Michael Kelly – Democratizing Access to the Middle Market at Future Standard (EP.473)

Our continuing exploration of the intersection of private wealth and alternatives takes us to Future Standard, one of the largest distribution platforms bringing the wealth channel exposure to the middle markets. Michael Kelly is Co-President and Chief Investment Officer of Future Standard, a $90 billion alternative asset manager focused on private middle-market strategies for the wealth channel. Michael has been in the alternatives industry for three decades, starting as an analyst under Lee Cooperman and Julian Robertson, helping build FrontPoint Partners, which began the institutionalization of hedge funds, serving as CEO of ORIX USA, where he led the acquisition of $250 billion global asset manager Robeco, and for the last decade turning to the democratization of alternatives. Our conversation covers Michael's path from working in hedge funds to building alternative asset businesses, including lessons about incentives, leadership, and culture. We then discuss his pivot from the institutional market to the wealth channel, and the growth from a single strategy at Franklin Square with $12 billion in assets to a full suite of strategies under the rebranded Future Standard with $90 billion across private credit, private equity, real estate, infrastructure, and multi-asset investing. Michael also shares his views on performance expectations and what the flood of new capital means for the institutional market. 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 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.

• 0:00Speaker 00

  The days of financial engineering, your way to higher returns, in my view, are over. Where you're really going to see the outperformance in private equity are going to be faster revenue growing companies, lower multiple entry points, more fragmented ecosystem private companies, and where you can add operational value. That just simply tends to be more in the middle market than in the large and mega cap private company market. Franklin Square, the analogy I use is Netflix. They were packaging and distributing other people's contents, in this case, GSO's middle market lending practice through BDCs. It's a little bit like red envelopes and DVDs. They had built this incredible distribution

• 0:41Speaker 00

  engine and pipes into all of these individual investors through the broker dealer market. It had been my background to build out asset management companies. And I thought, well, just like Netflix, eventually, came the conclusion that building your own TV and movie studio and putting it through your own pipes might be a good idea as long as the quality content is high. I thought, we can do that here.

• 1:08Ted Seides?

  I'm Ted Seides, and this is Capital Allocators. Our continuing exploration of the intersection of private wealth and alternatives takes us to Future Standard, one of the largest distribution platforms bringing the wealth channel exposure to the middle markets. My guest is Mike Kelly, co-president and chief investment officer of Future Standard, a $90 billion alternative asset manager focused on private middle market strategies for the wealth channel. Mike has been in the alternatives industry for three decades, starting as an analyst under Lee Cooperman and Julian Robertson, helping build Front Point Partners, which began the institutionalization of hedge funds, serving as CEO of ORIX USA,

• 1:53Ted Seides?

  where he led the acquisition of $250 billion global asset manager Robeco, and for the last decade, turning to the democratization of alternatives.

• 2:03Ted Seides?

  Our conversation covers Mike's path from working in hedge funds to building alternative asset businesses, including lessons about incentives, leadership, and culture. We then discuss his pivot from the institutional market to the wealth channel and the growth from a single strategy at Franklin Square with $12 billion in assets to a full suite of strategies under the rebranded Future Standard with $90 billion across private credit, private equity, real estate, infrastructure, and multi-asset investing. Mike also shares his views on performance expectations and what the flood of new capital means for the institutional market. Before we get going, it's that time of year when

• 2:44Ted Seides?

  we turn to traditions, like the tradition of Thanksgiving, gathering family and friends to share what we're thankful for. One of which is the ability to eat enough turkey and tryptophan to fall into one of the best slumbers all year: that nap on the couch while watching football. While I'll spend the turkey days with my family, I'm particularly grateful this year for the incredible team of professionals that brings together what you hear and experience with capital allocators. That's Hank, our CEO, Morgan, our Head of Ops, Tamar, our Head of Business Development, and Liz, our Head of Content. I put our starting five up against any NBA All-Star team off the court. Our

• 3:26Ted Seides?

