The Exchanges

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 Once you get past the six mega public companies, who else is getting set up to play?

A There's firms that are maybe over a hundred billion at times, firms that are a hundred billion, and even like in that fifty billion plus range, those are firms that are clearly on a growth path. There's a whole set of both scaled specialists. So I would call someone like Vista, a scaled specialist. They focused on software. They're about a hundred billion dollars or so of AUM. They have products across private equity, growth, and credit. And that's a firm that specializes on one thing, software, but they're a hundred billion dollars. And that's a massive market. Those firms have built scaled firms and brands and niches and who they are and what they do. They've done it at size. They've built a wealth team. They've hired people to do that. Those are the types of firms that have the ability to Get to the next stage. I think when you're pushing a hundred plus billion dollars, firms like that will start to think about the next phase of their business. They will start to think about, do we go public or do we become part of a larger platform? Because at some point you need to be a very large scale platform and serve investors across the different strategies. With this next wave of managers, you'll also see more willingness to partner where maybe a firm that's Great at private equity or software investing might say, hey, I'll partner up with someone who's great at infrastructure. We'r…

AI assessment note: “I would call someone like Vista, a scaled specialist. They focused on software.”

Q When private wealth has invested in the alts, there's this set of different vehicles that create more liquidity than historically you saw in private equity drawdown fund. I'd love to walk through These different names you hear, right? Evergreen structures, interval funds, tender offers, what they are, and how they get rolled out.

A I'll be talking more about private equity and other alternative asset classes, as opposed to something like hedge funds in this context. But historically, the way that people invested is their closed-end vehicles. So closed-end vehicles are drawdown structures. It puts the onus on the LP in terms of how they manage the rest of their cash flows. The Wealth Channel, historically and generally speaking, has not liked the fact that there's really no liquidity for 10 years, which if you're an individual investor in your forties, maybe you want to buy a house. So that can be a challenge just mechanically in terms of private markets being the right type of investment for people. So evergreen structures create mechanisms that enable things like liquidity. So let's break down evergreen structures. There's Tender offer funds, and there's interval funds. Those are slightly different structures. So with tender offer funds, there are periods of time where a GP says we want to buy back part of someone's investment at net asset value. We can do that. That's generally at the discretion of the GP. So yes, there is some liquidity, but not always. Interval funds are periodic times where we're at certain intervals. Other people can buy existing LPs holdings at net asset value again. Evergreen structures are generally lower fee, one 25, one 50, maybe one 75 in certain cases, lower carry, but the ma…

AI assessment note: “So let's break down evergreen structures. There's Tender offer funds, and there's interval funds.”

Q Let's break some of this apart. On the distribution side for asset managers, it seems like so far it's only been the largest scale players. You said you have to invest and build in this space. If you look at the different types of asset managers based on size, who's playing in the wealth space today and how do they go about it?

A It's a great question. And I think one that is on the minds of all of the firms in this space. So you take the top firms, the publicly traded managers, they've all made a decision that by virtue of who they are, the fact that they're in public markets and what they have to do to continue to grow their business and make shareholders happy is they have to think about the wealth channel. And it makes sense. They're of a size and scale to be able to do that. You have to invest in the wealth channel. And building out a team and process and infrastructure and product innovation and operational overhead to be able to handle working with the wealth channel. The top six firms account for the majority of market share of capital raised in private markets. On average, the top six firms, 20, 24, they raised twelve billion dollars. The top seven through 25 firms only raised 1.7 billion dollars. What that shows is that the biggest firms Are investing large amounts of resources and capital to serve that channel. It's critical. You have to. It requires boots on the ground. Think about just a wire house. There's still, I think, the eighty-twenty rule applies. There's still 80% of the capitals coming from 20% of the advisors, and that's even at the most sophisticated wire houses. We're still so early. And then you talk about the independent channel. We're so early there, too. I'd say roughly abou…

AI assessment note: “The top six firms account for the majority of market share of capital raised”

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A There's a few different elements to it. CIO is often responsible for picking and setting, like, here's an asset allocation framework, and here's the types of strategies we want. The alts team and diligence team will do the work to figure out which managers are the right fit for that. The advisors then have a menu to choose from. So ultimately, it's the advisors making the decision. And that's where I think this actually... Is not a simple sale because different advisors are in different places on their educational journey in private markets. Different advisors have different client types. So you could be at Merrill Lynch, and you might be a advisor team that has ultra high net worth, fifty million, hundred million dollar plus clients, billionaire clients, but you could also be another Merrill Lynch advisor and have massive fluent clients. So I think that actually makes the job really hard for The CIO and the Alts team figuring out what products are the right products to have on the platform to serve the various spectrum of advisors that we need to serve. We're starting to see the independent channel, which is the fastest growing part of the wealth management space. It's growing faster in terms of assets than the wire houses. And by the way, there's different models in the independent channel too. There's platforms like Hightower, Focus, Dynasty. That provide the platform and se…

AI assessment note: “CIO is often responsible for picking... The advisors then have a menu to choose from”

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

A My grandfather employed me at his antique show every year. I'd also work in his store at times. He was an antique dealer. In his second career, every summer on Long Island, go to the antique shows, and we would sell for him. We were kids. My cousin and I were 1011, 12. We would be selling antiques. We'd have to price everything. We'd have to run around the antique show and try to find things to buy and see how much something was, negotiate. And then bring it back and then try to sell it in addition to selling all the stuff that he had. So it was just a ton of fun. I learned all about how to value things, also how to sell and how to really understand people and understand what they were interested in and also talk to them. I mean, my grandfather was so good at this. He would build a relationship with them and he would talk to them about what they were interested in. Sometimes they didn't buy anything and that was fine. Maybe the next year they came back and they did. And I think that's so instructive on what Really, business is about, right, it's about building relationships. Sales come at the right time when they come, but people have to be, A, interested in buying something, and B, they have to trust the person that they're working with.

