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BONUS: Future Standard President & CIO Mike Kelly · Masters in Business

0:02
Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
0:11
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
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Speaker 2: This week on the podcast, an extra special guest, Mike
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Speaker 2: Kelly has an absolutely fascinating career from Omega to Tiger,
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Speaker 2: currently President and Chief Investment Officer at Future Standard. Really
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Speaker 2: about as knowledgeable an individual as you'll find, covering private
0:34
Speaker 2: credit infrastructures and the wealth channel and what the future
0:40
Speaker 2: of what we broadly call alternatives look like. I thought
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Speaker 2: this was fascinating and I think you will also, with
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Speaker 2: no further ado my conversation with Mike Kelly. Mike Kelly,
0:51
Speaker 2: Welcome to Bloomberg.
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Speaker 3: Thanks Perry, It's great to be here.
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Speaker 2: So I'm fascinated by both your background and your career path,
1:00
Speaker 2: which is really really interesting. But let's roll back a
1:04
Speaker 2: little bit. Bachelor's at Cornell NBA, from Stanford, what was
1:09
Speaker 2: the original career plan?
1:12
Speaker 3: So taking a step back, you know, I grew up
1:15
Speaker 3: on the border of Queens Long Island. My dad was
1:18
Speaker 3: an NYPD cop in really the South Bronx, and Queen's
1:23
Speaker 3: mom raised the five of us kids in a traditional
1:27
Speaker 3: Irish American household and valued education. I knew from a
1:32
Speaker 3: pretty early part of my life that I wanted to
1:36
Speaker 3: go into investing. I'll tell you a little stories. So
1:41
Speaker 3: when we turned thirteen in my family, you got the
1:44
Speaker 3: big gift. And at the time, I was a nerdy kid.
1:48
Speaker 3: I was into computers. My dad would drop me off
1:50
Speaker 3: at the Queens Village Public Library and I would, you know,
1:54
Speaker 3: learn how to program on this Apple computer. They had
1:56
Speaker 3: just got the Apple two e in. And for my
1:58
Speaker 3: thirteenth birthday, I asked my parents for you got up
2:03
Speaker 3: to three hundred dollars. I got three hundred dollars of
2:05
Speaker 3: Apple stock. Was my request, really, and the big day
2:09
Speaker 3: came they gave me the envelope. Was really excited. I
2:12
Speaker 3: opened it up and it was a saving spot for
2:16
Speaker 3: a local bank. And my parents noted the disappointment in
2:20
Speaker 3: my face and said, you know, Michael was sorry, we
2:22
Speaker 3: don't know how to buy stock.
2:25
Speaker 2: And this is like late eighties, this is eighty three,
2:27
Speaker 2: eighty three, okay.
2:28
Speaker 3: So I said, then in there, I am going to
2:34
Speaker 3: teach myself how to do this, how to invest in
2:37
Speaker 3: these companies, and I set out. I still have it.
2:40
Speaker 3: I have the notebook over here. I actually brought it
2:42
Speaker 3: with me about stocks and all the things that I
2:45
Speaker 3: would read about investing and investing in the stock market.
2:49
Speaker 3: And so from an early early part of my life
2:52
Speaker 3: I wanted to go into investing. And so throughout you know,
2:57
Speaker 3: the years at Cornell. You know, at the time, I
3:01
Speaker 3: did some great internships. Wanted a boiler room. They made
3:05
Speaker 3: a movie about that one for Steve Winn at the Mirage,
3:08
Speaker 3: which was exciting. And then I studied in Japan, studying
3:13
Speaker 3: the banking system there for one summer, and as I
3:16
Speaker 3: was coming back, the only firm that actually would interview
3:19
Speaker 3: me was Solomon Brothers, and so I wound up fortunately
3:23
Speaker 3: getting a job at Salomon Brothers in the capacity yeah,
3:28
Speaker 3: in the financial institutions banking group. Started as an ibanker,
3:34
Speaker 3: loved Salomon Brothers, went up going to the forty second
3:39
Speaker 3: floor of seven World Trade Center, which is where Michael
3:41
Speaker 3: Lewis wrote the book Liar's Poker. So I wound up
3:45
Speaker 3: going to the fixed income trading floor for my third
3:47
Speaker 3: year and really got bit by the bug of markets.
3:51
Speaker 3: I knew I wanted to make the transition from investment
3:55
Speaker 3: banking over to the byside. So as I headed off
3:59
Speaker 3: to Stanford Business School, that was my mission, was to
4:03
Speaker 3: find my way into the buyside.
4:05
Speaker 2: So there's a sort of urban legend that you kind
4:08
Speaker 2: of cold called your way from Solomon Brothers into an
4:12
Speaker 2: internship with hedge fund legend Lee Cooperman at Omega is,
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Speaker 2: first of all, is that a true story? And if
4:21
Speaker 2: it is, walk us through that.
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Speaker 3: Call, all right. So I was at Stanford and I
4:28
Speaker 3: knew I wanted to make this transition into the buyside.
4:32
Speaker 3: And in looking at the careers of what I was
4:37
Speaker 3: looking at the greatest minds in investing, they all seem
4:40
Speaker 3: to be relegated to this corner of the market of
4:44
Speaker 3: hedge funds and private equity firms. And we're talking about
4:48
Speaker 3: the mid nineties here, when people didn't have a lot
4:50
Speaker 3: of understanding of what these firms actually did. But it
4:53
Speaker 3: struck me as an incredibly intense and exciting career path.
4:59
Speaker 3: Many of the people were very young and seemingly making
5:02
Speaker 3: a lot of money doing it and really working on
5:05
Speaker 3: some dynamic investment investing strategies. And so I had a directory.
5:13
Speaker 3: It was called the Van Hedge Fund Directory. It was
5:15
Speaker 3: a printed out piece of paper like from a fax machine,
5:19
Speaker 3: and it had the names and addresses of at the
5:22
Speaker 3: time the top twenty five hedgephones. So had you know,
5:26
Speaker 3: Bruce Kubner in there, and you know Paul Tudor Jones
5:29
Speaker 3: and George Soros, And so I went through this directory
5:33
Speaker 3: and literally called from a payphone.
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Speaker 2: These individuals come on, Druckmiller, It's Mike Kelly like that.
5:40
Speaker 2: That sort of call.
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Speaker 3: Now, the disadvantage is most people were screening their calls.
5:46
Speaker 3: Their assistants were like, yeah, he'll never call you back.
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Speaker 3: The advantage for me was one of those individuals. Lee Cooperman,
5:55
Speaker 3: often didn't use an assistant and answered his own phone.
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Speaker 2: He's there five in the morning, he's there at eight
6:01
Speaker 2: at night. Absolutely, if you call outside of business hours,
6:04
Speaker 2: Lee's the only guy in there.
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Speaker 3: He picks up and goes Lee, and that's how he
6:09
Speaker 3: starts a conversation. I'm mister Cooperman. You know, I'm a
6:11
Speaker 3: kid from the Burrows like you. I just want to
6:14
Speaker 3: break into the industry. You know, I've worked at Solomon,
6:17
Speaker 3: but I've never been an investor before. I am willing
6:21
Speaker 3: to do whatever it takes. I am willing to sleep
6:23
Speaker 3: on my parents' couch and work for you for free.
6:27
Speaker 3: And he said, I only hire PhDs really, And I said, well,
6:31
Speaker 3: I'm getting my MBA right now and he said no, poor, hungry,
6:36
Speaker 3: and driven. And I was like, well, I'm all three
6:38
Speaker 3: of those. I check those boxes. And he said, well,
6:42
Speaker 3: I'm a value investor and I like the price. You
6:46
Speaker 3: can come work for me.
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Speaker 2: For free, no kidding, Like, oh my god.
6:50
Speaker 3: I show up day one at Omega and Lee comes
6:56
Speaker 3: to me and says, let's go to breakfast. And I thought,
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Speaker 3: this is a heaven first day and I'm going to
7:03
Speaker 3: breakfast with the legendary Lee Cooperman. So we go across
7:06
Speaker 3: the street. It's one hundred Wall Street. We go across
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Speaker 3: the street to an Aubont Pan for breakfast, and we
7:12
Speaker 3: get to the counter, we order, and Lee turns to
7:14
Speaker 3: me and says, you're buying. So here I am day
7:19
Speaker 3: one and I'm already thirty dollars in the whole right
7:24
Speaker 3: in my illustrious investment career. But it turned out okay,
7:28
Speaker 3: And and that was how that was how I got
7:31
Speaker 3: my start in the investment business, and in particular in
7:34
Speaker 3: hedge funds and the alternative investment that's unbelievable.
7:37
Speaker 2: So after Omega, you leap from Lee Cooperman to working
7:42
Speaker 2: under Julian Robertson at Tiger Management. How did that come about?
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Speaker 3: So I had worked full time after business school for
7:50
Speaker 3: Lee and four Omega Advisors. I received a phone call
7:54
Speaker 3: a few years later by Tiger Management. They were looking
7:57
Speaker 3: for someone in their macro an analyst group. And at
8:03
Speaker 3: that time, you know, getting a call from Tiger was
8:06
Speaker 3: like getting a call from the New York Yankees. Sure
8:08
Speaker 3: it was like the illustrious, you know, incredible firm. Was
8:11
Speaker 3: very honored and flattered interviewed.
8:13
Speaker 2: Let me interrupt you a second, just to remind listeners
8:16
Speaker 2: that the nineteen eighties and nineteen nineties were peak hedge
8:21
Speaker 2: fund years. They were masters of the universe. They put
8:25
Speaker 2: up the best numbers. They were the hardest for any
8:29
Speaker 2: investor that wanted to allocate to them. Was not easy
8:33
Speaker 2: to get into any of those funds. The world changed
8:36
Speaker 2: after the financial crisis, but that was the golden era
8:40
Speaker 2: of hedge funds, wasn't it?
8:41
Speaker 3: Most definitely? And I think what I appreciated the most
8:46
Speaker 3: about those first few firms I worked at, Solomon, Omega Advisors,
8:51
Speaker 3: Tiger Management. It was a commonality of culture in that
8:56
Speaker 3: these were very intense work environments with very intellectually curious
9:03
Speaker 3: individuals who were super smart and but like to have
9:09
Speaker 3: fun and were a joy to be around and learn from.
9:13
Speaker 3: And so I really enjoyed, you know, the aspects of
9:17
Speaker 3: the culture of the environments in my early career and
9:20
Speaker 3: really got a lot out of it. And it really
9:22
Speaker 3: appealed to kind of my personality of kind of an obsessive,
9:25
Speaker 3: intense personality. So I really enjoyed that. But going to
9:29
Speaker 3: Tiger was incredible, a very young group of people who
9:33
Speaker 3: have obviously gone on to do great things in their
9:35
Speaker 3: investment careers. A really intellectually challenging place to work. But
9:41
Speaker 3: I learned a ton about about investing from from you know,
9:45
Speaker 3: from Lee and from Julian and from the other individuals
9:48
Speaker 3: that I worked with and sort of shaped my sort
9:50
Speaker 3: of investment philosophy as time went on.
9:52
Speaker 2: I'm curious because they are obviously such different styles. Lee
9:56
Speaker 2: as the value guy, Tigers known as momentum and growth
10:00
Speaker 2: and just a hold and technology in a very very
10:03
Speaker 2: different opportunity set. What did you learn from from each
10:08
Speaker 2: of those? How different were Julian's and Lee's approaches?
