolve”

Q What was your first paid job and what'd you learn from it?

A My first paid job was delivering newspapers at 5:30 in the morning, the Detroit Free Press. So I would lay on my couch waiting to hear the stacks hit the front porch. And then I knew it was time to get up and roll the papers and put them in the front of my bike and then ride around my paper route delivering papers. Those were in the days to get paid, you had to go collect. There was no online. So I then had to go in the afternoon and knock on doors and collect money. I've always valued work, because anything that you do that someone's willing to pay you for is special. Even delivering a newspaper, because to the people receiving that paper at 5:30 in the morning, I'm part of their daily routine. If they didn't get that newspaper, I've set their day off in the wrong direction.

AI assessment note: “My first paid job was delivering newspapers at 5:30 in the morning”

Q What's one of your favorite examples of a creative structure in one of your investments?

A I have two examples. One is we invested in a very entrenched payments and invoicing company. They did payments in the real estate and property management space, which is heavily regulated around tenant protection. So historically, about 90% of landlords did not offer an electronic option. You had to pay by check, and there was a whole antiquated way of collecting and cashing checks so landlords could stay on the right side of tenant protection and tenant eviction laws. We had thesis in this. We went through our whole playbook. Stars aligned several years after building a relationship. And one company that we thought was great needed more capital. They didn't want to sell control. They were approached constantly by smaller private equity players, and they couldn't take on debt because one of the reasons they need more capital is they need to have substantially higher liquidity and tangible net worth as required by some of their processing bank partners. So what we did was an interesting structured deal. They were also dilution sensitive. So their view was their company was worth X. We thought if we had to sell the company tomorrow is worth 80% of X. We basically went to them and said, hey, if the company does not grow materially, we have to have some way we can make a respectable return. So we'll meet your valuation, but we get our money back first before anyone else. We get a b…

AI assessment note: “So we'll meet your valuation, but we get our money back first before anyone else.”

Q When you put these together, how do you think about structuring a portfolio?

A The shape of underlying deals could be a little idiosyncratic, but when we think about our funds, they are, call it plus or -10 positions, historically, maybe even closer to 12. Maybe we only have 10 or less outstanding at a given time. We have a high degree of recycling in our approach. So the way we think about it is, Plus or -10% positions at a max, one. Two, even though some deals may be a preferred note with warrants or a convertible preferred or totally unlevered vertical strip of the capital structure, when you blend those all together, we want something where in a downside case, you have a structured return that'll be meaningful. It could generate in and of itself A low to mid teens return where our risk exposure looks and feels like attaching at 10 to 20% LTV and detaching at 60 to 80% LTV. So really upper to middle of the capital structure type blended risk. But we want sufficient optionality across the portfolio so that we can hope to generate returns that are north of a three or four X groups. So blend those all together in a base case. Maybe that looks like we're an outcome of three X or more.

AI assessment note: “when we think about our funds, they are, call it plus or -10 positions”

Q As you crystallized the ideas you had into a strategy, how do you describe what you're doing at Dayer Street?

A I think two sides of the coin. So what are we doing from a structure and approach perspective? And then what are the themes we're investing behind? So from a structure and approach perspective, we are doing proprietary relationship driven partner deals where we are investing either on a totally unlevered basis or in the upper half to upper two thirds of the capital structure in a manner where we feel we're relatively downside protected and collateralized by some underlying recurring revenue stream that could be subscriptions, royalties, leases, or other financial assets. Or a hard asset. We're primarily providing capital to these companies for growth, so it's mainly primary capital, sometimes a bit of secondary. We're really not doing any buyouts. We've never been at an auction. We are investing in businesses where we hope have really low correlation with the capital markets. So these are businesses that their in-place revenue is super consistent. So North of 90% annual gross retention, north of a hundred percent year-over-year net retention, where these are businesses and financial services, real estate services, and business services that are gonna keep operating like clockwork. And they have, through the recent tariff spikes, COVID, last several downturns, the key way to make money is can they either consolidate in a fragmented industry Or can they grow organically in a way …

AI assessment note: “we are doing proprietary relationship driven partner deals where we are investing either on a totally unlevered basis”

Q With the way you structured positions and wanting to capture upside without necessarily needing to have the cash coupon, how do you blend that with wanting to make sure you have your downside protection if it's not coming in the form of cash?

