WEBVTT - ICapital Chairman and CEO Lawrence Calcano Talks Private Markets

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Let's turn to the

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<v Speaker 1>private markets, though, because as appetite for private assets grows.

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<v Speaker 1>Today we learned that I Capital has surpassed two hundred

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<v Speaker 1>billion dollars in global platform assets and for more on

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<v Speaker 1>this exclusive news. I'm pleased to say we're joined now

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<v Speaker 1>by Chairman and CEO Lawrence Kolkano, along with our own

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<v Speaker 1>Shanali bask And we should also note, of course that

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<v Speaker 1>Lawrence will be speaking tomorrow at the Greenwich Economic Forum.

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<v Speaker 2>Lawrence, it's great to have you with us. So two

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<v Speaker 2>hundred billion dollars.

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<v Speaker 1>In AUM you think about private markets, that's a pretty

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<v Speaker 1>broad church. Where are you seeing the most flows right

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<v Speaker 1>now when you dial down into the private markets.

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<v Speaker 3>Sure, so, thank you, Katie, it's great to be here.

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<v Speaker 3>I really appreciate it. So I think you look at

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<v Speaker 3>the flow question from two different perspectives. The first is

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<v Speaker 3>what are the strategies that people are using and then

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<v Speaker 3>sack in what are the structures they're using to get

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<v Speaker 3>into the acid class. So on the strategies, we're really

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<v Speaker 3>seeing a shift more to private credit. If you go

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<v Speaker 3>back two years, back to twenty two, and you remember

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<v Speaker 3>the economic environment was uncertain we were about to start

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<v Speaker 3>a fed rate hike trend and there was really a

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<v Speaker 3>risk off mode in the market. So in that context,

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<v Speaker 3>private credit, which is shorter duration than private equity, people

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<v Speaker 3>started to shift there. Most of the private credit products

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<v Speaker 3>are floating rate, and so people had a natural hedge,

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<v Speaker 3>you know, in their investment. And as time went on

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<v Speaker 3>and interest rates went to you know, five to six percent,

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<v Speaker 3>people were earning almost ten percent or a little bit

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<v Speaker 3>more on their private credit portfolio, which was which was very,

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<v Speaker 3>very exciting. We've seen flows into private credit year to

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<v Speaker 3>date of about forty one percent as compared to private

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<v Speaker 3>equity of thirty four percent, which is a flip from

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<v Speaker 3>last year. And then the other quick point I'd make

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<v Speaker 3>on the structures, we're seeing a big shift to evergreen

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<v Speaker 3>investment structures as opposed to the traditional private placements which

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<v Speaker 3>people had historically always use. And that's really a function

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<v Speaker 3>of more credited investors coming into the asset class and

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<v Speaker 3>those products. We've seen to the tune of about sixty

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<v Speaker 3>percent of the flows year to date versus forty percent

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<v Speaker 3>for the private assets.

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<v Speaker 4>Lawrence and Okatie and I have both been covering the

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<v Speaker 4>advent of a private credit etf Apollo and State Street

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<v Speaker 4>really breaking the gate wide open in terms of seeking approval.

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<v Speaker 4>For one still needs regulatory approval. But let's look around

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<v Speaker 4>the corner for a minute here, and should they get

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<v Speaker 4>this done, how fast you see more of these entry

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<v Speaker 4>in the market, and how will that change the way

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<v Speaker 4>that retail investors access these funds that have been typically

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<v Speaker 4>hard to access.

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<v Speaker 3>So I would say that you know, you're going to

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<v Speaker 3>see more of that, and you've seen it on the

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<v Speaker 3>M and A side with a lot of traditional asset

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<v Speaker 3>managers requiring alternative asset managers, You're going to see more

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<v Speaker 3>and more partnerships come to the for as you're suggesting,

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<v Speaker 3>as people think more holistically about these portfolios. You know,

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<v Speaker 3>we always think that, you know, though we are obviously

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<v Speaker 3>driving the volume in a lot of alternative assets, they

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<v Speaker 3>live somewhere, They live in a portfolio, and they have

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<v Speaker 3>to make sense in the context of the portfolio and

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<v Speaker 3>what the underlying investor is trying to accomplish in that portfolio.

