Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to The Money Stuff Podcast, your weekly podcast.
Speaker 2: You've already talked about stuff really to money. I'm Matt
Speaker 2: Levine and I read the Money Stuff column for Bloomberg Opinions.
Speaker 3: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 3: an anchor for Bloomberg Television.
Speaker 2: What are you at today, Katie?
Speaker 3: We're going to talk about M and A fees. Yep,
Speaker 3: We're going to talk about private asset ETFs and then
Speaker 3: we're going to do a mail bag mail bag.
Speaker 2: All right, let's get to it MNA fees.
Speaker 3: So how do investment bankers make money in a normal
Speaker 3: M and A environment?
Speaker 2: Stereotypically, investment bankers get paid for closing M and A deals. Yeah,
Speaker 2: they spend most of their time prospecting for deals and
Speaker 2: occasionally a deal actually happens, and then they get a
Speaker 2: big check. You know, I wrote that they do most
Speaker 2: of their work for free, and then sometimes they're wildly
Speaker 2: over paid. Right, Like, you do a lot of pitching,
Speaker 2: you do a lot of advising clients, You do a
Speaker 2: lot of working on deals that don't happen. Then you
Speaker 2: do a few deals that do happen and you get
Speaker 2: a twenty million dollar check.
Speaker 3: And like you said, occasionally deals close. It feels like
Speaker 3: occasionally is turning into someone infrequently deals closed. In this
Speaker 3: m ANDA.
Speaker 2: Environment, the norm is if you do a deal, you
Speaker 2: get paid, right, and doing a deal is like a
Speaker 2: little bit of a the concept they pitch a lot
Speaker 2: of deals that never happen or like you do some
Speaker 2: work stories. Yeah, but like if you sign a deal,
Speaker 2: you certainly expact that most of the deals that sign
Speaker 2: close two companies agreed to merge and then they merge. Right,
Speaker 2: in the current environment, it is less common. I mean
Speaker 2: it's pretty common, but it's like a little bit less
Speaker 2: certain that a deal that signs will close, right because
Speaker 2: of anti trust regulatory scrutiny is like the sort of
Speaker 2: big headline thing, but other reasons.
Speaker 3: To the golden age of anti trust.
Speaker 2: The golden age of anti trust, and so like some
Speaker 2: big companies sign big deals and then they don't close.
Speaker 2: And if you're a banker whose fee is continued closing,
Speaker 2: then you don't get the fee and then you really sad.
Speaker 3: So what do we do for these four investment bankers?
Speaker 3: Because you wrote about it this week, probably you wrote
Speaker 3: about it this week that it was a Reuter's article.
Speaker 2: I hope I'm pronouncing that name right.
Speaker 3: No, it was it Reuter's. I can say that again. Well,
Speaker 3: you wrote about this week a Reuter's article about these
Speaker 3: poor investment bankers who deals aren't closing as much as
Speaker 3: they were. What are they to do?
Speaker 2: There's been some amount of structuring where you could get
Speaker 2: your fee in some set of installments, right where like
Speaker 2: you could paid a little bit when the deal signs
Speaker 2: and more when the deal closes, or you could get
Speaker 2: paid something for a busted deal. But now bankers are
Speaker 2: charging more of their money up front, like when a
Speaker 2: deal signs, so like when they deliver a fairness opinion,
Speaker 2: and like the deal is sort of formally announced, the
Speaker 2: bank gets check. And they're also when deals get busted,
Speaker 2: banks will write in their engagement letter, if you sign
Speaker 2: a deal and then the deal doesn't close for like
Speaker 2: red uterors, and often the company will get a breakup
Speaker 2: fee closing for regulatory reasons. And banks will say, if
Speaker 2: you get a breakup fee, we want a chunk of it.
Speaker 2: And like both of those things, getting a chunk of
Speaker 2: the breakup fee and getting paid on announcement are like
Speaker 2: more common now and they make up a greater percentage
Speaker 2: now than they used to. So it's like now banks
Speaker 2: are getting like an aggregate twenty or twenty five percent
Speaker 2: of their fees on signing as opposed to like five
Speaker 2: ish percent a few years ago, and they are asking
Speaker 2: for like a quarter of the breakup fee instead of
Speaker 2: like ten or fifteen percent.
Speaker 3: And you know, this world intimately much more than I do.
Speaker 3: But I mean to me, that sounds totally reasonable.
Speaker 2: Oh yeah, it's totally reasonable. It's just like it was
Speaker 2: a norm that they didn't get paid that way. And
Speaker 2: it's funny. You know, I was an M and A
Speaker 2: lawyer and then I was an investment banker. Lawyers traditionally
Speaker 2: get paid by the hour. That's not really true in
Speaker 2: M and A anymore. A lot of lawyers, like bankers,
Speaker 2: get paid success fees. There's a reason why bankers get
Speaker 2: paid success fees so successfully, Like when the deal closes
Speaker 2: in like a classic cell side assignment, if you're selling
Speaker 2: a company and they're getting ten billion dollars for themselves
Speaker 2: and you're like, I want half a percent of that,
Speaker 2: and they're like, yeah, it's like free money. It's like
Speaker 2: all this money gushing in the door, you can have
Speaker 2: half a percent of it. I think that's a lot
Speaker 2: of money. Right. When you are a sell slid banker
Speaker 2: and you get paid only on deal closing, you are
Speaker 2: effectively getting paid by someone else, right, the client who
Speaker 2: hires yours like, ah, it's not my money, Like the
Speaker 2: buyer is paying that money anyway, will be gone, you know,
Speaker 2: will be great. You know, we're getting bought out at
Speaker 2: a premium, so we don't care about giving you half
Speaker 2: a percent of that. Right, And so if you're a banker,
Speaker 2: you can charge a bigger fee if it's entirely contingent.