  values of quality, entrepreneurial spirit, intellectual curiosity, respect, generosity, and fun win championships. Although I can't say the same on the court for my getting dunked on, because at 6'1", I'm the least vertically challenged of our starting five. Outside the office, I'm grateful for you for listening, engaging with our guests, and sharing kind words all year long. This podcast is the gift that keeps on giving. So before you start the mad year-end dash to calculate performance, conduct 360 reviews, and shop, take this time to be grateful for the many gifts in your life. As my friend Dasha Burns recently shared on the occasion of my 55th birthday, "May the

• 4:10Ted Seides?

  best of your yesterdays be the worst of your tomorrows." While you're feeling all warm and fuzzy, don't forget to spread the word about capital allocators to those closest to you to give them the gift that keeps on giving. Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called SuperAnalyst, an always-on agent that works like a power user on your behalf.

• 4:51Ted Seides?

  It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. Point SuperAnalyst at a theme, company, or market, and it learns the coverage universe so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next committee meeting and hand it to SuperAnalyst.

• 5:36Ted Seides?

  Start a free trial at alphasense.com/capital and see what it has ready for you. Capital Allocators is also brought to you by RidgeLine, the investment management platform built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your

• 6:16Ted Seides?

  growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery, so your talent can shift from managing old technology to materializing new ideas. Ridgeline helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there.

• 6:56Ted Seides?

  Then talk to Ridgeline about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square.

• 7:40Ted Seides?

  Learn more at junipersquare.com/capitalallocators. Please enjoy my conversation with Mike Kelly. Mike, thanks so much for joining me.

• 7:51Speaker 00

  Thanks for having me, Ted.

• 7:53Ted Seides?

  I'd love for you to take me back to your original initiation into the investment business.

• 7:59Speaker 00

  I started my career at Solomon Brothers. Spent a couple of years in the FIG Banking Group and then one year up on the Fixed Income Trading Floor. When I went back to business school, I wanted to make the switch over to investment management in the buy side. And this is now, we're going to talk about the mid 90s. So it always struck me as odd that who I viewed as the most talented investment professionals at the time were stuck in this arcane part of the investment business, hedge funds, venture capital, what we now call alternatives. So many of them that despite their young age had made tremendous impact. A part of financial services that was a pure meritocracy. And I thought to myself, I want to be part of that club.

• 8:44Speaker 00

  The hard part was, how do I break into that club? I had an old... Hedge fund directory, I still have it, paper directory of the names and contact information for all of the hedge funds of the day, the Julians and the Bruce Covners and the Paul Tudor Joneses.

• 9:03Ted Seides?

  How many pages was it?

• 9:04Speaker 00

  It's probably 20, 25 pages. I went down the list and I cold called all of them. The only one I got through to was Lee Cooperman. Lee, who notoriously was known for doing more with less, answered his own phone. Lee, one word. And I made my pitch. I was a kid from the burrows. He was a kid from the burrows of New York. I told him that I wanted to come work for him. I would work for free and sleep on my parents' couch and do whatever it takes to break into the hedge fund industry. He told me that he only hired PhDs. And I was getting my MBA at the time, so I thought I was ruled out. Then he said that PhDs are for poor, hungry, and driven.

• 9:47Speaker 00

  And I thought, well, I'd check all three of those boxes. He said, well, I'm a value investor. I like the price. You start Monday. That was the beginning of my entry into the hedge fund industry in the mid 90s. From there, I went on to work at Tiger Management. Incredible firm with incredible people, super talented, from Julian, across all of the analysts and PMs. After that, we started Frontpoint Partners with the view to bring specialized alternatives, hedge funds, to an institutional investor class. If you think back to the late 90s, early 2000s, that was actually a thing. We called it the institutionalization of hedge funds. Was 12 years of my life, wound up being the chief investment officer and co-CEO of

• 10:32Speaker 00

  that firm with Dan Waters. We ultimately sold it to Morgan Stanley and ran it from Morgan Stanley for a few years.

• 10:38Ted Seides?

  I'd love to hear what stuck most in your early analyst experiences with Lee and Julian at Tiger.

