The Exchanges

Q I'd love to tease through part of that capital allocation investment process. So as you started to go from a single relationship with GSO to what to become five asset classes, some done directly, some with managers, how did you think about, in a big world of asset managers, who you wanted to partner with?

A When we set out for partnerships, we thought about The individual spaces that we believed had risk reward that was appropriate for the private wealth channel. Varying forms of private credit stood out among them. Middle market private credit, unit tranche lending, real estate, commercial real estate lending. These were areas that we felt strongly about offered a very attractive entry point for individual investors through their advisors. For what they were looking for, which again, going back was very income focused in terms of the objective set. We then came to who do we believe are the best of breed managers across these different areas. GSO and KKR stood out as that. Golden tree in the hybrid between public and private credit. EIG and energy credit. Rialto in commercial real estate lending. A lot of these were personal relationships that we had. These were People we knew very well. We knew their teams understood their orientation towards risk as with all forms of credit. It's not just someone who can source and originate and underwrite credit, but also someone who can deal with problems when they arise and credit problems always arise. And so we wanted strong risk orientation and workout capabilities across those areas. That's how we decided on the varying combination of personal relationships and core competencies.

AI assessment note: “who do we believe are the best of breed managers across these different areas.”

Q So in addition to making sure there's a calibration of what people understand, there's the potential very large volume of capital coming into these strategies. We've already seen it in private credit, and maybe it happens in private equity. What does that mean for, say, the institutional owner who's there today who sees a lot more demands than they had in the past?

A They should understand that it's here to stay. This isn't a temporal situation. The demand from private wealth will be the fastest growing source of capital into alternatives for the foreseeable future. If you're an institutional investor or allocator, you can think of it as competing with your capital. You can look at it as displacing your capital. You can think about it as an opportunity to potentially partner with that capital or use it in some advantageous way. If you think about that last category, there are institutions and we work with a number of them who will Seed vehicles that will be primarily offered to private wealth channels. By doing so, they will gain economics and ownership in the revenue stream of those vehicles. There are institutions that are buying GP stakes in managers who for the first time are offering their strategies to private wealth. So they will take advantage of the growth of that channel on those businesses and the value of those businesses. And there are institutions that are using that as an opportunity to avail themselves of liquidity in the secondaries market. If you take endowments that are looking at selling some of their private equity and venture positions, the primary demand for those secondary positions are coming from evergreen private equity vehicles. If you try to continue to carve your assets away from that trend, you can do that. Yo…

AI assessment note: “institutional investors should learn to coexist with it.”

Q What opportunities most excite you both on the investment side and on the business side?

A In terms of opportunities, if you're looking over the long arc, there's still tremendous opportunity in private credit. Despite recent concerns about individual credits, despite the fears that there might be a bubble forming, we are still undercapitalized in private credit to where the opportunity set is. The amount of dry powder in private equity, the number of companies that want access to lending capital. We are just scratching the surface on areas like asset-based finance, which is a multi-trillion dollar market. We're only just beginning to offer those in private credit. There's still significant room for growth there. In the secondaries market, we have a 10 trillion dollar private equity market globally. Only two hundred billion dollars of volume in private equity secondaries this year. It's two percent of the stock in private credit. That number is a hundred, a hundred twenty billion dollars, almost two trillion dollars of stocks of small amounts of secondary markets will grow. We're in the very early innings of secondary markets for both fund level investments, individual GP led single asset secondaries, pre IPO secondaries and things of that nature. That area is another big area for growth. Outside of that, AI gets a lot of the press in terms of what that will do for the economy, for financial services and healthcare and all of these businesses. The area that probably …

AI assessment note: “there's still tremendous opportunity in private credit.”

Q What led you from, you could say, working in the business, doing research on companies, picking stocks, to the front point which was institutionalizing the business itself, working on the business?

