Michael Sidgmore – Alternatives Go Mainstream (Private Wealth 1, EP.443)

Michael Sidgmore is the Co-Founder of Broadhaven Ventures and the creator of the Alt Goes Mainstream podcast, which explores the intersection of private markets, technology, and wealth management. His career spans early roles at Goldman Sachs and iCapital, experience building businesses in fintech and asset management, and investing across the private market ecosystem. Our conversation offers an in-depth introduction to the intersection of private markets and private wealth. We discuss the origins of Alt Goes Mainstream, the rapid evolution of private markets, the convergence of institutional and wealth channels, and the rise of evergreen structures and new distribution models. We close with Michael's perspective on how the wave of capital flowing into private markets from private wealth will impact investors, and on the importance of content, brand, and community in shaping the industry's future. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ted Seides?

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• 0:46Ted Seides?

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• 2:06Ted Seides?

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• 2:47Ted Seides?

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• 3:32Ted Seides?

  Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:18Ted Seides?

  30 years ago, institutional investors held most of their assets in stocks and bonds. David Swensen led a movement to an approach to portfolio management that broadened the asset mix to alternative investments, including hedge funds, private equity, venture capital, and real assets. These days, almost every institutional portfolio incorporates significant allocations to alternatives to produce better outcomes with similar risk or similar outcomes with lower risk. However, capital in the hands of individuals has not yet followed suit. Private wealth portfolios, particularly the so-called mass affluent, typically hold only 2% to 5% of their assets in alternatives,

• 5:00Ted Seides?

  compared to a range of 20% to 50% for institutions. But that's changing quickly. Innovations in structure have allowed individuals to access alternative strategies at lower minimums with liquidity options not previously available. According to Arctos Partners, the six largest private banking and wirehouse platforms committed $110 billion to funds last year, approximately twice the amount invested from the six largest institutional investors in North America. And those flows are just beginning. The potential investment dollars from private wealth to alternatives are staggering. Every 1% asset allocation shift would equate

• 5:44Ted Seides?

  to approximately $500 billion of new investments. The impact of these capital flows will have ramifications for GPs and LPs for decades to come. How will the capital get deployed? What will it do to asset prices? What will it mean for returns and for fees? And who will win and who will lose? This mini-series, Private Wealth, explores the important questions raised by the accelerating convergence of institutional-style investing with private wealth. We'll hear from three of the most influential asset owners, one each from the private banking, wirehouse, and RIA channels, and three of the most significant asset managers

• 6:28Ted Seides?

  playing in the space. Just as this channel is in the early innings of changing the investment landscape, so too will this mini-series be just the beginning of our exploration of what it means for you. My guest on the first episode of Private Wealth is Michael Sidgmore, the co-founder of Broadhaven Ventures and the creator of the Alt Goes Mainstream podcast, where he explores the intersection of private markets, technology, and wealth management. Michael's career spans early roles at Goldman Sachs and iCapital, experienced building businesses in fintech and asset management, and investing across the private market ecosystem. Our conversation offers an in-depth introduction to the intersection

• 7:12Ted Seides?

  of private markets and private wealth. We discuss the origins of Alt Goes Mainstream, the rapid evolution of private markets, the convergence of institutional and wealth channels, and the rise of evergreen structures and new distribution models. We close with Michael's perspective on how the wave of capital flowing into private markets from private wealth will impact investors, and on the importance of content, brand, and community in shaping the industry's future. Before we get going, as we approach the all-important Mother's Day and Father's Day holidays, we have a special something to offer that special someone in your life. Academic studies show that experiences surpass things in creating happiness.

• 7:57Ted Seides?

  So let's start there. Summertime brings opportunities for all kinds of experiences: a day at the ballpark, a trip to the zoo, a night at the ballet, or a weekend on a lake. All of those create valued memories and make for wonderful gifts. But other than those memories, none of them offer a gift that keeps on giving. And we have just the thing for you. How about the opportunity to learn and keep learning week after week with a Capital Allocator's Premium Membership? Your folks can supplement their listening on iTunes and watching on YouTube by taking out their reading glasses to peruse our library of around 10,000 pages across 500 transcripts.

• 8:41Ted Seides?

  And they can practice their tech skills by reading our weekly email and playing around with our LLM, ChatGPT-TED.

• 8:49Ted Seides?

  So when you think about Father's Day or Mother's Day, think Capital Allocators Premium. And because we love our parents so much, we're offering a 20% discount on the first year of membership between now and Mother's Day. In case you're wondering, that discount applies to you, too. Thanks so much for sharing the experience of Capital Allocators Premium. Please enjoy my conversation with Michael Sidgmore. Michael, great to see you.

• 9:19Speaker 02

  Ted, great to see you. Thanks for having me.

• 9:21Ted Seides?

  Why don't we start with your personal background and how that led up to what you're doing now with the podcast?

