Animal Spirits Podcast - Talk Your Book: Alt Goes Mainstream with Michael Sidgmore

Episode Date: August 24, 2024

On today's show, we are joined by Michael Sidgmore, Partner and Co-Founder of Broadhaven Ventures to discuss all things Alternatives, how that world has changed in recent years, why financial advisors in the RIA channel is such a big opportunity for alternative investments, and much more! Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. And today's show, we talked to Michael Sidgmore.

Michael is a partner and co-founder at Broadhaven Ventures. He also has a really cool podcast called Altsco Mainstream. So Michael and I wanted to talk to him about alternative investments, how that world has changed since I first started investing in Alts back in the day in my endowment and foundation, former life. and why financial advisors and the RA channel is such a huge opportunity for alternative investments. So here is our conversation with Michael Sidgemore. Michael, welcome to the show. It's good to see you.

Good to see you too, Michael and Ben. Thank you having me. You're welcome. All goes mainstream. Today, the topic of the show is going to be alternative investments. You've had a front row seat to the broader. turning out of alternative investments that traditionally started in the institutional space, pensions, foundations, endowments, giant pools of money.

And over the decades and years, it's gone downstream to wealth managers, RAs, people are able to get access with the much smaller dollar amount, and you had a front receipt of that at I Capital. Talk to us about the evolution of alternative investing. from the institutions down to the individuals over the last, I don't know, 30, 40 years. Sure. Yes, Alts indeed feel like they're going mainstream. I actually don't love the term downstreaming of Alts, and I'll tell you why, and that'll be a good jumping off point into this evolution of private markets. But I don't love the term because, on one hand, yes, you're providing investors who have smaller dollar amounts to invest in private markets. You're giving them

access to private markets. So it's downstreaming in that sense. But if you think about the size of the opportunity in the wealth channel, it's roughly equivalent to the size of opportunity in the institutional channel. There's about $145 trillion or so assets in the wealth channel, yet, you know, two, three, four percent is allocated to private markets. Rounds to zero. Exactly. Relative to some of the largest institutions in the world think the largest pension plans, the Yale endowment, it's etc. Sovereign wealth funds, 20, 30 plus percent allocation to alts. I had the CIO Calcers in my podcast. They're 300 billion or so. They're like 35, 40 percent allocated to alt. So when you think about that delta, there's just such an opportunity to enable the wealth channel investor

to access alts. And I Capital, amongst many other technology innovations that are happening in this space, are really creating the infrastructure to enable that to happen. There's also the investment and focus from the GPs, knowing that working with the wealth channel is, I consider their next institutional LP in terms of size and scale now, different in terms of how you have to manage it, different in terms of how you have to productize for it. But I do think that the wealth channel is really the next, quote unquote, institutional LP. Well, all the juice has been squeezed from institutions for the most part. If you're at 30%, how high are you going to go?

And let me ask you this, why is that number so high? like before, is it just because of the success that Swenson had with the Yale model and the alpha that they were able to generate? Like, what was, I don't know he's been doing, well, he's not around anymore, but I know that he had been doing that for decades. What was the institutional space like before he came along? Was it mostly private market, public markets? So, look, I think in, when it comes to like the evolution of, of alts and private markets,

I mean, Blackstone's 39 years old. They're a trillion of AUM. They joined the S&P this last year. 150-ish billion-dollar market cap company, not small, but they're only 39 years old. And when you think about the evolution of all these alternatives managers, many of them started out as private equity firms doing buyouts. So that was a small portion of the universe. And then that grew and scaled, and then they became multi-strategy. So Blackstone now does credit. They do real estate. They do growth. They do infrastructure, et cetera. They head fund investing, fund of funds, effectively

secondaries. So when you think about the evolution of these firms, they've become these massive platforms and they service institutions and individuals now, but by providing a whole platform. And prior to kind of the initial start of the alt's world being a part of an investor's portfolio, So, yeah, it was really, I mean, people had a 60-40 portfolio. The institutions were the first to allocate to private markets because they saw this as an inefficient market where people could get higher returns. Obviously, there was a smaller market than it is today, right? There's 14 trillion or so in private markets, about 6 to 7 trillion of that is in private equity. So that has become a more efficient market.

And that plays out in the data, too, right? the large buyout firms, the interquartile spread between first quartile fund performing funds and fourth quartile funds is a smaller intercortile spread than lower middle market buyout where it's obviously it's a much more fragmented market, but the intercortile spread between first and fourth quartile's larger, same with venture. The case, best performing venture funds are much, much better than the lowest performing venture funds. So I think the market has evolved to become more efficient. We'll probably continue to become more efficient. That gets to an interesting kind of next phase of evolution of alts, which is, is it as much about alpha?