• 10:46Speaker 00

  What I appreciated the most was being around

• 10:51Speaker 00

  Really intelligent people doing intense focused work. It always struck me that one of the most important lessons was to be intellectually flexible. And what I mean by that is come to a view based on your work, but be open to change your mind. If you see disconfirming evidence, don't just find evidence that supports your view and block out anything that disconfirms your view. The other important lesson that I learned, it really came more from Michael Steinhardt than anyone else, which is this idea of a variant perception. Think about what's already in the price. You might be bullish on something, but if everyone else is just as bullish, then where

• 11:36Speaker 00

  is the opportunity? Somebody who says, well, I like to be long high-quality companies and short poor-quality companies. Well, I wouldn't mind being long a poor-quality company if it's going to get better, if I have a variant view on that, and vice versa. This idea of finding your thought process and how it differs from what's already baked into the price was a big, important lesson early in the investment career.

• 12:00Ted Seides?

  What was it like sitting in those seats when hedge funds weren't even much in the institutional market?

• 12:07Speaker 00

  If you think about my career and the arc of asset management, when you think about the 60s and 70s, the old A.W. Jones model, which then talked about the early days of barbarians at the gate and private markets, went from the Bass Brothers and Richard Rainwater's, that family office, Memphis mafia-type capital through that 70s and 80s. And of course, as you're very familiar with, David Swensen then in the mid 80s adopted the endowment model and began to say, I want to invest the way these sophisticated pools of capital are investing. That begun the trend of institutions embracing that. When you're in the 90s, you're still at a point where it was mostly family office capital

• 12:52Speaker 00

  invested in these types of strategies. This is the early days of endowments embracing and then ultimately pension plans, insurance companies.

• 13:01Ted Seides?

  What did it feel like doing the work on companies with the rigor that hedge funds had back then compared to what seemed like a much smaller pool of active managers?

• 13:12Speaker 00

  Back then, information was not as ubiquitous. There was extra legwork you could do that would give you a real comparative advantage. Looking at these companies, looking at trends, identifying sources of information on macroeconomics and data, working within the companies, understanding the supply chains. That was a time when there was far more inefficiencies. That created significant amount of opportunity. As time went on, as we saw through the 2000s, the passive indexation and ETFs and the capital markets changes and the public market rendered some of those advantages obsolete.

• 13:52Ted Seides?

  What led you from, you could say, working in the business, doing research on companies, picking stocks, to the front point, which was institutionalizing the business itself, working on the business?

• 14:04Speaker 00

  Early in my career, I went into macro investing. I wanted to be Stanley Druckenmiller or Paul Gere Jones. It always struck me that people who went into investment management wanted to be the next Warren Buffett, they wanted to be the next Julian Robertson or Stanley Druckenmiller. Very few people set out to say, I want to be Larry Fink or Chip Miller and manage these businesses and grow these businesses. I thought I could spend my life trying to become the next great macro investor and I might be good at it. There are a lot of people fishing in that pond, but actually building asset management companies and managing them, there seemed to be nobody that sets out to do that. I thought, maybe that is my career path. If I can do that, there are few people fishing in that pond.

• 14:47Speaker 00

  It's a much more inefficient market and I could be A+ at that. That's where my head was at when we were building Frontpoint as opposed to using that as a platform to manage money. It was my original intention to go and help build asset management businesses.

• 15:03Ted Seides?

  As institutions were first starting to adopt hedge funds, what did you see that was important for Frontpoint to deliver to institutions who were adopting it for the first time?

• 15:14Speaker 00

  When we started Frontpoint, many of the hedge funds at the time were run similar to a family office. We saw an opportunity to build a firm that could partner with institutional investors and help them demystify these strategies, understand what the risks were, understand how they fit into their portfolios, give them much greater transparency around holdings and around risk attributes and risk contributions. More akin to what they were used to in dealing with more traditional asset management companies, which at the time were long-only companies. We set out to build a firm that brought the best facets

• 15:58Speaker 00

  of the traditional asset management business to alternative and hedge fund strategies in that business. We saw an opportunity to be a key partner to institutional investors and help them embrace these strategies and how they could be helpful to them in their portfolios. This is back in 2000, in late 90s, it was differentiated.

• 16:20Ted Seides?

  What was it that you did that hadn't been in place before then?