• 9:27Speaker 02

  Grew up outside of DC, was a soccer player. So tried to go over to the UK to play soccer. Wasn't good enough, got injured. Ended up going to Middlebury for a year and then London School of Economics. At LSC, I ran the world's largest student conference on hedge funds and private equity. This was 2009, 2010 and 11. So it was the early days of the big alternatives managers being public, getting more into the mainstream, but still very early for the industry. Then I ended up working at Goldman Sachs. So was in London on a team. It's now part of GS Growth. It was called the Principal Strategic Investments Team, investing in capital markets infrastructure. That was pre-private markets infrastructure becoming the next market structure evolution, in my view, after equities, fixed income derivatives,

• 10:10Speaker 02

  but very informative in terms of how I think about the technology evolution that's happening in private markets from pre to post investment. I think it's mirroring a lot of what's happening, equity, fixed income derivatives, obviously with its own bells and whistles, but that was a fascinating experience. That team was the team that invested in iCapital. More recently, 73 Strings and some others. Then went to Mosaic, was the first sales hire there. It's a residential home solar loan originator. Done about 14 billion in home solar loan originations, backed by Warburg Pincus. Learned a ton there. I was working with the Wealth Channel and then joined iCapital early on. So was one of the early employees, pre-product, helped build the sales team with two others. That was a fascinating experience, just seeing the Wealth Channel early days. It was 2014. Was at iCapital till the end of 2016,

• 10:54Speaker 02

  after BlackRock invested. And then joined my partner at Broadhaven. He had built A financial services investment bank. It's now about 65 people, done 100 billion or so of M and A transaction volume. All financial services focused. And we started a principal investment business on top of that. First with early stage venture capital, big focus on private markets. And then we'll also incubate businesses in asset management. We're currently incubating and building a GP stakes business focused on the lower mid market. And then the content platform that I started, Alco's mainstream, which kind of just started by happenstance during COVID. Here we are talking about Alco's mainstream. So how did you get to the idea of the podcast? It's really informed by what was happening in private markets.

• 11:38Speaker 02

  I go back to the early days of iCapital. Educating was so important. The wealth channel needed to understand private markets. The alternative asset managers wanted to understand how to work with the wealth channel. So during COVID, I was like, how do I connect the dots between the GPs, the LPs, and all the technology companies trying to work with both GPs and LPs? It was COVID, couldn't do anything other than meet with people virtually. I was having a lot of good conversations with GPs and LPs and the tech companies in the space. And I was like, why don't I just start a podcast to open source things? I started writing first. End of 2020, early 21, started really thinking about why are private markets at this point? Where it really feels like the adoption of investing into private markets via a technology platform was becoming more mainstream.

• 12:24Speaker 02

  So 2014, roll back the tape. It was hard for people to say, hey, I'm going to invest into some online platform, click a button into a private equity fund or a company. By 2020, 2021, I think people's mindset had shifted a little bit. So I just started writing and it was everything from traditional private markets, what we see today. And that's really the big pony here is there's trillions of dollars in wealth channel capital that is looking to flow into private markets because they're under allocated. Then it was also things like alternative assets, things like collectibles, sports cards, crypto to some extent. That was also a driving force during COVID. It was a zerp environment, so there was reason to believe that that was probably a little bit frivolous in many cases. But I think it was also indicative of a

• 13:08Speaker 02

  Younger generation thinking about investing differently and that got my mind turning. So started podcasting April of 21 and then I've since done about 145 episodes. Many of the biggest GPs, many of the largest wealth platforms, really just trying to connect the dots on what's going on in private markets and then writing weekly on different trends and themes and topics that are going on in this space because there's just so much happening at the intersection of private markets and wealth. Also interesting that we're sitting across the table from each other too, because I think it's actually very indicative of where we are in private markets. The institutional world, which you've covered tremendously well with capital allocators and the wealth worlds are kind of converging. Institutions are trying to think about how they think about private markets. The wealth channel is now starting to think about private markets.

• 13:51Speaker 02

  How GPs serve both is really interesting. Is the wealth channel and the insurance firm, are they the new institutional LP? So I think it's actually a really interesting time for us to both be sitting across the table from each other.

• 14:03Ted Seides?

  In the couple of years you've been doing the podcast, I'd love to hear your thoughts on the evolution of both sides of the GP side, the asset management business and then the LP side and particularly in wealth.

• 14:15Speaker 02

  Let's start with the GP world. So if we think about alternative asset managers and traditional asset managers, we'll get to that too, because that's a part of the story here as well. Alternative asset managers have evolved as businesses. Blackstone, about 40 years old, started with $300,000 of capital under management. They're now over a trillion dollars of assets. About a fourth of that, 250 billion or so, comes from the wealth channel today. So it's a relatively short period of time for these firms. These firms are so big, they do so many different things. They're not just private equity firms as we knew it in the 80s, 90s. They're not doing leveraged buyouts. That's one piece of what they do, but they're also doing credit. They're also doing infrastructure. They're also doing real estate, secondaries, et cetera.

• 14:57Speaker 02

  So these firms, they've evolved from funds into firms and by doing so, they need to think about what they are as a business and honestly, who they want to be when they grow up and what the industry wants to be when it grows up. So I think that then cascades to a whole set of other things. One, it's how do these firms operate as businesses? What do they do to keep their talent? Also add new talent. Do they add new businesses, strategies? How do they work with their customers? Customers being institutional LPs who are still going to allocate to private markets, but there's obvious challenges around how much liquidity they have, how much more capital are they going to allocate to private markets, given where they need to manage their own portfolio construction? And then new customers, like the wealth channel.

• 15:41Speaker 02

  So that's creating a whole new set of products. That's creating new businesses within businesses. So I think of these wealth solutions businesses as businesses. They're startups. They require a lot of capital, a lot of people. You actually need to invest in it to do well and to cover the wealth channel properly. Then you need to productize for that channel. You need to create new packages that make sense. The firms that are going public have to think about their brand differently. So there's a whole set of things that are all tied together when it comes to how these firms operate, what they want to be, and how they want to continue to evolve. That's creating a whole wave of consolidation. Dave Leighton, the CEO of Partners Group, has said, I think we'll go from 11,000-plus firms or so to 100 platforms.