Speaker 2: If it's like you pay no money unless you get
Speaker 2: bought out, right, So it's an attractive proposition. It's just
Speaker 2: like if more deals don't close, then like your business
Speaker 2: gets very risky, and like sometimes you don't make any money.
Speaker 2: You know, lawyers traditionally get paid much more reliably. They
Speaker 2: build by the hour, even law firms that charge success fees.
Speaker 2: If a deal doesn't close, they usually get paid something anyway,
Speaker 2: you know, whereas like bankers traditionally got less of that,
Speaker 2: and the lawyers like the way they get paid. And
Speaker 2: there have been criticisms from like lawyers and judges of
Speaker 2: how bankers get paid, because like, if you're a banker
Speaker 2: and you get paid only on completing a deal, you
Speaker 2: have incentives to make sure that deals get done right.
Speaker 2: The client is like, I don't know if this is
Speaker 2: actually a good idea. Do we really want to sell?
Speaker 2: Like we might be better off on our own. There is
Speaker 2: a stereotype. The banker is like, no, you got to
Speaker 2: sell them, And then I'm not really true and like
Speaker 2: trusted investment banker knows what to say no and whatever.
Speaker 2: But it's like something amount of truth to this, where
Speaker 2: like the investment banker is always incentivized to do a deal,
Speaker 2: whereas someone else might sometimes correctly advise the company like
Speaker 2: do nothing. Bill.
Speaker 3: I don't know how you feel, but I was very
Speaker 3: excited reading money stuff this week. And then there was
Speaker 3: a current news happening that very neatly illustrated what we're
Speaker 3: talking about, because this, of course what we're talking about,
Speaker 3: M and A bankers wanting more of the breakup fees
Speaker 3: in part due to antitrust concerns, and this week one
Speaker 3: of the biggest sorries was this cybersecurity startup named wiz
Speaker 3: Google had offered a takeover bid of twenty three billion
Speaker 3: dollars and Wiz turned it down. They said that they
Speaker 3: were gonna go for an IPO instead, but Bloomberg reported
Speaker 3: that Whiz decided it could ultimately be worth more as
Speaker 3: a public company, but also concerns about the potential for
Speaker 3: a protracted regulatory approval process also encouraged it to go
Speaker 3: this route as well. So, I mean, twenty three billion
Speaker 3: dollars is hard to walk away from. I think the
Speaker 3: CEO called it a humbling offer. But I mean if
Speaker 3: the deal's probably gonna come under scrutiny and probably won't close,
Speaker 3: maybe it's not worth a headache.
Speaker 2: Yeah, I mean you see a lot of this, like
Speaker 2: where if you're a company and you get a really
Speaker 2: tempting offer and you're like, there's a fifty percent chance
Speaker 2: this won't close for regular tor reasons, Like you're in
Speaker 2: a much worse situation in a lot of ways if
Speaker 2: you like spend months working on getting this deal closed,
Speaker 2: sort of spending all of your operations to plan a merger,
Speaker 2: and then like it falls apart for regulatory reasons and
Speaker 2: you're kind of back to nowhere. It's a bad situation.
Speaker 2: To be in and so if the money sounds great,
Speaker 2: but you might say, you know, this is like like
Speaker 2: a mirage of getting all this money. I mean from
Speaker 2: the banker's perspective too, the deals that don't close are
Speaker 2: the ones that in some ways to take the most work,
Speaker 2: right because like you signed the deal and that's like
Speaker 2: this anti trust investigation and you're like sort of you know,
Speaker 2: working to integrate the companies and also like respond to
Speaker 2: regulatory concerns. It's a lot of work. And then it
Speaker 2: doesn't close and you don't get bad.
Speaker 3: So who's happy?
Speaker 1: Here?
Speaker 3: Is there silver lining? Like are the lawyers happy? Maybe
Speaker 3: the bankers are sad, but the lawyers are happy.
Speaker 2: The bankers are fine. Like what's happening is they're changing
Speaker 2: their free structures to get pop. The people who are
Speaker 2: unhappy to some degree are like the companies who were
Speaker 2: used to paying for success, and like you pay nothing
Speaker 2: unless you get a merger, and now it's like, you know,
Speaker 2: you pay something if you don't get a merger, and
Speaker 2: like that's a bummer to have your deal fall apart
Speaker 2: and still get the bill from the bankers.
Speaker 3: Okay, let's get to the good stuff. Let's talk about
Speaker 3: private asset ETF. So we've already spoken about.
Speaker 2: Yea, you were like, I think last week you were like,
Speaker 2: how were we gonna put private assets into NAIs? Like, Yeah,
Speaker 2: there's gotta be some way. Now we're going to talk
Speaker 2: about it for real.
Speaker 3: We're gonna talk about it for real because it's one
Speaker 3: of the most fun and most frequent thought exercises that's
Speaker 3: happening in the ETF industry right now. You have this
Speaker 3: like super in demand asset class, this super in demand wrapper,
Speaker 3: and you have all these big brains trying to figure
Speaker 3: out how to put private assets into an ETF and
Speaker 3: no one has cracked the code yet.
Speaker 2: But you're gonna tell us how.