A Early in my career, I went into macro investing. I wanted to be Stanley Druckenmiller or Paltier Jones. It always struck me that people who went into investment management wanted to be the next Warren Buffett. They wanted to be the next Trillian Robertson or Stanley Druckenmiller. Very few people set out to say, I'd want to be Larry Fink or Chip Miller and manage these businesses and grow these businesses. I thought I could spend my life trying to become the next great macro investor. And I might be good at it. There are a lot of people fishing in that pond, but actually building asset management companies and managing them, there seemed to be nobody that sets out to do that. I thought maybe that is my career path. If I can do that, there are a few people fishing in that pond. It's a much more inefficient market. And I could be a plus at that. That's where my head was at when we were building front point, as opposed to using that as a platform to manage money was my original intention. To go and help build asset management businesses.

AI assessment note: “building asset management companies and managing them, there seemed to be nobody that sets out”

Q So after a long period of time of doing that, you sell the business to Morgan Stanley, how did you decide what was going to come next for you?

A I like to build businesses. I enjoy investment firms where there's a combination of working with investment professionals and managing people and working closely with clients. Finding an opportunity to be entrepreneurial and Be able to harness those experiences and skills. While thinking about where the world was going and what the next big trends were going to be, that was the real opportunity. And that's where I was taking the time to think through what are the next big opportunities in asset management, that arc of history of high net worth, ultra high net worth capital, institutional capital, embracing these non-traditional forms of investing, who was being left behind in that. The mass affluent and the individual investors, and how to bring those opportunities to them. If they're so good for the most sophisticated allocators in the world, why are they not made available to this group of investors? That was just a mission-based opportunity. So I was at Oryx Asset Management. I was running asset management. This is a Japanese holding company, and they wanted to build vertical businesses, one of which was in asset management. I was helping them do that, and I bought Robico for them in Europe, which is a several hundred billion dollar asset manager out of the Netherlands. I wanted to go back and do something more entrepreneurial again and build another business. This is now 12…

AI assessment note: “I was taking the time to think through what are the next big opportunities”

Q How do you think this will play out in the four one K market?

A Defined contribution is 12, 13 trillion of assets. For one case, a significant piece of that. Much of that in target date funds, qualified default options. Ultimately, we will see more partnerships between traditional asset managers and alternative asset managers that create structures like collective investment trust to be put into target date funds and for one K plans that have a mix of Liquid traditional investments and less liquid alternative investments. Now, private market alternatives might comprise 10, 15% of that pool, but I've always viewed that as a missed opportunity to begin with. If you're someone in your twenties or thirties and you have a multi-decade long horizon to invest your retirement assets. Why should all of your assets be in 100% daily liquid instruments? It doesn't make any sense to me, and it never has. At least having the opportunity to avail yourself of an illiquidity premium over a long duration, long duration assets that can diversify your exposures and enhance the returns of your exposures makes common sense to We will inevitably see that find its way into defined contribution in the four Oh one K market. One of the reasons we like working with advisors generally is who better to determine the suitability of these investments than an advisor who's closest to the individual investor client and knows whether or not those trade-offs, because there's …

AI assessment note: “we will see more partnerships between traditional asset managers and alternative asset managers”

Q You mentioned expectations and incentives in the first iteration with institutions. What are the expectations of that individual wealth vertical that led you to say yield is going to be the right place to get started?

A Backing up, think about the post great financial crisis period of time when yields really started collapsing. Disinflation, globalization, Everything driving yields down towards zero and, you know, culminated up to 2021 when we had zero interest rates. At that time, the desire to have an alternative in fixed income to what was historically high liquidity, high duration, low credit risk. Most fixed income portfolios, the 60, 40, the 40% were mostly government bonds and agencies and mortgage backed. Which had high duration, high liquidity, little credit risk. To be able to complement that with credit exposures that were less liquid, that had higher credit risk, or a shorter duration through their floating rate characteristics, was a nice offset and balance to what was in the traditional fixed income portfolios, and picking up an illiquidity premium, in some cases a complexity premium around that asset class, That to me was a lot of the main drivers of private wealth into private credit.