• 16:23Speaker 02

  I don't know if we'll get that level of consolidation in this space, but I think he makes a really important point. It's a thought-provoking exercise to go through, which is if this space is going to go through consolidation, because firms need to figure out who they want to be. They either need to be really big or really niche. What happens to the middle? What happens to that $10 billion manager, $30 billion manager? Great businesses. By the way, asset management businesses, they have, in many cases, if it's private equity or other strategies, 10 years of contracted revenues from enterprise customers who likely re-up. So it's not like these $10 billion managers are bad businesses by any means, but they need to figure out, do they want to invest in the wealth channel? Do they want to create evergreen structures to serve the wealth channel? Because the wealth channel has a certain set of needs and requirements

• 17:08Speaker 02

  when it comes to liquidity, when it comes to allocating to private markets. So I think the industry is at a real crossroads from a GP perspective and an asset management business evolution perspective. And then you add the wealth channel in. Wealth management itself, that business is changing. That business is consolidating too. The large wealth management platforms are starting to lose. Look like institutional investors. The wirehouses are putting large portions of capital into private markets. But then you have large independent wealth managers, the creative plannings, the mariners, the Focus Financials, the High Towers, the Dynasties, the Sarities, the Rockefellers. All of these firms, they're growing. As they grow, they need to offer private markets to their clients, oftentimes high net worth or ultra high net worth.

• 17:52Speaker 02

  They need to serve them well, and the way to attract and retain them is by private markets. That means they also need to mature their business. And the way they mature their business is by creating capabilities to do private markets. Or in some cases, you had another group on your podcast, Pathstone, another $100 billion firm, acquiring Hall Capital. And I think that's indicative of where we are in wealth management, that wealth management as both a business and the way it's investing in private markets is institutionalizing itself. Those firms are acquiring OCIOs to add capabilities that give them institutional quality diligence and processes to invest in private markets.

• 18:26Ted Seides?

  Let's break some of this apart. On the distribution side for asset managers, it seems like so far it's only been the largest scale players. You said you have to invest and build in this space. If you look at the different types of asset managers, based on size, who's playing in the wealth space today and how do they go about it?

• 18:47Speaker 02

  It's a great question, and I think one that is on the minds of all of the firms in this space. So you take the top firms, the publicly traded managers, they've all made a decision that by virtue of who they are, the fact that they're in public markets and what they have to do to continue to grow their business and make shareholders happy is they have to think about the wealth channel. And it makes sense. They're of a size and scale to be able to do that. You have to invest in the wealth channel and building out a team and process and infrastructure and product innovation and operational overhead to be able to handle working with the wealth channel. The top six firms count for the majority of market share of capital raised in private markets.

• 19:29Speaker 02

  On average, the top six firms, 2024, they raised $12 billion. The top seven through 25 firms only raised $1.7 billion. What that shows is that the big Firms are investing large amounts of resources and capital to serve that channel. It's critical. You have to. It requires boots on the ground. Think about just a wirehouse. There's still, I think the 80/20 rule applies. There's still 80% of the capital's coming from 20% of the advisors. And that's even at the most sophisticated wirehouses. We're still so early. And then you talk about the independent channel. We're so early there, too. I'd say roughly about, on average, 1% to 3% of the 145 trillion of assets that Bain talks about is actually allocated to private markets within the wealth channel.

• 20:13Speaker 02

  That compares roughly to a sophisticated institution, many of whom you've had on your show, 20, 30, sometimes even 40% allocated to private markets, or was a year ago or so. So when you think about the opportunity to serve the wealth channel, one, it's huge. Two, it requires real resources. Blackstone has a team of hundreds of people, Blue Owl, hundreds of people, KKR, Apollo, hundreds of people to serve the wealth channel. And it's not just salespeople. Marketing is just as important. And that's why you're seeing this dovetail with brand. So all the publicly traded firms know they need to build their brand. They need to be on social media. They need to be on LinkedIn. You've seen the running videos with John Gray. Every firm will do it in their own way because every firm has their own unique DNA of who they are and who they want to be and the culture they have.

• 20:57Speaker 02

  And I think that that's great. They need to educate. They need to help people understand what private markets actually are.

• 21:03Ted Seides?

  Once you get past the six mega public companies, who else is getting set up to play?

• 21:10Speaker 02

  There's firms that are maybe over 100 billion at times, firms that are 100 billion, and even like in that 50 billion plus range. Those are firms that are clearly on a growth path. There's a whole set of both scaled specialists. So I would call someone like Vista a scaled specialist. They focused on software. They're about $100 billion or so of AUM. They have products across private equity, growth, and credit. And that's a firm that specializes on one thing, software. But they're $100 billion. And that's a massive market. Those firms have built scaled firms and brands and niches and who they are and what they do. They've done it at size. They've built a wealth team. They've hired people to do that. Those are the types of firms that have the ability to get to the next stage.