I still think it's about alpha in many cases, but it's also about diversification, because it diversifies you away from public markets. And if we think about, like, to me, the big story in alts is you think about a few different trends. One, there's private companies staying private longer. The number of companies that have, that are in public markets has basically halved in the last 10 to 15 years. So there's about 4,000 or so companies that investors can access if they want to invest in equities of a company. Private companies are staying private longer. You have a move to passive. You have indexation and you have concentration in the MAG 7 and a certain number of stocks that are driving returns in public markets. 87% of private companies,

87% companies in the U.S. with 100 million revenue or more are private companies. So how do you give people access to all these businesses as equity owners that becomes, one, private markets, and two, you've got to provide the infrastructure and enable them to do that. So the institutional, the retail to wealth management thing is interesting, because I came from the institutional side where there was like this hierarchy of people who thought they were better than other people. So you had endowments at the top, right? And they thumbed their nose at the pension funds. And the pension funds thumbed their nose at the wealth managers and the wealth managers selling their nose at the retail.

And that was kind of the hierarchy from when I was in there. And the thinking was always like, well, the endowments, we get the best, we get access to the best managers. And pensions kind of get the also ran. And then once it gets down to the wealth manager channel or the retail, they get like the table scraps, right? They're eating with the dogs or whatever. They're getting the bones.

So how do you get over that stigma of by the time it makes it to retail, all the good stuff has been picked through and good luck finding a top quartile manager that can actually outperform. Has that sentiment changed? Yeah. This was a while ago, obviously, that I was kind of more involved in that space. So I'm talking, you know, like a decade ago, but it obviously has, but I'm curious to hear your version of how that sentiment has changed and how wealth managers are thinking about

it now. No, it's a great question. I say that a little bit tongue in cheek. So I think a few things there. There were some trends that played into this. So one is as all these alternatives managers got larger and the large institutional investors wanted to have big relationships with them, they started to do things like co-invest. And the Maple 8 were real pioneers of that as well as some other sovereign wealth funds

where they'd want to get co-invest access to blend down their fees from 2 and 20. I don't think we're at 2 and 20 anymore even with the wealth channel. And we're seeing that play out with evergreen structures, which are not 2 and 20 structures. But as they grow in AUM in size and scale, the GPs can make up for the fact that there's not two and 20 fee structures anymore, but they're still generating large amounts of fee paying AUM from that. But I actually think because the wealth channel is such a big opportunity for these GPs, I think what you said was the case 10 years ago, that the GPs would go to the wealth channel and they would, whatever funds they had allocations to that were left open, they would give access to the wealth channel. Now, I think this, and this really kind of explains, in my view, why ALTS are going mainstream, is the GPs are now providing access to private investors in the same, this different

product construction, but the same types of products. A lot of these evergreen structures have co-investments where people can access these evergreen structures and invest alongside the flagship private equity fund of a large GP into a deal. So they're now getting, it's not always the case, but in many cases they're now getting access to the same or similar type investments that institutions got access to. And I think that's going to change the industry too. I mean, you think about what things like evergreen structures do to the potential dollars of co-invest for large institutions. I think that's a really interesting question, too. You mentioned the dispersion between top quartile and bottom quartile performers

going, compressing in certain spaces. And that's a natural product of so much money coming in. And the days of these outsized returns where there was just a few dollars have massive inefficiencies, in my opinion, that's over. It just can't persist. Also, valuations were way lower and all that good stuff. But you mentioned something that's interesting, is that maybe, and this, I guess my word's not yours, the alpha is not going to be what it was in the 80s and 90s. Like just, in my opinion, just full stop. It's just not going to happen. However, access to different areas of the market.

You mentioned the company staying private for longer. So if you're trying to get access to like the microcaps or the small caps of the world, that jives. And I like that you use the word diversification because public equity and private equity, they're both equity, right? And one gets marked daily and one doesn't. And so ultimately, these are both business. and so they should be correlated, but that doesn't mean that you can't get diversification.

I wholeheartedly agree. I think we've moved from a conceptual framework in terms of asset allocation or portfolio construction from 6040 to something other than 6040. Now, the way I like to think of it is instead of being pieces of a pie and alternatives being a piece of that allocate, that acid allocation pie, you now have buckets and spectrums. So there's an equities bucket. But equities end up being public equities and private equities. And to your point, that's still equity risk, but you're just taking different type of illiquidity, hopefully generating a different type of return for taking on that illiquidity, so different risk profile. But you're going to have people think about the spectrum of liquidity when it comes to equity, when it comes

to fixed income or credit, public, public credit or public fixed income, private credit, private fixed income effectively, right? So I think that's going to change the way that people think about asset allocation. And liquidity, I think for the wealth channel is really going to be the big question. Evergreens are trying to address some of that by having these structures that provide for some level of liquidity. They're not, I don't think they're semi-liquid. That's a term that some use in the space because they're not, they're not terribly liquid, right? And the fund can decide how much liquidity they want to offer to investors on a quarterly basis. But there is some level of liquidity versus a traditional closed-end fund private equity, right?