Speaker 3: I'm not going to tell you how, but I'm going
Speaker 3: to talk to you about different attempts to do that,
Speaker 3: and you're gonna opine on it. Probably there's like all
Speaker 3: these proxy sort of things. It sort of is similar
Speaker 3: to when there weren't spot bitcoin or Bitcoin Futures ETF,
Speaker 3: so you would have these ETFs that were launch that
Speaker 3: held a bunch of bitcoin miners and things such as
Speaker 3: that those exist right now. Then there was this filing
Speaker 3: for the Crane shares Man Liquid Private Equity Index ETF,
Speaker 3: which would basically seek to be a quote proxy for
Speaker 3: private equity performance and risk exposures by focusing on small
Speaker 3: and MidCap stocks that have characteristics similar to companies in
Speaker 3: private equity buyout funds. And I thought that was interesting
Speaker 3: because it's not buying shares of publicly listed private equity firms.
Speaker 3: There's a few ETFs that do that right now, but
Speaker 3: it's basically trying to mimic the portfolio of these private
Speaker 3: equity companies.
Speaker 2: Yeah, there's a theory that like the value add from
Speaker 2: private equity consists of like taking a certain tranch of
Speaker 2: kind of smaller MidCap sort of cash flowty companies and
Speaker 2: then levering them up a lot. The thought is, like
Speaker 2: you can do that on your own instead of investing
Speaker 2: with take Care or Blacks. Then to like buy out
Speaker 2: these like MidCap companies and like put a bunch of
Speaker 2: leverage on them. You can just buy their publicly traded
Speaker 2: shares and like they got a margin and learn answer shares,
Speaker 2: and then you kind of like recreated a private equity
Speaker 2: portfolio that is true at like a very high level.
Speaker 2: And then it's like it abstracts away from like whatever
Speaker 2: operational improvements they make. Whatever clever financial engineering they do,
Speaker 2: it takes away all of the like stuff they pride
Speaker 2: themselves on doing. But like the basic thing of like
Speaker 2: buying some companies with cash flows and borrowing against them, Like, yeah,
Speaker 2: you can do that on your own, the ideas the
Speaker 2: ETF can do that on insigne. I don't actually do
Speaker 2: the leverage part as much as like people like started
Speaker 2: to publicly traded vehicles to like try to make private
Speaker 2: equity returns by doing that kind of trade.
Speaker 3: Yeah, it is unsatisfying.
Speaker 4: Though.
Speaker 2: One reason it's unsatisfying is that when you talk about
Speaker 2: like private assets being a hot asset class, like one
Speaker 2: thing that means is like private credit is very hot.
Speaker 2: But like when we talk about like people who want
Speaker 2: to go to parties and say that they own blah
Speaker 2: blah blah, Like the thing they want to own is
Speaker 2: like SpaceX right or like stripe right, it's these hot
Speaker 2: startups taking a like slice of mid cap companies. Is
Speaker 2: not that there's no proxy for very fast growing private
Speaker 2: tech space startups right, Like this is like a proxy
Speaker 2: for like a middle market private equity fund, which is
Speaker 2: like not quite the like sexy thing that you're trying to.
Speaker 3: Sell yeah, And I mean part of the reason that
Speaker 3: we're talking about this so much, and I've made us
Speaker 3: talk about this for two weeks in a row, is
Speaker 3: because speaking of a deal that actually did work, Blackrock
Speaker 3: bought private markets data provider Prequin, and then BlackRock's chief
Speaker 3: financial officer said that basically they want to take some
Speaker 3: of the data that Prequin has, create investable indices and
Speaker 3: launch quote things like exchange traded products. So when I
Speaker 3: say the best and brightest, I mean, you know, some
Speaker 3: of the biggest ones.
Speaker 2: They're going to do that.
Speaker 3: Well, that's the question, Matt, how do they do it.
Speaker 3: You take a look at the SEC's rule book. They
Speaker 3: have a fifteen percent limit on liquid investments for funds,
Speaker 3: So I mean, maybe you have an ETF that's like
Speaker 3: fifteen percent private assets. But the way that they define
Speaker 3: a quid investments is that basically they're assets that can't
Speaker 3: be sold in seven days without significantly changing the market
Speaker 3: value of the investment. So that's also kind of unsatisfying.
Speaker 3: I mean, you have an ETF, it does hold private assets,
Speaker 3: they can only be fifteen percent of the fund and
Speaker 3: then you kind of dilute the rest with like equities
Speaker 3: or cash. Or something.
Speaker 2: I love the idea that like it's a fifteen percent
Speaker 2: priority and like you put the rest in like SMP. Right, Yeah,
Speaker 2: this is like eighty five percent goes to your index
Speaker 2: allocation and like fifteen percent goes to your private sellocation,
Speaker 2: and like you just keep that in mind when you
Speaker 2: buy the thing. Yeah, that's a cool idea. That's like
Speaker 2: very like amateurish financial engineering. Like yeah, you know you
Speaker 2: do that. You short eighty five percent as much of
Speaker 2: like an SMP ETF and like, yeah, you're right, you
Speaker 2: get a private.
Speaker 3: Assets ct and that gets you a lot closer than
Speaker 3: anything else, right now.
Speaker 2: Obviously, Yeah, I do think that's like a hard thing
Speaker 2: to market, to be like this is an eighty five
Speaker 2: percent SMPTF and a fifteen percent pile of private assets.
Speaker 2: That's weird.
Speaker 3: It is a little bit weird.