• 21:55Speaker 02

  I think when you're pushing 100-plus billion dollars, firms like that will start to think about the next phase of their business. They will start to think about, do we go public? Or do we become part of a larger platform? Because at some point, you need to be a very large-scale platform and serve investors across the different strategies. With this next wave of managers, you'll also see more willingness to partner where maybe a firm that's great at private equity or software investing might say, hey, I'll partner up with someone who's great at infrastructure. We're never going to get into the same category ourselves because that might be a little bit too hard, but let's partner. Because the reality is, the question for the wealth channel is, what is the right product

• 22:38Speaker 02

  at the right time and how do you package it up in the right way?

• 22:41Ted Seides?

  So if you're not 50 billion or north, what do you do if you see this as an opportunity, but you're never going to have the resources to go deploy a huge sales force and reach the distribution in that way?

• 22:54Speaker 02

  The firms really have to ask themselves, who do they actually want to be? What investment culture they want to have? I think to some extent, it can also get into the firm dynamics. So how old are the managing partners? And how young are the next wave of managing partners who might run the firm over time? How does the next generation stay and continue to operate in a time when I think fundraising is going to get harder? We're in a world where the largest firms will be able to raise capital, particularly from the wealth channel, because of sheer size and scale. So the smaller firms, I think, really have to ask themselves the question, do they want to be in this business? If you want to truly go big and compete with the largest firms, you have to have tens,

• 23:38Speaker 02

  if not hundreds, of people focused on the wealth channel. You have to productize for the wealth channel. That probably means creating some form of an evergreen product structure, so tender offer funds, interval funds, things of that nature. And that doesn't just require resources on the distribution side. It requires resource on the operational side, and it also requires having enough deal flow. The reality is a lot of those firms are probably going to say no, and that's fine. It doesn't mean, A, they don't have a great business, because they do. And B, it doesn't mean that they can't focus on what they're really good at and say, I am the best at this strategy or this space, and this is my differentiation. And then the third piece of it is, I think we're probably going to see more and more consolidation.

• 24:20Speaker 02

  So some of these firms might end up becoming part of larger platforms. So there's the big alternatives platforms who might need to add one or two capabilities. They have most of them, might need to add one more. Hard to build sometimes, not easy to integrate either. And then I think we'd be remiss if we didn't talk about the traditional asset managers. So BlackRock acquired GIP and HPS. Now, those are blue chip firms, 100-plus billion of AUM. They acquired them for over $12 billion in each case. So there are firms that will get acquired.

• 24:52Ted Seides?

  What is the ecosystem like for just the distribution side? So if someone wanted to say, okay, I'm not going to build this myself, but I'd love to partner up. And the platforms or the equivalent of the third-party placement agent in the institutional world?

• 25:07Speaker 02

  Placement agents call on RIAs, and they call on the sophisticated wealth managers and family offices, for sure. There are platforms, so iCapital, Case, they have marketplaces. They enable the smaller firms, and there are smaller firms on these marketplaces that can raise capital from the wealth channel. Any wealth manager or wirehouse advisor, RIA, can go on to iCapital and find funds to invest in. They can invest in Blackstone, they can invest in Apollo, Blue Al, KKR, et cetera. But we're at this crossroads where firms, I think particularly the larger wealth platforms, are thinking about how do we create customization for our clients and differentiation? Any advisor can now get access. Are they? No, but could they? Yes.

• 25:51Speaker 02

  How do we create customization and differentiation, but also do that at scale? So I think that actually gives smaller managers hope, because I think there's a world where Where some of the larger sophisticated wealth platforms will want to do things that are more differentiated. In certain cases, that will mean working with the largest firms. And I think there's a prevailing view out there that people are doing more with less. That has happened on the institutional side for a number of years. And I think that's starting to happen with the wealth channel. Because if you're a hundred billion dollar firm like a Cerity, you can't spend time on a $10 million allocation. You have to think more like an institutional investor. So that does mean that they'll consolidate their relationships, but they also have to think about differentiation.

• 26:34Speaker 02

  So I think there's room for really high quality, smaller, more niche managers. They're really good at something. They will be able to raise capital from the wealth channel. The question though becomes can they properly find and service the wealth channel? I think that's really one of the next phases of this space. And yet to be determined what the answer is.

• 26:51Ted Seides?

  I want to turn over to the LP side. There are these different channels. You talk about wirehouses or a private bank, an RIA. Love you to walk through the different types of players on the LP side in the wealth channel.

• 27:05Speaker 02

  The wealth channel is not just one thing. I think that's also what's been so challenging about working with the wealth channel relative to the institutional channel. The institutional channel is relatively similar cadence in terms of how a GP would sell. They know when their investment committee meetings are. They know the cadence for how they buy. They often are able to know the cadence for how they re-up. And by the way, the institutions also have very sophisticated cash flow models and return hurdles where they understand this is how much we need to allocate. This is what we need to generate on an annualized basis for our constituents. And they have all of those pieces in place.

• 27:46Speaker 02

  So it makes fundraising, while never easy, harder in today's environment, much easier than the wealth channel because we get to the wealth channel. And a wirehouse is very different from a family office, from an independent wealth advisor, from a wealth platform. So if we think about it, let's start with the wires. The wires, I still think, will be the largest source of flows from the wealth channel into private markets. I call it the wires are plugged in. So I mean that figuratively, I also mean that to some extent, literally. So wirehouses, who are they? They're the big private bank complexes. So it's the Merrells, the Morgan Stanleys, the UBSs. They have tons of resources.