• 16:23Speaker 00

  There wasn't a level of transparency and understanding of reporting and risks and positions, diligence down to the manager level and their process. That approach wasn't fully embraced. The culture was more about, we're great investors, give us your money and we'll generate great returns. We may or may not be able to or want to explain to you how we go about doing that.

• 16:52Ted Seides?

  And the trajectory of that decade, Frontpoint had some great success as

• 16:58Ted Seides?

  Hedge funds were getting adopted by institutions, then had some hard times later. Would love to hear what you took away from what works when there's a big group like institutions starting to adopt a new area? And then what are some of the pitfalls along the way?

• 17:12Speaker 00

  When you look at capital coming in, understanding what the motivation of the capital coming in, what drives that motivation? And are expectations appropriately matched with what can be delivered? At the time, institutions were looking to hedge funds as diversifiers. You and I both know you can construct portfolios that extract the alpha and mitigate the beta. The whole of the hedge fund industry wasn't necessarily doing that. There were still a lot of embedded beta in many of these strategies, ensuring that what you were offering and what the institutions were getting was a big factor in that. In terms of learnings, being in a position where you can manage expectations and incentives

• 17:57Speaker 00

  appropriately is extremely important. If you think about the Charlie Munger quote around, "Show me the incentives and I'll show you the behavior." If you want individuals to act in a way where they are collaborating and working towards a client outcome, you have to appropriately construct those incentives correctly. That's often where in investment management, things go awry. Because I'm having a problem getting these guys that I'm managing to do what I want them to do, I always start by asking them, "Well, what's the incentive framework that you've designed to get them to do that?" Because if you correctly frame the incentives, they will behave appropriately. They're rational human beings.

• 18:38Ted Seides?

  So after a long period of time of doing that, you sell the business to Morgan Stanley. How did you decide what was going to come next for you?

• 18:47Speaker 00

  I like to build businesses. I enjoy investment firms where there's a combination of working with investment professionals and managing people and working closely with clients. Finding an opportunity to be entrepreneurial, be able to harness those experiences and skills.

• 19:11Speaker 00

  While thinking about where the world was going and what the next big trends were going to be, that was the real opportunity. And that's where I was taking the time to think through what are the next big opportunities in asset management, that arc of history of high net worth, ultra-high net worth capital, institutional capital, embracing these non-traditional forms of investing. Who was being left behind in that? The mass affluent and the individual investors, and how to bring those opportunities to them. If they're so good for the most sophisticated allocators in the world, why are they not made available to this group of investors?

• 19:52Speaker 00

  That was some mission-based opportunity. So I was at Oryx Asset Management. I was running asset management. This is a Japanese holding company, and they wanted to build vertical businesses, one of which was in asset management. I was helping them do that, and I bought Robeco for them in Europe, which is a several hundred billion dollar asset manager out of the Netherlands. I wanted to go back and do something more entrepreneurial again, and build another business. This is now 12, 13 years ago. I had a view that the next big leg in investment management was going to be bringing alternative investments

• 20:35Speaker 00

  to a broader marketplace, the mass affluent marketplace, individual investor marketplace. I began to talk to some people in my network about that view and what to do about it. Bennett Goodman and Doug Ostrover at GSO, along with a good friend of mine, Scott Fletcher, had mentioned Michael Forman and Franklin Square. GSO had had a relationship with Franklin Square. They were sub-advising the BDCs for them. Bennett and Doug thought it would be a good idea to go meet with Michael and talk to him about what I was thinking, what he had been doing already. That begun a series of conversations with Michael, talking about his business. And it really resonated with me, what Michael's vision was. He was bringing income strategies to the individual investor marketplace through the

• 21:20Speaker 00

  independent broker dealer channel and wanted to build that out. At the time Franklin Square, the analogy I use is Netflix. They were packaging and distributing other people's contents, in this case GSO's middle market lending practice through BDCs. It was a little bit like red envelopes and DVDs. They had built this incredible distribution engine and pipes into all of these individual investors through the broker dealer market. It had been my background to build out asset management companies and I thought, well, just like Netflix, eventually came the conclusion that building your own TV and movie studio and putting it through your own pipes might be a good idea as long as the quality content is high. I thought, we can do that here.