Speaker 2: It's also weird, by the way, is like the ETF
Speaker 2: structure is like there are legal limits, but there's also
Speaker 2: like the point of the ETF structure is that you
Speaker 2: can create and redeem it in kind, right, or you
Speaker 2: can create and redeem it anyway, right, So like if
Speaker 2: the price of the ETF is not in line with
Speaker 2: like the value of the underlying assets. Then like some
Speaker 2: arbor treasure can like buy the ETF and you know,
Speaker 2: sell the assets or vice versa to bring the price
Speaker 2: back in line. It's much harder to do with private
Speaker 2: assets that don't trade even away from like the SEC rules.
Speaker 2: You need to set up some mechanism to keep the
Speaker 2: price online. It just like the easy way to do
Speaker 2: a like private asset ETF more or less is and
Speaker 2: we've talked about it a bunch of times, the Destiny
Speaker 2: take one hundred fund.
Speaker 4: Right.
Speaker 2: The easy way to do it is you have a
Speaker 2: product that trades, that is a closed end fund that
Speaker 2: owns private assets.
Speaker 3: Right.
Speaker 2: The whole problem with that is that the trading price
Speaker 2: of the product doesn't have to have anything to do
Speaker 2: with the value of the underlying assets, and so Destiny
Speaker 2: trade out a keete premium in a way that makes
Speaker 2: it feel not like a great proxy for the assets,
Speaker 2: because like you're not buying SpaceX or buying this huge premium. Yeah,
Speaker 2: and that's like a hard nut.
Speaker 3: To crack, right, Yeah, it's like the ultimate liquidity mismatch.
Speaker 3: Some of the conversations that I've been having around private
Speaker 3: asset ETFs uh, and I've had a lot of them
Speaker 3: with issuers who aren't quite ready to go on the
Speaker 3: record yet. But the big question is how do you
Speaker 3: take a wrapper that is liquid by definition trees like water,
Speaker 3: take these assets that don't really trade and put them together.
Speaker 3: And it sounds like a lot of the conversations I
Speaker 3: was having in early twenty twenty about fixed income ETFs.
Speaker 3: There was a lot of I.
Speaker 2: Was going to say, like, right, so, first of all,
Speaker 2: like liquidity mismatch is a term that I used to
Speaker 2: write about all the time when I had like a
Speaker 2: jerky daily section in the newsletter. Yeah, that old people
Speaker 2: are worried about bond rocket liquidity because like, oh, these
Speaker 2: bond ETFs you can trade them all the time, but
Speaker 2: the bonds don't trade that much, and like what will happen?
Speaker 3: I did see something o her in your eyes and
Speaker 3: your listener. I wish you could have seen it when.
Speaker 2: I spent equity mismatch. It's such a misconception to think
Speaker 2: that you can't have a liquid wrapper for an I
Speaker 2: liquid thing, because all stocks are that, right, Like a
Speaker 2: company is like a bunch of like factories and like
Speaker 2: employment contracts and all this like super I liquid like
Speaker 2: hard to value.
Speaker 3: Stuff they're not just on the screen, right.
Speaker 2: Right, like a company. I'll say, it's just not but
Speaker 2: you can like completely abstract it to a line that
Speaker 2: trades like every millisecond. Right, So the liquidity mismatch point
Speaker 2: is so strange what people worry about with bond funds,
Speaker 2: And it's really much more about mutual funds than ETFs,
Speaker 2: but people lump them together. People worry about like it's
Speaker 2: not the liquidity of the rapper versus the liquidity of
Speaker 2: the underlying It's like sometimes you want to take the
Speaker 2: underlying out of the wrapper, and like that is hard, right,
Speaker 2: Like you're used to liquidly trading the ETF and then
Speaker 2: like you like get the bombs and oh, these bonds
Speaker 2: don't trade with a company. That's not a problem because
Speaker 2: you're not taking assets out of the company.
Speaker 3: Right.
Speaker 2: With a closed un fund, it's not a problem because
Speaker 2: you're not taking assets out of the clothes un fund.
Speaker 2: The problem is how with a company it can trade
Speaker 2: at a price that doesn't reflect the value of the
Speaker 2: underlying assets. I would say the other problem with like
Speaker 2: this whole idea is that it's one thing to be
Speaker 2: like people want to buy private assets, so we have
Speaker 2: to find a convenient rapper to sell these private assets
Speaker 2: to retail investors. But like, where do you get the
Speaker 2: private assets? Like, there's plenty of private assets in the world, right,
Speaker 2: there's plenty of people who will sell you a private investment,
Speaker 2: but like there are fewer people who will sell you SpaceX, right,
Speaker 2: there are fewer people who will sell you Stripe. The
Speaker 2: private assets that people really want are allocated. They're like
Speaker 2: owned fairly tightly by like big investors who one might
Speaker 2: not want to sell, and two the company tries to
Speaker 2: keep them close, right, Like Stripe tries very hard to
Speaker 2: prevent its investors from selling any stock to destiny.
Speaker 3: I want to say Blackrock can just do a ton
Speaker 3: of what forward contracts on Stripe.