You commit dollars over a number of years, the capital is called, but you can't take the capital out unless there's an exit and there's capital return. So I think liquidity is going to become the really big question, but I think the diversification piece is interesting. Mark Rowan said that at the Norges Bank Investment Conference a few months ago, he talked about diversification, an important piece of private markets. And I almost look at that in two contexts. One, I think there's truth to that, and I think it does provide diversification away from public equities if you're doing private equity. So you get diversification away from the Mag 7 into other growth areas of a market or a region or a sector. The cynical way to look at

that, though, is that he's trying to future-proof both his firm and the industry from the fact there might be lower returns, like you say. So that, I think, is an interesting concept to unpack, which is, okay, now private markets, investors are starting to talk about diversification? But are they doing that because they know there's more capital coming into the space, and returns might be lower than they have been in the past? Well, let me ask you this. So I was about to say, anytime you democratize an asset class, returns have to go lower.

And I do believe that. I guess a counterpoint would be, well, the index fund didn't lower returns. Yeah. Yeah, I mean, I think one stat that has stood out to me, KKR recently released a report talking about the growth in evergreen structures, and they obviously have their own evergreen funds. And for the audience, what's an evergreen structure fund? An evergreen structure is a, it's different than a closed-end fund.

It's a structure where investors allocate, but the fund is always open, but there's no end date of the fund. So there will be exits, and that can return capital to an investor. But unlike a closed-end fund, which is a defined fund life, so closed-end private equity fund will be a 10-year fund. The fund manager has to return capital in 10 years or maybe with a few extensions, 12 years or so, roughly speaking, maybe, again, they can ask for more extensions. But they have to return capital and exit the companies they've invested in. An evergreen structure does not have that. So they've created a different way of enabling people to access private markets, which is they can,

invest in these structures. There's no end date of the fund, but they can get liquidity on a quarterly basis. They can take some capital out. But the concept and idea is that there will be compounding of capital. So if you leave it in and you're generating 10, 12 percent return a year, over time that compounding adds up. And that was really the point at KKR's report, which was if you're compounding that capital at 11, 12 percent a year, you're returning 3X over 10 years, roughly, which is that's, that would be in many cases and in many vintages, close to top quartile private equity returns, right? And can you get that in public markets? I assume most of these companies are willing to do the evergreen fund because they know, I mean, a lot of them have the thing where they say, listen, we do 5%, we'll let you take out 5%.

Because they know that it's going to be an ever churning of clients, not churning, but new clients are going to be coming with more capital, some clients are going to be taking out. So that's the idea where they're more willing to do that structure because operationally, it's, easier for them and easier for the advisor? Yes. So I think there's a few points of Evergreens. There's, I'll hit on the, why it's good for the GP from a deal perspective, why it's good for an LP from the structure perspective, and why it's good for the GP from a business perspective.

I think it's great from the companies that they don't have to exit in 10 years. But say more on that. So that's a really important point. If a GP, Blackstone, can go to a family-owned business and say, hey, we'll invest in you, but we don't have to exit our investment and sell your business in 10 years. The family is going to love that because they can hold it for multiple generations. So it's great for the GP, and it can help the GP win a deal potentially. So there's benefits from structure in that perspective. And it means that a GP doesn't have to sell either, right?

So say they want to hold that business for 20 years because it's a nice cash flow in business. They don't have to exit and return capital to investors because they can just keep holding it in an evergreen structure and let it compensate. there's benefits there. I think, Ben, you hit on a really important point for the wealth channel, and this is one of the biggest learnings I had for my capital, which is the largest platform that enables the wealth channel to access private markets, which is that you need to figure out how to meet advisors where they are. Different advisors have different types of clients. They have different types of needs when it comes to reporting, when it comes to liquidity, when it comes

to client size, how to put minimum investments, how to put investors in alternative products. So Evergreen solve for some of that. There's no K-1s, there's one capital call so you don't have to worry about cash flow planning. If you're investing in a closed-end fund, you might have a number of capital calls over three years. And then you have to hope that capital comes back in 10 years and then you recycle that, but you don't necessarily know when it's going to come back or when they're going to exit. And that can change cash flow planning, liquidity needs for the client, et cetera. So that can be a challenge. Evergreen abstracts a lot of those challenges away. So from a structural, perspective. It makes it a lot easier for reporting, for enabling investors to access funds, right? I mean, as a wealth manager, too, they might have some clients who get onboarded, and you can get investors invested right away. You don't have to wait until the next vintage. Say a fund isn't raising until a year from now. You have some clients in XYZ, private equity fund, Evergreen, you can just put the new clients in that same fund, obviously at potentially a different nav because it's been a year and the investments have been marked at a different

price, but you can just put those clients in there rather than have to wait until the next vintage. So I think there's a lot of structural reasons why it makes sense. And then the third reason why it's a really interesting development for the market is really from the GP's business building perspective. So alternative asset managers, and this kind of gets back to our earlier conversation about the evolution of private markets. These, number of these businesses are now public companies. They are big businesses that are in many cases valued on fee-related earnings. So management fee.