A It depends on the deal. There are some deals that are minority deals where we'll be senior preferred. We'll have all protections around Debt major actions, budget approval, etc. And even though that minimum return is on an accrued basis, on an exit liquidation event or some other form of liquidity, we're going to end up earning just based on that minimum return, something that's equivalent or materially in excess to where a conventional private lender is earning. And in fact, we're going to have A more efficient and faster means to protect against adverse scenarios than a lender might who can't be on the board and can't have certain consents around the table and can't step in and help when things go awry because they're worried about lender liability issues.

AI assessment note: “minority deals where we'll be senior preferred. We'll have all protections around Debt”

Q What was your first paid job, and what did you learn from it?

A I had lots of traditional small jobs, babysitting, fixing computers, any little side hustle. My first paid job was actually being a style and marketing consultant for Levi Strauss when I was 11. A stranger heard me talking and recruited me to do this job, and for about two years I got assignments from Levi Strauss company to basically give them my opinion on lots of different ideas they put in front of me. Actually, the New York Times wrote a story about how it was child exploitation. I thought it was the greatest thing ever. I guess what I learned from it was even people who are experts and are possibly the best at what they do only know so much. I sit around a table with all these adults I thought obviously had all the answers, and it was crazy to me that they didn't know everything.

AI assessment note: “My first paid job was actually being a style and marketing consultant for Levi Strauss”

Q Why don't you take me all the way back to your upbringing?

A Well, I was actually born in a suburb of Toronto, Canada. My parents actually were not high school graduates. I'm one of three boys, and my father started life as a butcher and worked his way up and became a regional vice president for A&P Supermarkets, which no longer exists, but was a big supermarket chain back in the day. Then in 1980, he was asked to take a job transfer, and we ultimately ended up Moving to Detroit. So that's how I ended up in the United States. I went to high school in Detroit, graduated high school young. I was 16 when I went away to college, which was a little unusual, but I started pursuing a business degree and my father got me my first job, which was in food sales over the course of the summer. And then at the end of my third year, the company that I was working for offered me a full-time job. So I started to work full-time in food sales. Pursued my degree at night at Eastern Michigan while I was becoming a food salesperson. That went on for about five years, and then I had this idea of going to law school. I really didn't know any lawyers, but I thought being a lawyer is a better job than being a juice salesman. So I went to law school and really just completely fell in love with studying law. Started practicing law in Detroit at a firm named Honigman Miller as a corporate lawyer. And just felt like this is what I'm supposed to do. I had some aptitud…

AI assessment note: “Well, I was actually born in a suburb of Toronto, Canada.”

Q As you look out now over the next couple of years, how do you scope out what you think this opportunity is in the space?

A It's funny. A lot of different people are looking at it and come up with vastly different numbers. But I think the point is it is a very large and growing market. Importantly for us, it's just been historically for Aries untapped. So if you look at our roughly five hundred billion of AUM today, about Forty billion of that is from the wealth channel. Most firms like Aries expect that 40% of their capital raising going forward will come from the wealth channel. That's not our expectation, but I mean, I think if we think about sizing new capital on an annual basis, my guess is something like 20% of our forecast for 2025 would be retail flows from the wealth channel.

AI assessment note: “something like 20% of our forecast for 2025 would be retail flows”

Q As you look out now over the next couple of years, how do you scope out what you think this opportunity is in the space?

A It's funny. A lot of different people are looking at it and come up with vastly different numbers. But I think the point is it is a very large and growing market. Importantly for us, it's just been historically for Aries untapped. So if you look at our roughly five hundred billion of AUM today, about Forty billion of that is from the wealth channel. Most firms like Aries expect that 40% of their capital raising going forward will come from the wealth channel. That's not our expectation, but I mean, I think if we think about sizing new capital on an annual basis, my guess is something like 20% of our forecast for 2025 would be retail flows from the wealth channel.

AI assessment note: “something like 20% of our forecast for 2025 would be retail flows”

Q So at what point in time did the transactions move from LP-led, an LP needing liquidity, to the GPs using it as a technology that was useful for them to, say, wrap up a fun life or what to become with continuation vehicles?