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<v Speaker 2>So I think you're going to see.

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<v Speaker 3>More of these types of arrangements, and I think ultimately

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<v Speaker 3>they will really help the investor because right now, one

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<v Speaker 3>of the challenges that advisors have is making sense of

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<v Speaker 3>how do you allocate how do you bring these alternative

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<v Speaker 3>assets into a portfolio.

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<v Speaker 4>Well, one major issue too is the liquidity profile. When

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<v Speaker 4>people look at the ETFs, they say, well, wait a minute,

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<v Speaker 4>you're taking an elective asset putting it into a very

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<v Speaker 4>liquid structure. But you've seen these interval funds throughout the

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<v Speaker 4>last year, some very successful, but some of course getting

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<v Speaker 4>into some issues when it comes to redemption requests. Are

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<v Speaker 4>investors thinking about that structure, whether it'll be semi liquid,

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<v Speaker 4>do they want daily liquidity or do they not want

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<v Speaker 4>liquidity for these structures at all?

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<v Speaker 3>So look, I think it's really early days right now

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<v Speaker 3>for all of this, and so a lot of people

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<v Speaker 3>are experimenting on how to make this all work. I

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<v Speaker 3>think the one thing you have to keep in mind,

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<v Speaker 3>and that is an alternative asset, generally speaking, is an

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<v Speaker 3>ill liquid investment.

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<v Speaker 2>So when you think about some of the funds that

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<v Speaker 2>might have.

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<v Speaker 3>Had gates put up, which is by the way, a feature,

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<v Speaker 3>not a bug of how those products are designed, they

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<v Speaker 3>are ultimately investing in long lived, I liquid assets, and

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<v Speaker 3>what people are trying to do is figure out how

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<v Speaker 3>to put hospitable wrappers for this market around those products

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<v Speaker 3>so that people can have that access. But you can't

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<v Speaker 3>get away from the fact that these are still, you know,

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<v Speaker 3>the underlying investments are very illiquid, and so people have

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<v Speaker 3>to understand that. I will tell you one of the

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<v Speaker 3>things I find quite frustrat creating is the description of

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<v Speaker 3>these assets is semi liquid, because I think human nature

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<v Speaker 3>being what it is, when people hear semi liquid, they

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<v Speaker 3>hear what they want to hear, and they hear liquid.

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<v Speaker 3>The reality is that these products are generally speaking illiquid

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<v Speaker 3>with some liquidity features, and I think that's a really

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<v Speaker 3>important component of the education that has to go on

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<v Speaker 3>in this space.

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<v Speaker 2>We certainly spend a lot of time on it, as.

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<v Speaker 3>Do many of the leading asset managers, and really helping

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<v Speaker 3>people understand the underlying character of these products and how

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<v Speaker 3>they work and how they're supposed to work for investors.

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<v Speaker 1>Lawrence, it's a great point, and of course making sure

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<v Speaker 1>that it's communicated to perspective retail investors in particular. I

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<v Speaker 1>know a lot of etf issuers who are thinking carefully

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<v Speaker 1>about that topic, but I am curious when it comes

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<v Speaker 1>to retail investors moving into private assets.

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<v Speaker 2>I have to ask why bother when.

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<v Speaker 1>You have public markets that are up twenty one percent

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<v Speaker 1>you're to date on the S and P five hundred,

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<v Speaker 1>for example, what role do you see assets playing in

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<v Speaker 1>the typical portfolio of just the average investor.

