Animal Spirits Podcast - Talk Your Book: Private Investing for Fiduciaries

Episode Date: March 4, 2024

On today's show, Ben Carlson and Michael Batnick are joined by Jacob Miller, Co-Founder of Opto Investments to discuss: how difficult it is for RIAs to get private market exposure, the growth of private credit, and why that may be an issue, Opto's screening process for private 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 Riddholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Riddholt's wealth management may maintain positions in the securities discussed in this podcast. On today's show, we're joined by Jake Miller. Jake is a co-founder of Opto investments, a company which I am an advisor to.

So wanted to get that full disclosure slash disclaimer out of the way before we got into this conversation. Ben, one of the bets that a lot of companies like Opto are making is that one of the reasons why institutional investors, and there's a million reasons, but one of the primary reasons why institutional investors have called 30% of their portfolio in ALTS and the average high net worth investor has, you know, an allocation that rounds down to zero

is because of access and the pain in the butt that it is to go through this process. It's a lot. I did this in the past. I always mentioned this, and it was a lot of work, and it's operationally and efficient. It's a lot of heavy lifting involved. And especially for advisors that have hundreds, maybe thousands of clients,

it's a lot to ask for them to do it. It's a lot. So opt on that side of the industry is making the bet that if they build it, the advisors and their clients will come. And that is going to be one of the things that I'm most interested in watching unfold over the next decade. Can advisors and their clients get off of zero?

And not that they're going to go to 30% like, institutions, but can they get to 2%? Can they get to 5%? And if they're able to, what are some of the challenges that they're going to face along the way? What are some of the gaps that need to close? Not just in terms of technology and access, but really education. Education is the big one. And what does it do to the industry? Does it, because people have talked for years that one of the reasons hedge funds don't work as long anymore is because you get in early to the best ones, but once all the money flows in and there's 11,000 hedge funds, there goes all the alpha. Does that same thing happen in private markets?

So we had a really good conversation with Jake Miller today about everything that we just discussed from the building to the sourcing, to the diligence, to the education and the explaining and all and everything in between. So with that out of the way, here is our conversation with Jake Miller. We're joined today by Jake Miller. Jake is the co-founder of Opto Investments. Welcome to the show, Jake. Thanks for having me.

We're going to talk today about private market. Markets, what Opto is doing to bridge the gap, make it easier, private access, all that sort of stuff. But before we get to the meat of it, why don't you tell us briefly about your background, how did you come to co-found the company? Yeah, so I've been in markets junkie since I was very young. I grew up in San Francisco. Coming of age during the dot-com boom and bust, I tell the story a lot. A true nerd. A true nerd. But our next door neighbor went from driving a beat-up old Honda to a Ferrari, back to, I believe, the same beat-up old Honda in the span of about 18 months. And eight-year-old me was like, that looks like a fun game.

I should figure out how to play it better than him. So my dad set me up with, you know, 50 bucks in a e-trade account or whatever it was at that point. And sort of never looked back by the time I got to college was mainly focused on bonds, currencies, commodities. Through that, got connected with the folks at Bridgewater, intern there. Spent about four years as an investor at Bridgewater, primarily focused on the debt side, which we can get into how that relates to this later. In late 2019, sort of confidence factors, growth of the private markets, seeing the excitement there, public markets that were, you know, I believe getting harder to have real alpha in led me to sort of lockpick the golden handcuffs. And met Joe Lonsdale, founder of Palantir, Adapar, ABC, through a mutual friend.

He'd been thinking about the access piece of privates sort of the other angle of seeing large, sophisticated groups who struggled to do this in a truly scale. efficient way and the technology to improve that. And so put our heads together and you know, with a couple of their folks, Matt Reed, who's been an Adapar for over eight years, some technical co-founders put our heads together and decided to found a business to really empower fiduciaries across the country to invest seamlessly in private markets. So your main focus is on helping advisors get into the private space because it's way harder for them to source this stuff, perform due diligence, handle the operations on it. that's the main idea. Yeah, I mean, even if you, let's say you have a good network in an area,

maybe a few of your clients are big PE fund folks or venture capitalists. You probably don't have a network across all the private markets, so venture, private equity, private credit, real estate infrastructure. And even if you do, which again would be rare, doing diligence on, call it 50 deals a year, doing operations on, let's say, have 100 clients across those, you choose 20 of those deals. You're talking about reams and reams of paper. it probably looks something like that famous photo, Bill Gates, where he's got the CD-ROM in his hand and a stack of paper underneath him. Like, that's how many subdocs you've got and K-1s.

