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