Speaker 2: If you're big enough, you probably can get some of
Speaker 2: these things, and you probably can negotiate terms. Right. But
Speaker 2: there are a lot of big financial institutions that would
Speaker 2: love to have a big pile of Stripper SpaceX to
Speaker 2: sell to their customers, and these private companies to them
Speaker 2: like there's a reason they having on public, right, and
Speaker 2: like going semi public by like selling some shares to
Speaker 2: some vehicle that is going to list publicly. It is
Speaker 2: like kind of an annoyance for them if you crack
Speaker 2: the code in such a way that your vehicle provides
Speaker 2: even by proxy, like a mark for the private assets. Right,
Speaker 2: if you're like if you can look at the like
Speaker 2: Kitty Greifeld Private Markets ETF and be like, oh, that
Speaker 2: tells me that SpaceX is trading at thirty seven, then
Speaker 2: like that's like what SpaceX is trying to prevent, Like
Speaker 2: they don't want their price to go up and down
Speaker 2: every day. Yeah, and so like, to the extent this
Speaker 2: works mechanically, it's annoying for the issuers. And then like
Speaker 2: you know, the question is if you have this product,
Speaker 2: it's easier for you to get bad private companies. Yeah,
Speaker 2: like like oh, sure, I'll sell you one hundred million
Speaker 2: shares for your thing. You know, you talk about Blackrock
Speaker 2: wanting to index the private markets. Like if you could
Speaker 2: get like a true like index slice of the private markets,
Speaker 2: First of all, that might be bad, right, but you
Speaker 2: really want it's like the good companies. But like the
Speaker 2: real worry is like you would end up with not
Speaker 2: an index of all the companies, but like the bad
Speaker 2: ones that are willing to be involved in your index. Yeah,
Speaker 2: that might be even worse.
Speaker 3: Than just yeah, so you want your blue chip private
Speaker 3: companies the one who would have iPod in a normal market.
Speaker 3: But we're not in a normal market.
Speaker 2: It's not clear to me exactly why some of the
Speaker 2: blue chip companies don't IPO, and like some of it
Speaker 2: is like we're in a bad IPO market. But I
Speaker 2: think some of it is you're now in an environment
Speaker 2: where you can be a very large private company without IPO,
Speaker 2: and your cost of capital is not that high, and
Speaker 2: you have some like attractive benefits of not having the
Speaker 2: nuisances of a public market. ELI and mus doesn't like
Speaker 2: being public that much, right, Like would SpaceX go public
Speaker 2: even in a good IPO market? I don't know.
Speaker 3: Yeah, And I mean Stripe is sort of the same
Speaker 3: idea they could have iPod, right, I mean, if you
Speaker 3: had an index of private assets, could you just do
Speaker 3: like swaps for disposure.
Speaker 2: That's the other thing I was thinking, like when I
Speaker 2: was thinking about just like the abstract question of like
Speaker 2: can you do an ETF of private markets? The natural
Speaker 2: way to do it is the way bitcoin ETFs worked
Speaker 2: before the like spot bitcoin ETFs were approved for whatever reason,
Speaker 2: you can't hold the asset here because you can't buy
Speaker 2: the shares or because you have liquidity rules that don't
Speaker 2: allow you to buy the shares, so you hold like
Speaker 2: a derivative on the underlying asset, right, Like you get
Speaker 2: some hedge fund bank speculator to write you a swap
Speaker 2: on the value of SpaceX shares and then you use that,
Speaker 2: you put that in the thing, and like that's your proxy.
Speaker 3: That sounds like it could happen pretty soon.
Speaker 2: Yeah, it's like tricky, right, first all the SEC has
Speaker 2: rules about derivatives and funds. But like again, like it
Speaker 2: can be done, right, Bitcoin futures ets did it. Secondly,
Speaker 2: you have to have someone write you that swap and
Speaker 2: like be short SpaceX restrip, which is a risky pat Now,
Speaker 2: somebody who writes you that swap might be able to
Speaker 2: hedge it by owning the underlying shares, right, but like
Speaker 2: that's a risky proposition too, Like you don't know who
Speaker 2: that person is, and like you know their contracts with
Speaker 2: the company. You might ban them from hedging by writing swaps.
Speaker 2: And you have like pricing problems, right because like you
Speaker 2: know the forward contracts for some of these private companies.
Speaker 2: It's like when they go public, you deliver the shares
Speaker 2: and so like, there's ultimately a price for the forward contract,
Speaker 2: but like, how do you market to market before they
Speaker 2: go public with an ETF, Like you kind of need
Speaker 2: a daily market price, and it's hard to hard to
Speaker 2: mark that thing to market without actual trading, and with swaps,
Speaker 2: it's not obvious that some of these things will ever
Speaker 2: go public. So I don't know you could do it
Speaker 2: that way. But like, you have a lot of mechanics
Speaker 2: to work.
Speaker 3: There a lot of big questions. But boy, isn't it
Speaker 3: fun to think about?
Speaker 4: I love it.
Speaker 1: It's time for mail bag, mail bag, mail bag.
Speaker 3: So we did a call out for mail back questions
Speaker 3: last week. We were thinking, well, should we say we
Speaker 3: want you to keep sending questions?
Speaker 2: We got really good ones. We did get really try
Speaker 2: to like respond to them enthusiastically so that you'll send
Speaker 2: us more.
Speaker 3: Yeah, please send us more. We're going to answer a
Speaker 3: few of them right now.
Speaker 2: But please send us more more in the hopper.
Speaker 3: Yeah, boy, and they are fun to read. Andrew had
Speaker 3: a fun one. We were talking about Ron Barron last week,
Speaker 3: and and Andrew wrote, I was catching up with Friday Show,
Speaker 3: listening to the general trend of active management getting squeezed
Speaker 3: on their fees. It reminded me of a conversation I
Speaker 3: had in the sauna with this guy who was in
Speaker 3: town for the Baron Funds annual meeting. He ran money
Speaker 3: for an institution and told me he kept some money
Speaker 3: in their funds just for the entertainment at their annual meeting.