And that's not scalable. The paperwork really is immense for a private book of an al-QA. I used to work in the endowment space, and we had, I don't know, 10% sleeve of hedge funds and a 15% sleeve in private equity in venture. And this is kind of the pre-cloud days. And we had just file cabinets full of the docs. Yeah, and that was one holder of those positions. and a non-taxable investor.

And so multiply that by 50, 100, 200 families, a bunch of different underlying accounts, taxable and non-taxable mix of those. That's not as scalable for an RA trying to grow their business. And at the same time, you need private markets today to differentiate. And there's also a lot to be said about what it actually differentiates you now that their access is increasing. It's just not across the board.

There are certain products that everyone has access to now. That's not going to help you win an ultra-high-knit. individual, but there's still parts of privates that are inaccessible and can help differentiate practices. So before we get into some of the exciting stuff, the investment, let's just start backwards and talk about, okay, operationally, so there are stacks of paper. It's just a pain in the butt. What did you all create in order to make this easier for both the advisor and the end client? Yeah, so it starts in the decision making step. And so we are not product pushers. We're not here to sell one fund. And so we started agnosticly and said, how do we help map

financial planning and goal setting onto the private space? Not something that's done super commonly. And so ability to import and integrate with your planning software, with your reporting provider, pull in portfolios and goals and help say, this mix of private markets is likely to help this book of clients. So already you've cut out a lot of work of copy and pasting into Excel, doing a bunch of your own research, having to go through a bunch of PDFs. From there, the ability to seamlessly create proposals. So take that information plus a recommendation that you build with us and turn that into a compliance-ready, easily shareable thing

that you can bring to a client meeting as a PDF, that you can send as a hyperlink that's white-labeled for your firm. And so cut down on the need to make decks and spend hours in PowerPoint, adjusting logos of these underlying managers. From there is where I think the efficiency really starts to kick in. Once you're ready to invest, say, for 10 families, you just enter amounts, you know, we've imported that client list, you just enter the amounts,

and we've basically automated the subscription document process where there's a simple sort of form field, most of that's pre-populated from CRM reporting, custody, so that by the time you get to the subdocs, 90 to 95% is filled out, usually if still have to upload an ID or something, you just click generate, you get a doci sign packet, you can be subscribed in seven minutes, at one client for one of their funds do $20 million across 11 clients and 33 minutes. And then once you've done that once, that investor profiles is stored in a secure server. So the next time you want to invest on them, it's 100% filled out. I would imagine that you're integrated with all of the performance reporting pieces of software,

all of the custodians. And one of the magical things that you do, which we'll get to later, is the portfolio aspect of these private placements. Talk about how that process works. Yeah, so definitely integrated with reporting, custody, CRM, like, that was table stakes for us. We talked to a lot of advisors before we wrote a line of code, and it just has to work, and it can't be a copy-paste exercise. But the portfolio side felt really untapped to us when we looked at the market. I think that's because so much backward-looking has been focused on distribution of specific products, and you would never build a tool that wouldn't recommend the product you're trying to sell.

And so not every product is going to be right for every investor. And so you would avoid a portfolio-level approach because you might not be able to sell the thing that's your job to sell. Because we sit on the same side of the table as our clients, we didn't have that problem. And so I wanted to approach this with the same rigor, analytics, and sort of holistic, goal-oriented view that most people approach for their public markets allocations. So these private investments have historically been reserved for institutional investors and the best have not just been reserved for institutional investors, but the largest ones. right? If you have $90 million or whatever, good luck getting into some of the best deals. Over time, as more capital has come into the space, they've gone downstream. You don't need a billion dollars anymore to get in. Wealth management has been a hot space. The price that has

been paid for some of these deals has risen commensurately such that a lot of the, I'm using air quote alpha, which was really just the illiquidity premium, you were able to buy these companies at four times whatever your cash flow metric is, lever it up and get a really juicy return. Over time, there's been a compression between public markets and private markets such that I don't know if there's any alpha at all anymore, broadly speaking. So talk about what you're doing to address what I just said. Yeah, to start by saying, there should never be alpha, broadly speaking. Alpha is hard. And for every, well, we can get into this, but usually. Usually for every winner, there needs to be a loser.

That's a little bit more complicated in privates, but usually the average should be average, and then you add fees and you're below average. I guess just the premise that the reason why you would even invest in these products at all, because they are paying the ass historically, is because you're trying to outperform what you could very easily get in the liquid markets paying three basis points for. That's the deal?