• 22:02Speaker 00

  And that began my joining Franklin Square and working with Michael and the team to turn them from this packaging and distribution company into a world-class asset management company. What was the product suite when you arrived? At the time, Michael and GSO had launched the first ever non-traded BDC. They had a BDC and a closed-end fund. And it was exclusively at the time with GSO as the solo partner. The first thing we set out to do was to undertake external partnerships with some other managers, GoldenTree, EIG, Rialto and Real Estate, and building out the product suite in other areas of private markets, mostly around an income orientation.

• 22:46Speaker 00

  At the time, bringing strategies that delivered income in a world that was starving for yield into retirement accounts. We set about doing that. Then we began to internalize the capabilities. I'd hired Andrew Beckman, who I knew from Goldman Sachs and Magnetar. So Andrew Beckman and his partner Nick Hailbutt, and then built a team around that for internal private credit capabilities. That began a series of additional bolt-ons of teams and acquisitions. About three years ago, we made the decision to expand from income strategies into growth strategies and solutions businesses.

• 23:24Speaker 00

  We talked to a number of investment firms about that and came across Portfolio Advisors. Portfolio Advisors had been a private equity solutions business and been in business for 30 years, helping institutional investors navigate the middle market private equity business. So, primary allocations, secondaries, co-investments. That began a conversation with them, which culminated into us merging our businesses two years ago. There was no overlap in our strategy base, so we took our credit and real estate capabilities and combined it with their private equity capabilities and integrated that under the common future standard brand.

• 24:04Speaker 00

  Today, we have close to 90 billion of assets under management across five different verticals: private credit, private equity, real estate, multi-asset, and infrastructure. We just announced an acquisition of Post Road Group in digital infrastructure, so that will be our fifth vertical, and about 20 different investment strategies that we offer across those five verticals.

• 24:26Ted Seides?

  I'd love to tease through part of that capital allocation investment process. So, as you started to go from a single relationship with GSO to what's become five asset classes, some done directly, some with managers, how did you think about, in a big world of asset managers, who you wanted to partner with?

• 24:46Speaker 00

  When we set out for partnerships, we thought about the individual spaces that we believed had risk reward that was appropriate for the private wealth channel. Varying forms of private credit stood out among them. Middle market private credit, unitranch lending, real estate, commercial real estate lending. These were areas that we felt strongly about, offered a very attractive entry point for individual investors through their advisors for what they were looking for, which, again, going back, was very income-focused in terms of the objective set. We then came to who do we believe are the best of breed managers across these different areas?

• 25:31Speaker 00

  GSO and KKR stood out as that golden tree in the hybrid between public and private credit. EIG and energy credit, Rialto in commercial real estate lending. A lot of these were personal relationships that we had. These were people we knew very well. We knew their teams, understood their orientation towards risk. As with all forms of credit, it's not just someone who can source and originate an underwrite credit, but also someone who can deal with problems when they arise. And credit problems always arise. And so we wanted strong risk orientation and workout capabilities across those areas. That's how we decided on the varying combination of personal relationships and core competencies.

• 26:13Ted Seides?

  You mentioned expectations and incentives in the first iteration with institutions. What are the expectations of that individual wealth vertical that led you to say yield is going to be the right place to get started?

• 26:28Speaker 00

  Backing up, think about the post-great financial crisis period of time when yields really started collapsing. Disinflation, globalization, everything driving yields down towards zero and culminated up to 2021 when we had zero interest rates. At that time, that desire to have an alternative in fixed income to what was historically high liquidity, high duration, low credit risk. Most fixed income portfolios, the 60, 40, the 40% were mostly government bonds and agencies

• 27:09Speaker 00

  and mortgage backed, which had high duration, high liquidity, little credit risk. To be able to complement that with credit exposures that were less liquid, that had higher credit risk or a shorter duration through their floating rate characteristics was a nice offset and balance to what was in the traditional fixed income portfolios and picking up an illiquidity premium, in some cases, a complexity premium around that asset class. That, to me, was a lot of the main drivers of private wealth into private credit.

• 27:47Ted Seides?

  One of the things I always wondered is why income generating strategies are so popular with this group of taxable investors?