Speaker 3: Look at the bands that get to perform at their meetings, Fleetwood, Mac,
Speaker 3: Justin Timberlake, lots of others. I thought that type of
Speaker 3: thing would have been eliminated years ago, but he said,
Speaker 3: you just have to have any amount of money invested
Speaker 3: and you get an invite. That is incredible. I love that.
Speaker 2: It's like a real model in investment management. Right. Yeah,
Speaker 2: It's like you give your clients some like you know,
Speaker 2: ancillary cool service and exchange. You get to manage some
Speaker 2: of their money for them at higher fees than they
Speaker 2: would pay the van card.
Speaker 4: Right.
Speaker 2: The guy in this lot is like an institutional allocator,
Speaker 2: which is like a little weird, right yeah, because like
Speaker 2: he's putting his clients money into Barren so that he
Speaker 2: can go to the justin Termala truck. But like you
Speaker 2: read about like private equity funds have like LP advisory
Speaker 2: councils like sort of like a board of directors or
Speaker 2: like a private equity fund, Like you know, ten of
Speaker 2: their big investors will be on some sort of board
Speaker 2: where like every quarter they review the investments and like
Speaker 2: they chat with the GP. But they have those meetings
Speaker 2: and like vacation destinations and like those meetings are fun.
Speaker 2: Right if you're like the like state treasurer or whatever,
Speaker 2: you can like go to like a really ritzy resort
Speaker 2: for a weekend to like be on your advisory council
Speaker 2: and like then maybe you all get some more money
Speaker 2: to that private equity fund.
Speaker 3: Makes a lot of sense to me. I was so
Speaker 3: delighted to get this email because this touches on something
Speaker 3: that you were writing about in the newsletter this past week.
Speaker 3: You quoted Sebastian Mallaby. He is the author of More
Speaker 3: Money than God Hedge Funds and the Making of the
Speaker 3: New Elite. And one of the conclusions that you reached
Speaker 3: in the newsletter this week was that the parties are
Speaker 3: less fun because traditional stock picking is going away.
Speaker 2: There was a vogue for hedge funds being like celebrity
Speaker 2: stock pickers who like went to conferences and were like ah,
Speaker 2: putting my best idea is blah blah blah. Right, and
Speaker 2: now it's a much more like grinding out alpha kind
Speaker 2: of business. And you know it's just like more professionalized
Speaker 2: and less like party driven, but it's still like there's
Speaker 2: still a lot of like party driven stuff. And oh yeah, finance.
Speaker 2: The other thing you know in this vein a famous
Speaker 2: fact about finance is like some number of investment firms
Speaker 2: either like started as or like are marketed by email newsletters,
Speaker 2: and like Bridgewater is the most famous one. Like Bridgewater
Speaker 2: sort of starts as an investment newsletter and people like, yeah,
Speaker 2: your newsletter is so good, I'd like to give you money.
Speaker 2: And now like they have the most money of any
Speaker 2: hedge fund, they sort of say, well, you know, some
Speaker 2: investors allocate to Bridgewater not because the returns are so great,
Speaker 2: but because they like getting Bridgewater's research right. You know,
Speaker 2: it's more boring and like going to the justin Timberlake party.
Speaker 2: But again, it's like you're providing some benefit other than
Speaker 2: like managing the money in the best way, and people
Speaker 2: are willing to give you some of the money in
Speaker 2: exchange for like nice aura around all the services you
Speaker 2: provide and they hope that they'll that you'll make the money.
Speaker 4: You have.
Speaker 3: Interesting that you mentioned justin Timberlake but not Fleetwood Mac.
Speaker 2: It was just like thinking that the kids these days,
Speaker 2: But of course justin Timberlake is like far bend the
Speaker 2: kids these days.
Speaker 3: It's going to ruin the tour.
Speaker 2: It's going to ruin.
Speaker 3: Is pokers taking a security?
Speaker 2: Is poker's taking a security? Do you want to read
Speaker 2: the email? Yes?
Speaker 3: No, I love reading from an anonymous reader. Writer, No,
Speaker 3: I guess they're a reader anyway, from an anonymous reader.
Speaker 3: It is fairly common for poker players to be staked.
Speaker 3: By that, I mean that a person or a group
Speaker 3: of people provide some or all of the money the
Speaker 3: poker player is gambling with parentheses, either as the entry
Speaker 3: fee to a tournament or the bank roll they used
Speaker 3: to play in cash games, and in return they get
Speaker 3: some agreed upon percentage of the winnings, if there are any.
Speaker 3: There are even sites where you can buy and sell
Speaker 3: stakes for tournaments. Do poker steaks past the Howie test?
Speaker 3: Are these staking websites unregistered security exchanges?
Speaker 2: So I was having any people an investment firm last week,
Speaker 2: and they kept asking a questions and I kept saying,
Speaker 2: I'm sorry to do this, but really this is about cryptoe.
Speaker 2: I'm sick of crypto. We're all sick of CRI. Yeah,
Speaker 2: but like crypto has really changed how a lot of
Speaker 2: people understand a lot of things in finance. And like,
Speaker 2: this question is a crypto.
Speaker 3: Question, Like do you feel like they're trying to trick you?
Speaker 2: No, No, I'm not sure that our anonymous reader thinks
Speaker 2: it's a crypto. It's just like it is a cryptical question.