And so what I'd say is the illiquidity premium, I actually think of more as a beta-like return. It's a return for risk that I agree has basically been compensated. petered away. There are still pockets of it where, like, it is still truly liquid, like outside of the larger private credit, private equity space. But that's a return for risk, and it's one that you should expect to pay you over time, but should be very inconsistent at any point in time. Sorry to cut in here. So do you think for something private equity, it is just you have this more illiquid asset that forces you to hold for the long term, plus you had some leverage

on it, and just getting the beta there might be enough? Or do you think that you need to actually Historically, yes, and forward-looking, no. And this is, I think, true across beta assets. You're coming off of a decade of very easy capital. Looking at, call it yield space. So residential real estate yields and equity earnings yields, which are the two primary mechanisms of American saving, are at basically their peak overvaluedness versus the short rate.

And that same dynamic is at play in private markets and play at all markets. What you have in private markets is, and this is based off of seeing the inside of a hedge fund as well, in the liquid side, more sustainable sources of actual alpha. What I mean by actual alpha is, you know, the illiquidity premium, that's not skill. That's just, do you have a longer horizon than the average investor? I break it down into four buckets if you need to have unique information, unique access, unique insight, or luck. Those are the four ways you outperform the average. The first two are illegal in public markets. So you've got to be really insightful, which is hard.

And you've got to hope you're lucky. But the lifeblood of privates is unique information and access. What's your network? What deals do you see? What information do you have that others don't? And that's actually a more sustainable edge to measure in the diligence process. And so when you look at the serial correlation of outperformance, unless people are growing way too fast. And so like doubling fund size or a little bit less, it is much more likely that a top quartile fund is top quartile the next time than the average fund.

Because it's a relationship business and they have the relationships. Exactly. And these things compound, right? If I'm a startup founder, and I'm hearing all this news that this venture capitalist is the best in the business because they picked a lot of great companies, I'm going to want them to pick my company because now it's a stamp for me. It's almost self-fulfilling. Yeah. All right. Before we get back into how Opto is doing, I just want to stick with the broad landscape of private. So private equity, I guess it was like it was hedge funds in the 90s. They got their faces ripped off in the GFC. And then it was private equity and venture.

And now it's gone from, okay, let's take ownership positions in these private companies to, hey, wait a minute. What if we lend these companies money? I'm talking about private credit. And to say that that has become betified, for lack of a better word, very quickly. And I don't pretend to be an expert on the space, but just the headlines. I can't help but notice that it's reached a fever pitch. Talk to, I'd love to get your take on what's going on in the process.

private credit space. No, you're absolutely right. And my view is by the time someone is telling you something's in a golden age, it's usually in the dark age. If you have to say it's in a golden age, probably not. That dynamic is definitely reached a fever pitch. And that's on the back of, you know, if we look back over the last 18 months, obviously inflation impulse, Fed responds in ways that you'd expect the Fed to respond,

maybe a little bit late, but responded. On the back of that, some banks break, particularly around the venture space, SVB, FRB, regionals come under pressure on the real estate side, and that tightens bank standards. So the number of percentage of banks tightening to businesses and consumers was at a cyclical high, and private credit stepped in to fill the breach. And they did this at rates that we don't think make sense by and large. Now, of course, these markets are varied. There are still folks who have, I think, the right covenants in place.

I have a question on that. Sorry to interrupt. But when you say at rates that don't make sense, are you saying that they're not being compensated for the risk? or perhaps worse, that they're putting too much of a burden on the companies that they're lending to, and the companies won't be able to pay them back? It's a great question. I think it's mostly the former, but there are pockets of the latter, particularly in spaces

that are under pressure like technology. I don't want to be told that I could get 15%. That seems like you're heading down a dangerous road. And I'm not saying that anybody's saying that, but just as an example, we see that right all time. And that is burdensome. You need to believe that there's something material will change or that that is going to, you know, that's, you need to believe your business is going to grow faster than that. That's going to fund in an environment where growth overall is two, three percent, maybe nominally a little bit higher. Like, that's a pretty high bar. I saw, I saw Bob Elliott, who you know, poking about private credit that these are,

he was joking that, you know, these are the best bond managers or whatever, lenders and they do it at sustainable rates and there's alpha and all that sort of stuff. But what happens if the private piece of it? Because these are loans, right? They're not bonds. They don't trade. What happens if and when? So there was an article like J.P. Morgan might be trying to bring liquidity to some of these loans. What happens like at the next phase of it when there's no longer really where the illiquidity premium to the extent that exists just goes away actually. Yeah. And so I think it's helpful to put some numbers around this. So round numbers here, direct lending space, which is where we see a lot of the froth. Call it 10-ish percent, 9-10 percent is what a lot of loans we see

