Business Breakdowns
· Josh Clarkson
[00:00:00] S1: My pleasure, Matt, and thrilled to be back here again. $4 trillion is a pretty big number. It's the GDP of Japan, actually. And it's also where Morgan Stanley analysts put the opportunity for the large alternative asset managers in terms of AUM growth over the next few years, if the retail private wealth, however you want to define that channel, expands their holdings of alternatives to be anywhere close to where institutions are now. For reference, institutions are 20 to 30% plus. Individuals are currently at 2 to 5%, depending on what you look at and how you define it. So if they could get closer to 15 to 20%, that's $4 trillion in AUM, using round numbers, for a lot of the big alts managers to divvy up. $4 trillion is also the shortfall that at least one think tank has out there between what Americans have saved for retirement and what they need for a comfortable retirement. And the goal of introducing these new assets and investment strategies into those people's investing menus is so that they can better meet that shortfall and they can have a better retirement through access to better investment strategies and better assets.
· Matt Reustle
[00:00:00] S0: I think I've read AUM of alternative managers is somewhere around 20 to low 20 trillion today. Just that represents a material step up in terms of what the AUM base could be. You can understand why those businesses are interested from the investor standpoint and getting this access. It's worth mentioning we're here in October 2025. There's been some headlines out there in the market that naturally would lead one to say, if they're fear mongering, oh, it's coming right when we have a canary in the coal mine. Maybe you want to just touch on the headlines that are out there, what they mean in the system, how you would go against someone or support someone that said, right when we have the signals that the bad things are finally starting to play out, this is when we're going to bring it to the rest of the world and the retail investor?
· Josh Clarkson
[00:00:00] S1: These are really important points that matter for a lot of people, and definitely want to confront them head on. Taking a bit of a step back, it's important to bear in mind that individual investors have had access to many of these strategies, such as private credit, for quite a long time. Publicly listed BDCs have outperformed liquid benchmarks since the financial crisis. And you've had private semi-liquid alternatives available in the private wealth channel for five or six years now at real scale. And that's gone generally pretty well. Now, recently, coinciding with this greater move to expand the aperture of that retail base to get these into 401k plans, you've had a few idiosyncratic situations. An auto parts supplier named First Brands, a subprime auto lender named Tricolor are two of the biggest. There have been a few others that some commentators have positioned as private markets deals gone bad or canaries in the coal mine of private markets. However, what's really important to bear in mind is that neither of these companies were PE owned, and neither of them were primarily financed by private credit. They both primarily raised financing, especially at the corporate level, in the liquid markets. First Brands was a massive BSL issuer. In fact, when they went to refinance and there was potentially going to be some private credit involvement in the second lien, those were who were pushing for the quality of earnings, as well as other funds that were potentially going to be involved. It wasn't all private credit, but it was many private credit firms pushing for greater transparency and deeper diligence that brought the house of cards down, so to speak. While these are bad idiosyncratic situations that, according to a lot of the reporting, likely involve fraud, it's really important to understand that delineation between liquid and private markets and that just because these used a little more off-the-run financing structures or didn't issue regular way bonds, that doesn't make it a private markets issue.
· Josh Clarkson, Matt Reustle
And I'd say if anything, especially in the area of credit, this only makes the case stronger that to access sub-investment grade corporate credit and the high single digit, low double digit yields that can deliver for an income-seeking investor, direct lending and private credit is a far better, far safer way to do it than the liquid markets. [00:00:00] S0: It's a fair rebuttal. It points to the idea of the diligence that actually does go and happen with these firms, and they don't last for long if they're not doing some of that. Let's just step back and capture some of the dynamics with the regulation changes and what is happening. You mentioned this isn't a completely new phenomenon. There's been increasing access. Can you just provide some type of background backstory to how we've led up to this point?
· Josh Clarkson
[00:00:00] S1: Let's get out of the way the elephant in the room, if you will, of the most notable recent regulatory step, which is President Trump's executive order mandating that ERISA look into adding private markets into 401k and DC plans and facilitating that change. That was the big bang recently that really set a lot of this off, and that countermanded a Biden executive order that said they were probably not a fit because there had been attempts at this before. But the Trump executive order, which had been long anticipated, is certainly viewed as the largest, biggest change recently that opens a whole new market. Now, beyond that, there have been other more recent regulatory changes, such as no-action letters around marketing rules and some changes about how many illiquid assets certain types of funds, like interval funds and closed-end funds, can hold. I think some of those are more around the edges. But if you go back much further, the beginning of the United States securities regulation as we know it today was really in response to the Great Depression. And in the Great Depression and the run-up that preceded it in the '20s, you did have lots of these investment trusts that were leveraged investment vehicles investing in the hot stocks that performed very poorly. And so the SEC was very focused on regulating what types of commingled investment products could be brought to market for the retail market. And they created the world of registered securities, which means both individual securities as well as mutual funds. And over time, certain exemptions to that evolved: certain private markets exemptions, certain other type of structures.
· Matt Reustle
[00:00:00] S0: Yeah, and maybe you can elaborate on some of the products that did become available to retail investors and how some of those played out. Maybe they can instruct what's going to happen in the future.