Yes, there's an incentive fee, but the markets are looking at how stable and predictable is there fee-related earnings, management fees on the funds that they run and manage and the capital that they raise, and AUM growth ends up being a big driver of of whether or not investors like what those businesses look like. So why do GP staking when you could just buy Blackstone? It's a good question. Is that the best way to access private markets? It's just all these companies?

I think the answer is both. So I think you can do GP staking and you can buy the publicly traded firms. I mean, some of these publicly traded firms will grow in size and scale. I think scale does matter in private markets. You look at the largest firms. they, A, will continue to benefit from being the biggest. They can, they have the brand, they can invest in their brand, they can invest in distribution professionals on the ground.

Blackstone has 300 plus people focused on wealth channel distribution. Not every firm can do that, but the firms that can do that, the other publicly traded firms are also investing heavily in distribution to work with the wealth channel, the big wirehouses, there's plenty of people who need to be covered there. The RIA channel, completely fragmented, hard to cover, so you need to. people and boots on the ground. You need to build relationships. You need to build trust. You need to build brand. Those firms will do well in growing AUM. And scale does matter there. And I think going public is part of that brand building exercise. People will know who they are.

Blackstone has a TV commercial now. People are going to look at that and say, oh, this is Blackstone. I want to invest in that. Just like I invest in and I shares ETF. So I'm seeing a lot of LinkedIn ads for these private companies. And there's been a lot of articles written in the recent months. Are private markets in a bubble? Is there too much money in there? So anytime... Sorry, let me set this up a little bit better.

Sure. I mentioned that any time you democratize an asset class, returns have to come down, index funds are free riding the market, their owner of the market. But for something like private credit, for example, which is the hottest private investment in my career that I can remember,

they're raising money, right? These GPs are raising money. They have to then go deploy the money. there's so much money coming into the space. How are the GPs literally finding companies to give the money to? So it's a great. Where's all this demand for the borrowing coming from? No, it's a great question.

And I think there's two sides of the coin. So one is anytime there's massive growth in a market, you have to stop and take stock of that and say, okay, is this going too fast? And is too much capital coming into a space? You have to just step back and look. as bullish as I am on private markets in general and private markets becoming a bigger part of the investing universe, which I think they are, right? It went from sub a trillion of AUM in

2006, 2007 to now over 14 trillion. Prequin expects it to be anywhere from 18 to 20 plus trillion by 2027, 2028. So we're talking about this is not a small part of the universe. Relative to public markets, it's still a small fraction of assets. Where does that money go? How does that money find a home that treats its investors well? Sure. So I think that's one side of it. The other side is specific to private credit. You have the largest firm. So Apollo has said anything that's on a bank balance sheet is really private credit. And we can actually help remove some risk from the system and de-levered some of these banks by some of these assets actually going into the private credit universe, whether it be

direct lending, asset-based finance, consumer loans, things like that, where you could take some of that off bank balance sheet. Apollo calls that market $40 trillion. Private credits at $1.7 trillion. Even if you take Aries, who's another large manager, they call it $20 trillion. Blackstone calls it $25 trillion. No matter if it's any one of those three, I think they're... They would argue that it's a very large market, that there's still plenty of room to run, and there's plenty of companies to finance. So, and I think, you know, banks have kind of due to regulations, they've retrenched a little bit from lending and private credit.

They're now trying to find ways to get back into it. But Jamie Diamond spoke about this recently on this call. He's like, hey, wait a minute. We could do this, too. Sure. And they actually looked at buying Monroe Capital, which was a $19 billion private credit firm. So, you know, I think banks are both understanding of the fact that private credit and these alternative asset managers are eating into their lunch, but they're also trying

to do this too. I mean, Goldman raised $20 billion in their private credit fund recently. So I think banks understand that they can do this themselves. They also understand the competitive pressure from these alternative asset managers who are encroaching on their territory. I mean, Blackson at $150 billion market cap is bigger than, it's roughly the same size, depending on the day, as Goldman Sachs market cap, maybe a little bigger. So, like, that's not a small business.

What does the recession do to private credit? That's like the big question. That's, I think that's a really valid question to ask. And also, what do lower rates do to private credit? In a higher rate environment, most private credit instruments are done on floating rate. So in a higher rate environment, it's actually generally a good thing for private credit, in a sense. I'm surprised that there's been someone. much interest in private credit, given that you can get 5% risk-free.