being written at. And when you look at that versus kind of how geared these companies are either to sales or margins and their ability to make that payment, it looks a lot more like equity risk to us than normal debt-like risk. There's not a margin of safety. And then when I think about, okay, short rates at 5%, equity excess return should be somewhere in the 3 to 4% range, I'm getting equity-like return with equity-like risk, and I'm usually paying more for it because I'm going through one of these active managers. And so there's probably even a bit of overvaluedness we can get to in a second, but even just from a raw deal perspective, I can get very cheap equity-like return for equity-like risk

in the equity market, or I can get expensive equity-like return for equity-like risk in the private credit markets. But do you think that people like are lying to themselves about the risk that they're taking because it doesn't get marked? Forget about daily. It doesn't get marked at all. It doesn't get marked at all. And that's where the bringing more liquidity to the space could be a root awakening. Right. If I have to see this get remarked every day. Don't show me. Don't show me. Yeah. I mean, I think if you asked a lot of active investors, how much would you pay to only be marked quarterly? A lot. They probably pay a lot. Yeah. So private credit is the hot dot right now. Michael's description of the different ways that it's changed over the time, I think is pretty accurate.

It's so funny that I know hedge funds still manage a ton of money, but you don't hear about hedge funds as much anymore as he did in the 2010s. Do you, at Opto, have to have an opinion on this stuff, or are you take a more diversified approach where we want to get you into each of these different asset classes and diversify by vintage year and have a more static bucket? Or do you have to have more opinion and analysis based of this whole sector here is kind of tapped out? we think you should be moving this way. How do you view that approach to the wider landscape of alts because there are so many options? You have to be selective in private markets. Great question, Ben. Great question. You basically, you know, that's the reason we exist. You have to be selective in these markets. The difference between a top quartile and bottom quartile long, short equity manager, depending on the year, let's call it an average 4 to 5%. The difference between top

quartile and bottom quartile private equity more like 15 to 20 percent and that story is repeated a little less own private credit but still call it like 12 to 15 percent so you you know if you choose wrong all of that yield you just got goes away and you're negative you have to be selective you also do have to be diversified and so you know one of the things we don't like about some of these semi-liquid strategies is you're buying into existing portfolio and so these loans were written at a different time there's some cross-liability across these loans, i.e. if loans stop coming into these large books or people start trying to withdraw, all these companies can be affected. It's a lot less diversified than a true vintage approach where I write loans to a company in 2024, and then I do

more in 2025. And each time I'm capturing the market dynamic of that day rather than this book of some existing loans I'd probably rather not hold. And also across sectors, like for every private credit in the technology space, I should do something in commodities or in financials. And I should also have other sleeves. This is just like the public markets where you wouldn't say, hey, I should go buy this one slice of BAA. That'd be kind of a weird fixed income approach. Same thing applies here. All right. So at Opto, talk, all right, talk about like the landscape before you guys got on the scene. So you're not the first platform company. to try to bring better access with technology,

with diligence, with fund selection. You're not the first to do this. What is the opportunity? What is different about what you are doing, how you're working with advisors, versus what had been on the market before you came to it? Yeah, so the big thing we saw was who were the companies built for?

And so we're coming out of a period, honestly, a very similar timeline to the hedge funds. Another collateral damage in that hedge fund blow up was all the brokers who'd been selling hedge funds. And you saw the BD model really losing steam and wires losing steam and the growth of the independent RIA market. And various platforms have tried to pivot

to go from being largely wirehouse-based shops with wholesalers and large deals and large funds to servicing the RIAs, but their DNA is still on that transaction-based comp model. Now, that's not how most independent RIAs work. they're fiduciaries and they're fee only. And so you have a mismatch in how these companies are operating. We wanted to undo that mismatch.

And so we are fiduciaries alongside our clients. We take fiduciary risk on all the funds we do. We're often taking our own balance sheet and investing alongside our clients. And what this does is it opens up a lot more in the market. The best managers don't need to pay to raise capital. Why would I pay a placement agent 5% if I'm oversubscribed? And so because we're not going in and saying the way we get paid is we charge you to raise your next fund, we can talk to anyone, not just the mega funds that are trying to raise 20 billion this

time and so are willing to pay a little bit to get that raised. We can talk to the really unique issues that are consistently oversubscribed that have stayed true to their strategy, not grown too fast, and have been consistent generators of alpha. One of the things that you mentioned in terms of generating alpha is unique access. Where is that unique access at Opta coming from? So it comes from our founder and chairman, Joe Lonz, Dahl, and the networks of our, our founders and investors. We have a lot of the top family offices, some large institutions, folks who are deep private markets investors. We stuck to pretty strategic players for our fundraise where we can go to them once a month and say, what's the most exciting thing you've done?