• 28:25Speaker 02

  They have CIOs and they have diligence teams focused on finding, sourcing, vetting, and putting private markets managers on their platforms. That's for advisors to then pick from. It's a menu. Now, they have a different compensation model than the independent channel. So there's always questions as to why are those managers being put on the platform? There's placement fees involved at times, not always, but at times. And that does drive why an advisor may pick a certain manager versus another. But having said that, they are very institutional in quality and in process. So the CIO will decide, we need this type of asset allocation. The alts diligence team will figure out which managers they want to put on the platform. They'll have some larger managers.

• 29:09Speaker 02

  They'll have some smaller managers. I think one of the large wirehouses has like 60 different evergreen fund options. So there's a lot of choice now advisors have to pick and choose. What it means is the biggest GPs are probably best placed to cover the wires because they have the resources to actually cover all the different advisors, serve them, whether it's doing large events with them, whether it's going and meeting that advisor in the office in Dallas, or the Midwest, or California, or New York. So you need the resources and coverage model to be able to do that. So I think the biggest firms will probably benefit most from working with the wires. And it's the most institutional in process in nature.

• 29:49Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity, and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value, and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com/own.

• 30:27Speaker 03

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 30:32Ted Seides?

  And now, back to the show.

• 30:36Ted Seides?

  How does the decision-making work for when an allocation goes to a manager at a wire?

• 30:42Speaker 02

  There's a few different elements to it. CIO is often responsible for picking and setting, like, here's an asset allocation framework, and here's the types of strategies we want. The alts team, diligence team, will do the work to figure out which managers are the right fit for that. The advisors then have a menu to choose from. So ultimately, it's the advisors making the decision. And that's where I think this actually is not a simple sale, because different advisors are in different places on their educational journey in private markets. Different advisors have different client types. So you could be at Merrill Lynch, and you might be an advisor team that has ultra-high net worth, $50 million, $100 million-plus clients, billionaire clients. But you could also be another Merrill Lynch advisor and have massive flume clients.

• 31:26Speaker 02

  So I think that actually makes the job really hard for the CIO and the alts team figuring out what products are the right products to have on the platform to serve the various spectrum of advisors that we need to serve. We're starting to see the independent channel, which is the fastest-growing part of the wealth management space. It's growing faster in terms of assets than the wirehouses. And by the way, there's different models in the independent channel, too. There's platforms like Hightower, Focus, Dynasty, that provide the platform and services, including the alts capabilities and investment services, in addition to technology stack, to true independent platforms, which are just totally independent, have their own business, maybe they're private equity-backed. But all of those firms then have different ways

• 32:10Speaker 02

  of deciding to source and implement private market strategies. The big platforms have head of alts. They have a CIO. And now they're starting to do things top-down. So they're creating menus. They're creating diligence processes. And then they're helping their advisors, saying, here's a set of products that we've done diligence on. We've vetted. We've sourced. This is a menu for you to work with. And by the way, there is value in that because those firms are now getting so big, you can start to drive some terms. The other parts of the wealth channel, family offices. When you know one family office, you know one family office. That could mean it's very institutional in nature. That could mean it's a principal making decisions and that's the way that they run their process.

• 32:55Speaker 02

  They could be larger, they could be smaller. That's also a hard market to cover because every family office is different, but they don't necessarily have the same decision-making cadence as a large institutional LP. Then you have the whole independent channel and broker dealers. You have the Osaics of the world, the LPLs. They're just starting to get into private markets. In many cases, they tend to have more of the mass affluent client types. Those firms are in part serving that cohort of investors. So you need to create new products to meet the needs of those clients. And then I think you're going to have the self-directed individual investors. So recently Schwab launched an alt platform. So for their brokerage clients, individual, high net worth investors, 5 million net worth and above,

• 33:39Speaker 02

  Schwab has a few trillion dollars custodied and of assets held at Schwab in brokerage accounts from individual investors. And if a portion of that, I think they said they'd like to get 5% of those client assets allocated in private markets, you're talking about hundreds of billions of dollars. And that's going to be more self-directed in nature. And even I think we'll get to the Robin Hoods, the Revolut's, the SoFi's, which has embedded some private markets products to the wealth channel within their complex as well. That's going to be really interesting to see how that works. And that's where education and brand matter even more.

• 34:14Ted Seides?

  How does the way that the wirehouse investment decisions get made compared to a private bank platform?

• 34:20Speaker 02

  All the private banks know they need to serve their ultra-high net worth clients in a very unique and different way. So why did Goldman Sachs, as an example, launch Apex, which is a family office platform for their ultra-high net worth clients? They're doing things like more direct deals. And I think we're at a really interesting place for the private banks in terms of how they're thinking about servicing the wealth channel, that they know they need to differentiate. How do we? Offer things like late-stage private companies that are really interesting and compelling that only we have access to because we have a broader platform. How do we get access to investing in sports alongside some of the funds or maybe into the funds in a unique way? Those types of things, I think, are what private banks are trying to do to differentiate themselves because now the wealth management space is getting increasingly competitive

• 35:04Speaker 02

  and crowded when it comes to accessing private markets.

• 35:07Ted Seides?

  If you look at the range of different alternative investment strategies, where today is that capital that's coming from the wealth going?