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Speaker 3: Well, I think Julian and Lee the inception of that
10:16
Speaker 3: both had a very value oriented approach. I think within
10:20
Speaker 3: Tiger there was an evolution over time and an adaptation
10:23
Speaker 3: even with some of the Tiger cubs, of adopting a
10:25
Speaker 3: more growth oriented strategy. But it was a time when
10:30
Speaker 3: doing real intense work could uncover really great long and
10:34
Speaker 3: short opportunities. I do think you know, years later, decades later,
10:38
Speaker 3: it became much more difficult with indexation and ETFs and
10:42
Speaker 3: and and the market structure changed. But back then, I
10:46
Speaker 3: would say, from an investment philosophy standpoint, there was a
10:50
Speaker 3: view that every single day you rebuy your portfolio. It
10:55
Speaker 3: doesn't matter if you're losing money or you're in the money,
11:00
Speaker 3: made a double already, if you own it, think about it,
11:03
Speaker 3: and re underwrite it as if you just bought it today.
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Speaker 3: And are you as excited from a long and short
11:08
Speaker 3: perspective about that opportunity in the go forward period? And
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Speaker 3: I think that discipline of reunderwriting your holdings every single
11:16
Speaker 3: day is something that's remained with me. I think, secondly,
11:19
Speaker 3: I would say what I would call a variant perception,
11:23
Speaker 3: or what is called a variant perception, something that Michael
11:25
Speaker 3: Steinhardt popularized of when you make an investment, How is
11:30
Speaker 3: your view different from the market, Because if you want
11:33
Speaker 3: to outperform the market, you can't just agree with the
11:37
Speaker 3: thesis that's already embedded in the price or value of
11:39
Speaker 3: an investment. And so that variant perception of how do
11:43
Speaker 3: you look at it different? You're either more bullish about
11:46
Speaker 3: that opportunity or you think that opportunity is overdone, and
11:51
Speaker 3: so you're either selling or your shorting or what have you.
11:53
Speaker 3: And so I think the variant perception is really really
11:56
Speaker 3: an important aspect of the philosophy. Having investment conviction is
12:02
Speaker 3: another principle. You know, go all in, do your work,
12:07
Speaker 3: get to a high conviction thesis, but loosely hold it
12:11
Speaker 3: like hold on loosely strong opinions.
12:14
Speaker 2: Loosely held is the expression I heard.
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Speaker 3: That's exactly right, because if you have disconfirming evidence, don't
12:20
Speaker 3: ignore it, don't double down with your escalation of commitment,
12:25
Speaker 3: you know, reunderwrite it, and ask yourself, well, maybe I
12:28
Speaker 3: have to change my mind. The greatest investors in my mind,
12:30
Speaker 3: someone like a Stanley Druckn Miller, is willing to change
12:33
Speaker 3: his mind all the time, you know, based on new information.
12:36
Speaker 3: And so I think these principles form an investment philosophy
12:39
Speaker 3: that if if you don't know what your competitive advantage
12:42
Speaker 3: is in making an investment, whether you're a private market
12:44
Speaker 3: investor or a public market investor, you probably don't have
12:48
Speaker 3: a reason to be in that investment in the first place.
12:50
Speaker 2: That's exactly right. I love the concept of re underwriting
12:55
Speaker 2: so many new investors, and I started on a trading desk.
13:00
Speaker 2: Any position you had, you had to justify every moment
13:04
Speaker 2: you owned it. Hey, this is capital. I could turn
13:06
Speaker 2: this into capital in a millisecond. Would you buy this
13:10
Speaker 2: if this was back as cash and not as a
13:13
Speaker 2: holding where you bought it, whether you're underwater or head
13:17
Speaker 2: is totally irrelevant. Would you continue to re underwrite that?
13:20
Speaker 2: That's a great way to describe that. I'm really impressed
13:23
Speaker 2: with that. So from Tiger you go to front Point
13:27
Speaker 2: Partners and helped turn it into a truly institutionalized hedge fund.
13:32
Speaker 2: Tell us a little bit about front Point.
13:34
Speaker 3: So I got a call from the two original founders
13:37
Speaker 3: of front Point and they asked me to look at
13:40
Speaker 3: the business plan and to give them a critique, which
13:43
Speaker 3: I did. I thought it was fascinating at the time.
13:45
Speaker 3: A lot of hedge funds were frankly run as almost
13:49
Speaker 3: like family offices as a business.
13:51
Speaker 2: The third of the capital was the founders half the
13:54
Speaker 2: time any.
13:55
Speaker 3: Way, right, and most of the investment capital came from
13:59
Speaker 3: ultra high net worth family offices like Memphis, Mafia and others.
14:03
Speaker 3: And so there was a view that institutions would begin
14:09
Speaker 3: to embrace alternative strategies, and for them to embrace alternative strategies,
14:17
Speaker 3: the firms they would allocate capital to would need to
14:19
Speaker 3: look like the institutional asset managers they were used to
14:23
Speaker 3: like in the traditional mutual fund business. But a lot
14:25
Speaker 3: of hedge funds didn't look and feel that way. They
14:27
Speaker 3: were run more like family offices. And so we had
14:30
Speaker 3: a view that by forming a real institutional quality asset
14:35
Speaker 3: management firm that would house diversified strategies and managers who
14:42
Speaker 3: could provide absolute return strategies to these institutional clients, that
14:46
Speaker 3: that would be embraced. It would be embraced because of
14:49
Speaker 3: the excellence of the investment teams, but also by the
14:53
Speaker 3: world class investment asset management infrastructure that we would build
14:58
Speaker 3: with front Point. And so that was the thesis. You know,
15:00
Speaker 3: you're going back to two thousand now, and to be
15:04
Speaker 3: invited to join a firm, and these guys were in
15:08
Speaker 3: their fifties. I was, you know, twenty nine, thirty years
15:10
Speaker 3: old to build a company. It was an exciting thing
15:12
Speaker 3: for me. At the time. I still wanted to become
15:16
Speaker 3: Paul tuter Jones. I wanted to be a macro investor.
15:18
Speaker 3: I wanted to be an investment manager. But I thought,
15:21
Speaker 3: I'll start by helping these individuals help build this firm,
15:25
Speaker 3: and then I'll go back to running a fund, probably
15:27
Speaker 3: at front point, And didn't you.
15:30
Speaker 2: Begin at from point as CIO and eventually became co CEO.
15:34
Speaker 3: I was the head of manager's selection and overseeing the
15:37
Speaker 3: investment teams. Then I became chief investment officer and head
15:41
Speaker 3: of the multi strategy, and then I became co CEO
15:43
Speaker 3: of the firm. So it was an evolution over time.
15:48
Speaker 3: But at the outset, you know, hiring the investment teams,
15:50
Speaker 3: overseeing what they were doing, picking and selecting them was
15:53
Speaker 3: a fascinating job for me. I loved learning about different approaches,
15:57
Speaker 3: you know, market wizards, stock market wizards, all the different
16:00
Speaker 3: ways you could skin a cat with investing. So it
16:03
Speaker 3: was like a kid in a candy store and I
16:05
Speaker 3: began to reflect on my career at that time, in
16:10
Speaker 3: that everyone goes into the investment business with the mindset
16:13
Speaker 3: of I want to become a great investor. I want
16:15
Speaker 3: to become Warren Buffett, I want to become Julian Robertson.
16:18
Speaker 3: I want to become Paul Truder Jones. I was no different.
16:21
Speaker 3: That is a very crowded pond and a lot of
16:23
Speaker 3: luck and things have to go your way to conspire
16:26
Speaker 3: to result that way to become one of the top
16:28
Speaker 3: decile quartile managers out there. And I thought at the time,
16:32
Speaker 3: you know, building an asset management company like this, like
16:35
Speaker 3: I'm doing with my partner's at front Point. You know,
16:37
Speaker 3: I'm a young guy, my whole career ahead of me,
16:39
Speaker 3: and I thought, you know, actually, if I spent my
16:41
Speaker 3: career building asset management companies and managing them, that could
16:45
Speaker 3: be a pretty you know, robust career. I could really
16:48
Speaker 3: enjoy myself. And it's a pond no one seems to
16:50
Speaker 3: be fishing in, and maybe twenty years from now this
16:53
Speaker 3: might result in something. And so it was at that moment,
16:57
Speaker 3: you know, within front Point, that I began to move
17:01
Speaker 3: away from investing professionally in the markets and more building
17:06
Speaker 3: investment organizations and overseeing investment managers and strategies.
17:10
Speaker 2: So the next step along your career path you join
17:14
Speaker 2: ORX asset Management as CEO.
17:17
Speaker 3: Right, So we'd sold from point to Morgan Stanley. I'd
17:20
Speaker 3: run with my partner there for a few years. I
17:24
Speaker 3: was hired away from ORX to be the CEO of
17:27
Speaker 3: their asset management unit. So Japanese holding company, they were
17:30
Speaker 3: looking to diversify their holdings into the US and into
17:33
Speaker 3: various industries, one of them being asset management. They had
17:38
Speaker 3: a lot of capital to deploy and a low cost
17:40
Speaker 3: of capital being a Japanese holding company, and I thought
17:43
Speaker 3: I could exceed that hurdle and build something here. So
17:47
Speaker 3: it was back in twenty twelve, and it was during
17:49
Speaker 3: the pigs crisis, you know, and thinking about where could
17:52
Speaker 3: we acquire compelling asset management.
17:56
Speaker 2: Let me interrupt you for the people who might not
17:59
Speaker 2: have been traded through Brexit, Grexit, whatever the pigs crisis
18:03
Speaker 2: was Portugal, Italy, Greece, Spain, that.
18:07
Speaker 3: Correct, that's correct, And at that time the European Central
18:12
Speaker 3: Bank and some of the local national banks of these
18:14
Speaker 3: European countries were encouraging financial parties to divest of their
18:20
Speaker 3: non core holdings. And so as we were thinking about,
18:24
Speaker 3: you know, where in the world could we deploy capital
18:26
Speaker 3: to acquire asset management capabilities, Europe seemed a logical place
18:31
Speaker 3: because there was a force selling happening and so there
18:37
Speaker 3: was a jewel in the Crown of Rabobanks Holdings private
18:40
Speaker 3: bank in the Netherlands, and they needed to divest of Robiko,
18:45
Speaker 3: which had been around for which giant three hundred billion
18:49
Speaker 3: dollars plus and they had purchased that historically and had
18:55
Speaker 3: owned it, but it was non core to their to
18:57
Speaker 3: their private bank, and so we positioned ourselves as an
19:02
Speaker 3: advantageous buyer to them. We purchased it a very attractive valuation,
19:09
Speaker 3: was the largest in orcx's history. We acquired that capability,
19:13
Speaker 3: and you know, at the time, it was exciting to
19:18
Speaker 3: get that deal done. We had bought another stakes and
19:21
Speaker 3: other managers in the alternative space, but really I wanted
19:26
Speaker 3: to do something more entrepreneurial again, and so I began
19:32
Speaker 3: to look at what is the next business with an
19:35
Speaker 3: asset management like From point that I could, you know,
19:38
Speaker 3: set my career out to build. And that is how
19:41
Speaker 3: the inception of coming across what was then Franklin Square
19:45
Speaker 3: now Future Standard came about.
19:47
Speaker 2: So when you joined, did you join as CIO or
19:51
Speaker 2: president or what was the initial role?
19:53
Speaker 3: Yeah? So I was introduced to Michael Forman, the founder
19:57
Speaker 3: of Franklin Square, through a head hunter friend of mine,
20:01
Speaker 3: Scott Fletcher, and I was also introduced by Bennett Goodman
20:05
Speaker 3: and Doug Ostrover at GSO and Blackstone, and they had
20:09
Speaker 3: encouraged me to go and meet with their partner who
20:11
Speaker 3: they had partnered with. As I was describing what I
20:14
Speaker 3: thought the next big thing in asset management would be
20:18
Speaker 3: would be the arc of history of bringing alternatives from
20:23
Speaker 3: family offices and ultra high network throughout the eighties and nineties,
20:26
Speaker 3: and then the endowment model with David Swinson. Eventually institutions
20:29
Speaker 3: began adopting it. The one constituency that was still left
20:33
Speaker 3: out were the individual investors below ultra high net worth
20:37
Speaker 3: and family offices. And so I had a view that
20:42
Speaker 3: at some point that would change, and I wanted to
20:44
Speaker 3: help effectuate that change. And that is where I was
20:47
Speaker 3: introduced to Michael Foreman and his vision for what he
20:51
Speaker 3: was doing with Franklin Square and had been doing. And
20:54
Speaker 3: he had built this incredible chassis around productizing andributing income
21:01
Speaker 3: strategies and convinced me to join up with him as president.