• 27:55Speaker 00

  If you look at the profile, the investments will often be put into a retirement account where taxes will be less the issue and factoring into the decision making. In other cases, even with a taxable account, the level of yield one can generate is oftentimes even post-tax fairly attractive if you can generate high single-digit, low double-digit yields in private credit and map that up against a cash alternative or where tenure yields are, it still may be considered advantageous or on a trade-off basis.

• 28:37Ted Seides?

  When you looked at the people that you wanted to partner with, best-of-breed managers, how did you align your incentives with them and their incentives with the ultimate investors so that those expectations can get met in a way that everyone's rowing in the same direction?

• 28:56Speaker 00

  In the early days of providing alternatives to the private wealth market, what was then called retail, although we don't call it retail today for good reason, there were a lot of products out there and partnerships that were adding fees on fees. Once you get through all the layers of fees and loads that are involved in these offerings, what's left for the individual investor? We wanted to avoid that situation and the way to do that is identifying strategic partnerships where we offer one layer of fee and we share in the revenues between partners. We have contributions of capabilities to deliver that and deliver that with one layer

• 29:37Speaker 00

  of fees as opposed to passing on two separate layers of fees to the individual investor. That's really been the mission of Future Standard from the beginning, which is We want to level the playing field for all investors. The private wealth channel and individual investors deserve to get the same treatment as institutional investors. So the same types of investments that institutional investors invest in to give them more fair fees, to give them better structures where they can invest more seamlessly directly into these underlying investments. That's been the point of all of this. And it's been an evolution because it's a big sea change from the early days of those offerings and the access to those original investments to today where you have individual

• 30:21Speaker 00

  investors accessing the exact same investments as the largest, most sophisticated pools of institutional capital in the world at institutional levels of fees and structures that work for them in terms of liquidity and so forth.

• 30:35Ted Seides?

  When you're going to those managers, what does the team behind you look like that had cracked the code on the distribution so that a manager who already has a big institutional presence sees it as a net positive and is willing to share those fees with you?

• 30:50Speaker 00

  I joined 11 years ago. Not many alternative investment firms had spent time and money on the private wealth channels. They might've had a small team dedicated to it. In order for an investment firm to undertake serving the private wealth channel, it takes a significant amount of resources, a significant amount of patience and time, because it does take time. We had a fully built national wholesale distribution capability across independent broker dealers, registered investment advisors, wirehouses, regional broker dealers, with national accounts, business development, sales and marketing, education and thought

• 31:35Speaker 00

  leadership, all of that built out. It's significant resources invested in doing that. That's an important distinction because when you think about a firm like Morgan Stanley, like a wirehouse that has a significant number of advisors and their underlying clients looking at these strategies, they don't want an investment manager to say to them, here's a bucket, go fill it up with your private wealth money. You have to work with the advisors, help them understand the strategies, the risks, educate them, help them educate their client base. And there weren't many investment firms that had that capability and set of resources and experience doing that through the years some have undertaken to make that serious

• 32:19Speaker 00

  investment and done it well. Still to this day, there aren't many firms that are well-equipped to bring their offerings to the private wealth market.

• 32:27Ted Seides?

  If you look at that side of your business today, how many people are involved in that activity?

• 32:31Speaker 00

  We currently employ 600 people roughly at Future Standard. Of those 140 are in that full suite of distribution and client relationship side of the business.

• 32:47Ted Seides?

  When you had these couple of acquisitions with Portfolio Advisors, how did you think about the buy versus build decision when you wanted to get into a new strategy?

• 32:58Speaker 00

  When it came to Portfolio Advisors, their business had been operating for 30 years. They'd been operating in the middle market space of private equity, which the middle market's a broad definition of $10 million to $1 billion of revenues, private companies, there's 200,000 of them. But the focus at Future Standard is enterprises of $1 billion in valuation and down, so core and lower middle market. That was the sweet spot for Portfolio Advisors across their primary and secondaries and co-investment business. So it matched well. With that came capabilities in each of those areas, funds that had been around for many years. Also, they had built several hundred relationships

• 33:42Speaker 00

  with high-quality, middle-market, private equity sponsors. And those relationships were a very powerful engine for sourcing deal flow. That was a distinctive point of you could try to replicate this, but it would take many, many years to replicate this business. And you can't replicate several hundred relationships overnight. Why that set of relationships matters is today, we're able to work with a given middle-market, private equity sponsor and say to them, we can invest directly in your fund. We can co-invest with your portfolio companies across your funds. We can provide you with a solution for your LPs for secondary liquidity.