Like, I understand 12% is attractive. Yeah. But I- People love yields, though. Yeah. Yeah. Like your point about private credit being a bigger opportunity, I actually agree with that because the whole thing about endowments and foundations taking on long-term

illiquidity risk, that makes sense because they have their maybe 5% bogged hit, but they, those are perpetual funds. Like, they can last forever. A lot of these clients for advisors have goals that they have to reach. in, you know, in maybe the near-intermediate term. So the whole private credit being a bigger piece of this for the wealth channel makes way more sense to me in terms of advisors wanting to sell it. Because it's not like the yield is a guaranteed return, but showing that to clients makes

them feel a little bit better than, oh, well, this VC or private equity fund could give you this, but we don't know, versus here's the yield now that you're going to get. So I think the selling point of it, not saying private credit is going to automatically do awesome, but from a sales perspective, it makes way more sense to me from the advisor side of the aisle. Yeah, I think it's a really interesting intellectual question as to, okay, there's a lot of features of private credit that makes sense. There's also, I think, to your point, a very valid risk of like if we do enter a recession, if rates change, what happens to private credit. But I think also by the same token, Ben, what you're saying is how big the market.

is, there's plenty of room to run. And I think that's the argument that a lot of these big alternative asset managers are making, which is like there is so much market size and space to go after that there's still plenty of room to run. And even if we're raising all this capital against that, then it should work. The one caveat, and I will say this, I think the larger managers will generally be in good shape because they have the size and scale to do the the biggest deals and win those mandates that are with blue chip companies. I think where private credit could get a little bit trickier is as you go a little bit downstream, if firms have to win deals and loosen up terms, lighter covenants,

maybe be a little bit less strict on some of the borrowing characteristics. There's no doubt that's going to happen. Then that could cause some problems. Not everywhere. But for not Blackstone. And that's why I will say, I think, like, private credit, you have to look at an okay, say, this is $1.7 trillion of assets. I think that's up from like $500 trillion a few years ago.

So it's massive growth and it's projected to grow to over $3 trillion by 2028. I think you then have to break it down, though, and say there are parts of the private credit universe, like asset-based finance, which is asset-backed, which is, different from other portions of the private credit universe that may actually be a little bit different in terms of the risk and underwriting and who's doing it that make it a little bit different. So like area, sorry, Blue Owl as an example, they just acquired Adelaia, $10 billion private credit firm that's mostly focused on asset-based lending or ABF. And I think like that's a pretty interesting indication. Like you can almost kind of follow some of these large

or publicly traded firms and see what they're doing in terms of where they're raising new funds, what geographies they're raising new funds in, too. You see a lot of these large firms go to Asia. Like Blackstone's been in Japan.

Japan seems to be an interesting place because now Japanese investors want access to, like you said it before, Ben, they want access to yield. And now they can invest in private markets. They need the education. But if Blackstone's spending a lot of time there, that's pretty interesting.

Blue Al-acquiring Adelaia to do more in the ABF space. That's interesting, right? This is a, you know, $26 billion company, you know, a few hundred billion mark of AUM. They, they want to do more ABF and their private credits in their DNA. So I think you can kind of follow the tea leaves on some of these publicly traded firms and see what they're focused on and doing. And that becomes kind of a way to track and see what's going on. To your point earlier, I do think owning, I'm not trying to talk a book here, but I do think owning some of the publicly traded firms is something that makes sense. And that is one way

to play the space. I don't think it should preclude people from investing in GP stakes as an example or investing in closed-end funds or even Evergreen funds in private markets. But I think that's one component of allocating to the growth in private markets because those firms are going to grow their AUM, and that growth in AUM will generate to fee-paying or fee-related earnings, and that's going to increase revenues, and then the stock price may end up benefiting positively. One of the challenges for investors, the democratization of Aultz, is that at these foundations and the other institutional investors, they had teams of analysts that really understood the intricacies of the asset class, the managers, et cetera.

As advisors, there's a huge gap. Like, we just don't have the resources that they do. And then furthermore, let's just say that we said, okay, I can wrap my head around like asset backed financing. Like, I get it. That all makes sense. But then how do I know that company X or company Y is doing a better job? I can't, I don't see the docs that they're preparing.

I don't see, I'm not in the meetings. I have no idea. It really is a leap of faith. So I think it's a great question. I think where I'd start first is education. Advisor channel and the high net worth or individual investor, education is crucially important to helping them understand alternatives, writ large, who the players are, what the different strategies are, and how they can invest. I think that the firms themselves are trying to do that. Blackstone has Blackstone University, Apollo has Apollo Academy.