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<v Speaker 3>Sure, if you look at the sort of large families,

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<v Speaker 3>family offices, you look at institutions, many of those are

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<v Speaker 3>allocated well in access of fifty percent. If you look

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<v Speaker 3>at the suggested allocations at most of the large private banks,

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<v Speaker 3>they're suggesting allocations of fifteen to twenty five percent into

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<v Speaker 3>alternative investments for their underlying wealth clients. And so the

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<v Speaker 3>view is clearly that there's an opportunity for you know,

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<v Speaker 3>incremental return. People buy these things for the same reasons

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<v Speaker 3>that large families and institutions do. They want and they're

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<v Speaker 3>seeking incremental return opportunities. They're seeking diversification of the portfolio.

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<v Speaker 3>And you think about the private markets today, there are

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<v Speaker 3>hundreds of thousands of private companies and there are four

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<v Speaker 3>or five thousand public companies.

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<v Speaker 2>So if you think about the.

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<v Speaker 3>Market, not investing in is shutting down a very significant.

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<v Speaker 2>Part of the marketplace to the underlying investors.

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<v Speaker 3>So I think privates play a really important role in

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<v Speaker 3>a complete portfolio. Most certainly they will not be for

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<v Speaker 3>everybody because of the liquidity conversations that we had a

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<v Speaker 3>few seconds ago, as well as some other reasons, but

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<v Speaker 3>I think for the right investor base, they can be

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<v Speaker 3>very additive to the portfolio.

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<v Speaker 1>Yeah, it's an interesting point, especially when you think the

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<v Speaker 1>fact about the fact that we aren't seeing a lot

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<v Speaker 1>of IPOs lately. We have seen some delistings, so it

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<v Speaker 1>feels just like the public markets are shrink and going

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<v Speaker 1>into privates. And speaking of privates, you make the points

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<v Speaker 1>in your notes that private credit has had a good run,

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<v Speaker 1>it's had a lot of the mind share as well,

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<v Speaker 1>but you see private equity growing in the months ahead.

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<v Speaker 2>Walk us through that call.

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<v Speaker 3>Sure, So it's sort of the inverse of what I

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<v Speaker 3>talked about earlier, where you know, you have as interest

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<v Speaker 3>rates were coming down, you know, private credit became very

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<v Speaker 3>very attractive. Sorry, as interest rates were going up, private

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<v Speaker 3>credit it became very very attractive given the hedge and frankly,

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<v Speaker 3>the spread between the expected total return on credit that

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<v Speaker 3>was then yielding ten percent and equity was narrowing. As

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<v Speaker 3>we now perhaps start a reduction cycle in interest rates,

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<v Speaker 3>you're going to see the spreads in private credit and

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<v Speaker 3>private equity start to widen again. And I also think

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<v Speaker 3>as we get into sort of that climate, equities tend

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<v Speaker 3>to perform quite well, so we would expect more allocation

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<v Speaker 3>into private equity in the months ahead. But I would

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<v Speaker 3>say very much that the private credit strategies are going

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<v Speaker 3>to be a core part of alternative holdings. And I

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<v Speaker 3>think as you look forward, when you think about how

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<v Speaker 3>people will allocate, at some point, I think people are

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<v Speaker 3>going to stop even referring to these assets as alternative.

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<v Speaker 3>I think people are going to have an equity portfolio,

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<v Speaker 3>and that portfolio is going to have common stocks, ETFs,

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<v Speaker 3>private companies, private.

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<v Speaker 2>Equity funds, maybe some venture funds.

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<v Speaker 3>Private credit portfolio is going to have unis, treasuries, corporate bonds,

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<v Speaker 3>and private credit maybe structured credit, real estate credit, et cetera.

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<v Speaker 3>And you're going to see a blending of the private

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<v Speaker 3>markets and the public markets, and people are going to

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<v Speaker 3>are going to think about, you know, how to combine

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<v Speaker 3>these things to get to the portfolio outcomes they're looking for.

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<v Speaker 1>All right, Lawrence, great conversation, Really appreciate your time. Of course,

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<v Speaker 1>that is Lawrence Kolkano. He is the Chairman and CEO

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<v Speaker 1>of I Capital and thanks of course to Shanali bask