A Beginning in, like, 2012 and 13, there were some early deals, and the language they would use would be, like, zombie funds or GP restructurings. Those were largely tougher assets or tougher manager quality, and that continued largely but in a very small percentage through 2017. For me, there was a watershed moment when one of our best GPs Decided to do a GP-led transaction, and immediately the market Change the name of a restructuring to a recapitalization. A recapitalization has all those positive connotations versus a restructuring, which has the negative connotation. The market shifted wholesale in 2017, 2018, and you can see that with the volume. By 2020, about half the volume was GP-led transactions and half the volume was LP transactions. Juxtapose that versus 2010, it was all LP transactions. And it fundamentally changed the way that the market approached secondaries. The next thing that happened was COVID, and in COVID, managers realized that they would need more time on their portfolios, so we renamed GP leads and started calling them continuation funds. Same mechanics, same structure, same assets, but we just changed the name because that was how they were going to behave. This is when GPs needed a little bit more time. We needed the COVID metrics to Flow through the financials, and nothing was really selling in 2019 or 20. I think the next major milestone is really 2…

AI assessment note: “The market shifted wholesale in 2017, 2018, and you can see that with the volume.”

Q As an active participant in the secondary market, how do you think about the different ways you want to play in the space?

A Maybe I could create a framework of how I think of the secondary players sitting today. In my mind, it's a three-dimensional rubik. On one axis would be deal sizes. For example, RCP, we focus on very small deals. Ten million to fifty million dollars in size. On the very biggest end would be Lexington and Collar. Their transactions are very big. Another axis would be style. We focus solely on North American lower middle market buyout. You have some managers focusing only on venture, some managers focusing only on credit, some managers that have a global footprint. Those are all differentiators in the market today. And then the last dimension of this would be how the managers believe they're creating value. So for our RCP, we feel like because we have a very big primary business, our relationships and information give us an advantage in sourcing deal flow and diligencing that deal flow. Some people feel like their value is that they can do very big transactions that most people can't do. Some people feel like their value is maybe buying more complex transactions that some people do not want to do. Understanding that framework really is the foundation for identifying our market is maturing. Once we land into that idea, then we can approach, how do LPs want to use this market? If I go back in 2010, people thought it was an IRR investment. Get capital back very quickly. Establish a …

AI assessment note: “In my mind, it's a three-dimensional rubik. On one axis would be deal sizes.”

Q How did you define what that landscape looked like eight years ago?

A It's interesting when people say wealth, it means something different to different people. In my book, there are really three components to the wealth market. There is what I would call the ultra, ultra high net worth family office component. Those are typically professional buyers of investment solutions. They tend to have their own infrastructure, their own CIOs, And in a lot of ways, make decisions like institutional investors. The second category that we think about in wealth is the wealth that's financially intermediated. So we think of those individual investors that utilize financial advisors or financial consultants or some type of platform to help with investment management. And then the third category that I would consider is the self-directed individual investor. So those investors don't use any Formal financial advice. Obviously, in the asset management business, for the most part, the focus is usually on the first two categories, but over time, you might see different people focusing on different parts of that market.

AI assessment note: “In my book, there are really three components to the wealth market.”

Q So there are other ways your mother could access what you're doing, most notably KKR stock. So how do you think about that as a potential solution for this channel?

A Anyone could buy our stock, which is certainly one way to get exposure to some of these investments. But if you think about it, the investment in KKR stock trades at a multiple to earnings and reflects the number of things that we do here at KKR, which includes asset management. It also includes the insurance company that we own, Global Atlantic. So it would not be as a pure play exposure to say private equity or infrastructure or real estate or credit. And obviously as an investor, you're customizing your portfolio to Based upon your goals and objectives. So for my mom, she'd probably be allocating more to, say, private credit or real estate than likely a larger exposure to PE.

AI assessment note: “it would not be as a pure play exposure to say private equity”

Q And in the middle, maybe not so much. How have you thought about scale beyond what you mentioned, the ability to have the resources to have breadth and depth of client relationships?