me, they're trying to educate, of course, with the intent of hopefully selling their products, but they also, I think, realized I had the head of global wealth of Blue Al on my podcast in Okers mainstream. And, you know, he mentioned that having industry-wide initiatives to educate is good for everybody. Sure, certain firms may benefit more than others, but that's going to benefit everyone. And I agree with that. I think that's true. I think there's a growing need for independent education, and that's part of why I created Alco's mainstream to help connect the GP world and the LP world and the wealth channel in terms of understanding private markets. That's a big piece of it, too, is just helping people understand the space, who the players are. I have an index that I

publish every week of all the publicly traded managers, what their market cap is, how that changes, what the flows are in terms of AUM flows, just so people can familiarize themselves with those firms. I think that's important too. And that's part of why I actually think, I wrote about this a few weeks ago, but I think that one way for advisors to end up on ramping or even individuals on ramping into private markets is buy some of the publicly traded firm stocks. You're going to start, when you're an investor, you're going to start paying more attention. Right. I think the same thing happened with crypto too. Like a lot of advisors started buying Bitcoin out of their own PA. Once they did that, they understood what the price action was. They understood what this asset was a little bit more.

they probably spent more time thinking about it, paying attention to it. I think the same could be true with the publicly traded alts managers of understanding what those firms do, where are they growing, what types of funds they have, where are they raising money, and then I think that gets to, okay, how do you actually evaluate managers? I think that will still be, to some extent, outsourced. I think, to your point, the advisor channel has varying degrees of expertise and also resources. So the largest firms, many of whom are private equity back, so think like the large platforms. So the high towers, you know, they hired Robert Picard to run all their alternatives business. He's doing diligence on all the managers. He's a background

of manager research. At Broadhaven, we have an investment bank as well, and we advise Sarity on buying agility, $15 billion OCIO. And that's an example of, I think, the large firms will look to resource themselves adequately so that they can actually evaluate private markets and help their clients navigate and navigate the space, find the right funds, get access, structure things the right way. Not every firm will have that. So that's where I think platforms like I Capital, Case, Allocate, et cetera, all come into play where people can then access private markets more efficiently. There's funds that have been diligence that have been approved. There's funds that people can look at, and that helps advisors kind of understand.

So I think all of those different players, whether it's the OCIO world, private banks certainly have a role to play. I still think private banks will be the largest flows into ALTS just because of the structure and way that those businesses operate, how the advisors are compensated and incentivized, and how those firms have diligence teams, have created menus, have made it easy for advisors and their end clients to actually access private markets. But I think you're seeing this whole industry be built to enable the wealth channel to get better access and also get better education.

And it's all going to go hand in hand. I think education does lead to allocation, but it's still going to take time. I mean, we're still at a few percentage points of most people's portfolios out of that $145 trillion of AUM and global wealth that has been allocated alts. So how long do you think this process is going to take?

if it, the way you're laying it out makes it seem kind of inevitable. And obviously there's no crystal ball here, but like, where do you see this going? I only see this going one way, which is continued increase in AUM into private markets. That could have its contours. And sure, if there's a recession or, you know, certain strategies fall more out of favor than others for a number of reasons. The speed and pace at which that happens may change. But I don't see a world where, Alts don't continue to go mainstream. You have the structures in place. You have the wherewithal from many of these firms to focus on education and also selling

and distributing products to the wealth channel. You have traditional asset managers. BlackRock acquired a $100 billion AUM infrastructure manager, GIP. They acquired them for $12.5 billion. And that's traditional manager trying to get into alts. And they acquired prequine on the data side. So they also have a massive software and data business, as you know with Aladdin. They acquired EFront, which is software for GPs and LPs, and then they just acquired Prequin,

which has a treasure trove of data and a big community of GPs and LPs in addition to content. So that's in their – that's in the other side of their business. That's not asset management. But BlackRock's 330 plus billion of AUM in private markets, it's not small. You know, I mean, compare that to Blackstone. that's a trillion of AUM. But, you know, I think that there's only one way that this goes, Ben, which is it continues to increase in size and scale just because of the fact that you have all the structures in place. And then I think you have some of the structural aspects of public

markets that make it make sense for people to have some portion, whether maybe it's only a few percentage points, maybe it's more. But people should have some portion of their assets allocated to private markets. I agree with you that I think that the future is up to the right with, you know, bumps and hiccups along the way. But I think anybody who sees the money coming in and says their private equity is private or private markets in a bubble, I think it's early. I think in 10 years now, it's going to look, it's going to look small today.

So with that said, and that is no, I am not commenting on the performance. I'm just talking about the asset size. What area of the private markets are you most excited about? So because of the structural trends in private markets, things that we all laid out, increased growth in AUM, you have more investors now getting access. So there's going to be more assets coming in from different sources. And the larger firms are getting larger. They need to acquire and consolidate.