• 35:16Speaker 02

  If you think about the different strategies within private markets, private equity, which has the largest pool of capital within the $15 trillion or so of private markets assets. So it's about $5 or $6 trillion of assets. Private credit is growing. It's grown from a few hundred billion to over 1.7 trillion over the last few years. And if you take what everyone from Blackstone, which has said $20 trillion market, to Ares, $30 trillion market, to Apollo, $40 trillion market, so anything on a bank balance sheet, there's a lot of room to run in private credit, and that's a growing ecosystem. You have real estate, which is a large market. You have secondaries, first, private equity secondaries. And there's a lot of structural reasons why that might make sense because people need liquidity.

• 36:00Speaker 02

  You have private credit secondaries, which has grown, I think, 17 times. Still a small market, it's like 30 billion of assets, but growing because private credit is now growing. So that's another really interesting category. And then infrastructure, also another growing category, where there's trillions of dollars required to finance massive mega trends, rise of AI, investing in data centers, decarbonization. Those are multi-trillion-dollar trends, tens of trillions of dollars where capital's going to need to go. And the private sector is probably going to fill some of that gap. So big infrastructure funds. And then GP stakes, which is a small but growing market and ecosystem where I think if you believe in private markets growing, betting on the growth of asset managers and their AUM,

• 36:43Speaker 02

  there's reason to believe why people may look at that and say, this is a derivative of this whole space growing.

• 36:50Ted Seides?

  What is the value proposition that the ultimate buyer in private wealth is looking for?

• 36:57Speaker 02

  I think first and foremost, it has to be excess return. Now, there's a nuance to that, which is in private markets, I think there will be firms that truly generate alpha. And there will be firms that have private markets beta or private equity beta. Now then the question becomes, is the private markets exposure on a risk adjusted basis, factoring in most likely illiquidity? If the returns are still greater than what you can get in public markets, then I think there's a reason to do private markets. That still gets to things like manager selection really matters. Second thing, they're going to think about what managers can we work with over a long period of time? I do think that tends to favor the brands.

• 37:40Speaker 02

  So I think it's going to be easier for managers who have big brands and large multi-strat platforms to be able to win dollars from the wealth channel because they're a brand that people know. And I think it's no different than on the public side or in the institutional side where people will be able to sleep at night if they work with the top brands. At the end of the day, though, I really think this has to come down to investors have to be able to generate better returns and they could by investing just in the alternative.

• 38:08Ted Seides?

  I'm curious your thoughts on how hedge funds may or may not fit into the picture.

• 38:13Speaker 02

  So you are much more of an expert on hedge funds than I am. I think hedge funds are in an interesting spot. They're by no means a small part of the universe. The large multi-strat funds have done a great job of building their business. Their businesses too, right? The big pod shops, 60 plus, 70 plus billion dollars. And those have become the ways to allocate to the hedge fund space. What has been interesting from my perspective as somebody who's focused more on the other parts of private markets is that you are starting to see some hedge funds think about private credit and you are starting to see some hedge funds think about longer lock vehicles. So they're kind of getting into certain aspects of private markets that a larger

• 38:57Speaker 02

  multi-strategy alternative asset manager would play in, which is interesting. And I think they are not ignoring the wealth channel either. There are plenty of larger hedge funds that are on some of the big capital raising platforms. Certainly they've worked with private banks for years. That's where a large portion of the wealth capital has come from. I think that hedge funds will certainly play a role in all this.

• 39:17Ted Seides?

  How does the private wealth LP think about hedge funds today?

• 39:21Speaker 02

  There are certain firms that have done hedge funds for a long time, and I think that will continue to persist. I think that there's a set of newer LPs that I imagine they will probably think about hedge funds. The challenge is you almost have to do a two-layer sale. It's marketing and educating the advisor, and it's marketing and educating the end client. The firms that people know about are probably going to be the ones that more likely get allocations and people are more comfortable with. I'll call out a Bain survey from 2022. Bain and Company asked 418 ultra-high net worth individuals, "Name three firms that come to mind when you think of alternative assets and who are the providers?" First answer, the biggest answer in the bubble chart was, "I don't know."

• 40:03Speaker 02

  The next three: Schwab, Fidelity, and BlackRock, which in 2022, Schwab and Fidelity were not doing private markets. I think that shows how important brand is, and it also shows how important being public is.

• 40:18Ted Seides?

  When private wealth has invested in the alts, there's this set of different vehicles that create more liquidity than historically you saw as a private equity drawdown fund. I'd love to walk through these different names you hear, Evergreen Structures, interval funds, tender offers, what they are and how they get rolled out.

• 40:38Speaker 02

  I'll be talking more about private equity and other alternative asset classes as opposed to something like hedge funds in this context. But historically, the way that people invested is their closed-end vehicles. So closed-end vehicles or drawdown structures, it puts the onus on the LP in terms of how they manage the rest of their cash flows. The wealth channel, historically and generally speaking, has not liked the fact that there's really no liquidity for 10 years, which if you're an individual investor in your 40s, maybe you want to buy a house. So that can be a challenge just mechanically in terms of private markets being the right type of investment for people. Evergreen structures create mechanisms that enable things like liquidity.