21:06
Speaker 3: To go join him and you know, be the chief
21:09
Speaker 3: investment officer, help build out the asset management capability. Now,
21:15
Speaker 3: at the time, Franklin Square was a product and distribution firm,
21:21
Speaker 3: so they were creating the rappers and distributed them. But
21:24
Speaker 3: other external parties at the time Blackstone were the ones
21:28
Speaker 3: subadvising and providing all of the investment acumen. And as
21:32
Speaker 3: I would describe it today, and I use this analogy
21:36
Speaker 3: of Netflix, it was like seeing the red envelopes and DVDs,
21:40
Speaker 3: but Michael had created this incredible distribution engine, one hundred
21:45
Speaker 3: million person mailing list type of you know, distribution capability.
21:48
Speaker 3: And just like Netflix figured out how to digitize their
21:52
Speaker 3: business and create their own in house TV and movie studio.
21:57
Speaker 3: You know, that was my pitch to Michael, as you
21:58
Speaker 3: could eventually diversify this product base and you could bring
22:02
Speaker 3: in house capabilities so long as the quality is still
22:05
Speaker 3: very high, you can put it through these channels and
22:09
Speaker 3: offer them to private wealth clients. And so that's what
22:13
Speaker 3: we set out to do.
22:16
Speaker 2: Really fascinating coming up we continue our conversation with Mike Kelly,
22:21
Speaker 2: chief investment Officer and president of Future Standard, discussing how
22:25
Speaker 2: he helped build the company into a ninety billion dollar
22:29
Speaker 2: multi strategy platform for wealth management clients. I'm Barry Ridults.
22:34
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
22:50
Speaker 2: Barry Ridults. You're listening to Masters in Business on Bloomberg Radio.
22:54
Speaker 2: My extra special guest this week is Mike Kelly. He's
22:58
Speaker 2: president and chief investment officer a Future Standard. They are
23:01
Speaker 2: an alternatives manager focused on the wealth channel, running over
23:06
Speaker 2: ninety billion dollars in client assets. You know, when you
23:11
Speaker 2: joined what was Franklin Square before it became Future Standard
23:16
Speaker 2: FS Investments, they effectively had one credit strategy plus whatever
23:21
Speaker 2: they were reselling on behalf of other people all over
23:24
Speaker 2: ten billion dollars. You're almost ten times the size now
23:28
Speaker 2: with a full multi strategy platform. How did that evolution
23:33
Speaker 2: come about? What were the key inflection points? Was that
23:37
Speaker 2: a tough sale to get everybody in house to accept that, hey,
23:42
Speaker 2: we have a nice little business here, Mike, why do
23:44
Speaker 2: you want to mess with it?
23:45
Speaker 3: Well, there was a nice business there, and change comes
23:51
Speaker 3: with resistance. But I think we've had a fortuitous progress
23:58
Speaker 3: of change over the last twelve years. And I would
24:00
Speaker 3: say it started out with forming multiple partnerships with various
24:07
Speaker 3: outside firms that Michael and I had relationships with the
24:12
Speaker 3: likes of KKR and Golden Tree, Rialto and real Estate EIG,
24:17
Speaker 3: Magnetar Wilshire in order to create some diversified strategies that
24:25
Speaker 3: we could offer to clients with best of breed managers
24:28
Speaker 3: across various disciplines. And so that was the first stage
24:31
Speaker 3: of evolution, was moving into more of a multi manager architecture.
24:37
Speaker 3: Concurrent to that, I began to hire internal talent, which
24:41
Speaker 3: is something similar to what I had done at front Point,
24:44
Speaker 3: and brought in individuals like Andrew Beckman and helped him
24:47
Speaker 3: build out his internal private credit team. We made some
24:51
Speaker 3: acquisitions as well and Chiron Asset Management, Portfolio Advisors, Post
24:57
Speaker 3: Road Group in various disciplines, and so it was a
25:01
Speaker 3: combination of an evolution of external partnerships, in house hiring
25:09
Speaker 3: and talent and development and growing those and acquisitions sort
25:13
Speaker 3: of inorganic acquisitions of capabilities and managers to bring on.
25:18
Speaker 3: And I'd say starting from this inception of packaging and distribution,
25:24
Speaker 3: we then evolved into a diversified asset manager. And then
25:31
Speaker 3: after this series of in house capabilities and acquisitions, we
25:37
Speaker 3: adapted the firm into what I would call a true
25:43
Speaker 3: alternative platform. You know, a platform, And I'll distinguish a
25:46
Speaker 3: platform from a diversified asset management because I do think
25:49
Speaker 3: they are different. Diverse fied asset manager, you have different
25:53
Speaker 3: strategies that you offered to clients, but those strategies don't
25:56
Speaker 3: have to interrelate at all with one another, and there
25:59
Speaker 3: may be no shared set of relationships or gleaned insights
26:03
Speaker 3: or what have you. A platform, as I would call it,
26:08
Speaker 3: is more interwoven. There's more collaboration, there's shared underwriting, their
26:13
Speaker 3: shared origination and relationships for deal flow, there's an exchange
26:18
Speaker 3: of insights and specializations, all with the intention of improving
26:25
Speaker 3: outcomes for clients. And that evolution if you will. You know,
26:32
Speaker 3: it's easy to wipeboard that out and describe we're going
26:35
Speaker 3: to do this to your point, it's really hard to
26:38
Speaker 3: actually execute on that.
26:41
Speaker 2: So there's an underlying thesis in this. Once this full
26:46
Speaker 2: platform is built out, Hey, there is a giant wealth
26:50
Speaker 2: channel that a lot of alts are not tapping. Into
26:53
Speaker 2: it's the next great frontier. High net worth mass affluent
26:58
Speaker 2: wants the same sort of access to strategies that they
27:01
Speaker 2: see foundations and Dowmans institutions having access to tell us
27:06
Speaker 2: a little bit about how you see that opportunity, How
27:10
Speaker 2: large is it, how much has already been captured? Where
27:13
Speaker 2: are we in the cycle of this getting pushed out
27:16
Speaker 2: to mom and pop investors.
27:19
Speaker 3: So backing up to when Michael first started Franklin Square,
27:25
Speaker 3: this is now back in seven eight, launched the fund
27:29
Speaker 3: in January vote nine. So auspicious, great timing for a
27:34
Speaker 3: credit strategy and delivering income to individual investors through the
27:39
Speaker 3: independent broker dealer channel. And you know, if you remember
27:43
Speaker 3: that time, you had this declining yield environment and the
27:48
Speaker 3: FED cutting rates over that course of time, and so
27:52
Speaker 3: there was a search for income, particularly for retirement accounts.
27:55
Speaker 3: And so in the early days, a lot of our
27:56
Speaker 3: offerings were income strategies, income oriented, whether it's middle market
28:01
Speaker 3: lending clos offering, our real estate lending strategies and so
28:07
Speaker 3: for so generating income. And I think we saw that
28:14
Speaker 3: post Great post a Great financial crisis, banks would begin
28:18
Speaker 3: to withdraw from those lending activities and see those over
28:22
Speaker 3: to asset managers and direct lenders like ourselves, but also
28:26
Speaker 3: that private wealth and individual investors would begin to embrace
28:30
Speaker 3: these strategies to pick up income sources. And so those
28:35
Speaker 3: two trends I think we got correct. What we probably
28:40
Speaker 3: didn't foresee was the adoption curve. I think we probably
28:43
Speaker 3: assumed it would be more linear than it actually turned
28:45
Speaker 3: out to be. It took longer you think about it.
28:47
Speaker 3: This is now going back. I mean, Franklin Square has
28:49
Speaker 3: started almost twenty years ago. It's very topical today, and
28:52
Speaker 3: we've seen a lot of flows in the last five
28:54
Speaker 3: plus years, but it has been more recent that adoption
28:58
Speaker 3: picking up and being spoken about across the entire industry.
29:03
Speaker 3: So I do think there's been this arc of evolution
29:08
Speaker 3: and adoption, but I would tell you Barry, it's still
29:12
Speaker 3: very much in the early days, given the dynamics of
29:15
Speaker 3: private companies and their capital needs.
29:16
Speaker 2: So let's put that into a little context. The twenty tens,
29:21
Speaker 2: you not only had zero interest rate policy of ZYRUP,
29:24
Speaker 2: you had QE, you had Operation Twist, like the FED
29:27
Speaker 2: did everything it could do to make cash trash and
29:30
Speaker 2: force people off the sidelines. Hence, Tina, there is no
29:36
Speaker 2: alternative became popular. In hindsight, it's kind of surprising that
29:41
Speaker 2: it took private credit as long as it did to
29:45
Speaker 2: really find a bit Like you would think in that
29:48
Speaker 2: era of zero interest rates, Hey we're going to give
29:51
Speaker 2: you seven percent, but it's variable. If the Fed raises rates,
29:55
Speaker 2: we should see you bump up in yields. What was
29:58
Speaker 2: it like building out into that environment as a not
30:02
Speaker 2: just as an executor, but also as an investor as.
30:05
Speaker 3: A c Yeah, I would say two things. One's a
30:09
Speaker 3: market backdrop issue in one's more of an operational issue
30:13
Speaker 3: on the market backdrop issue, I define this golden era
30:16
Speaker 3: of investing is post vulker like nineteen eighty seven up
30:20
Speaker 3: until twenty twenty one. As we're coming out of COVID,
30:23
Speaker 3: And if you look at a chart of spectacle US
30:26
Speaker 3: stocks and bond prices, sixty forty made incredible sense. You
30:32
Speaker 3: had disinflationary forces, you had benign demographics, you had globalization,
30:39
Speaker 3: and it was great to set it and forget it
30:41
Speaker 3: with a sixty forty mix.
30:43
Speaker 2: That era was a thirty five year bull market in bonds.
30:47
Speaker 3: That incredible.
30:48
Speaker 2: There are long stretches where fixed income is outperforming equity
30:53
Speaker 2: in that run.
30:54
Speaker 3: Right, So why do you need an alternative right? If
31:00
Speaker 3: the music sounds great, you don't need alternative music. When
31:05
Speaker 3: the music is all crap. Nirvana comes along, right, and
31:09
Speaker 3: so I think the experience that investors had was proved
31:16
Speaker 3: to me, I need something else, and it hasn't really
31:19
Speaker 3: been you know, particularly with fixed income. Right when you
31:22
Speaker 3: think about the experience of the last six years or
31:25
Speaker 3: so where high duration fixed income has not been great
31:29
Speaker 3: at all, that's forty percent of your traditional portfolio that's
31:32
Speaker 3: just stopped working overnight. And so that catalyzed a lot
31:36
Speaker 3: more inquiry into diversified sources of private market income, private returns,
31:41
Speaker 3: and so forth. The other issue that slowed the adoption
31:44
Speaker 3: curve is on the operational infrastructure side, and it's something
31:47
Speaker 3: that the likes of Lawrence at I Capital and Matt
31:51
Speaker 3: A Case have been solving for. But it was really
31:54
Speaker 3: clunky in the early days. You had you know, double
31:57
Speaker 3: layers or fees, you had feeder funds, you had high
31:59
Speaker 3: loads K one I say, just not something that the
32:03
Speaker 3: individual investor and their advisors wanted to embrace, understandably, because
32:08
Speaker 3: you had to fill out by hand a subdoc for
32:10
Speaker 3: every single investor and so both the MAC market backdrop
32:16
Speaker 3: changing and morphing and opening up people's minds, as well
32:21
Speaker 3: as access and operational infrastructure. And we'll get to this,
32:26
Speaker 3: but education, which we're clumsily, you know, getting our way
32:30
Speaker 3: to educating these strategies, how they work, these structures, how
32:34
Speaker 3: to embrace them, how to incorporate them into portfolio. You know,
32:37
Speaker 3: that took time. It just took time for the whole
32:40
Speaker 3: industry to get there. And I feel like we're finally
32:43
Speaker 3: at the point where we're arriving. But as I said earlier,
32:46
Speaker 3: I still look at this adoption and penetration from these
32:50
Speaker 3: investors as very early.
