Business Breakdowns
· Matt Reustle
[00:00:00] S0: It certainly makes me revisit some of those marketing initiatives which I admittedly scratched my head a bit when they were going on. I talked myself into them becoming bigger and needing to have more connective points into the business people of the world. But now I think you could see exactly what was going on there on the earlier point that you made just around positioning. If I step back and kind of evaluate what you were saying there, it feels like the credit franchise for any of these big alternative asset managers is really one of the biggest things here. If you're to take a huge alternative asset manager without a strong credit franchise, they could be left a bit behind just in terms of positioning or they're not as well positioned. Is that a fair conclusion from what you were saying?
· Josh Clarkson
[00:00:00] S1: I think it's a very fair conclusion. That is true in the broader world of institutions as well as credit has just become a bigger part of the private markets mix. Having the best vehicle for wealth is one of many reasons why having a really strong credit arm is essential to being a multi-strategy private markets manager today. But I'd say it isn't necessarily the only or primary one. You'd be hard pressed to find what most people would consider a mega fund private markets operator that doesn't. Just from my public observations, you saw TPG go public and then very quickly add top tier credit capability in Angelo Gordon and that integration seems to be going very well. You've even seen folks like Blue Owl who came to market with a really strong direct lending offering that was their calling card, that remains their forte, add those other pieces of the credit puzzle such as digital infrastructure, asset based, to really deliver the comprehensive credit offering that you need today. So I definitely think it's true that you need a top tier multifaceted credit offering to be a large diversified. You can still be a very successful business without one. But to really hit on all cylinders, I do think you need that. Most of them have that and have seen that writing on the wall for some time.
· Matt Reustle
[00:00:00] S0: As it relates to that earlier comment, just in terms of the offering and how it will be provided, whether it's some direct linkage, whether it's through a brokerage platform or whoever is managing your 401k for the end investor. Do you have any sense of what that could mean to fees? Because I think you brought up in your earlier point, some of the democratized access to private markets now is just higher prices marked up with a ton of fees mixed on top of it. And not all, but certainly some that I see. What's your expectation or what are the early signals around that?
· Josh Clarkson
[00:00:00] S1: Fees going to be higher. Full stop, these are more expensive businesses to run. If you compare direct lending to a liquid bond fund, in direct lending you need an army of originators going out there and covering the sponsors, covering the non-sponsored borrowers and finding you those direct deals. In a liquid credit fund the bank does all that work for you and you just trade with the bank desk. So there's a whole half of your business operation that you just don't need. Similarly, you're structuring all the deals in house, you're negotiating all the deals in house. So you need way more in house legal and structuring expertise than a liquid credit fund does, where they're going to maybe have some to evaluate the legal documents of what they're investing in. The good ones do, but they don't need the resources to negotiate the document themselves necessarily. And that costs more money. There are higher fees charged for these products because they cost more to run. These managers do run very attractive fee margins. I'm not going to elide that fact, but I do think that most folks who are experienced in investing in alternatives, because in many cases there is a wider band of outcomes, or at least the band of outcomes is more attributable to skill than to market factors beyond your control, there's much more of a focus on net-of-fee performance than there may be in the retail channel for liquid market investments. Most private market managers have a proven track record of beating the liquid alternative in their sector. Obviously, the indexes for private markets are imprecise sometimes, but in direct lending you have Cliffwater pre-quantized PE data, I think. So there's stuff out there, and there are quartiles that are assigned for different vintages. Most of the operations that you see bringing these funds to market that have reached that scale, having that level of higher performance than the market, has kind of been a requisite of them getting to the scale where they can do this. So there's already almost been like a natural filtering of, to get that big, you had to do something pretty good. Generally, investors in the space, and I would hope advisors who are working with retail on the space, hone in more on the net-of-fee performance. Certainly, it's important to understand the fees of what you're investing in.
· Josh Clarkson, Matt Reustle
I'm not trying to minimize that at all. And certainly, if you're looking at two funds that have generally similar performance and one of them charges 1.0 and 12 over a 7, and the other one charges 1.5 and 17.5 over a 6, sure, you should definitely consider that pretty heavily. And this information should be made available to people. Like, it's not buried. It's not harder to find. But I don't think the right calculus for people to take is this costs XYZ more than the BSL ETF, so long as when you look at the net performance, the alternative option, the private markets option, is delivering on that versus the cheaper liquid option. [00:00:00] S0: It's not new. I can remember looking at my 401k options, and there would be the mutual funds and their fees that they offer and the ETFs. And in the public markets, that outperformance didn't necessarily match. Therefore, the ETFs were often the better option with significantly less fees associated with them. On the broader point of disclosure education, do you have any sense of if that's a piece of the regulatory push? Because it does feel incredibly important. Because even if you set up something where it's capped at 5% of NAV each quarter and it might be clearly disclosed, but there can be an uproar even if that is the case. Do you have any sense of if that's a big push that's coming along with the regulatory changes?
· Josh Clarkson
[00:00:00] S1: I'm not so sure it's being taken on by the regulators. It possibly should be. That's a very good debate to be had. But I do think the managers themselves—I mean, you've seen this in the Alts Academy from Blaze, the Apollo University, or maybe it's Blackstone University. I'm sorry, I can't remember all the matches. But the big managers have brought to bear these very comprehensive education platforms aimed at the advisor, mostly not so much the individual, but where the advisors need to get continuing education credit, they get it from these. It's a very formalized thing, and certainly there's an element of you're being educated by somebody who is looking to sell you a product. But these are really serious educational things because they want to forestall that crisis, exactly what you just said. It's not in the manager's interest to have any of these things mis-sold because they're going to have to pay for it on the back end when somebody doesn't get the experience they expected. So I think the managers have taken a lot of that mantle on and invested huge sums in building those. It's partly because the advisors just need to know what they're doing to effectively provide the client counsel on them. A lot of them just really don't know it. I heard that there was a poll recently, relatively well-off investors. They were asked to name three top private markets firms, and the most common answer was that nobody could. I'd have to check exactly who they were surveying. I think it was a Bain survey. I'd have to double-check who the respondents were, but I think it was higher-end investors. There is a lot of education to be done here. The advisors are, I think, for the foreseeable future, going to be the conduit of much of that. I wish that every single individual investor would listen to this podcast and all your wonderful podcasts and read more about private credit, like I do. I don't think that's necessarily something we can expect of your average mass affluent consumer. But their advisor needs to get smart on it. The enforcement factor for that is FINRA has a very vibrant arbitration process, and I do think if advisors are mis-selling these products, investors should have every right of recourse against that advisor as if they were mis-sold any other product, and they should avail themselves of that.