• 41:22Speaker 02

  So let's break down evergreen structures. There's tender offer funds and there's interval funds. Those are slightly different structures. So with tender offer funds, there are periods of time where a GP says, we want to buy back part of someone's investment at net asset value. We can do that. That's generally at the discretion of the GP. So yes, there is some liquidity, but not always. Interval funds are periodic times where, where at certain intervals, other people can buy existing LPs holdings at net asset value again. Evergreen structures are generally lower fee, 125, 150, maybe 175 in certain cases,

• 42:07Speaker 02

  lower carry, but the management fee and carry is charged on net asset value. So as businesses compound and net asset value grows over time, in theory, you can start to generate real fee streams on that 125. So if you do the math, would you rather have, you know, 10 or 15 billion dollars at 125? Or a two or three billion dollar fund that you have to raise? Or a five billion dollar fund that you have to raise every, every three to five years at 2%? So I think it's creating some really interesting business dynamics and questions. Goldman had a report on evergreens in the fall of 2024. And there's really only, in the US at the time, there's like 200 evergreen funds.

• 42:48Speaker 02

  So there's not a lot of choices relative to the thousands of closed-end funds that people can invest in. Evergreens just make it easier. The capital compounds in theory, and then you get a 1099, don't get a K1. So it's just easier from a operational perspective.

• 43:04Ted Seides?

  So for an investor in an evergreen fund, if the manager needs to be able to provide some liquidity, whether it's an interval fund or a tender offer. What dilution would you expect if you're thinking about expected returns compared to a drawdown structure?

• 43:19Speaker 02

  Some firms have put out white papers that are based on data and backtesting. If you're in a drawdown fund, you have to generate high teens returns to get the same multiple on invested capital over a 10-year period as you would if you're getting low teens IRRs in an evergreen structure. This gets to a really important point when it comes to thinking about evergreen structures, both if you're an LP and if you're a GP thinking about creating an evergreen structure. The question that people need to ask is, what is, one, the deal flow? Does this firm have the capacity and ability to source enough deals, either from their own platform? The other aspect of it is investor management.

• 44:02Speaker 02

  So it's great to be able to raise a lot of capital, but if you raise too much capital and then don't have the deals to deploy that into, then that's just dragging down IRR for the investors. So it requires a different skillset in terms of managing the investments, because you have to know, A, what to source and when and how, but then, B, actually how to manage that asset properly and when to get out. Because you need to be able to create the ability to distribute capital back to investors. You need to have a team across the investment team, IR team, and the operations team that's all working in unison to be able to make sure that things are done properly, from sourcing deals all the way through to capital raising.

• 44:46Ted Seides?

  I'd love to ask you about the implications of all of this fund flows to come and the structures on the existing institutional community.

• 44:57Speaker 02

  Start with-

• 44:58Ted Seides?

  What do you think happens to asset prices in the private markets as this money seems to coming in with demand that no one's really talking about at what price?

• 45:07Speaker 02

  I've thought about this in the context of, is this alpha in search of beta? I say that a little bit tongue-in-cheek, but I think what this does go back to is, for the risk people are taking, illiquidity risk, being in private markets- Are people still generating returns that are in excess of what they're getting if they're only in public markets? Now, it's a really fair question. As more capital comes into the space, do returns go down? Without knowing and having crystal ball, I think it'd be hard to say that the answer is no. I think in certain sectors and categories, multiples have gotten higher, and I think that's very much the case. If you look at the difference between lower middle market and the upper end of the market, multiples are generally lower in the lower middle market.

• 45:49Speaker 02

  So I think there's still pockets of private markets where you can generate returns. There's also areas of private markets where scale really does matter. Talk about private credit or infrastructure. How many people can do a $20 billion deal in infrastructure that BlackRock or GIP did, the Panama Canal? There are very few firms that can do that. And in the rarefied air, there are sometimes cases where being really big can help, and you're not competing with a ton of other people. You actually may be able to get good deals or get good assets at fair prices. But I do think that's a question that private markets is going to have to answer because investors are coming into this, and they're coming in at a time when more capital is flowing into the space. That also brings us to the institutional side of things, which is institutions are

• 46:32Speaker 02

  not going to become insignificant allocators to private markets. Insurance companies are going to be much bigger allocators. Lincoln recently partnered with Bain and Partners Group, these really strategic partnerships. They have hundreds of billions of dollars in the general account to invest into private markets. So the institutional channel is not going away. I want to be very clear on that. I do think the creation of evergreen funds brings up a really interesting question, though, which is you've seen over the past 15 years in private equity that the largest GPs have found ways to strategically partner with the largest LPs. So think like large sovereign wealth or the Maple Eight, the Canadian pensions, Calsters, Calpers, et cetera, where those firms were able to drive down fees by doing fee-free co-invest.

• 47:15Speaker 02

  And that was in part to help these managers do bigger and bigger deals. The question becomes with evergreen structures, if a GP can generate fees on the evergreen structure, why would they give that away fee-free to co-invest? Firms, I think, are certainly acutely aware of this because they know how important the institutional customer is to them, that there needs to be harmonization between the institutional investor relations team and the wealth solutions business. All of this is thinking through, how do these customers work with your business, and how do you integrate them both into what you do?

• 47:48Ted Seides?

  As you look out over the next few years, this is kind of a dovetail question between your podcast and your investment interests. What excites you about both what you're trying to cover and then how you're trying to capture economics from the opportunity set?

• 48:04Speaker 02

  All of these things cannot be made sense of in isolation. The different activities that I'm doing give me a very interesting perspective and they're all related. So the investing side at Broadhaven Ventures, we've invested in 20 companies from pre to post-trade in private markets. I think the technology revolution in private markets market structure from pre to post-investment. How do you find investments? How do you execute investments? Post-trade, how do you manage track value, all the data, et cetera? That can't be decoupled from the evolution of asset management as a business and the distribution evolution that's happening on the private markets manager side.