It's usually pretty cool stuff. We still have a low pass rate even given that, but it gets us into some of the best conversations about allocation in the country rather than the stuff that is actively trying to be sold. All right. So walk us to the process. You get a deal that you think is interesting. What does that look like? How does it go through the filter? Yeah, so we look at strategy, structure, and sponsor side. A lot of that is more on the operational diligence, though we really see it all as one thing. So that's things like, are there conflicts between the manager and the fund? Are they paid in a way that is client aligned? How could, what does that mean? How could there be a conflict between the sponsor and the fund? So, for example,

a common thing you see is deal fees being paid to the manager, but not accruing to the fund. you have a fund who's just incentivized to do a ton of deals because the manager gets paid, but that doesn't necessarily accrue benefit to the investors in the fund. Or other sort of funky relationships between different fund entities. Are they lending to companies they previously did equity rounds in at rates that don't make a ton of sense? And then on the structure side, our leverage level is appropriate? Is the management team solid? Do they have good continuity?

Yeah, this stuff can make or break a fund over a fund life. and these can be, you know, five to ten plus years. And so you want to be really sure about the longevity of these organizations. So that the longevity piece is something I've been thinking about. So to Michael's point about institutional investors, I was in the like Endowments and Foundation space. And that's just way more money, even than in the IRA space in a lot of ways. And you would think that a lot of these private funds would say, why do I need an RIA if I have access to these big, huge pensions and endowments and sovereign wealth funds?

But my experience there is those funds are very fickle. and they look at like quarterly performance, and they put a lot of pressure because they're dealing with boards and investment committees and alumni and donors and all these things, and they may not be the best long-term partner, even though they should have a very long-time horizon. So do you think that this space with RAs can actually be a better long-term partner than those institutions because they're more willing to stick with a fund over the long-term than jumping out as much as those institutions do? Yeah, we deeply believe that. And so there's a few things going on here. First, most institutions are at or near their policy maximum for private markets exposure. And so they may continue to be investors in these funds, but they can't grow their footprint all that much on average. And the public defined benefit space is sort of winding down. There's a lot of headwinds to capital coming from that area. So the institutional space is like 30% alts, whereas the average high net worth, high net worth investor is 1%. Exactly. Yeah. And. to your point, Ben, those investors have pretty strict, often regulatory limits on these things. And so we saw, like, last year, because these things mark more slowly, public markets fall. Your private market book doesn't mark.

You become a forced seller because you, you know, you said, I'm not going to breach 25% in privates. And now I'm at 33 because my public went down. And now I have to go sell at a loss. Even if the fund is doing well, the secondary markets folks are going to pick up that I'm a forced seller here and kind of beat the crap out of me. And so they become fickle. They are evaluated. Usually it's a three-year period for a lot of the internal folks, since they're just looking like,

how do I make sure that that number looks good? And they'll fire folks who don't contribute to that goal. And then there's a lot of what I call non-economic factors, things like ESG and various regulatory requirements, particularly in Europe, that can make these really burdensome, especially for small fund managers. You may be investing in like solar technology and battery tech

and like be making the world greener. are you going to pay a consultant $500,000 to say that you're an ESG fund? You might not have that bandwidth or want to do that. And it's kind of, you know, rent-seeking behavior. I don't like it. But they'll, you know, fire you because you haven't gotten the stamp even if you're doing the good work. You know, contrast that with the wealth market, which, A, you know, is massive. It's fragmented.

It's massive. And then there's a lot of real value to it, too. If I can connect with a family who's deep in logistics in the middle of the country, and I'm a private equity manager and I work in that space. There's probably real relationships I can form through that that aren't the same with an institution that's really more of a financial player. And so the value of LPs being somewhat active in these

is much higher in the wealth space because these people have wealth tend to have created businesses. And those businesses can be active partners to these funds over time. So talk about the deal flow that you've seen. and just give us a sense of the numbers of companies, of funds, of deals that have come through versus how many you've invested. And what do they look like? Yeah, I mean, so we see a little bit of everything. We have our five course leaves, our venture, private equity, private credit,

real estate infrastructure. And obviously, there's variation. In each one of those, wait, I'm sorry to cut off because I don't know I just answer you a question, but this is important. Why are hedge funds not in one of those five pillars? So we focus exclusively on private markets, and hedge funds, you know, classically speaking, tend not to be private. That's not to say there aren't great hedge funds out there. And it's obviously where my background is. But, you know, basically because of that wave, we talked about this being the hot thing in the 90s into the thousands, that was less of a gap in a lot of RAs offerings. They generally feel like they have access to hedge funds if they need it.