AI assessment note: “desire to have an alternative in fixed income to what was historically high liquidity”

Q In the original credit strategy and some of the others, you either hired people and built it on your own or partnered with someone and said, what were the pivot points in those decisions to buy or build?

A After we separated with Blackstone, Blackstone had gone on to build their own private wealth business and undertake building their own BDCs. We partnered with KKR. There were only a handful of firms that had the origination scale. To be able to undertake originating several billion dollars a year of private credit lending, and our BDCs are of significant scaled size, it made it easy to decide we were going to partner, not to try to build that from scratch. In terms of bringing Andrew and his team in, in terms of opportunistic private credit and non-sponsored private credit, Andrew had been doing that for many years, and we had a smaller pool of capital, which he took over permanent capital vehicle and began to manage that set of portfolios and built over time a team of 30 credit professionals. Today, we're managing close to ten billion dollars across a series of vehicles, both offered to private wealth, but also to institutional investors, as well as the CLO business. And now has a team of significant size to build that over time and originate private credit.

AI assessment note: “There were only a handful of firms that had the origination scale.”

Q When you looked at the people that you wanted to partner with, best of breed managers, how did you align your incentives with them and their incentives with the ultimate investors so that those expectations can get met in a way that everyone's rowing in the same direction?

A In the early days of providing alternatives to the private wealth market, what was then called retail, although we don't call it retail today for good reason, There were a lot of products out there and partnerships that were adding fees on fees. Once you get through all the layers of fees and loads that are involved in these offerings, what's left for the individual investor? We wanted to avoid that situation, and the way to do that is identifying strategic partnerships where we offer one layer of fee and we share in the revenues between partners. We have contributions of capabilities to deliver that. And deliver that with one layer of fees, as opposed to passing on two separate layers of fees to the individual investor. That's really been the mission of future standard from the beginning, which is we want to level the playing field for all investors. The private wealth channel and individual investors deserve to get the same treatment as institutional investors. So the same types of investments that institutional investors invest in to give them more fair fees, to give them better structures where they can invest more seamlessly directly into these underlying investments. That's been the point of all of this, and it's been an evolution because it's a big sea change from the early days of those offerings and the access to those original investments to today where you have indiv…

AI assessment note: “we offer one layer of fee and we share in the revenues between partners”

Q When you're going to those managers, what is the team behind you look like that had cracked the code on the distribution so that a manager who already has a big institutional presence sees it as a net positive and is willing to share those fees with you?

A I joined 11 years ago. Not many alternative investment firms had spent time and money on the private wealth channels. They might have had a small team dedicated to it. In order for an investment firm to undertake serving the private wealth channel, it takes a significant amount of resources, a significant amount of patience and time, because it does take time. We had a fully built national wholesale distribution capability across independent broker dealers, registered investment advisors, wire houses, regional broker dealers. With national accounts, business development, sales and marketing, education and thought leadership, all of that built out. It's significant resources invested in doing that. That's an important distinction because when you think about a firm like Morgan Stanley, like a wire house that has a significant number of advisors and their underlying clients looking at these strategies, they don't want an investment manager to say to them, here's a bucket, go fill it up with your Private wealth money. You have to work with the advisors, help them understand the strategies, the risks, educate them, help them educate their client base. And there weren't many investment firms that had that capability and set of resources and experience doing that. Through the years, some have undertaken to make that serious investment and done it well. Still to this day, there aren't…

AI assessment note: “We had a fully built national wholesale distribution capability across independent broker dealers”

Q I'm curious in this space, almost like mag seven and concentration, there are a small number of mostly large public alternative asset managers who have addressed this market with products and distribution. What's it like competing with them in this space?