• 34:26Speaker 00

  We can work with you at the GP level on a continuation vehicle. And we can lend to any of your portfolio companies from senior in the capital structure down to junior mezz solution behind a bank first lien. Why that matters is those private equity sponsors then view us as your strategic partner. There's a lot of capital out there and capital has become more and more of a commodity. Everyone in that ecosystem, you need to prove why you're not just a commoditized piece of capital. This strategic partnership model is something that generates significant deal flow across our five verticals. That deal flow is ultimately what begets the opportunity for our clients and the outperformance.

• 35:06Ted Seides?

  In the original credit strategy and some of the others, you either hired people and built it on your own or partnered with someone and said, what were the pivot points in those decisions to buy or build?

• 35:18Speaker 00

  After we separated with Blackstone, Blackstone had gone on to build their own private wealth business and undertake building their own BDCs. We partnered with KKR. There were only a handful of firms that had the origination scale to be able to undertake originating several billion dollars a year of private credit lending. And our BDCs are of significant scaled size. It made it easy to decide we were going to partner, not to try to build that from scratch. In terms of bringing Andrew and his team in, in terms of opportunistic private credit

• 35:59Speaker 00

  and non-sponsored private credit, Andrew had been doing that for many years. And we had a smaller pool of capital, which he took over permanent capital vehicle and began to manage that set of portfolios and built over time, a team of 30 credit professionals. Today, we're managing close to $10 billion across a series of vehicles, both offered to private wealth, but also to institutional investors as well as a CLO business. And now has a team of significant size to build that over time and originate private credit.

• 36:36Ted Seides?

  When you joined Franklin Square, BDCs were the vehicle where a lot of the wealth individuals were accessing these strategies. That's evolved. There's now interval funds. I'd love to hear your thoughts on the strengths and weaknesses of different vehicles and where you're seeing that demand today.

• 36:56Speaker 00

  BDCs originally were created through a congressional act in 1980 as a way to bring capital into private businesses in the United States. The original BDCs back then was more of a venture capital model. It was really only after the Great Financial Crisis that BDCs became this private credit lending model with proliferation of funds like ours and Ares and others. There's an advantage in terms of the ability for individual investors to invest in those vehicles at low minimums. It's friendly for an individual investor model

• 37:41Speaker 00

  to be able to invest their capital into BDCs for income. There are advantages for the end investors through the leverage that's allowed in the vehicle to deliver the type of income objectives that one has. Now, there are limitations as to what's qualified assets and not qualified assets and structural limitations to the types of things that can be put into a BDC. The interval funds have greater flexibility on the one hand, but more leverage limitations. You might have an interval fund that, for instance, could have all asset-backed financing strategies, which has a limitation in the BDC model of qualified versus non-qualified

• 38:24Speaker 00

  investments. You don't get the same degree of leverage in a closed-end interval fund. Different strategies will have different types of wrappers. Private equity interval funds, private equity RICS today are typically offered in a tender offer fund. In Evergreen Strategies, credit fits quite well into those wrappers because they're more cash-flowing than private equity. You have cash income refinancings, shorter duration, three to five-year assets. Whereas in private equity, these are longer duration assets. The reason you see secondaries so often in private equity evergreen strategies is there's greater ability to provide for leverage.

• 39:05Speaker 00

  The structures that have evolved over time, the wrappers that you create to deliver that to investors have to take that into account. Real estate can fit well into a REIT, private equity assets into a tender offer fund, credit into interval funds. That's typically what you see in the market.

• 39:22Ted Seides?

  Where are you seeing the adoption of private equity compared to what's been some massive surge in adoption of private credit in these markets?