A Can I talk about scale on an investment standpoint? I very much bought into David Swenson's book, Pioneering Portfolio Manage. And one of the premises there was Find differentiated uncorrelated returns. The premise around that was that you had to be in the alternative space, and a lot of that he talked about the hedge fund universe. What I identified in that is to really generate significant alpha. You had to go into these small asymmetric deals, and he talks about the dispersion between being a public manager's returns first and third quartile is very tight. Where the dispersion in alternatives managers is large. So the selection, this one's asset allocation. This one here is manager selection. You have to get that right because I think he talks about VC where the median return for VC actually lagged public market returns. So I used to think that scale was a bad thing. I used to think that you had to be small in the alternative space to generate alpha. But I've found that there's alpha in scale. There's relevancy in scale. When you're large, you command a tremendous amount of attention from people. You can't do that if you're small. If it's income generation and capital preservation, then the scale and the quality of these businesses, whether it's a GP in a world where people are doing more with less and bigger managers are getting the majority of the attention, you can only d…

AI assessment note: “I used to think that scale was a bad thing... But I've found that there's alpha in scale.”

Q If you look at the range of different alternative investment strategies, where today is that capital that's coming from the wealth going?

A If you think about the different strategies within private markets, private equity, which has the largest pool of capital within the 15 trillion dollars or so of private markets assets, so it's about five or six trillion dollars of assets. Private credit is growing. It's grown from Few hundred billion to over 1.7 trillion over the last few years. And if you take what everyone from Blackstone, which has said, 20 trillion dollar market to Aries, 30 trillion dollar market to Apollo, 40 trillion dollar market. So anything on a bank balance sheet, there's a lot of room to run in private credit, and that's a growing ecosystem. You have real estate, which is a large market. You have secondaries, first private equity secondaries, and there's a lot of structural reasons why that might make sense because people need liquidity. You have private credit secondaries, which has grown, I think, 17 times. Still a small market is like thirty billion of assets, but growing because private credit is now growing. So that's another really interesting category. And then infrastructure, also another growing category, uh, where there's trillions of dollars required to finance massive mega trends, rise of AI, investing in data centers, decarbonization. Those are multi-trillion dollar trends. Tens of trillions of dollars where capital is going to need to go, and the private sector is probably going to fi…

AI assessment note: “If you think about the different strategies within private markets, private equity”

Q Why don't we start with your personal background and how that led up to what you're doing now with the podcast?

A Grew up outside of DC. I was a soccer player, so tried to go over to the UK to play soccer. Wasn't good enough. Got injured. Ended up going to Middlebury for a year and then London School of Economics. At LSC, I ran the world's largest student conference on hedge funds and private equity. This was 2009, 2010, and 11, so it was the early days of the big alternatives managers being public, getting more into the mainstream, but still very early for the industry. Then I ended up working at Goldman Sachs, so was in London on a team. It's now part of GS Growth. It was called the Principal Strategic Investments Team, investing in capital markets infrastructure. That was Pre-private markets infrastructure becoming the next market structure evolution, in my view, after equities fixed income derivatives, but very informative in terms of how I think about the technology evolution that's happening in private markets from pre to post investment. I think it's mirroring a lot of what's happening, equity fixed income derivatives, obviously with its own bells and whistles, but that was a fascinating experience. That team was the team that invested in iCapital, more recently, 73 Strings and some others. Then went to Mosaic, was the first sales hire there. It's a residential home solar loan originator. Done about fourteen billion in home solar loan originations, backed by Warburg Pincus. Learned …

AI assessment note: “Grew up outside of DC. I was a soccer player”

Q That first group of the creators of the stablecoin They're not paying interest. They're earning a lot. What is the structure that allows that to stay in place?

A There's been a bit of path dependency. So back when rates were zero, you saw a lot of growth in the stable coin economy because people didn't really care about earning yield. And also you could take those stable coins and deposit them on chain in one of these DeFi lending protocols and earn some sort of rate that roughly matched the real economy. But today, you're seeing a whole host of different firms focus on yield-bearing stablecoins or tokenizing treasuries, and actually BlackRock is a great example of this. They recently launched a product that effectively passes through treasury yields, less a modest amount of fees back to themselves in exchange for passing that yield back to users, and yield-bearing stablecoins as a percent of the total stablecoin market is growing. As it should. But look, if you're in Nigeria using Tether for B to B payments, you may not really care about the four percent opportunity cost of capital. One, you are likely outperforming your local fiat currency. And two, you're just using this as working capital, and it tends to be a pretty great user experience relative to using their traditional rails or cash.

AI assessment note: “There's been a bit of path dependency... you may not really care about the four percent”