I think all three of those trends make me interested in, okay, how do you actually index the space. I think one way of doing that is GP stakes. I think it's it's such a fascinating. What is GP stakes for the audience? So it's it's taking minority equity stakes in alternative asset managers. So you actually own a piece of their business. How do asset managers or alternative asset managers make money? They generate management fees and they generate performance fees. And if they exit their business and get acquired, then there's there's an exit event on how do you index that space. So by investing in a GP stakes fund or building a GP stakes business, you will own minority stakes in alternative asset managers. You'll build a portfolio. Blue Al is the largest

firm doing this. They have, they acquired dials GP stakes business. It's called Blue Al strategic capitol. They have 60 billion of AUM. That's a space that I think is probably going to at least double, if not more, in the next few years, just because there's so many many managers in this, in private markets, but so few of them, particularly in the middle market, that have actually transacted. So there's many of the largest firms have either gone public. So in effect, they've, yeah, Carlisle, Blue Al, Blackstone, Apollo, Ares, CBC is now public. So like those firms have, some of them had GP stakes investors to help them grow their business before. But they effect, in effect, have investors in their business that are outside of,

the partnership model. But then you see, even in the middle market, now there's firms that are thinking about, okay, how do we grow our business? Because I think, as you think about private markets, you look at the largest scaled firms, not only do they make good investments that hopefully as investment products generate returns for their LPs, but the businesses themselves are incredibly good businesses. Think about management fees, and you have an element of this with your own business and wealth management's going through the same thing with consolidation. You have private equity investing in wealth management, but you have this stable, steady revenue stream of management fees.

In some ways, you could argue, it's better than SaaS, right? You get contracted revenues for, if it's a closed-end fund, 10 years, that money's not coming out, way less churn, and you have upside with Kerry. So when I think about GP stakes, I think of the strategy itself as kind of a culmination of what's happening in private markets, which the industry is consolidating. there's going to be exits. The industry is growing and the industry is evolving where larger firms are acquiring smaller firms to build out their multi-strategy or multi-product platform. And from that, I think you're going to see a lot of benefit for the managers who end up building really good

businesses, either as specialists and then become part of a bigger firm or grow enough themselves to become really big businesses. And like, if you think about GP stakes, it's a combination of you get, it's shades of private credit because there's a current yield and cash flow component from owning a piece of the management fees that the GPs take every year. And most of these businesses are like 60% EBITDA margin businesses. They're private equity component to it. If there's, you own a piece of the carry. So if those firms perform well, then you get a piece of the investment performance or carry that they have. And if there's an exit, you also get some upside from that. And then there's shades of secondaries too, right? If you think about secondaries,

what is a secondaries product? It's a product that reduces the J curve for investors because there's capital coming back quicker. And there's generally diversification across strategy and vintage year. And by owning a portfolio of GPs, probably own some private credit, private equity, some infrastructure, maybe some VC managers, some secondaries managers. You get this, you get this kind of diversified exposure. And with the current cash flow from the, from the fee income that you earn piece of, then you reduce the J-curve. There must be an ETF for this, right,

that owns all these companies that are public? So there are some ETFs. Investco has one. There's not a ton, surprisingly. But that, I think, on the publicly traded side, that's one piece of it. You mean an ETF of like the Blackstone and Carlisle for the world?

Yeah, there must be one of those that owns Blackstone, Carlisle, yeah, of all these companies. There is. And then the GP stakes on the private side are privately held managers where people are owning minority stakes. It's not quite an ETF in the sense of it being, you know, it's not a traded product, but it is a way to get diversified exposure to private markets into a number of managers who will likely grow their AUM have different products that they offer, maybe acquire other businesses and grow their businesses. Did you see the article from the Financial Times a couple of months ago showing all the money that came into private markets and the lack of distributions that went out?

Unfair, fair, overblown. What's the story there? Very fair. I think private markets is going to have to figure out how to distribute capital back to investors. Certainly institutions who have been longer private markets than the wealth channel, they need capital back. But massive bare market and growth equity, that's sort of not being discussed enough.

Like, there's some really nasty, gnarly shit going on. Sure. I mean, I think, like, you think about 20, 21, 22, and valuations and valuation multiples, things got a little bit out of hand, sure. And I think, you know, that's come back down to earth. I think some of those vintages won't necessarily do as well, because I do think even in private markets, purchase price does matter. I think it's to be a bloodbath.

In a couple of years, when these start getting reported, it's going to be ugly. So the question is, will those LPs re-up? I think funds that don't have the brand or the track record that some of the larger funds and funds that have been around for a longer period of time do have, they may struggle a little bit more. Problem was, it was the name brands that were leading the charge. Sure. And I think that's something that LPs are going to have to reckon with, which is, do I go and buy a brand because it's a brand? or do I buy another firm's product that may not have as great of a brand, but the performance

may be there. And I think I'd be curious to hear your perspectives as a firm to allocates capital to managers of like how you'd think about that because I think there's there's some level of safety going with a brand. And to our point earlier too, like if you can get 11, 12 percent compounded and you can make a two to two and a half to three X return net would you take it even if it's not necessarily the best performing manager but how but but still is a brand you're not going to lose sleep over you're not going to get fired it's an interesting question of should

you do that or should you try to find the best manager and maybe that also gets to resourcing certain firms can do that well it depends who you are if you're if you're if you're somebody that doesn't have expertise in the space you're not finding the best and guess what you getting access to the best. So do you think the space ever gets truly indexed? That's a good question. I think a lot of people were looking at the Pekwin acquisition by BlackRock and saying, okay, this is the firm that has been the biggest player in the ETF space, and they're going to do the same now that they have access to all the data with Pekin. Like, how would you do it?