32:52
Speaker 2: How much of an accelerant was twenty twenty two with
32:55
Speaker 2: the what was it, five hundred and fifty basis points
32:58
Speaker 2: of rate hikes if your long duration, well that's going
33:03
Speaker 2: to really leave a mark. What did that year do
33:07
Speaker 2: to acceptance of alternatives from that wealth channel?
33:12
Speaker 3: So two things, One was positive and one was more
33:17
Speaker 3: of a challenge. The positive side of things was with
33:20
Speaker 3: the backup of duration of the long yields that began
33:25
Speaker 3: to challenge the traditional fixed income side of the portfolio.
33:31
Speaker 3: So if you think about the traditional fixed income portfolio,
33:33
Speaker 3: I think about fixed income risk in three ways liquidity,
33:37
Speaker 3: credit risk, and duration. And so most people had very
33:40
Speaker 3: long duration, highly liquid, low credit risk investments and treasuries
33:44
Speaker 3: and agency bonds and mortgage securities, municipal securities that began
33:49
Speaker 3: to fail them and not provide the ballast against equities
33:53
Speaker 3: it had been and it didn't provide the income because
33:56
Speaker 3: duration was working against you. So that was a positive
33:59
Speaker 3: four for let's find something else. The negative force was
34:04
Speaker 3: going from zero to five percent. People went from not
34:07
Speaker 3: earning anything on their cash and needing to deploy it
34:10
Speaker 3: to make any money, to oh, wait a minute, I
34:12
Speaker 3: haven't made money on my cash in a long time.
34:15
Speaker 3: Five percent sounds pretty good.
34:17
Speaker 2: Money market five and change was great it especially when.
34:22
Speaker 3: The time Yeah, yeah, for sure. And so you began
34:25
Speaker 3: to see some hoarding of cash balances that only began
34:30
Speaker 3: to be deployed as the FED started to cut that
34:33
Speaker 3: those rates again.
34:34
Speaker 2: I would imagine the inverted yield curve around that time
34:36
Speaker 2: was problematical. So why do I want to tie up
34:38
Speaker 2: money if liquid money market is yielding even more?
34:43
Speaker 3: Most definitely?
34:44
Speaker 2: Huh really interesting. So, so you've described the current environment
34:49
Speaker 2: as having created a new investing imperative, focus, research, flexibility
34:56
Speaker 2: to change course, conviction. Tell us about what you see
35:00
Speaker 2: is the modern investing imperative around alternatives.
35:06
Speaker 3: Right, So we all know about the decline and the
35:12
Speaker 3: number of publicly traded companies. If we were coming out
35:16
Speaker 3: of college, it was nine thousand. Today you know barely
35:19
Speaker 3: four thousand. Both the number of private companies and the
35:24
Speaker 3: size of private companies has exploded, and the opportunity to
35:29
Speaker 3: invest in these private companies has increased dramatically as well
35:33
Speaker 3: as the access and the availability and those companies taking
35:38
Speaker 3: advantage of access to private equity and direct lending sources
35:42
Speaker 3: of financing. And that allows for a much broader palette
35:47
Speaker 3: for investors to build portfolios with by accessing those companies.
35:53
Speaker 3: And I would say very increasingly, in order to get diversification,
35:57
Speaker 3: or to build diversification, you do have to look outside
36:00
Speaker 3: of public stocks and bonds. The stock market is becoming
36:05
Speaker 3: less and less representative of the total economy as it
36:08
Speaker 3: used to be. It's very concentrated right now in AI
36:12
Speaker 3: infrastructure and the mag seven and the build out there.
36:15
Speaker 3: And you have, you know, myriad number of private companies
36:20
Speaker 3: of you know, small to mid size and some larger
36:22
Speaker 3: size that provide you access to what's really driving the
36:26
Speaker 3: US economy. We call that the middle market. And the
36:29
Speaker 3: middle market are you know, a couple hundred thousand plus
36:32
Speaker 3: companies that drive the US economy that are not publicly traded.
36:37
Speaker 3: We define the middle market as companies of a billion
36:39
Speaker 3: dollars of enterprise value and down, so sort of lower
36:42
Speaker 3: and core middle market. And these are businesses that you know, frankly,
36:46
Speaker 3: are fast growing, they're fragmented ecosystem, They're hard to find.
36:51
Speaker 3: But if you can navigate and invest directly in these
36:55
Speaker 3: businesses or lend to these businesses, it's a very attractive
36:58
Speaker 3: access for investors.
37:00
Speaker 2: Let's talk a little bit about that. I like to
37:02
Speaker 2: step back and take the thirty thousand foot view to
37:06
Speaker 2: kind of get a sense of how this evolved. My
37:09
Speaker 2: general sense was you had a lot of consolidation with
37:12
Speaker 2: big money center banks following the financial crisis, even the
37:16
Speaker 2: decade leading up to, and it felt like much of
37:21
Speaker 2: Wall Street, much of the giant banks, just kept moving
37:25
Speaker 2: up market and left these huge swaths of billion dollar
37:28
Speaker 2: companies behind because let's be honest, what's a billion dollar company?
37:32
Speaker 2: It's small change to them? Is that what created the
37:36
Speaker 2: opening for all of this private credit, real estate financing,
37:42
Speaker 2: private debt. There's like this whole world that used to
37:46
Speaker 2: be traditional banks. Like explain that transition a little bit.
37:50
Speaker 3: So, as I spoke about earlier, I started my career
37:54
Speaker 3: at Solomon and Fig Banking, and we would talk about
37:57
Speaker 3: merging banks, and we had these old that you would
38:01
Speaker 3: take with bank information and merge the banking world and
38:04
Speaker 3: pitch banks on why they should consolidate. Well they did.
38:08
Speaker 3: Throughout the eighties, nineties, and two thousands, the banking world
38:12
Speaker 3: became much more consolidated into these four Meggat banks that
38:15
Speaker 3: hoovered up a number of regional banks. So that was
38:18
Speaker 3: you know, this is a confluence of factors. That was
38:20
Speaker 3: one factor the Great Financial Crisis, and Dodd Frank and
38:23
Speaker 3: red capitules was another big factor of driving higher capital
38:28
Speaker 3: requirements for banks and their activities. You also had banks
38:33
Speaker 3: increasingly looking towards generating fee income versus making loans on
38:40
Speaker 3: their balance sheet. In other words, they wanted to be
38:43
Speaker 3: in the moving business, not the storage business, because that's
38:46
Speaker 3: what they're publicly traded shareholders were valuing. And so they
38:50
Speaker 3: answered that call, and so increasingly they began to step
38:55
Speaker 3: back from those lending activities, particularly to mid size private
39:01
Speaker 3: companies and real estate activities. And that allowed for asset
39:07
Speaker 3: management companies, who I would estimate have very attractive asset
39:13
Speaker 3: liability matches within their lending activities to step into that
39:19
Speaker 3: opportunity and provide that financing capital through closed end funds,
39:24
Speaker 3: through BDCs, through different structures to be able to lend
39:29
Speaker 3: and provide access to the individual investor to generate income
39:32
Speaker 3: off those lending activities. And so I think all of
39:35
Speaker 3: those things provided the opening and it's been a market
39:39
Speaker 3: share shift from the banking system to the direct lending
39:43
Speaker 3: and asset management world in private lending.
39:45
Speaker 2: Really interesting last question on the evolution of future standard.
39:51
Speaker 2: You've served roles both as chief Investment Officer and CEO
39:55
Speaker 2: co CEO. As CIO, you think about generating returns. As
40:02
Speaker 2: a CEO, you have to think about so many everything
40:05
Speaker 2: else but people, infrastructure, clients, culture, systems. How do you
40:11
Speaker 2: integrate that those two very different sets of responsibilities.
40:17
Speaker 3: Right, So, in terms of thinking about the role, overseeing
40:23
Speaker 3: the investment teams and investment strategies is a big part
40:27
Speaker 3: of what I do as Chief Investment Officer, I like
40:30
Speaker 3: to use the analogy of like I like to be
40:34
Speaker 3: the Rick Rubin in the room of really talented professionals,
40:39
Speaker 3: provide an environment by which they can do their best work,
40:42
Speaker 3: and then get the hell out of the way. And
40:44
Speaker 3: so you have to identify the talent you help to
40:47
Speaker 3: work and develop them. You have to work with their process,
40:51
Speaker 3: how and why they make decisions as individuals and teams
40:53
Speaker 3: of individuals. Make sure that their priorities align with our
40:58
Speaker 3: clients and the firm overall. Give them all the resources
41:03
Speaker 3: that they need to do their job, and increasingly they're
41:06
Speaker 3: more sophisticated resource requests like around AI deployment and things
41:09
Speaker 3: of that nature. And then get out of their way,
41:12
Speaker 3: allow them to do their best work. And you pointed out,
41:15
Speaker 3: you know, designing incentives, designing culture, reinforcing behavior is a
41:19
Speaker 3: big part of all of that. So that's one big
41:22
Speaker 3: part of my job. You know, also interfacing with clients,
41:25
Speaker 3: both private wealth clients and institutional clients. Strategy for the firm,
41:30
Speaker 3: internal strategy, corporate development, but also M and A and
41:33
Speaker 3: new new deployment of acquisition of different strategies, products and
41:39
Speaker 3: launching new products and new extensions of existing products is
41:43
Speaker 3: a big part of my of my role and then
41:46
Speaker 3: reinforcing you know, the culture overall of what we're trying
41:49
Speaker 3: to build.
41:50
Speaker 2: And you mentioned earlier you were I'm want to say
41:54
Speaker 2: that again. Earlier you mentioned that the firm was selling
41:59
Speaker 2: into the broker dealer networks. That seems to have evolved
42:03
Speaker 2: into more of an RIA networks. Even the big shops
42:07
Speaker 2: like Ubs and Morgan Stanley have kind of pivoted away
42:12
Speaker 2: from transactions more to fees. How has that transition affected
42:17
Speaker 2: who you're selling products to?
42:20
Speaker 3: So over the last you know, fifteen plus years, there
42:23
Speaker 3: has been an evolution and a broadening of the types
42:26
Speaker 3: of platforms that have been embracing private market strategies, alternative
42:33
Speaker 3: investment strategies. You know, there's the wirehouses, so the big
42:36
Speaker 3: four names Morgan Stanley, UBS, Merrill, Lynch, Wells Fargo. There
42:40
Speaker 3: are the large rias like Rockefeller and Saratae that are
42:44
Speaker 3: building out their capabilities for independent advisors and growing quite tremendously.
42:50
Speaker 3: And then you have the independent broker dealer channel, the
42:52
Speaker 3: lpls of the world, and so there there's an ecosystem
42:56
Speaker 3: of wealth platforms just here in the US. You know,
42:59
Speaker 3: overse three hundred thousand financial advisors and brokers in the
43:02
Speaker 3: United States, and all of those channels are increasingly embracing
43:09
Speaker 3: and hosting onto their platforms access to these types of
43:13
Speaker 3: strategies through various, you know, phases of development within those platforms.
