Business Breakdowns
· Josh Clarkson
[00:00:00] S1: Really glad to go a little bit more in-depth with this because I do think a lot of what you hear and read about it glosses over it as this homogenous category of alts or private markets for retail. And it's really important to make those distinctions now. First of all, with the 401(k) market, what's really important to bear in mind is that everybody I've seen discussing this in any level of detail is really talking about adding these to target date funds. I don't think there's anybody out there who's pushing really aggressively to have standalone options for PE and private credit in your 401(k). Most of the focus right now, which I think is entirely appropriate, is on creating target date funds. And "fund" may be a bit of a misnomer because in many cases it would probably be an SMA or collective investment trust, especially in larger 401(k) providers, larger corporations, larger retirement plans that have the ability to do custom glide paths where you can build that private market exposure into that target date fund in a way that you have good forecastability into those cash flows. And the vast majority of the portfolio will remain in liquid assets. So you shouldn't really have that risk of somebody wanting all their money back and you not being able to very easily give it to them. Shifting gears a little bit into some of the products and asset classes that have long been and are gaining momentum in that private wealth retail channel outside of the retirement plan context, asset class-wise, credit has been the strongest grower, the one that has the most product in many ways. That's because it really makes the most sense for a lot of high-net-worth, mass affluent investors who are looking for high current income as they are in or approaching retirement, want to minimize volatility, and are willing to trade that liquidity for that potential higher income. Importantly, those products also, by having that yield focus, naturally throw off regular distributions, which is somewhat de-risking the investment and preventing a big liquidity squeeze because you have contractual interest payments and maturities that allow the manager to sync that up with the assets they have and give the investor what they want in the form of continuous liquidity.
· Josh Clarkson
And at the same time, there are also more liquid classes of credit, such as syndicated loans, structured credit that don't suffer from too much of a return drag compared to that core direct lending offering and can be maintained in that fund alongside it to provide that liquidity sleeve in a way that has very liquid instruments and also doesn't pose too much of a return drag compared to the core strategy of the fund. Other areas have been infrastructure, which is gaining a lot of steam right now, also that yield-oriented camp. Real estate was one of the first to take off. As the whole asset class hit some rough patches, you saw some declining interest there, I would say. What's been interesting now is, as you've seen real estate markets rebound, and our mutual friend on Twitter, Elliot, often points this out, you've seen the private markets rebounding much more strongly than the public REIT asset class. There is an argument there that if you want that real estate exposure, you should at least be thinking about it from both sides of the coin. Don't just buy REITs. Look into non-traded or semi-liquid REIT structures, which have begun delivering positive performance in recent quarters, whereas I think the REITs generally have been pretty range-bound. PE is kind of the emerging new frontier, if you will, of these semi-liquid products for retail, and you've seen them rolling out. You've seen them get a lot of strong initial interest. You see them deliver really strong performance out of the gate, mid- to high-teens, I think, for some of the better-performing ones. And I think you've seen BXPE cross a billion in sales in a month. Now, I have to double-check that, but the general point is that they're getting pretty strong adoption. And again, I do think that is with that higher to ultra-high-net-worth type of investor. I know many of the PE products started out being available to a qualified purchaser, which, not to interject this in the middle of the product discussion, but just to level-set, there's a thing called the Accredited Investor Standard, which applies to many of these products, which is that you have a $200,000-a-year income or a net worth excluding your primary residence of $1 million, or you're a financial professional of some kind.