A I have nothing but admiration for our competition. They are the best at what they do. Our focus is on private markets. Our focus is on the middle market and future standard. We do think that's distinct from some of these larger alternative players who are operating in the larger mega cap space. They're providing equity and credit capital to companies that 10 years ago would have been publicly traded. That is the upper middle market. Distinguishing what we do from what they do is important. We think that our offering has differentiation and brings something to the table for clients that they can access with those large players. But I think it's tremendous that individual investors now get access to the likes of Blackstone and KKR and Aries and Apollo. These are tremendous firms. It's a great evolution for all individual investors.

AI assessment note: “Distinguishing what we do from what they do is important. We think that our offering has differentiation”

Q Where are you seeing the adoption of private equity compared to what's been, there's a massive surge in adoption of private credit in these markets?

A It's still early, but the education learning curve advisors have come up and have understood these evergreen structures and are now looking at opportunities to invest in growth strategies in private markets. The offerings themselves, the advantages of a private equity evergreen structure are that your capital is drawn immediately and invested. You have vintage diversification. You mitigate the J curve. You're not waiting for capital drawdowns. You have continuous compounding as opposed to waiting for your capital to get called and brought in. There's a managed expectation of putting your capital to work. The trade-off, and there's always trade-offs, include the fact that these are not liquid strategies, so they're in semi-liquid structures, that you're not going to generate The same level of returns in a private equity evergreen structure as you will in a private equity drawdown structure. You might be looking at high teens net IRRs or higher. Given the fact that you have to manage for liquidity, you're not going to generate that level of returns. The returns will be more likely a 12 or a 13%. You're trading off the return there. The advantage goes back To continuous compounding and J-curb mitigation, vendor diversification. So those are the trade-offs that you need to weigh between locking your capital up for 10 to 12 years in a drawdown vehicle, if you have the investment min…

AI assessment note: “It's still early, but the education learning curve advisors have come up”

Q And the trajectory of that decade from point had some great success as hedge funds were getting adopted by institutions, then had some hard times later, and would love to hear what you took away from what works when there's a big group like institutions starting to adopt a new area, and then what are some of the pitfalls along the way?

A When you look at capital coming in, understanding what the motivation of the capital coming in, what drives that motivation, and are expectations appropriately matched with what can be delivered? At the time, institutions were looking to hedge funds as diversifiers. You and I both know you can construct portfolios that extract the alpha and mitigate the beta. The whole of the hedge fund industry wasn't necessarily doing that. There was still a lot of embedded data in many of these strategies. Ensuring that what you were offering and what the institutions were getting was a big factor in that. In terms of learnings, being in a position where you can manage expectations and incentives appropriately is extremely important. If you think about the Charlie Munger quote around, show me the incentives and I'll show you the behavior. If you want individuals to act in a way where they are collaborating and working towards a client outcome, you have to appropriately construct those incentives correctly. That's often where in investment management things go awry. So I'm having a problem getting these guys that I'm managing to do what I want them to do. I always start by asking them, well, what's the incentive framework that you've designed to get them to do that? Because if you correctly frame the incentives, they will Behave appropriately. They're rational human beings.

AI assessment note: “In terms of learnings, being in a position where you can manage expectations and incentives”

Q What was it like sitting in those seats when hedge funds weren't even much in the institutional market?

A If you think about my career in the arc of asset management, when you think about the sixties and seventies, the old A.W. Jones model, which then talked about the early days of barbarians to gate and private markets, went from the Bass brothers and Richard Rainwaters that Family office, Memphis mafia type capital through that seventies and eighties. And of course, as you were very familiar with David Swenson, then in the mid eighties adopted the endowment model and began to say, I want to invest the way these sophisticated pools of capital are investing. That begun the trend of institutions embracing that. When you're in the nineties, you're still at a point where it was mostly family office capital. Invest in these types of strategies. This is the early days of endowments, embracing, and then ultimately pension plans, insurance companies.

AI assessment note: “When you're in the nineties, you're still at a point where it was mostly family office”