Business Breakdowns
· 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.
· Josh Clarkson, Matt Reustle
So they actually did exactly what they were supposed to do. They got their investors access to an 8 to 10% return stream, they kept a really close eye on it, and when they saw certain metrics evolving in a way they didn't like, they exited it. So I do think that's actually a case of the guardrails working well for that retail investor. [00:00:00] S0: Looking at the landscape, the other thing to consider is there's a broader menu of options. Now what is on that menu when you think about access? And we could take this from the lens of the alternative asset managers that would theoretically benefit the most here. Who's best positioned and most interested in capturing the opportunity from the signals that you've seen, where is that going to come from?
· Josh Clarkson
[00:00:00] S1: You mentioned that stat earlier, about $20 trillion-ish AUM in alts, which sounds right to me. I do think the winners here though will not be evenly distributed across that $20 trillion. It will be the bigger scaled firms, the Blue Owls, the Ares, the Apollos, the Blackstones of the world who have the breadth and scale to both offer top-tier products across a range of functions and build out those sales forces to really go after that opportunity in a really concerted way. Take a firm like Oaktree, for example, which while primarily being focused on the institutional channel for many years has built a very strong public brand anchored in their founder Howard Marks and his memos and his thought leadership. But that has percolated through the firm and they really have a much higher level of public awareness than many other similarly sized institutionally-oriented credit-focused managers do. And that's certainly a huge asset to them and their partners at Brookfield, and as they're building that business out for the retail channel. There's going to be an important role for managers that are really good at a certain thing, like a Kennedy Lewis in non-sponsor lending, something like that, where you're bringing something that is complementary and different to the table. I do think there's a role for that as well, especially with the more sophisticated consumer who maybe already got their initial direct lending exposure, is looking for more private credit exposure, but not the same exact return streams. Terribly niche strategies and smaller non-scalable strategies are not amenable to this treatment. And very often the firms that invest that way are not going to have the scale to really build that out. And this has been a continuing trend for a while in the private markets and alternative space that the big keep getting bigger, for lack of a better word. I think that will continue. You've also seen a lot of partnerships struck between traditional asset managers who have the distribution footprint and in many cases the 401k platform, and the alternative asset managers who have that private markets investing capability. Now a lot of those are pretty early days and we haven't really seen the results.