And they're liquid products. They're easier to get it out of. They tend to be less capacity constrained. And so we didn't see the access piece as pressing as on the private side. Okay. All right. So back to you. So you've got these five different sleeves.

But then outside of that, we'll look at co-invest that those managers send us. We'll look at deals that our clients are sent for them and be sort of an outside diligence arm for them. And so we end up seeing a lot of companies, direct deals, co-invest, what have you, secondaries. We've looked at, we've screened over 2,250 deals. and companies now. We've passed about 25. Meaning 25 have gotten onto the platform out of over 2000? Yeah. Now, a lot of that gets, it's sort of like job applications or college screen. A lot ends up on the floor after the first cut. But we have a pretty strict diligence process, and that's because, again, we're fiduciaries. We're not brokers. Brokers

are held the fair deal, fair dealing. We're fiduciaries held the fiduciary standard just like our clients. We're not going to put money into anything that we don't think we would do it with our own capital. So who's weight? What does the diligence process look like? So there's usually, there's an initial screen. So we have a lot of data, you know, about 600,000 funds back to 1980

that we can use to benchmark managers, understand where they fit. Is this something that is interesting for the platform, for our clients? And run their historical returns through sort of an attribution analysis where we can understand, like, were they concentrated in one bet?

were they, are they good at some sectors but bad at others and they're growing into those sectors they're bad at. And is that proprietary or is that you guys built or is that something that's off the shelf? We built that, yeah. That was a lot of our first year of build, building out sort of an alt-stated map. And so you can get a long way in the screen and you have to have that be pretty systematic because if you're really allocated and getting sent a bunch of deals, you don't have time to do the in-person touch on every one. So you have to be able to, let's say, get rid of 80% based on a pretty systematic approach with a human checking. It's not like AI's taken over completely yet. Once you've gotten that step

where like this is worth digging into, it's still a pretty high touch approach. And so we'll fly out. We always do it in person. You can learn things in person with a manager that you don't really you're never going to see in a deck. Like I've met groups and you sit down and you realize the two main partners hate each other's guts. And back to the longevity thing, you're like, okay, how long are these guys going to be in the same room together? Like I can just tell this is not a healthy match here. So you got to show up in person. You got to connect with the operations team. You got to go deep on that structure and sponsor part. You got to find unsolicited references. And so they're going to send you a list of people to call. Those are people they've already told.

Hey, are you okay being called? Do you like us? Their college roommate. Yeah. And so this is another thing. Our database that we built helps with we can often find totally unsolicited in network folks who have invested with them, co-invested with them, even companies they've invested in. So we can get that unfiltered view. And then you've got to be unconflicted. We never work with folks where there's a dual relationship. And then you've got to have a diversity opinion and you've got to plan for the worst and hope for the best, right? So my favorite diligence question is basically do the premortem. Imagine this is the worst fun we've ever done. Tell me what happened to get us there. I thought you were going to say, what's your morning routine? How often are the fund managers honest

with you on that? Because I think that's a really good sign of a good fund manager is someone that will give you the honest assessment of like this is the this is the environment or reason that we could see a poor performing fund 10 to 15% of time and that's a great sign like if they fail than something else you're not going to invest but like more often than not if they can be honest with you about that it's probably a pretty good fund nothing goes up all the time if it did it would go away and so I mean one of the best things someone can say to me is I don't know like I love that answer when I'm doing diligence in someone And if I ask questions to say, I don't know, let me get back to you.

My trust goes up to 10 minutes. Yeah, it means they're not full of shut. Yeah. All right. So we spoke about the overall landscape of some of the private markets. We spoke about some of what your competitors are doing, how you source deals and your unique access. Talk to me about the business. So an advisor comes to you and says, hey, we want to create access for our clients.

We want to get them into deals. maybe even better. We want to build them a portfolio. Like, what does the, what is the working relationship like? Because one of the challenges with, with advisors investing in private markets is, and I'll speak for the industry, we just don't know a lot about it. This is not what we spend most of our time doing. So there is a large education gap.