43:20
Speaker 3: I would say there's a real spectrum of adoption, you know.
43:24
Speaker 3: You know, when I started at what was then Franklin Square,
43:28
Speaker 3: you know, talking to a big wirehouse like Morgan Stanley,
43:32
Speaker 3: they would tell you that a very small group of
43:35
Speaker 3: their advisors were doing the vast majority of alternatives business.
43:39
Speaker 3: Now across you know, fifteen thousand plus advisors, there's a
43:43
Speaker 3: much broader and wider democratization of adoption of alternatives across
43:48
Speaker 3: THEIRS and other people's platforms. But there's still a lot
43:53
Speaker 3: of individual investors and advisors who are still at zero
43:57
Speaker 3: percent allocated to something other than a stock under cash,
44:01
Speaker 3: and that evolution is that's why I think we're still
44:04
Speaker 3: in the very early I.
44:05
Speaker 2: Think really really interesting. Coming up, we continue our conversation
44:09
Speaker 2: with Mike Kelly, President and Chief Investment Officer of Future Standard,
44:14
Speaker 2: discussing the state of alternatives today. I'm Barry Ridults. You're
44:18
Speaker 2: listening to Masters in Business on Bloomberg Radio. I'm Barry Redults.
44:37
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
44:40
Speaker 2: extra special guest today is Mike Kelly. He is president
44:43
Speaker 2: and chief investment officer of Future Standard. They are a
44:47
Speaker 2: ninety billion dollar alternative platform focusing on private credit, private equity,
44:53
Speaker 2: real estate, infrastructure, and multi asset strategies. So it's hard
44:59
Speaker 2: not to look at I have a credit today and
45:01
Speaker 2: not think this is becoming a jug ernaut. Is that
45:05
Speaker 2: a sign of maturity or is this, you know, just
45:08
Speaker 2: a lot of capital chasing, not a lot of loans.
45:12
Speaker 3: So I'd start by saying that there is a misconception
45:19
Speaker 3: that private credit generally is becoming a bubble. And I
45:23
Speaker 3: consider myself a student of history and calamities, and I
45:26
Speaker 3: try to think about and if you look at the
45:29
Speaker 3: build of what we call private credit, the asset management's
45:33
Speaker 3: direct lending to private companies matching up against you know,
45:37
Speaker 3: various you know situations in the past where we had
45:40
Speaker 3: true bubbles, you had an outgrowth of capital versus the
45:44
Speaker 3: economic driver of activity. We don't have that today. If
45:48
Speaker 3: you actually add up the pockets of what we really
45:50
Speaker 3: call private credit, which is not just direct lending but
45:53
Speaker 3: high yield strategies, broadly syndicated loans and banks and eye loans.
45:57
Speaker 3: That's private credit provision. It's grown lockstep with the economy.
46:02
Speaker 3: The economy had gone from twelve thirteen billion before the
46:05
Speaker 3: Great Financial Crisis, it's thirty trillion today, and so it's
46:08
Speaker 3: grown in lockstep. It's just the market share has shifted
46:11
Speaker 3: to direct lenders in asset management away from banks, high
46:15
Speaker 3: yield and broadly syndicated loans. And so the opportunity in
46:19
Speaker 3: private credit is not outgrowing the underlying opportunities. These private
46:23
Speaker 3: companies are making themselves. They're availing themselves of this private
46:28
Speaker 3: form of financing from asset management companies. And there's a
46:31
Speaker 3: lot more of these private companies demanding this capital. So
46:34
Speaker 3: there is a balance between the supply and demand of
46:39
Speaker 3: this capital for the opportunity. Now, having said that, in
46:43
Speaker 3: this search for yield that we talked about, there was
46:48
Speaker 3: an outgrowth of evergreen strategies and selling to the private
46:53
Speaker 3: wealth community, particularly within private credit strategies, in this demand
46:58
Speaker 3: for income, and we did see an explosion and concentration
47:03
Speaker 3: and crowdedness in particular funds and pockets of large cap
47:08
Speaker 3: lending that did result in you know, very tight spreads,
47:14
Speaker 3: covenants being loosened, an increase in paying kind or pick
47:19
Speaker 3: over cash financing, and we also sort of a concentration
47:25
Speaker 3: of lending to software companies as rates were being cut
47:29
Speaker 3: and distributions were being cut. Within BBC's and private credit,
47:33
Speaker 3: we began to see that, coupled with the concerns about
47:36
Speaker 3: software exposure, begin to result in some redemptions. And that
47:42
Speaker 3: is where a lot of the headlines have been focused
47:45
Speaker 3: on private credit and negative sentiment around private credit trying
47:50
Speaker 3: to get out of these structures when they're having difficulty
47:54
Speaker 3: doing so. I think the backdrop, though, is private credit
47:58
Speaker 3: is still a very valuable and value enhancing component for
48:05
Speaker 3: most portfolios to generate income, despite some of the indigestion
48:10
Speaker 3: and negative headlines that I've been developing.
48:12
Speaker 2: Let's talk about those retemptions because they always crack me up.
48:17
Speaker 2: We saw this a couple of years ago with b
48:19
Speaker 2: RET and b cred, which is which part of five
48:23
Speaker 2: year lockup is confusing to you. I don't I don't understand,
48:28
Speaker 2: and for the listener, a lot of these illiquid alternatives
48:34
Speaker 2: have a tiny gait of five percent gate, which is
48:38
Speaker 2: really there as an accommodation when you know, I call
48:41
Speaker 2: it the widows and orphans clause. If you know, if
48:45
Speaker 2: if the surgeon is hit by a bus and he
48:49
Speaker 2: leaves behind wife and kids, they perhaps shouldn't be in
48:52
Speaker 2: an illiquid alternative in those circumstances. But given that, let's
48:56
Speaker 2: let's talk a little bit about the ill liquidity premium,
49:00
Speaker 2: which some people look at as a bug, but I
49:02
Speaker 2: think is a feature of the this sort of investment.
49:05
Speaker 2: Tell us a little bit about how you think about
49:08
Speaker 2: ill equidity and how do you communicate ill equidity or
49:12
Speaker 2: liquidity issues to potential investors.
49:15
Speaker 3: Well, I'd start by saying investing is all about trade offs.
49:18
Speaker 3: There's no right or wrong, no black or white. You know,
49:21
Speaker 3: alternatives aren't better than traditional in forms of investing. There's
49:24
Speaker 3: just trade offs. And the trade offs within private market
49:28
Speaker 3: strategies and the structures that offer them is that you
49:31
Speaker 3: have the advantages of the potential for enhanced return through
49:36
Speaker 3: an illiquidity premium or enhance diversification from your public holdings.
49:41
Speaker 3: The tradeoff of that is these are ill liquid strategies,
49:45
Speaker 3: They are complex, and they are higher fees than public
49:50
Speaker 3: market strategies. ETFs and indices and things of that nature,
49:53
Speaker 3: and so you have to balance those before determining whether
49:58
Speaker 3: or not the trade offfs make sense for you, for
50:01
Speaker 3: your clients, for an institution, what have you. And I
50:05
Speaker 3: really mentioned the liquid the liquid part of it, because
50:08
Speaker 3: these strategies are a liquid evergreen structures as wrappers around
50:11
Speaker 3: these liquid underlying strategies did not make an ill liquid
50:18
Speaker 3: private asset class liquid. It was just an access point.
50:22
Speaker 3: It provides its own advantages of continuous compounding and no
50:25
Speaker 3: capital calls and ten ninety nine's and so forth, but
50:28
Speaker 3: it didn't turn an I liquid asset class into liquid.
50:31
Speaker 3: I never understood the term semi liquid, which implies half liquid,
50:35
Speaker 3: which it's not. These are not half liquid private investments,
50:38
Speaker 3: and so that isn't ast as a backdrop. You know,
50:43
Speaker 3: a lot of it comes down to managing the expectations
50:46
Speaker 3: of what the trade offs are. Going back to the
50:50
Speaker 3: advantages you are providing capital and in our case a
50:54
Speaker 3: future standard, we're providing capital to a very fragmented ecosystem.
50:58
Speaker 3: We cherry pick, you know, a handful of the best
51:01
Speaker 3: middle market, mid sized private businesses, and we provide them
51:06
Speaker 3: with capital, either through equity capital or through loans that
51:10
Speaker 3: we make to these companies. These companies are not massive
51:14
Speaker 3: in size, and they can't dictate final terms, and so
51:18
Speaker 3: we can lend to them at very advantageous prices that
51:21
Speaker 3: work for them because they're growing businesses. They need capital
51:24
Speaker 3: to grow, to acquire new businesses, to fund their operations,
51:28
Speaker 3: and so they're not going to negotiate to the final
51:31
Speaker 3: basis point on spread. So we can provide a very
51:35
Speaker 3: attractive form of financing to them and pass along that
51:39
Speaker 3: income to individual investors through the private wealth community. And
51:44
Speaker 3: so it works for both sides. And that form of
51:48
Speaker 3: income is you know, does come with an expectation of
51:54
Speaker 3: higher returns than what you'll be able to replicate in
51:56
Speaker 3: the sort of megacap market or in the public fixed
52:00
Speaker 3: income market.
52:01
Speaker 2: It makes a lot of sense. Back in the day
52:04
Speaker 2: this was thought of as an institutional product and a
52:07
Speaker 2: family office product. It began migrating downstream to ultra high
52:13
Speaker 2: net worth and then high net worth. Now the question
52:16
Speaker 2: is is this going to be marketed to mass affluent
52:20
Speaker 2: for one case? Things like that, who do you see
52:23
Speaker 2: as as appropriate buyers of a variety of private credit products.
52:31
Speaker 3: So we'll start by saying, you know, one of the
52:33
Speaker 3: reasons at future standard. Why we like working with advisors
52:36
Speaker 3: is nobody has a better finger on the pulse of
52:40
Speaker 3: suitability than the advisor to their clients. They will know
52:45
Speaker 3: for their client base, risk preferences, liquidity preferences. You know
52:51
Speaker 3: their ability to understand these strategies and have them incorporated
52:56
Speaker 3: into their portfolio. We say that if if you're going
53:01
Speaker 3: to allocate to a private market strategy like the ones
53:04
Speaker 3: we offer, if you're not looking to allocate for at
53:07
Speaker 3: least the next four or five years or beyond, don't
53:09
Speaker 3: make the allocation. If you need the liquidity in the
53:12
Speaker 3: next few years, there's no guarantee to our earlier point
53:15
Speaker 3: that you'll be availed of that liquidity, and so the
53:19
Speaker 3: determination of suitability is at the advisor level, and I
53:23
Speaker 3: think that's where it sits. You could make the argument
53:25
Speaker 3: that this should be relegated to those with net worth
53:30
Speaker 3: or income of a certain bracket of level. The regulators,
53:34
Speaker 3: you know, have their policies on that. But when it
53:37
Speaker 3: gets a little bit fuzzy where someone is accredited but
53:40
Speaker 3: may or may not be suitable, I think the advisor
53:43
Speaker 3: is most positioned to be able to and we would
53:46
Speaker 3: rather have fewer but more suitable investors or as a
53:50
Speaker 3: client base than more and less suitable investors as our
53:53
Speaker 3: client base. You asked a question about retirement accounts. I
53:57
Speaker 3: think there's been a lot of you know, lines written
54:00
Speaker 3: about the big numbers that are being thrown around, you know,
54:02
Speaker 3: twelve to fifteen trillion of DC four oh one K plans. This,
54:08
Speaker 3: in my view, should be among the least controversial of
54:11
Speaker 3: places to think about incorporating less liquid private market strategies.