I think it's a little bit more challenging. That's where I think the question in my mind is, not that could BlackRock figure something out. I think if there's anyone that's that's smart enough and has both the size scale data and innovative mindset, it's probably them. But the question is, like, is it a square peg round hole type thing? Should private markets be indexed? Yes, I think people should have access to private markets. I think Evergreens are part of the way there. There's some level of liquidity. People are getting access to private markets. It's not indexing because people are generally investing in one fund or now there's structures where people can invest in multiple funds or like iCapital has a fund as an example where they have

three different managers and you can invest in that evergreen structure of of those three alternative managers but that's not indexing now i do think there are ways to create structures where people can access different private markets funds and put a put a wrap on it, where then investors can access, maybe have some liquidity, and index a high quality set of managers. That's not quite a fund of funds, but there's some elements of it, right? You're just trying to get exposure to a number of the top managers in the space. But true index in creating an ETF, like a daily liquid product where there's, I'm also not sure that you should strike navs every day in private market, in certain aspects of private markets. Like part of the benefits

not just for the fund managers or the companies, but for the investors of private markets is that you don't have to lose sleep at night. What happened a few weeks ago with the market turning upside down with the Japan carry trade, like that, you know. Well, not having liquidity as a benefit

that maybe investors are going to end up paying for. It's not going to be a premium, it'll be a discount, which, by the way, that's a whole other argument. Maybe it's worth a discount. I mean, yeah, sure. And sure, and that's where I think, like, and I think, you know, that's, there's, there's arguments on both sides. And I think they're very valid ones. There are people who, who call, you know, private markets, volatility laundering.

It is. And there's, you know, there's some validity to that, I think. But at the same time, I do think illiquidity can be a feature, not a bug, and I can actually save investors from themselves. I agree with them to. You guys have written. Yeah, advisors could use it as a behavioral, it's keeping you in for the long term, like, we're preaching. I can see that. Yeah.

I mean, you guys have written great stuff on the psychology of markets and investors. And actually, like, I mean, you've written great stuff about even like, hey, buying the all-time high is maybe not the worst idea in the world. Like, you look at the data that actually, it actually may be the right thing to do. And I think if people can get educated on the merits of illiquidity and private markets, and this is where I think, like, one of the biggest things going forward, for private markets is going to be the education about what illiquidity means. And when do you need to have illiquidity? How much illiquidity you need to have? Do you need to be 50% liquid so that you can get liquidity next Tuesday? Probably not, right? So that becomes, I think, the most important question, which is like, how do you understand liquidity? What does it mean? How do you construct a

portfolio that enables people to access? And in the right way, too, I mean, I think we could talk about retirement plans and 401Ks. There are structures where people can't take money out or shouldn't take money out or incentivize not to. Private markets, which is long-dated, long duration, there's probably ways to fit pieces of the puzzle together.

I know there's challenges and complexities. I don't want to oversimplify it. But I think there are ways to give everybody access to private markets in a way that makes sense and is done in a way that's thoughtful and you know, protects the investor. It's funny how we spoke, we just spent

45 minutes talking about Alton Hedgefords didn't come up. Shows you how the industry has evolved over the year. So Michael, we could talk for hours about this. There's so much to cover that we didn't get to today. I read your substack every week. You've got a great podcast. You're doing the world of service. Educating investors about... You slip the name of the podcast

in about anyone knowing. It's like watching a movie where they say the title of movie in the movie. He's good. So Michael, where... How do people find you if they want to listen if they want to learn and read along. How do they find you? Yeah, so the podcast and newsletter is called Alt Goes Mainstream. It's alt goes mainstream.com. It's subscribed to by many senior executives, C-suite in private markets on the GP side, a lot of the wealth channel as well. And I'm really just trying to bring the industry together and help people learn about

private markets talk about, have conversations like this. Honestly, I mean, I think this is a really healthy dialogue for people to have. Different people have different views. Different people sit in different seats. You have to deal with things in your day-to-day business that are really important questions for the GPs to understand and for other wealth managers to understand and for the end client to understand. So I think that's the goal. If we can make private markets continue to become a talked about subject, then it's going to help people understand where and how they should do it. Different people should do it in different ways. There's no one way to do private markets. I think the topic we talked about earlier from Ben's question of like which way is this going I think

you said it to Michael it's going up into the right I think we can all probably understand that intellectually so then it's how do we think about bringing it all together and that's that's part of what I'm trying to do amen all right Michael thank you very much thanks for having me