The Exchanges

Q What are some of the drawbacks of the structure?

A The drawbacks are asset liability management. So you have to manage The liquidity. That's not an easy task, so every quarter we will redeem or repurchase up to five percent of shares outstanding. Our flagship fund is over twenty billion dollars, so a billion dollars will offer repurchase. We have to have liquidity to meet that potential of a billion dollars, and so we don't want to hold cash, because cash is a drag, People are paying us to hold private assets, not cash or liquid credit. Having credit facilities in place where we can draw a billion on a few days notice, that's not an easy task, and you have an asset team, you gotta have a liability team that's first class.

AI assessment note: “The drawbacks are asset liability management. So you have to manage The liquidity.”

Q Why don't you take me back to what got you started in the investment consulting world?

A I was very lucky. I've had three jobs in my career. The first coming out of business school was with Wells Fargo Investment Advisors, and they were one of the first to do index funds, if not the first. And I got to work with some very smart people, in particular, Bill Sharp and Bill Faust. He taught the dividend discount model to me. I thought that was fascinating because he had a way to project expected returns on Equities, rather than just looking retrospectively at historical returns. And that was really important in the evolution of asset allocation. It allowed people to pivot from just looking in the rearview mirror to looking forward. I got involved in asset allocation along with index funds. Wilshire Associates hired me in 1980 because they thought I knew something about asset allocation and they wanted to start a consulting business. So I went there. And at that time, consulting was all about manager selection and Wilshire stood that on its head and said, no, manager selection is not important. It's asset allocation. I was a consultant there for over 20 years. I ran the consulting group for about 15 years. Success there was on the premise that we spend 90% of our time on manager selection, but really it's asset allocation that's going to determine returns.

AI assessment note: “Wilshire Associates hired me in 1980 because they thought I knew something about asset allocation”

Q So as you started this with under twenty, hundred, thirty million dollars, and the flagship's now twenty billion in just a couple of years, how did that all happen?

A I don't know, Ted. Sometimes you're lucky. But it just seemed to be a right product at the right time in the right market. Sometimes you get everything right. I've had a lot of strikeouts in my career. This was one where I think it all worked. I will say the RIA market was a huge decision for us and a big payout. Seven years ago, when I started talking to lenders and managers saying, hey, I want to do this fund and I want to go to RIA channel, I think they said, Oh, that's great, Steve. Good luck. We're in, but I don't think they thought we'd be successful at all, and it just happens that that is the market that everybody wants to get into these days. I will say, we worked with close to 800 RIAs, and before we launched this product, before we went to RIA channel, maybe I'd get 10 to 15 outsiders on my quarterly asset allocation call, you know, or institutional clients, and now I get 500. They want objective advice. We found a group that was starving for independent and high quality information across asset classes.

AI assessment note: “the RIA market was a huge decision for us and a big payout.”

Q What's one fact that most people don't know about you?

A I was interested in how much time of my life have I spent on a plane. So I've been in this business for 45 years, traveling to this client, their clients, some places to not so great places. I travel about six or seven million miles. If I did that all at once, how long would that be? It's like almost a decade. I spent a decade of my life, did LA, New York equivalent. So it would be like, okay, for the next decade, Every day I'm going to get up, go to the airport, fly from LA to New York, sleep there, get on the plane, next day go New York to LA. 10 years. So I think if I knew that when I started, I wouldn't have gotten into part of the business I got in.

AI assessment note: “I travel about six or seven million miles. It's like almost a decade.”

Q How did you think about The research process of what types of managers you would recommend across the different asset categories that you were covering at Cliffwater?

A It varies by alternative asset class, but there are some alternatives where manager selection is almost everything. In venture, you can make the right asset allocation decision, but if you can't get the best managers, or at least the top quartile managers, it's not going to matter. It's not going to deliver. That's most true in venture, maybe a little less so in buyout and hedge funds, but unlike the public asset classes where you get 99% of your return from beta, You get the majority of your return from manager selection or alpha in the case of those asset classes. I think the difference was private debt is different. Most asset classes, there's upside optionality, fixed income, and private debt as well. It's downside optionality, and so there's diversification, and there are a lot of good managers, and so we focus a lot more on beta than we do on alpha, which is limited in the private debt class.

AI assessment note: “It varies by alternative asset class, but there are some alternatives where manager selection”

Q I'd love to ask about how you thought about the changes and the state of your business. Leading into what's been this very significant shift over the last four or five years?