Speaker 2: So here's the deal. There's like an ancient Supreme Court
Speaker 2: case called Howie where the Supreme Court said that a security,
Speaker 2: subject to like sec securities regulation, is an investment of
Speaker 2: money in a common enterprise, with profits to come solely
Speaker 2: from the efforts of others. Right. And so for most
Speaker 2: of my career, if you ask what is a security,
Speaker 2: people like, yeah, it's like a stock or a bond, right,
Speaker 2: And most sec cases are stocks and bonds, not all,
Speaker 2: but like most. And that was like the focus of securities.
Speaker 2: And so you had this world where people would offer
Speaker 2: stocks and bonds and the sec would regulate it. And
Speaker 2: you have the world of people that other like investment
Speaker 2: opportunities and they're like you know, ways to make money.
Speaker 2: People trade baseball cards, you know, like people had beanie babies,
Speaker 2: and all this stuff was like clearly not a security,
Speaker 2: and like no one would think it was a security.
Speaker 2: And then crypto came along, and cryptos like, we're gonna
Speaker 2: start companies. We're gonna raise hundreds of millions of dollars
Speaker 2: from public offerings. We're gonna use that money to do
Speaker 2: businesses and promise people share of the profits of that business,
Speaker 2: and we're gonna all call it crypto on the blockchain,
Speaker 2: and it's not going to be a security because it's
Speaker 2: not a stock or a bond, and we're gonna not
Speaker 2: be regulated, and we're gonna steal half of the money,
Speaker 2: right Yeah. And so the SEC responded to that slowly
Speaker 2: by saying, this is all securities, right, this is all passes.
Speaker 2: The how he does this is an investment of money
Speaker 2: in a common enterprise with profits to come solely from
Speaker 2: the efforts of others, and so it's all a security.
Speaker 2: And this is like hotly litigated and there's a lot
Speaker 2: of fighting over like particular cases, but like that's what
Speaker 2: the SEC things. But one result of that is like
Speaker 2: the SEC then like kind of goes back and looks
Speaker 2: at everything else that like no one would have thought
Speaker 2: was the security twenty years ago and was like, oh,
Speaker 2: that's not a security like that. That kind of also
Speaker 2: looks like a crypto token. I quote sometimes Hester Pierce
Speaker 2: is a SEC commissioner, Like the SEC basically like approved
Speaker 2: some crypto company for doing like gift cards for private
Speaker 2: jet travel or something, and Aster Pierce said in a
Speaker 2: speech like if those tokens are security is then you
Speaker 2: can't distinguish them from any other sort of gift card,
Speaker 2: because a Starbucks gift card of security, right, and like
Speaker 2: there's like now kind of almost like a live question
Speaker 2: as a Starbucks gift card of security. So anyway, poker,
Speaker 2: like if you're investing in someone's like poker business, like, yeah,
Speaker 2: that's clearly a security.
Speaker 1: It just is.
Speaker 2: We looked online and there's some lawry articles being like, yeah,
Speaker 2: this is obviously security. Is there any history of enforcement?
Speaker 2: In twenty seventeen, the SEC looked into one of these
Speaker 2: taking platforms, and the staking platform actually sued the SEC
Speaker 2: to make them drop their case and say we're not
Speaker 2: a security. That didn't get litigated. The SEC moved on
Speaker 2: and dropped the case, it's twenty seventeen. Like, I think
Speaker 2: the twenty twenty four SEC one might not bother because
Speaker 2: they're busy with all the crypto lawsuits. But two, if
Speaker 2: they did bother, they'd be like, this is clearly a
Speaker 2: security what are you doing here? So I don't know,
Speaker 2: I might be missing something in the legal analysis that
Speaker 2: poker staking sites are currently doing, but like, yeah, this
Speaker 2: is a thing that the current SEC would probably think
Speaker 2: is a security.
Speaker 3: Poker staking poker station is a security Starbucks gift cards though.
Speaker 2: Not legal advice. Got There's two questions, like one is
Speaker 2: is it a security? And the other is like are
Speaker 2: you offering it to the public, because if you are,
Speaker 2: you have to register at the SEC blah blah. If
Speaker 2: you're not, if you're like only doing it to the
Speaker 2: certain kinds of credit investors, and it's like less of
Speaker 2: a problem. So maybe that's how Hooker's taking works. But
Speaker 2: it's like a little risky. Yeah, all right, her reader asks,
Speaker 2: having just listened to the episode on hedge fund training programs.
Speaker 2: I'm wondering where the tipping point for too many portfolio
Speaker 2: managers is, like, is alpha like calculus where you just
Speaker 2: keep reducing it into smaller and smaller amounts, and the
Speaker 2: marginal return on a new PM is falling or is
Speaker 2: their finite alpha. So when we train our ten thousandth
Speaker 2: or one hundred thousandth portfolio manager, we have perfect equilibrium
Speaker 2: where all the pro portfolio managers find all the new
Speaker 2: alpha for the day and no more can be found.
Speaker 2: Then you just have a replacement market for portfolio managers.
Speaker 2: Like long snappers, in the NFL, there's always exactly thirty
Speaker 2: two professional long snappers because teams all carry exactly one
Speaker 2: long snapper. I think imagine being the thirty third best
Speaker 2: long snapper. There's like camps for long snappers. Yeah're like,
Speaker 2: they train you to be a long snapper, and if
Speaker 2: you're the thirty third best in the world, you're like, yeah,
Speaker 2: you know.
Speaker 3: Gotta say, I have no idea what a long snapper is.