So how do you get the advisors comfortable? How do you get the clients comfortable? How does this fit into what they're doing overall? Talk to us about how all of that works. Yeah. So it is not a lot of what you're doing. and it should stay that way. That's why we're here.

You don't have time to have this be a full-time job. Most of our business is in that portfolio approach. And so most of our clients come to us and say, I understand private markets have a place in my client's portfolios. I think of my clients in this way. What should I do? And we'll sit down with them and try and split their investors into sort of goals-based groups.

That could be an overall group. That could be the growth group, income, you know, founders, people who are working in the private markets, et cetera. And you can build goals-based. based approaches that are commingled for those folks. And so let's take growth in an example. So your mid-career folks, they're doing well, they can tolerate some ill liquidity. They're looking for outside returns.

They're looking for their RA and help to differentiate from the competition through their access. And maybe they have it in spots where they work, but they want more. We'll sit down and, you know, most likely thing there is some mix, depending on your client base, of private equity, venture capital, maybe some real estate, if appropriate. And we will help them build a portfolio that's diversified. that's a single subdoc for, you know, 5, 7, 10 underlying managers plus co-investments down the road. It's a single K-1. And so a lot of that operational burden that would have historically, I mean, if, let's say you get 75 people into that fund across seven deals, that's, again, that's that stack of a paper.

That's going to be prohibitively painful. Not to mention a lot of these, the best funds are going to have a $10 million minimum. Do most clients have $75 million to put into these managers? No. If their advisor can work with Opto and write, you know, it doesn't even have to be with one of our clients. Across clients, we'll get to that $10 million. And then they can make the minimum check size for their custom fund 100K. And now all of a sudden a whole new part of their book that historically would have been basically impossible to build both in terms of efficiency and check size a diversified approach in privates for this becomes accessible.

100K. I have a question on writing the check from a wealth manager. This is kind of in the weeds a little bit. So you pick your managers that you want to invest in as an RIA and you have 15-year clients I want to invest. Because the cash flows are so uneven in privates where there's going to be capital calls and money going in and then money coming back in distributions, how do you handle the cash flow process from an operational perspective? Yeah. And so this is a place where these custom fund vehicles help a lot where what we'll do is we basically serve as a backstop and layer there. And rather than getting a dozen capital calls a quarter for very small amounts, if you're talking about 100K check into all of them, we'll just do a quarterly top-up.

Or we'll allow a set of fixed schedule. We're just like every quarter for the first two years, you call the same amount. So you have total certainty on the cash flow. The distributions, usually it's a little bit easier to get sent money than to send money. So we'd focus less on that. But streamline those capital calls across everything. So you can sort of smooth it up. and make it like an average saying, yeah, you're going to be putting in a set amount every

quarter or six months or a year, whatever it is. So let's say that an advisor at XYZ well thinks this is a great idea. And you're telling me for 100 grand, I can build a portfolio for my client where I don't have to go to them a la carte. Hey, how do you like this infrastructure deal? I don't know. Do you like it? I don't know. Do you like it? How about this venture fund? How about this private whatever? So you can build a portfolio. However, there are a within each fund's life cycle where they're raising a fund versus operating the fund and then there's maybe a window where they're not raising. So that seems like it could get pretty complicated pretty quickly. Yeah, and this is why you have to take a vintage approach. And so when I'm by that

is basically all of our clients are planning on always having something open. And so you have my RIA fund one. And let's say you let people subscribe to that for a year. Once that closes, you're ready with my IRA fund too. And so you always have a fund that's deploying. And so if there's a manager you really like, maybe they're only in market every 18 months. That's okay with you because every client's going to have each vintage and every other vintage is going to capture that manager.

And so you want to have that stable of a larger stable of managers to then feed into these funds because in any given fundraise timeline, not every manager is going to be open. And that's okay. It helps you get more managers, more diversification. more ways to win. When you're talking with advisors, are you recommending like, hey, we think this is a 10% sleeve

in this person's portfolio? Like, how hands-on do you get with the advisor and their client? We get very hands-on. We think another thing that was missing in the space was having an opinion. You say, like, you have a lot of things in your day. Why? Because some of your competitors, it's sort of like a supermarket

and they can get whatever they want. You know, you walk in. And if you don't know how to cook, walking into supermarkets not that helpful we see ourselves more as like your personal chef and it's going to be customized for you

what are your goals risk tolerance what do you want to excite clients with then we're going to come with an opinion we find that speeds the process up so much we might even be totally not on the money for what you want but I at least find it much harder