54:15
Speaker 2: Not tapping it for years ago, donate it for decades.
54:18
Speaker 3: Usually for a young person in the retirement account. I
54:21
Speaker 3: think about, you know, my little brother who's a school
54:24
Speaker 3: teacher and Queen's and you know, if he has a
54:27
Speaker 3: thirty year horizon or at a twenty year horizon, why
54:30
Speaker 3: shouldn't he have some allocation incorporated in say a target
54:35
Speaker 3: date fund, two long duration investments that might pick up
54:41
Speaker 3: an illiquidity premium if he doesn't need the capital for
54:44
Speaker 3: a very long time.
54:45
Speaker 2: And that's a couple of hundred basis points over treasury easily.
54:49
Speaker 3: And also, let's face a lot of the best investors
54:54
Speaker 3: in the world are still occupied in this world we
54:57
Speaker 3: call alternatives, and so why not avail yourself of the
55:01
Speaker 3: best investment minds and teams and firms that are out
55:04
Speaker 3: there and their capability sets. And so I do think
55:07
Speaker 3: there will be in corporation of private market strategies into
55:12
Speaker 3: retirement plans into d C four oh one K plans.
55:15
Speaker 3: I think it's going to be a much longer evolution
55:18
Speaker 3: than maybe some would like. It will also only be
55:21
Speaker 3: a subset of the twelfth to fifteen trillion out there,
55:24
Speaker 3: because you have to get the planned sponsors comfortable and
55:27
Speaker 3: other constituents and players up to speed and comfortable with
55:31
Speaker 3: the risks and the fees and the liabilities and so forth.
55:34
Speaker 3: And so it's a going to be a small allocation,
55:37
Speaker 3: say fifteen percent of a target date fund, and that's
55:41
Speaker 3: going to be a subset of all of the capital
55:44
Speaker 3: out there. So in the end, it's an opportunity. Long term,
55:49
Speaker 3: it will be something that people can elect to have
55:52
Speaker 3: or not have in the QDIA. It may be qualified default,
55:56
Speaker 3: they may elect in or so forth. That will evolve
55:58
Speaker 3: over time. But I do think the headlines are getting
56:02
Speaker 3: a little bit ahead of themselves that there's this wave
56:05
Speaker 3: of trillions of dollars that are about to go into alternatives.
56:08
Speaker 2: So you mentioned sixty forty earlier. I'm kind of hearing, hey,
56:13
Speaker 2: sixty forty is going to be changing over the next
56:17
Speaker 2: decade to something that's maybe sixty twenty five fifteen. Is
56:21
Speaker 2: that sort of a reasonable number set?
56:24
Speaker 3: So this will now get into my view on portfolios
56:29
Speaker 3: and portfolio allocation generally, which I have a view that
56:34
Speaker 3: doesn't match up with those numbers?
56:36
Speaker 2: Can I before you say something? I always get into
56:41
Speaker 2: trouble when I say this, But hey, if you're twenty
56:44
Speaker 2: thirty forty and you have a reasonable risk tolerance, what
56:48
Speaker 2: the hell do you need bonds for? Like, people don't
56:51
Speaker 2: like hearing that, But sixty forty, how about ninety ten?
56:54
Speaker 2: If you have fifty year time horizon, you just have
56:59
Speaker 2: to not mess it up at the worst possible moment.
57:02
Speaker 2: Where are you going with your pushback to sixty forty?
57:05
Speaker 3: So I'm not even though I've used the term alternatives
57:09
Speaker 3: throughout the discussion here, I don't really like it. I
57:14
Speaker 3: think there's a point in the future where we won't
57:17
Speaker 3: call these strategies alternatives.
57:19
Speaker 2: Because they're not all the same. There's a broad dispersion
57:22
Speaker 2: of risk and returns there.
57:24
Speaker 3: That's exactly right, and to use that other analogy. When
57:28
Speaker 3: everyone's wearing a Nirvana T shirt, it's no longer alternative music, right,
57:32
Speaker 3: And let's face it, there's a much broader embrace of
57:37
Speaker 3: these strategies. Although it's early, eighty eight percent of Advisor's
57:40
Speaker 3: surveyed have indicated that they plan to allocate capital for
57:46
Speaker 3: their clients to private market strategies. So this is not
57:49
Speaker 3: a niche embrace. This is a broad embrace. And so
57:54
Speaker 3: it's becoming more mainstream. And you know, the reason I
58:00
Speaker 3: don't like the numbers of sixty forty versus you know,
58:03
Speaker 3: fifty thirty twenty is when you think about alternatives, it's
58:07
Speaker 3: just this little peg like a trivial pursuit, you know,
58:10
Speaker 3: you know, peg on a circle. Is it doesn't match
58:16
Speaker 3: up with with how I think about portfolios. So, if
58:20
Speaker 3: you think about private equity, private equity rhymes and looks
58:23
Speaker 3: a lot more from a risk standpoint like stocks than
58:27
Speaker 3: it does real estate credit. It's right there in the
58:30
Speaker 3: name and so yeah, right, it's equity, it's for growth
58:34
Speaker 3: and so, and yet we relegate private equity into a
58:38
Speaker 3: bucket with things like real estate credit, even though they
58:41
Speaker 3: do very very different things for your portfolio. So The
58:44
Speaker 3: way I like to look at it is there's a
58:46
Speaker 3: part of your portfolio for growth, and those are all
58:51
Speaker 3: forms of equity from public stocks and stock indices through
58:56
Speaker 3: to private equity and private company access, through to venture
59:00
Speaker 3: appital and other forms of growth equity. You have your
59:03
Speaker 3: income portfolio, and that's your lower risk, high duration, high
59:09
Speaker 3: liquidity treasuries and agency bonds, through to other forms of
59:13
Speaker 3: income like less liquid private credit you know, in other
59:18
Speaker 3: shorter duration, higher credit risk investment strategies. And then you
59:24
Speaker 3: have what I think is probably an introduction of something
59:27
Speaker 3: that we haven't had to think about since the seventies,
59:29
Speaker 3: like a real asset category and commodities based and precious metals,
59:34
Speaker 3: you know, raw land and real estate and things that
59:37
Speaker 3: in a more inflationary world and a world where you
59:39
Speaker 3: need more diversification of sources, you probably need. A real asset.
59:43
Speaker 3: Infrastructure would be another example of that real asset category.
59:47
Speaker 3: And within each of those three buckets of a portfolio,
59:52
Speaker 3: you have a spectrum of illiquidity and risk profile. And
59:57
Speaker 3: so for each allocator they will need to determin within
1:00:00
Speaker 3: their growth bucket how much liquidity they need to generate
1:00:04
Speaker 3: the kind of growth and how much risk. They're willing
1:00:07
Speaker 3: to bear into private equity and venture capital to build
1:00:11
Speaker 3: that growth bucket, and the same thing for their fixed
1:00:13
Speaker 3: income bucket with degrees of credit risk, liquidity duration, and
1:00:18
Speaker 3: then within their real acid bucket. And so I do believe,
1:00:21
Speaker 3: even though the world doesn't really look at it that way,
1:00:24
Speaker 3: that we will eventually get to that point and no
1:00:27
Speaker 3: longer talk about the term alternatives.
1:00:31
Speaker 2: It's going to be different types of income producing properties
1:00:34
Speaker 2: and growth produce.
1:00:35
Speaker 3: That's exactly right.
1:00:36
Speaker 2: It makes a lot of sense. You mentioned earlier we
1:00:38
Speaker 2: saw a big uptick in interest rates, which suddenly is
1:00:43
Speaker 2: a double edged sword. You're getting yield. We now have
1:00:47
Speaker 2: a new FED chair who seems to have surprised everybody
1:00:51
Speaker 2: by being a little bit hawkish in the current environment
1:00:55
Speaker 2: of oil prices and tariffs and hopefully the end of war.
1:00:59
Speaker 2: But how do you think about the role of rates
1:01:04
Speaker 2: and the FED. How does that impact the yield producing
1:01:09
Speaker 2: portion of the alternative portfolios?
1:01:13
Speaker 3: Well, as I said earlier, I do think we've exited
1:01:16
Speaker 3: this golden era that ended roughly five years ago into
1:01:20
Speaker 3: a more inflationary, deglobalized, less benign demographic backdrop. It will
1:01:28
Speaker 3: result in a higher resting heart rate for inflation. I'm
1:01:30
Speaker 3: not suggesting we're going back to the seventies by any means,
1:01:33
Speaker 3: but there's a dozen or so factors that will keep
1:01:36
Speaker 3: inflation more elevated, particularly in this deglobalized, localized world of
1:01:41
Speaker 3: supply chain breakdown.
1:01:42
Speaker 2: The post GFC zero rates, that's it for our lifetime.
1:01:47
Speaker 2: Nobody really expects to see that.
1:01:49
Speaker 3: Again, I don't expect to see that anytime, so.
1:01:52
Speaker 2: Barring media or from out of space. So what does
1:01:57
Speaker 2: that mean for the potential for are various types of
1:02:01
Speaker 2: private credit to generate.
1:02:03
Speaker 3: Right in that backdrop, you're going to have higher rate uncertainty,
1:02:05
Speaker 3: higher volatility, and a need to look for other forms
1:02:10
Speaker 3: of income, other forms of floating rate exposure. Right, if
1:02:15
Speaker 3: rates go up, floating rate exposure pays you more. It
1:02:18
Speaker 3: works against you with high duration investments. You begin to
1:02:21
Speaker 3: lose money on those, and so it does act as
1:02:23
Speaker 3: a balance to your traditional fixed income sources. You will
1:02:27
Speaker 3: need diversification just generally in the world, given this economic
1:02:31
Speaker 3: backdrop and the need for obtaining resources and how you
1:02:35
Speaker 3: build out a diversified portfolio, and so these types of
1:02:41
Speaker 3: income strategies and private equity strategies and real asset, real
1:02:45
Speaker 3: estate and infrastructure strategies are again a broader palette to
1:02:50
Speaker 3: paint from in a different environment than the one in
1:02:54
Speaker 3: which sixty forty was the perfect answer and a simplified
1:02:58
Speaker 3: answer of set it and forget it and be able
1:03:00
Speaker 3: to have you know, diversified, low volatility outcomes. And so
1:03:06
Speaker 3: I do think the role of the FED is trying
1:03:09
Speaker 3: to navigate this tug of war between the inflationary forces
1:03:13
Speaker 3: and perhaps the deflationary forces that AI may introduce to
1:03:16
Speaker 3: pockets of that economy. And so it's a tougher job
1:03:20
Speaker 3: for Kevin worsh And it's he wants to go back
1:03:24
Speaker 3: potentially to you know, less disclosure, maybe more Alan Greenspan,
1:03:30
Speaker 3: like you know, communication style, where we have to divine
1:03:33
Speaker 3: the tea leaves a little bit more and try to
1:03:35
Speaker 3: anticipate what's going to happen. And that makes a trickier
1:03:37
Speaker 3: And if you're building portfolios for the long term, incorporating
1:03:42
Speaker 3: these strategies in a diversified way, you will have you know,
1:03:47
Speaker 3: countervailing balance within your portfolio. It won't matter if the
1:03:51
Speaker 3: Fed's going to raise or lower interest rates by twenty
1:03:54
Speaker 3: five or fifty basis points. If you built a truly
1:03:56
Speaker 3: diversified portfolio.
1:03:58
Speaker 2: Makes a lot of sense. You mentioned some of the
1:04:00
Speaker 2: headline risk, and we've had a couple of minor blow
1:04:04
Speaker 2: ups over the past year or so. Some people look
1:04:07
Speaker 2: at that as the first cockroach. I don't know if
1:04:10
Speaker 2: that's the right metaphor. I'm curious what data points do
1:04:15
Speaker 2: you look at to just keep an eye on the
1:04:18
Speaker 2: health of private credit underwrited.