AI assessment note: “My grandfather employed me at his antique show every year.”

Q I'd love to ask you about the implications of all of this fund flows to come and the structures on the existing institutional community. Start with What do you think happens to asset prices in the private markets as this money seems to coming in with demand that no one's really talking about at what price?

A I've thought about this in the context of, is this alpha in search of beta? I say that a little bit tongue in cheek, but I think what this does go back to is for the risk people are taking, illiquidity risk, being in private markets, are people still generating returns that are in excess of what they're getting if they're only in public markets? Now, it's a really fair question. As more capital comes into the space, do returns go down? Without knowing and having crystal ball, I think it'd be hard to say that the answer is no. I think in certain sectors and categories, multiples have gotten higher, and I think that's very much the case. If you look at the difference between lower middle market and the upper end of the market, multiples are generally lower in the lower middle market, so I think there's still pockets of private markets where you can generate returns. There's also Areas of private markets where scale really does matter. Talk about private credit or infrastructure. How many people can do a twenty billion dollar deal in infrastructure that BlackRock or GIP did, the Panama Canal? There are very few firms that can do that, and in the rarefied air, there are sometimes cases where being really big can help, and you're not competing with a ton of other people. You actually may be able to get good deals or get good assets at fair prices, but I do think That's a question th…

AI assessment note: “in certain sectors and categories, multiples have gotten higher, and I think that's very much”

Q What is the value proposition that the ultimate buyer in private wealth is looking for?

A I think first and foremost, it has to be excess return. Now, there's a nuance to that, which is in private markets, I think there will be firms that truly generate alpha, and there will be firms that have private markets beta or private equity beta. Now, then the question becomes, is the private markets exposure on a risk-adjusted basis, factoring in most likely illiquidity, if The returns are still greater than what you can get in public markets, then I think there's a reason to do private markets. That still gets to things like manager selection really matters. Second thing, they're gonna think about what managers can we work with over a long period of time. I do think that tends to favor the brands, so I think it's going to be easier for managers who have big brands and large multi-strap platforms to be able to win dollars from the wealth channel because They're a brand that people know, and I think it's no different than on the public side or in the institutional side where people will be able to sleep at night if they work with the top brands. At the end of the day, though, I really think this has to come down to investors have to be able to generate better returns than they could by investing just in the alternative.

AI assessment note: “I think first and foremost, it has to be excess return.”

Q So how did you get to the idea of the podcast?

A It's really informed by what was happening in private markets. I go back to all the early days of iCapital. Educating was so important. The Wealth Channel needed to understand private markets. The alternative asset managers wanted to understand how to work with the Wealth Channel. So during COVID, I was like, how do I connect the dots between the GPs? The LPs and all the technology companies trying to work with both GPs and LPs. With COVID, couldn't do anything other than meet with people virtually. I was having a lot of good conversations with GPs and LPs and the tech companies in the space. And I was like, why don't I just start a podcast to open source things? I started writing first, end of twenty-twenty, early 21. Started really thinking about why are private markets at this point where it really feels like The adoption of investing into private markets via a technology platform was becoming more mainstream. So, 2014, roll back the tape, it was hard for people to say, hey, I'm gonna invest into some online platform, click a button into a private equity fund or a company. By 2020, 2021, I think people's mindset had shifted a little bit. So I just started writing, and it was everything from traditional private markets, what we see today, and that's really the big pony here, is there's trillions of dollars in Wealth Channel Capital that is looking to flow into private markets…

AI assessment note: “why don't I just start a podcast to open source things?”

Q So for an investor in an evergreen fund, If the manager needs to be able to provide some liquidity, whether it's an interval fund or a tenor offer, What dilution would you expect if you're thinking about expected returns compared to a drawdown structure?

A Some firms have put out white papers that are based on data and backtesting. If you're in a drawdown fund, you have to generate high teens returns to get the same multiple uninvested capital over a ten-year period as you would if you're getting low teens IRRs in an evergreen structure. This gets to a really important point when it comes to thinking about evergreen structures, both if you're an LP and if you're a GP thinking about creating an evergreen structure. The question that people need to ask is, what is, one, the deal flow? Does this firm have the capacity and ability to source enough deals, either from their own platform? The other aspect of it is investor management. So, It's great to be able to raise a lot of capital, but if you raise too much capital and then don't have the deals to deploy that into, then that's just dragging down IRR for the investors. So it requires a different skill set in terms of managing the investments, because you have to know, A, what to source and when and how, but then B, actually how to manage that asset properly and when to get out, because you need to be able to create the ability to distribute capital back to investors. You need to have a team across the investment team, IR team, and the operations team that's all working in unison to be able to make sure that things are done properly from sourcing deals all the way through to capital …

AI assessment note: “you have to generate high teens returns to get the same multiple uninvested capital”

Q How does the way that the wire house investment decisions get made compared to a private bank platform?

A All the private banks know they need to serve their ultra high net worth clients in a very unique and different way. So why did Goldman Sachs, as an example, launch Apex, which is family office platform for their ultra high net worth clients? They're doing things like more direct deals. And I think we're at a really interesting place for the private banks in terms of how they're thinking about Servicing the wealth channel that they know they need to differentiate. How do we offer things like late stage private companies that are really interesting and compelling that only we have access to because we have a broader platform? How do we get access to investing in sports alongside some of the funds or maybe into the funds in a unique way? Those types of things I think are what private banks are trying to do to differentiate themselves because now the wealth management space is getting increasingly competitive and crowded when it comes to accessing private markets.

AI assessment note: “All the private banks know they need to serve their ultra high net worth clients”