• 48:47Speaker 02

  So I think both of those things are happening. Then there's a whole set of things that come from that that are related. So one is, I think we're seeing an evolution in asset management where there's consolidation and there's this barbelling of like, you either need to be really big or really unique. We've thought about this from the lower middle market where if there's consolidation, finding top niche managers, that's why we own a portion of Cantilever Group, the GP Stakes business in the lower middle market because we see that as technology improves to be able to serve the wealth channel better. So things like iCapital, which I was involved with and was an investor in as well, all the way through to evolution of asset managers as a business and trying to work with the wealth channel.

• 49:30Speaker 02

  The lower middle market is actually pretty interesting because there's going to be really niche managers that are going to grow their business in a core area and strategy that they're very good at, very focused on. Maybe they get consolidated or that position gets sold to a larger stakes business. So I think that's why we've made a bet on the lower middle market of alternative asset management because I think even if the lion's share of capital goes into the largest firms, there's also going to be more capital going into the smaller firms. And going from one to five billion or five to 10 billion, that's probably more doable than going from 50 to 100 billion. And then the other piece of it is the content side of things. I think for this space to continue to mature and grow. Content is going to be critical and content's going to be at the core of how firms think

• 50:15Speaker 02

  about capital raising. You're seeing it with the largest firms. You can't think about this space without seeing what the largest firms are doing, using things like LinkedIn as a way to communicate with investors. They're putting out tons of research and white papers. They're building out content teams. That's emblematic of where this is all going. So I think content's critical. I started this because I really just wanted to help connect the dots in this space. It's become a business across content, community, and capital. Those three pillars all go hand in hand because you need all three in today's world. On that point, too, I think marketing is as important as distribution and sales. You need the aerial support from marketing and the constant barrage of information and communication with investors.

• 51:00Speaker 02

  And that can enable smaller firms to punch above their weight. If they do a great job of marketing content, you gotta invest in marketing, too.

• 51:06Ted Seides?

  Michael, I want to make sure I get a chance to ask you a couple of closing questions. What's your favorite hobby or activity outside of work and family?

• 51:11Speaker 02

  So two things. I love being outside in nature and hiking. The other thing that I love doing is I actually have collected sports cards for a long time. That's a really interesting category. We have a company that we've invested in that space that's built an exchange for sports cards called Alt. And I think that's, while smaller than the other alternative asset categories we talked about, it's a really interesting category where I think that's where culture intersects with investing. So I love collecting sports cards. I love supporting sports teams.

• 51:38Ted Seides?

  What was your first paid job and what'd you learn from it?

• 51:42Speaker 02

  My grandfather employed me at his antique show every year. I'd also work in his store at times. He was an antique dealer in his second career. Every summer on Long Island, go to the antique shows and we would sell for him. We were kids. My cousin and I were 10, 11, 12. We would be selling antiques. We'd have to price everything. We'd have to run around the antique show and try to find things to buy and see how much something was, negotiate, and then bring it back and then try to sell it, in addition to selling all the stuff that he had. So it was just a ton of fun. I learned all about how to value things, also how to sell and how to really understand people and understand what they were interested in and also talk to them. I mean, my grandfather was so good at this, he would build a relationship with them.

• 52:28Speaker 02

  And he would talk to them about what they were interested in. Sometimes they didn't buy anything and that was fine. Maybe the next year they came back and they did. And I think that's so instructive on what really business is about, right? It's about building relationships. Sales come at the right time when they come, but people have to be A, interested in buying something and B, they have to trust the person that they're working with.

• 52:50Ted Seides?

  How's your life turned out differently from how you expected it to?

• 52:53Speaker 02

  I certainly didn't expect to be in finance. I studied international relations and social policy. I worked for Rim to Read as well. So in the year I was trying to play soccer again after being injured, I worked for John Wood and Rim to Read, an international literacy organization. And I thought I was going to do something that was related to the international relations world. I ended up falling into finance. Finance is so critical to what makes the world move. And this is really honestly about what private markets is. How do you unlock access for more people to investing, particularly in emerging markets? How do you give people access to things in financial services that's so critical to what they do in their day to day life? How they buy a house, go to school, how they save for retirement? All of those things are related to finance.

• 53:36Speaker 02

  So even though I didn't study finance, I'm glad I ended up in it because it's so central to what everybody does every day.

• 53:42Ted Seides?

  What's a mystery you wonder about?

• 53:44Speaker 02

  With everything that's happening in AI, how will people learn going forward and what will be valued? So as a world becomes, particularly on the content side, more commoditized, AI might start to write and be smarter than people in many ways. How will original content actually matter? I wonder what will happen as content and things become more commoditized from AI. How will people build and maintain genuine connections?

• 54:14Ted Seides?

  All right, Michael, last one. If the next five years are a chapter in your life, what's that chapter about?

• 54:18Speaker 02

  My focus is on the private markets world. I think it's such an interesting time in this space where we're only in the early days of more people having access to private markets. I want to help be part of that by helping to educate the community, both the GPs, the LPs, everybody else involved in private markets. There's really big questions that society is facing. I hope private markets can play a role in that. I think a lot of it's going to happen in the next five years. That feels like the window.

• 54:45Ted Seides?

  Michael, thanks so much for sharing your wisdom about what's happening in the wealth space.

• 54:49Speaker 02

  Thanks for having me, Ted. Really appreciate it.

• 54:52Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.