1:04:21
Speaker 3: So when you're looking at private credit underwriting, you're looking
1:04:24
Speaker 3: at default rates versus history. You're looking at, you know,
1:04:30
Speaker 3: the situations where there are defaults and what losses ensue
1:04:35
Speaker 3: post those defaults. You're looking at interest rate coverage ratios,
1:04:40
Speaker 3: so to the extent that the businesses that you're underwriting
1:04:45
Speaker 3: in a diversified portfolio can cover their interest payments. So
1:04:48
Speaker 3: you're watching all of these metrics. You'll need the value
1:04:51
Speaker 3: of the collateral underlying those businesses. And I would say
1:04:56
Speaker 3: there's no systemic crisis broad based within private credit today.
1:05:00
Speaker 3: We're not seeing that. There are idiosyncratic stories, and when
1:05:03
Speaker 3: you have hundreds and hundreds of credits being underwritten, you're
1:05:07
Speaker 3: always going to have individual circumstances of companies that are
1:05:12
Speaker 3: going bad or undertaking one fraud normal default rate, and
1:05:16
Speaker 3: it doesn't By the way, just because of a company
1:05:18
Speaker 3: to false doesn't mean you lose money. I mean historically,
1:05:21
Speaker 3: if you had a default rate of you know, two
1:05:23
Speaker 3: or three percent, and you lose half your money on that,
1:05:26
Speaker 3: you can do the math and how much your actual
1:05:28
Speaker 3: losses will translate over a period of time against the
1:05:32
Speaker 3: income that you're generating in return. And so if you
1:05:35
Speaker 3: might factor in the loss of fifty or one hundred
1:05:37
Speaker 3: basis points of loss against the ability to generate nine
1:05:41
Speaker 3: or ten percent returns, you can do the math is
1:05:44
Speaker 3: what that on a net basis will return for you.
1:05:46
Speaker 3: Defaults today are well within historical ranges and are being
1:05:50
Speaker 3: well managed. Interest rate coverage ratios are well within historical
1:05:54
Speaker 3: ranges and are in a healthy range. Today. What we
1:05:58
Speaker 3: are seeing are pocket of weakness and pockets of vulnerability.
1:06:04
Speaker 3: And again, over the course of we haven't had an
1:06:07
Speaker 3: economic cycle since the Great Financial Crisis. I don't even
1:06:09
Speaker 3: count COVID if it wasn't an economic cycle.
1:06:12
Speaker 2: Even twenty twenty two care a blip.
1:06:15
Speaker 3: And yet we're always going to have some areas that
1:06:19
Speaker 3: are experiencing some disruption or some indigestion. Right now, you
1:06:24
Speaker 3: have software, which is an issue that AI is disrupting,
1:06:29
Speaker 3: but you have to sort through that and healthcare services.
1:06:32
Speaker 3: There are some labor and reimbursement issues that have hit
1:06:36
Speaker 3: certain healthcare companies within software. No one knows. No one
1:06:42
Speaker 3: knows what the true impact of AI is going to
1:06:44
Speaker 3: be on software. My view is most companies will be
1:06:48
Speaker 3: fine and adapt and evolve their business models. There will
1:06:51
Speaker 3: be a subset of those companies that will be truly
1:06:55
Speaker 3: disrupted and where your collateral will not be worth very much.
1:07:00
Speaker 3: But again, if you look at a megacap or large
1:07:03
Speaker 3: cap lent private credit portfolio and you said twenty percent
1:07:07
Speaker 3: is allocated to software, and you thought fifteen percent of
1:07:11
Speaker 3: that was going to have disruption and trouble. So now
1:07:14
Speaker 3: you're relegating this down to about three percent of your portfolio.
1:07:18
Speaker 3: And even if that all went to zero and there
1:07:21
Speaker 3: was no collateral value and no recovery on any of
1:07:24
Speaker 3: those that's going to ensue over the next three to
1:07:27
Speaker 3: five years three points of loss. So assume a straight
1:07:31
Speaker 3: line amortization of those losses about a point a year
1:07:35
Speaker 3: or less than a point a year off of a
1:07:37
Speaker 3: portfolio that generates nine percent ten percent, So instead of
1:07:41
Speaker 3: nine or ten, it's eight or nine if all of
1:07:44
Speaker 3: that gets disrupted as expected. In other words, this is
1:07:47
Speaker 3: not a catastrophe. This is a normal course of business
1:07:50
Speaker 3: with a pocket of sector weakness. I think the private
1:07:53
Speaker 3: credit industry is still healthy. It still provides very attractive
1:07:56
Speaker 3: general returns. And this is all assumptions based, and assumptions
1:07:59
Speaker 3: can change, and of course, but as I look at
1:08:02
Speaker 3: the fundamental health of the private credit business, it's still
1:08:06
Speaker 3: very much intact.
1:08:07
Speaker 2: Huh, really really interesting. I have one or two more
1:08:10
Speaker 2: questions before we get to our favorites, and I have
1:08:13
Speaker 2: to ask you a thirty thousand foot view. Step back
1:08:18
Speaker 2: and look at the private credit landscape three years, five years,
1:08:23
Speaker 2: ten years from now. What does it look like in
1:08:26
Speaker 2: terms of ongoing growth? How much do you think this
1:08:30
Speaker 2: is going to penetrate into the wealth channels? What does
1:08:35
Speaker 2: the industry look like you out a couple of years.
1:08:39
Speaker 3: So when we talk about private credit, and often when
1:08:42
Speaker 3: you read about private credit in the press, it seems
1:08:45
Speaker 3: like one monolithic category within private credit. There are a
1:08:53
Speaker 3: Baskin Robins series of flavors that all get defined as
1:08:58
Speaker 3: private credit. And you have senior credit, junior debt MEZ.
1:09:03
Speaker 3: You have clos, you have sponsored non sponsored opportunistic credit,
1:09:08
Speaker 3: you have asset backed finance, you have royalties and so forth.
1:09:12
Speaker 3: And so there are many different forms of credit to
1:09:17
Speaker 3: private entities and companies that we call private credit. My
1:09:22
Speaker 3: expectation is those flavors will develop, They will begin to uh,
1:09:28
Speaker 3: you know, grow in size, the demands for that capital
1:09:32
Speaker 3: buy those companies' entities will increase. We're seeing the entrance
1:09:36
Speaker 3: of insurance capital and an investment grade. You know, most
1:09:41
Speaker 3: of what we call in private credit is not investment grade,
1:09:44
Speaker 3: but there's the investment grade demand for private capital for
1:09:47
Speaker 3: these companies that is, you know, exploding in size, and
1:09:50
Speaker 3: you know Mark talks about that at Apollo, and you know,
1:09:53
Speaker 3: there is all of this that's developing over time, and
1:09:58
Speaker 3: I expect that to continue. And then on the demand side,
1:10:01
Speaker 3: I expect that private wealth will continue demand income. They
1:10:08
Speaker 3: will continue to struggle with traditional forms of fixed income
1:10:13
Speaker 3: and highduration assets. If my view on the macro world
1:10:17
Speaker 3: transpires as I think it will, they will continue to
1:10:20
Speaker 3: need to search for income through different sources. That's both
1:10:24
Speaker 3: corporate income and real estate income and other forms of
1:10:27
Speaker 3: asset backed income and so those demand that supply and
1:10:30
Speaker 3: demand will continue to grow lockstep with one another, and
1:10:34
Speaker 3: we will have a much larger ecosystem of what we
1:10:37
Speaker 3: call private credit in the future.
1:10:40
Speaker 2: So you were a trustee at the Stanford Graduate School
1:10:44
Speaker 2: of Business. You're currently a trustee of the Tiger Foundation
1:10:48
Speaker 2: as well as a board member at the Spotlight Foundation.
1:10:51
Speaker 2: Tell us a little bit about the work you do
1:10:53
Speaker 2: with these foundations.
1:10:54
Speaker 3: Yeah, So one of the things that Julian Robertson imparted
1:10:58
Speaker 3: on all of us from a young age was give
1:11:03
Speaker 3: back as much as you can, as early as you can.
1:11:05
Speaker 3: Don't wait until you know you're about to die. And
1:11:11
Speaker 3: so I joined the Tiger Foundation, you know, probably over
1:11:14
Speaker 3: twenty years ago, which was Julian's foundation at Tiger Management
1:11:19
Speaker 3: that funds not for profit initiatives in New York City
1:11:24
Speaker 3: to fight poverty and have been doing that now for
1:11:28
Speaker 3: a Tiger Foundation has been around at least twenty five
1:11:30
Speaker 3: years or more, and so that's been an exciting legacy
1:11:35
Speaker 3: for Julian and for all of us that work together
1:11:39
Speaker 3: a Tiger and I'm a trustee on that and work
1:11:43
Speaker 3: hand in hand with the other trustees in undertaking funding
1:11:47
Speaker 3: those initiatives. The Spotlight Foundation was a group of Stanford
1:11:53
Speaker 3: Business School friends of ours. We after we graduated, we
1:11:56
Speaker 3: decided to memorialize our friendship through a foundation that would
1:12:02
Speaker 3: fund not for profit entrepreneurs that were funding education initiatives.
1:12:07
Speaker 3: Seeing how important education was in all of our lives personally,
1:12:12
Speaker 3: wanting to impact those people that didn't have the same
1:12:16
Speaker 3: advantages and opportunities that we had. And so we fund
1:12:20
Speaker 3: a lot of education initiatives, particularly in less advantage communities,
1:12:26
Speaker 3: and we fund the entrepreneurs, the ones we're doing earlier
1:12:29
Speaker 3: stage startups that could become the next Kip, you know,
1:12:32
Speaker 3: in the charter schools of the world, or you know,
1:12:34
Speaker 3: we funded the Seattle Girls School to bring science initiatives
1:12:38
Speaker 3: to girls within the inner city Seattle community. And so
1:12:42
Speaker 3: that's something that you know, is very near and dear
1:12:44
Speaker 3: to my heart.
1:12:46
Speaker 2: Sounds really interesting, all right, Let's jump to our favorite
1:12:49
Speaker 2: questions we ask all of our guests, starting with tell
1:12:52
Speaker 2: us about your mentors who helped shape your career.
1:12:58
Speaker 3: Yeah, well, you know, I've had various mentors over the
1:13:01
Speaker 3: over time. Certainly would put you know, Lee and Julian
1:13:07
Speaker 3: in that category, not as a personal mentorship, but more
1:13:10
Speaker 3: as individuals I observed and admired as investors. But also
1:13:17
Speaker 3: you know, you're looking at someone like Julian, how philanthropic
1:13:20
Speaker 3: he was and giving and the way he treated people.
1:13:25
Speaker 3: I really admired that about him. There was another individual
1:13:30
Speaker 3: who's a mentor to me to this day, Gil Caffrey.
1:13:34
Speaker 3: Gil was a partner at Tiger. He was my partner
1:13:38
Speaker 3: at front Point as we built that firm. And Gil
1:13:44
Speaker 3: is an incredible human being. He's smart, and he has
1:13:47
Speaker 3: the highest integrity. He always treated everyone with respect. He
1:13:53
Speaker 3: was a direct individual, but you know, or is a
1:13:56
Speaker 3: direct individual, but he was never emotional. He just showed
1:14:02
Speaker 3: you how to treat clients with respect, how to treat
1:14:06
Speaker 3: your co workers with respect. And it's just somebody who
1:14:10
Speaker 3: mentored me personally and who I try to emulate every day.
1:14:15
Speaker 2: Really good answer. Let's talk about books. What are some
1:14:18
Speaker 2: of your favorites? What are you reading currently?