A The consulting business, in a sense, from a business perspective, has gotten very concentrated and virtually zero growth, where you probably have five, maybe 10, but not much more than that, really sharing the pie amongst themselves. Sometimes it seems to be a zero sum game there, and it competes on fees. All these top firms Very qualified, very good, have very good people, but the problem is they're not very differentiated, and it's questionable whether they're really adding a lot of value other than education and check the box on fiduciary oversight. It's a very tough business. Margins are very low, single digit, zero growth. It's hard to attract really good people in that type of business environment. I think all of them, like us, have been interested in Finding a clientele that values execution, can execute themselves, so they can differentiate themselves, so they can charge higher fees, attract better people, and add value. For us, I think we had the right idea in consulting. We were just undersized, and we focused on alternatives, but then after the financial crisis, the general consultants decided to do alternatives as well at a much lower price, so we were getting squeezed.

AI assessment note: “we focused on alternatives, but then after the financial crisis... we were getting squeezed.”

Q Now that you have a brand and significant traction in the channel, what else do you think about doing to help serve the RIAs?

A We started with private debt, the easiest asset class really to implement, and then we did a higher octane credit product that's going well. We just launched private equity, so we started the company thinking alternatives could add three plus percent net risk adjusted, so across efficient frontiers. So we started with the lowest risk alternative, and now we have the highest risk alternative in private equity. There are some between Asset classes, that's infrastructure or real estate. Those will be coming. I don't think our investors are missing out on anything, not doing those right now, but particularly infrastructure as an asset class, it needs to develop further before it's really useful to us. And of course, real estate's out there, but can't seem to sell anything with real estate today. So we're focused on private equity right now.

AI assessment note: “We just launched private equity... There are some between Asset classes, that's infrastructure or real estate.”

Q How have you gone about getting access to the ones if they're so readily identifiable through track records?

A Can be tough, particularly in the venture capital space where there's a shortage of supply with who you identify the best managers to be. It comes down to relationships and longevity of relationships. You could also be lucky if you're an institution like University of Michigan, Stanford in the industry that they can get access. We've dealt mostly with public funds. On the advisory side, that's a little more difficult. They have special requirements that a lot of venture firms do not like. We've had some success leveraging off our own relationships, helping our clients into them. You can also establish a relationship sometimes in the secondary market. You buy a secondary, all of a sudden you're in the club, and that helps. So there are some tricks, but no, it's basically having the GP recognize you as a good and reliable partner. Sometimes there are Significant drawdowns in the market, and having a willingness to step in, that counts for a lot.

AI assessment note: “It comes down to relationships... You can also establish a relationship sometimes in the secondary market.”

Q So when you launched private equity just in the last year, It's already crossed a billion dollars. How did you put that money to work at a cadence that's consistent with this incredible interest you're getting in inflows?

A If you have a good team and usefully good access, you can basically manage your launch date to your opportunity set, so what the optimal launch time is. We're not holding a lot of cash, or if we're holding cash, it's going to be for a very short period of time, and we can have a good experience. I will say, on the private equity, we didn't launch from zero, just cash. We negotiated with a large insurance company that had a private fund, and We bought that private fund, flipped it to an interval fund, and on we went. There are a lot of these tricks you can do, but you got to know how to do it. It's complicated. And be prepared to have a lot of lawyers on staff.

AI assessment note: “We negotiated with a large insurance company that had a private fund, and We bought”

Q So I'd love to dive through different aspects of that process. The index creation, what are some of the complexities that you walked into as you started thinking about creating what became the Direct Lending Index?

A I've been familiar with indexes my whole career. I've learned about them, actually implementing them at Wells Fargo Investment Advisors, so created a couple indices, two or three at Wilshire Associates. When it came to private debt, once I had the data, I knew how to create the index. And fortunately, the BDC market, not many people knew about it. These are 40 Act vehicles, so they're SEC registered. And the SEC requires disclosure On a quarterly basis, including holdings. If you can manipulate SEC data, you can create an index. People can replicate our index if they're now willing to spend an incredible amount of time and resources doing it. We scrub, sliced, and diced SEC data to create this index. It's an asset-weighted index of the underlying collateral. I analogize it to NACREF, the real estate Index, where it's a index, not of properties, but actual loans, and it's actually better than a creep because it's not populated by managers voluntarily giving their property values, but this is all SEC mandated information.