Speaker 1: Uh.
Speaker 2: It's a guy who throws the football between his legs
Speaker 2: a long distance so that someone can ticket.
Speaker 3: Jeez, Louise, it sounds like a fish.
Speaker 1: Uh.
Speaker 3: But in any case, I do love this idea that
Speaker 3: there's finite alpha, that like alpha is a scarce commodity.
Speaker 2: So I was talking actually this week to a hedgehund
Speaker 2: manager who like helped me orient my thinking on this.
Speaker 2: If you think about what hedge funds do, and particularly
Speaker 2: like these kinds of hedgeh ones. So we were talking
Speaker 2: about like the hedge funds that have like the big
Speaker 2: multi strategy funds that have a lot of portfolio managers
Speaker 2: and like have training programs to like identify new portfolio managers.
Speaker 2: What those funds are doing is like they're providing some
Speaker 2: sort of financial service to the market. They're providing like
Speaker 2: typically liquidity, but like they are intermediating some trades in
Speaker 2: some ways. They're doing what banks used to do. Right,
Speaker 2: we think about like the big trades that like these
Speaker 2: like multi strategy funds do. It's things like index rebalancing,
Speaker 2: where they like buy all the stocks before they get
Speaker 2: put into the index and then they sell them to
Speaker 2: the index funds. Or it's like the basis trade where
Speaker 2: they buy treasury bonds and sell treasury futures and like
Speaker 2: they're buying the bonds from treasury essentially, and they're selling
Speaker 2: the futures to like investment managers who for whatever reason
Speaker 2: don't want to own the bombs themselves. All this stuff
Speaker 2: is like service provision. It's like intermediation. It's like liquidity provision.
Speaker 2: It's like some sort of like business. Right. It's not
Speaker 2: like the mystical skill of like picking the stocks that
Speaker 2: will go up. It's like doing work on behalf of
Speaker 2: people and then you charge them money and they pay.
Speaker 2: So I think if you have that model, this question
Speaker 2: is like a little easier to understand, right, Like how
Speaker 2: much alpha is there? It's not alpha, it's like you know,
Speaker 2: fees for services, and so like if you find a
Speaker 2: new market where it would be valuable to provide liquidity
Speaker 2: in it, then like there's more alpha in the world,
Speaker 2: and like you can do some of that and you
Speaker 2: can get paid, right, And so like the question of
Speaker 2: like how do you train new portfolio managers? Like again,
Speaker 2: like when I hear this description, I think of like
Speaker 2: what banks used to do before they got like more
Speaker 2: risk averse and more capital regulated. Like when I worked
Speaker 2: at a bank, It's like heay, like, let's find a
Speaker 2: new customer base that we can sell new kinds of
Speaker 2: derivatives too, right, And like you sit in the lab
Speaker 2: and you cook up derivatives and you try to sell them.
Speaker 2: I think there's like something like that at Multi Strategy
Speaker 2: Hedge funds where it's like you sit in the lab
Speaker 2: and you think up, not like what alpha can we
Speaker 2: extract from the market, but like what's the need that
Speaker 2: people have? Like what's a demand for a product that
Speaker 2: we can intermediate and then make money on. So I
Speaker 2: think that's the answer, right, Like, and I think the
Speaker 2: other part of the answer is like if you're doing that,
Speaker 2: one thing you're doing is making financial markets more efficient, right,
Speaker 2: Like when you talk to a lot of these multi
Speaker 2: strategy hedge funds, you're like, what are you doing for
Speaker 2: society besides making a lot of money? And the answers
Speaker 2: are making markets more efficient?
Speaker 4: Right.
Speaker 2: If you make markets more efficient, there's more trading, and
Speaker 2: like you're capturing a smaller slice of that trading because
Speaker 2: the market's more efficient, but like you're capturing a smaller
Speaker 2: slice of a bigger pie because you've made the market
Speaker 2: more attractive, some more people trade. So like is there
Speaker 2: finite alpha now? Like if you like make the market
Speaker 2: more efficient, then like there'll be a bigger market and
Speaker 2: you'll get more of it.
Speaker 3: Just maatging that written on a tombstone here lies so
Speaker 3: and so they made markets more efficient, beloved.
Speaker 2: You know all the biggest stairs.
Speaker 3: That's true. So they just throw the football between their legs.
Speaker 3: That's it.
Speaker 2: Well yeah, yeah, well but accurately, like with people running
Speaker 2: at them.
Speaker 3: Yeah, all right, it's a hard job. But like again,
Speaker 3: I scream at a little camera for hours. Yeah, accurately,
Speaker 3: right you also and worthy, Yeah.
Speaker 1: That was so fun.
Speaker 3: Send us more mail at money pod at Bloomberg dot net.
Speaker 2: Money at Bloomberg dots Jesus, And that was the Money
Speaker 2: Stuff Podcast.
Speaker 3: I'm Matt Levin and I'm Katie Greifeld.
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Speaker 2: Stuff newsletter on Bloomberg dot com.
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Speaker 2: The Money Stuff Podcast is produced by Anna Maserakus and
Speaker 2: Moses Ondam In special thanks this week to cal Brooks.
Speaker 3: Our theme music was composed by Blake Maples.
Speaker 2: Brandon Francis Newdian is our executive producer, and.
Speaker 3: Sage Bauman is Bloomberg's head of podcasts.
Speaker 2: Thanks for listening to the Money Stuff Podcast. We'll be
Speaker 2: back next week with more stuff