to respond to something then go ex nihilo and so if I just say hey what do you want in private equity you're like, I don't know, there's thousands of managers. If I say, what about these four? And you say, no, I hate them for these reasons. We can come back to you three days later

once we've learned what you didn't like about them with something much better. And so we're always going to lead with an opinion. And I'm sure advisors love that because to Michael's point about, most advisors aren't experts in public markets. A lot of them are experts in financial planning, right? There's obviously some RAs that have an investment team,

but that's relatively rare. A lot of the RAs are really good at the financial planning side of things in investing is kind of like a side project. there are very few advisors who have a deep understanding of the private markets. And no one is an expert investor in every asset class. Right. This is why you have all teams. And we have many people within our org that service different sleeves.

But still having that opinion just speeds things up so much and allows you to respond versus sort of not knowing what you don't know. And because we're unconflicted, we're not here to sell you one thing. People trust our opinion. Last question from me. It's a two-parter. Talk about the fees because that's obviously been a huge. issue deterring people from investing? And then the process of working with Opto, do we get a

dedicated relationship manager? Is it a call center? How does it work? So fees and relationships. Yeah, so I'll go in reverse order there. So on the relationship side, it's a white glove experience. And so you're going to have operational support, product and technology support, sort of sales and advisory support and research. And all that's going to come together through your white labeled software experience. And so you get a unique branded website where we can share best ideas, share research, populate your custom fund, upload your clients, everything we've discussed, ongoing, manage those investments. Of course, we're integrated, but you can still view performance and what's coming next and all your tasks and research and stuff in one place.

And then, you know, it still is just a very personal industry. And so we want people to know that there is a trusted party who they can reach out to. There is no call center. You're going to have the cell phone number of someone who you can, you know, reach out to a or night and when markets are going sideways, that's what you need. In terms of fees, there's so much layering out there. And that layering is really a holdup of that wirehouse space that we discussed that we discussed. So off the bat, you're going to have lower fees because often that sort of massly sold stuff comes with additional fees. It's sort of seen as a cash cow. We're negotiating for institutional pricing with these managers because

We're writing it's usually sized checks. So that can look like a fee discount in some cases of the underlying manager or at nothing else is not sort of additional fees, expenses, and layers pounded onto that. Opto is a very simple model. We charge about 30 basis points management fee, which is much lower than the competition. And by and large, and we don't use expenses as a revenue center. It tends to be quite low and we hard cap it. And so the way our business makes money is really investing in these relationships. We're partners and we want to get paid like partners.

And so we take 5% carry on the back end, so based on performance, with a pretty aggressive hurdle. So we're not getting paid unless we did what we set out to do with our clients. We like this model. It gets you out of, I've been on both sides of this. If you're in a year where there's more hedge fund space, but you're up midyear at you charge performance, then you're down in the second half. And at the end of the year, the client looks at their statement.

And they're like, I paid you how much money? and you performed what? It can be a really bad look for the fund and definitely the advisor as well. Because that performance is all on distributions, you're locked in at a very low price over time on that management side, and so you're not going to have bad optics.

And you're only going to be paying us in any substantial way if you're in top-course child performers. And at that point, you're usually pretty happy. For that performance piece going forward in the reporting for clients, how much education is involved there? And how do you position that performance?

Because obviously the whole IRR thing with private funds is a little different than how people are used to looking at the performance of public investments. Do you talk about it through that lens or do you look at it more of like a cash on cash return? How do you explain that to advisors and their clients? Yeah, there's a lot of education involved in this. This is where that high touch approach comes in as well. We focus a lot of education. We've written hundreds of articles, filmed a bunch of videos. This stuff has to be explained well.

And we are very transparent interactions of education is a key part of making sure that, yeah, it's not like you're trying to sweep something under the rug. You want everyone to know exactly what they're getting into. In terms of how we think about it, the easiest way to do a sort of hurdle on performance, we think is Moik, just money on invested capital. IRR has a time-based component to it, which means you can fluctuate over and above a hurdle over several quarters, which gets very confusing. so we try and stick to, hey, if I get my principal plus 50% back, then I've crossed the hurdle

and post that, I'm in that carry phase. Prior to that, I'm not. Jake, this is great. For people who want to learn more about how they can help their clients access private markets, where do we send them? optoinvest.com. Optoinvest.com. All right, thanks, Jake. Thank you. Thank you to Jake.

If you want to learn more about how opt-o-invest. can help you and your clients get access to these sort of investments, visit optoinvest.com. That's optoinvest.com.