AI assessment note: “We scrub, sliced, and diced SEC data to create this index.”

Q So what was your base case for why you wanted to make that bet?

A The private debt we were interested in wasn't distressed. You didn't need to be a rocket scientist. All you needed was access to senior secured loans backed by viable companies. The yields were extremely attractive, and the question became, hey, can you hire managers that can underwrite those loans to close to a zero percent default rate? I felt that was the answer We'd still do hedge funds, but I saw this as a more simple and more elegant answer to that north, northwest quadrant, and it just so happened were a few, not many, that had done this through the nineties into the 2000 that I knew they performed very well during the financial crisis, hedge funds for the most part, and I felt, hey, let's do our due diligence on this asset class, on these managers, and start recommending them, so that's what we did. When we got interested in private debt, I was amazed. There was really no data. There was no index. So I felt that it's like any asset class. It's not going to take off until it has an index. I often say it's in the Wizard of Oz, the scarecrow. He wants to be recognized as smart. He is smart, but Wizard says, all you need is a diploma. And then everybody will think you're smart. I've discovered in the consulting business, in the institutional business, you need an index before you fit into asset allocation. So we spent an incredible amount of time, like five years, building …

AI assessment note: “senior secured loans backed by viable companies. The yields were extremely attractive”

Q accounting to reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it 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. How'd you go about getting your initial traction with the first interval fund?

A I leveraged off the Rolodex of this person. I had hired him like a year before to do all the prep work and everything, but he onboarded somebody else. So I had an East Coast person, a West Coast person, and we raised, I think it was like a hundred and twenty million out of the box. That got us going. I will say launching a 40 Act fund, a tremendous vehicle, but getting one launched Is extremely difficult. You've got to go through the entire regulatory process, which is a bear. You need to raise capital to launch all at once. And with the interval fund, there's not drawdown capital, that kind of stuff. But there are huge advantages, but getting it launched is a challenge, and you just have to be committed, and we were committed.

AI assessment note: “I leveraged off the Rolodex of this person... we raised, I think it was like a hundred and twenty million”

Q How have you gone, let's say, the investment process within the product?

A So first is our philosophy. Diversify. You only have downside optionality, so diversification is a free lunch. The problem with single manager funds is in portfolio construction, therefore, diversification, they're captive to their deal flow. Your portfolio construction is incredibly constrained. Individuals can Get around that by hiring a whole lot of managers, and if you look at the institutional markets, people are hiring 10, 20. With our interval fund, our philosophy is maximum diversification. We've got over 3000 credits in our fund, and importantly, at the largest credits, everybody talks about, hey, my average position as a percent of the total portfolio. First of all, you shouldn't look at total portfolio, you should Look at net assets just for leverage, but you'd be surprised if you look at the largest credit of a typical fund, the largest five, largest 10, how concentrated they are, and it seems every quarter, some manager goes into the penalty box because one of the largest credits has a problem, but for us, our largest credit is well below one percent, so in NAVs, I call this a quasi-index fund, so Basically our fund, we access loans from many managers. It's diversification. We're capturing beta. I know things will go wrong, but I know it won't wake me up at night.

AI assessment note: “Basically our fund, we access loans from many managers. It's diversification. We're capturing beta.”

Q How have you seen the comparison of what you're able to deliver in the interval fund product compared to, say, what you may have recommended in the past to the institutional market in the same asset class?

A I recently looked at that. We've been doing these funds, for example, the debt funds for five years now. We've looked at our clients, what their performance has been. And it's close to 10. In terms of bottom line performance, our institutional clients have been doing comparable to our own RIA performance. That's good news for the RIAs, because they can say getting an institutional level of return. I think from the institutional side, they should be able to say, we're getting Cliff Orders discretionary performance, so it's not like they're We're misallocating deals when we're to our discretionary products. More importantly, with a study, I found that I looked at roughly 35 big public funds that have disclosed June 30 numbers. Their average number is a high seven. There are a couple of funds that have kept pace with us. We respect them all, but I think a lot of times they suffer from over-diversification. A lot of people seem to think in the name of diversification, all of a sudden they'll Do some price niche product. I do think our product, we can deliver institutional plus returns to the RIA channel.

AI assessment note: “our institutional clients have been doing comparable to our own RIA performance.”