· Josh Clarkson
Now functionally, given the fact that those standards were set a long time ago and not indexed to inflation, it basically captures most of the American public that invests in stock markets today in a substantial way. Above that is the qualified purchaser standard, which is $5 million in investable assets. So certainly a higher tier of wealth, presumably less liquidity needs. Now that they've rolled them out in that channel, they've been making the PE product available to a broader set of folks. The flip side of that is the structure that they use. The real estate ones pretty obviously go in a REIT, that's non-traded REIT, that's pretty well established. The PE ones on the other side use a variety of structures from LLCs to tender offer funds, and it is more of a fund by fund and strategy by strategy decision. In the credit universe is where there's two very compelling products that are a bit different, which is the semi-liquid non-traded BDC on the one hand and the interval fund on the other. The differences between them are that the non-traded BDC is a BDC, which if anybody wants to listen to the prior episode or happens to know this, generally needs to invest 70% of its assets in private loans to U.S. companies with a 30% non-qualifying basket, which in these structures is most often used for that liquidity sleeve, but also can take its leverage up to 2x. Now, pretty much nobody levers these things 2x, but 1.25x is a pretty normal top end, and many of the private or the non-traded ones are still ramping to that, whereas the public ones sit there pretty comfortably. Interval funds, on the other hand, are 40 Act registered funds. They can trade with a ticker, not in the sense that you can buy them publicly, but in the sense of an RIA without the huge back office needed to process some of the paperwork for a non-traded REIT can more easily buy them on their screen from Schwab or Fidelity or whatever service they use to manage their RIA practice. They also importantly can invest in a broader range of assets than BDCs, including structured credit, less liquid bonds, whatever it may be. You usually see the interval funds having a broader range of credit exposure. They'll often be called a multi-asset credit fund or a tactical allocation credit fund. They also can't be levered as much.
· Josh Clarkson
For down the middle senior direct lending, very, very safe assets, it might not be the best fit because those assets are very leverageable. They have a very long history of being levered 1.25 times and doing quite well, whereas in that more diverse portfolio they can be somewhat leveraged, but you're going to use a little less leverage, more diverse pool of assets. Also one little difference is that for the non-traded REITs and the non-traded BDCs, that 5% liquidity can be, in an emergency, and I doubt any of the big managers would ever do this, but in theory the board could limit that. Whereas in interval funds, because they are registered funds, that is an absolutely mandatory thing that cannot be exempted from by the board or anything like that. So I know that was a really deep dive into a bunch of different assets and products, but I hope that gave a pretty good and pretty efficient overview of what's what out there in the world of retail alternatives.
· Matt Reustle
[00:00:00] S0: My sense from that takeaway is, based on some projection but also some precedent, where this would naturally show up most is in those yield-based vehicles, whether it's credit or real estate, and slightly less so when it relates to private equity and then particularly venture capital where you're moving out on the risk spectrum. When I first hear this, I think of a bunch of retail people getting exposure to venture funds where you can have zeros or very little at the end of the day. And it feels like, based on that response, the positioning that we've historically seen or the precedent suggests that the push will be more towards those products that you were referencing.
· Josh Clarkson
[00:00:00] S1: I think that's fair. Another way I might say it is those have been the initial primary focus and I think will continue to be most investors' initial on-ramp to the space. I think some of the fastest growth may actually be in those more PE-focused vehicles, which are just newer to the market, so naturally have more of a growth runway as they're newer. VC is an interesting one and I'm glad you mentioned it. It is certainly a bit of a different case than regular cash flow PE. I'm not talking about some SPV that you get cold emailed about to buy 200% marked up OpenAI shares. There's a firm out there called P10, for example. They have a subsidiary called TrueBridge that has long worked with private wealth platforms and other institutions that aren't especially large to get them access to a fund of funds of top-tier VC. Again, that's for a much higher wealth audience than somebody who's going to put $10K in a non-traded BDC, a much more sophisticated audience. Other firms also have versions of this, some that combine PE and VC in one fund, but where you have that fund of funds approach, so you do have more manager diversity, exposure to more situations. Again, to reduce that lottery ticket dynamic that a multi-hundred billion dollar pension plan may be very well positioned to bear, but even a very affluent individual may not really want that much exposure to or maybe shouldn't have that much exposure to. There are also platforms that make these more directly available to the retail market, because traditionally many of these things I'm referring to, they're sold through an advisor channel. There are also firms such as Willow Wealth, which was the old Yieldstreet, they recently rebranded, and they interact more directly with the retail consumer. And I think they're pivoting to a model where they're more going to distribute those funds from other people, but in a way that if you just want to pay fees to get access to that fund and not have a manager manage your whole portfolio, you can do that. And I would actually note that they were one of the only folks that anybody found documented retail exposure to the First Republic asset-based finance part of the capital structure where a lot of the supposed issues were. However, then Yieldstreet had successfully invested in that and exited well over a year before any of the issues or disruption arose.