1:14:22
Speaker 3: Book I'm reading currently London Falling by Patrick Radden Keith,
1:14:28
Speaker 3: who wrote Empire, Pain and Say Nothing. He's an incredible
1:14:32
Speaker 3: investigative journalist writing this wild story, a true story about
1:14:39
Speaker 3: a boy and a family within London in the eighties
1:14:42
Speaker 3: and nineties and in the backdrop of London undergoing the
1:14:46
Speaker 3: changes it had. It is a fascinating piece of work.
1:14:50
Speaker 3: It's one of the best books I've read, and I
1:14:52
Speaker 3: try to read a lot in the last five years,
1:14:55
Speaker 3: and so I've really enjoyed that best book all time.
1:15:01
Speaker 3: I would say, man Search for Meaning. I read it
1:15:05
Speaker 3: in high school. Victor Victor Francle, I read it in
1:15:08
Speaker 3: high school. I reread it every year, just it has
1:15:15
Speaker 3: It's amazing that Victor had the ability to have the
1:15:19
Speaker 3: mind frame he had through the horrors he faced, and
1:15:22
Speaker 3: how that mindset and your sort of ability to attach
1:15:28
Speaker 3: meaning to what goes on in your life. And you
1:15:31
Speaker 3: can't control what happens to you, but you can control
1:15:34
Speaker 3: how you respond to it. I love all things stoicism
1:15:40
Speaker 3: Marcus Aurelius. Yeah, sure, and and and but Victor Francle's writing.
1:15:46
Speaker 3: It's uh. I still have the torn pages of my
1:15:50
Speaker 3: high school copy with my pen marks and I and
1:15:53
Speaker 3: I reread it every year. It's it's It's an amazing book.
1:15:55
Speaker 2: Really really interesting. What are you streaming these days? Tell
1:15:58
Speaker 2: us what sort of podcasts or Netflix, Amazon Prime you're watching.
1:16:04
Speaker 3: So my wife and I love documentaries We are watching
1:16:10
Speaker 3: The Dark Wizard right now about Dean Potter, who was
1:16:15
Speaker 3: an extreme climber and extreme athlete. I love watching depictions
1:16:22
Speaker 3: of obsessive personalities, I think probably because I see some
1:16:27
Speaker 3: of that in myself. But I like watching based on
1:16:30
Speaker 3: people who are in other fields, so whether they're athletes
1:16:36
Speaker 3: or extreme athletes, or musicians or chefs, like Hero Dreams
1:16:40
Speaker 3: of Sushi, the Bears coming back Out, you know Last Dance.
1:16:45
Speaker 3: I love Kobe Bryant and Michael Jordans. You just people
1:16:48
Speaker 3: who pour themselves into what they do because I always
1:16:52
Speaker 3: learn something about how they think about the world and
1:16:56
Speaker 3: pour themselves into what they do as it applies to
1:16:59
Speaker 3: what I do, what I love to do, and so
1:17:01
Speaker 3: you know, I love It's one of the reasons I
1:17:03
Speaker 3: love watching some of these documentaries.
1:17:05
Speaker 2: So I have a couple of things I have to
1:17:08
Speaker 2: share with you. Have you ever read the book Endurance
1:17:12
Speaker 2: about the chefs like it reads like it's fiction. It's
1:17:17
Speaker 2: just so one of the best and I'm drawing a blank.
1:17:20
Speaker 2: I think it was called Open Andre Agassiz.
1:17:23
Speaker 3: Also one of the best sports biographies.
1:17:27
Speaker 2: Just really really interesting. And then I have to slip
1:17:31
Speaker 2: over to music because you mentioned Nirvana twice. You mentioned
1:17:34
Speaker 2: Rick Rubin. You're big music fan? What what genres?
1:17:39
Speaker 3: What do you? Where?
1:17:40
Speaker 2: Do you what? What ponds do you fish?
1:17:43
Speaker 3: When I was younger, I was really into heavy metal.
1:17:48
Speaker 3: I still am, but Rush and heavy metal and bands
1:17:51
Speaker 3: like that. Yeah, and I and I played bass in
1:17:54
Speaker 3: a band. And nowadays it's really you know, I'll listen
1:17:59
Speaker 3: to Miles day Davis, I'll listen to uh, you know,
1:18:02
Speaker 3: Burning Spear and Reggae. I'll listen to Radiohead, listened to Why.
1:18:08
Speaker 3: I've just finished Michael McDonald's autobiography.
1:18:12
Speaker 2: Uh, I know what you're told you're about to say.
1:18:17
Speaker 2: Did you see it's.
1:18:19
Speaker 3: Yea yacht documentary or something? They called it yacht rock
1:18:24
Speaker 3: doc I love yacht music, yacht rock. It was so
1:18:27
Speaker 3: surprisingly good.
1:18:30
Speaker 2: I'm a big Steely Dan fan. Well, so I expect
1:18:33
Speaker 2: it to hate it. And there's a brilliant line where
1:18:36
Speaker 2: he gets Donald Fagan on the phone and he's just.
1:18:38
Speaker 3: Like and he hated the fact that he called him
1:18:40
Speaker 3: yacht rock and hung up on him. But like in
1:18:42
Speaker 3: the in the Michael McDonald autobiography, he talks about Steely
1:18:47
Speaker 3: Dan and their process. They were super obsessive, you know,
1:18:52
Speaker 3: they every note counted. They would do take after take
1:18:55
Speaker 3: after take. It was very sort of Beatles Beach Boys
1:18:58
Speaker 3: for certain musicians, Miles Davis probably you know, who were
1:19:03
Speaker 3: just so intense about the process of creating music. And
1:19:07
Speaker 3: I love seeing that and I love learning from that.
1:19:10
Speaker 2: So there's a YouTube series, or it's a series that
1:19:13
Speaker 2: ended up on YouTube called Classic Albums and the making
1:19:17
Speaker 2: of Steely dan Asia is insane. But they also give
1:19:23
Speaker 2: you a little history and show you, Hey, you like
1:19:27
Speaker 2: my old school. Here's the forty three different guitar solos
1:19:31
Speaker 2: before they and then they didn't just take one, they
1:19:33
Speaker 2: patched twelve of them together. Yeah, it's it's pretty amazing.
1:19:37
Speaker 2: I think it's called Classic Albums, and you can find
1:19:40
Speaker 2: a bunch of other stuff, But I thought the Steely
1:19:43
Speaker 2: dance stuff was was really it was.
1:19:46
Speaker 3: Really solo every time.
1:19:49
Speaker 2: And I have a couple of years on you, but
1:19:51
Speaker 2: I'll make you a tiny little bit jealous. I was
1:19:55
Speaker 2: in I want to say, high school. I saw a
1:19:56
Speaker 2: Black Sabbath at Madison Square Garden and this unknown band's
1:20:02
Speaker 2: opened for them named Van Halen. Oh gosh, and it
1:20:05
Speaker 2: was insane. I'm not exaggerated.
1:20:08
Speaker 3: Jealous.
1:20:09
Speaker 2: Is this what every concert is supposed to be like
1:20:12
Speaker 2: I want to say I was fourteen something like that.
1:20:15
Speaker 2: Head blown. All right, our final two questions. What sort
1:20:21
Speaker 2: of advice would you give to a recent college grad
1:20:24
Speaker 2: interested in a career in either alternative investments, private credit,
1:20:29
Speaker 2: what have you?
1:20:32
Speaker 1: So?
1:20:34
Speaker 3: In my view, and I have two young sons well
1:20:38
Speaker 3: twenty and seventeen, and it's kind of the advice that
1:20:41
Speaker 3: I've given them. I believe the greatest definition or criteria
1:20:47
Speaker 3: of success going forward is going to be adaptation. So
1:20:54
Speaker 3: learn to adapt. Everything is being disrupted. Jobs are being disrupted,
1:20:58
Speaker 3: not replaced or being dis abrupted, careers, the world. Your
1:21:03
Speaker 3: ability to try and fail and get up again. You know,
1:21:10
Speaker 3: as the Japanese say, you know Rise eight fall seven,
1:21:14
Speaker 3: you know, Nanna koobi yaogi, You're actually supposed to put
1:21:21
Speaker 3: yourself out there and be resilient and adapt, and you're
1:21:24
Speaker 3: going to need to. I think in the future. That's
1:21:29
Speaker 3: a really important I think mindset to have in the
1:21:33
Speaker 3: world we're entering into and is going to transpire. Obsess
1:21:38
Speaker 3: about what you do as much as you can read
1:21:40
Speaker 3: everything you can get your hands on, network to what
1:21:44
Speaker 3: every extent you can meet people, put yourself out there
1:21:47
Speaker 3: and do it in person, don't do it over zoom.
1:21:49
Speaker 3: Get out there and immerse yourself in whatever it is
1:21:52
Speaker 3: that you're doing. And then finally, I would say, be
1:21:57
Speaker 3: the man or woman in the arena. You know, I
1:22:01
Speaker 3: think there's an overfixation on likes and the comment section.
1:22:06
Speaker 3: Forget the comment section, forget the number of likes you have.
1:22:10
Speaker 3: Put yourself in the arena. They are always going to
1:22:13
Speaker 3: be weak critics sitting in the stands throwing rocks at you.
1:22:17
Speaker 3: Ignore them.
1:22:18
Speaker 2: That's the famous quote from Theodore Roosevelt Teddy, Right, yeah,
1:22:22
Speaker 2: that's right, the man in the arena. And our final question,
1:22:26
Speaker 2: what do you know about the world of alternative investments
1:22:29
Speaker 2: and private credit today? Might have been helpful when you
1:22:32
Speaker 2: were first getting started thirty or so years ago.
1:22:37
Speaker 3: So when I was starting out in the business, I
1:22:39
Speaker 3: viewed the markets as this giant puzzle that needed to
1:22:43
Speaker 3: be solved. And I like puzzles, So you know, I thought,
1:22:46
Speaker 3: all right, I'll take all of the classes and read
1:22:50
Speaker 3: all of the books on cracking the code, and you know,
1:22:54
Speaker 3: quantitative finance and derivative math and all of these things.
1:22:58
Speaker 3: And yes, over the years I've used those, But if
1:23:02
Speaker 3: I could go back and do it all over again,
1:23:05
Speaker 3: I would have taken far more psychology and philosophy classes
1:23:09
Speaker 3: and maybe fewer you know, classes on building DCF models,
1:23:14
Speaker 3: because as I think about my career and how it's
1:23:18
Speaker 3: evolved in my daily interactions and even observing the markets,
1:23:23
Speaker 3: it's far more driven by behavior than it is by math,
1:23:27
Speaker 3: at least the world I've occupied. I don't work at rentech,
1:23:30
Speaker 3: but it's irrationality and incentives and behavior for better or
1:23:39
Speaker 3: worse that creates opportunities, that creates management challenges, what have you.
1:23:44
Speaker 3: But I would have studied more of the psychology and philosophy.
1:23:48
Speaker 2: Really really interesting answer. Thank you Mike for being so
1:23:51
Speaker 2: generous with your time. We have been speaking with Mike Kelly,
1:23:55
Speaker 2: President and chief investment Officer at Future Standard. If you
1:23:59
Speaker 2: and enjoy this conversation, well check out any of the
1:24:03
Speaker 2: six hundred and forty nine we've done over the past
1:24:05
Speaker 2: twelve years. You can find those at iTunes, Spotify, YouTube, Bloomberg,
1:24:10
Speaker 2: wherever you find your favorite podcast. I would be remiss
1:24:14
Speaker 2: if I didn't thank our crack staff that helps put
1:24:16
Speaker 2: these conversations together each week. Alexis Noriega is my video
1:24:21
Speaker 2: producer Sean Russo is my researcher. Anna Luke is my
1:24:26
Speaker 2: podcast producer. I'm Barry Ritaults. You're listening to Masters in
1:24:31
Speaker 2: Business on Bloomberg Radio.