• 39:31Speaker 00

  It's still early, but the education learning curve advisors have come up and have understood these evergreen structures and are now looking at opportunities to invest in growth strategies in private markets. The offerings themselves, the advantages of a private equity evergreen structure are that your capital is drawn immediately and invested. You have vintage diversification. You mitigate the J curve. You're not waiting for capital drawdowns. You have continuous compounding as opposed to waiting for your capital to get called and brought in. There's a managed expectation of putting your capital to work.

• 40:14Speaker 00

  The trade-offs, and there's always trade-offs, include the fact that these are not liquid strategies, so they're in semi-liquid structures, that you're not going to generate the same level of returns in a private equity evergreen structure as you will in a private equity drawdown structure. You might be looking at high teens net IRRs or higher. Given the fact that you have to manage for liquidity, you're not going to generate that level of returns. The returns will be more likely a 12% or a 13%. You're trading off the return there. The advantage goes back to continuous compounding and J curve mitigation, vintage diversification. So those are the trade-offs that you need to weigh between locking your capital up

• 40:59Speaker 00

  for 10 to 12 years in a drawdown vehicle, if you have the investment minimum to satisfy that, or investing in an evergreen strategy, you get lower investment minimums, but you're going to trade off returns for that.

• 41:10Ted Seides?

  How do you think about the increasing adoption, particularly in private equity side, as it relates to where we are in the cycle? Rates are a little higher, private equity prices are higher than they were in the past, and you can look back at the returns and say they have been great, but most people think this is a harder starting point. As the advisors are talking to the wealth channel about coming into this for the first time, they're growing it significantly for the first time. How do they think about the expectations for what forward returns will look like?

• 41:40Speaker 00

  On the private credit side of the business, the state of play today is you have tighter spreads, there's a lot more capital in credit than there has been. You have higher base rates. We did exit zero interest rate period, so if you're looking at a floating rate loan, so far it's a lot higher than it was three, four years ago. The expectations have to be base rates are coming down, distribution rates and yields will come down in those private credit floating rate vehicles. In the middle market, once you move into smaller companies or midsize companies, you do get an additional premium of spread for those types of opportunities.

• 42:21Speaker 00

  When you move into more opportunistic credit and non-sponsored based credit, you have even more of a premium that gets added. The trade-off is those are riskier, those are more fragmented, more risk, more return, and weighing the trade-off across that is the job that we undertake in diligence, but also the advisor needs to think about in terms of what's suitable for their clients and their objectives. On the private equity side, if you think about private equity going back 10 years ago and decomposing returns, private equity returns had witnessed increasing degrees of leverage.

• 43:01Speaker 00

  We saw LBO multiples of leverage of six, seven, eight times, decreasing cost of financing that leverage, each turn of capital as debt capital became cheaper, and multiple expansion, which we saw prevalent over that period of time. Well, now fast forward to today, cost of financing is higher by hundreds of basis points. You're not going to get much multiple expansion on large and mega cap LBOs that are trading at 17 to low 20s times EBITDA. You really can't lever beyond six, seven, eight turns of leverage on these LBO turns. The days of financial engineering, your way to higher returns. In my view are over. Where you're really going to see the outperformance in private equity are going to be faster revenue

• 43:45Speaker 00

  growing companies, lower multiple entry points, more fragmented ecosystem private companies, and where you can add operational value. That just simply tends to be more in the middle market than in the large and mega cap private company market. So I do think that the outperformance that you've seen over time with middle market private equity funds over their large and mega cap peers is only going to not just continue, but move even higher.

• 44:15Ted Seides?

  It's easy for us to talk about the historical perspective and where we think it might go today. It strikes me it's harder for that end owner who doesn't have the history in the markets to understand and calibrate their expectations of what they should get out of private equity. But how does that education process get to that end client so that they're not disappointed five or 10 years from now if returns are okay, but they're not what someone might have pitched them looking backwards?

• 44:45Speaker 00

  You do need to understand history to start. You need to understand what the historical returns have been. You need to understand the underlying fundamentals that drive those returns. Revenue growth, EBITDA growth. If there's leverage being incorporated, how much leverage is incorporated? What is the cost of that leverage? So there's the quantitative metrics that have to go into it. Then there's the fundamental and qualitative understanding of impacting these companies and helping their businesses. There are private equity firms who have expertise in industrial services and they have some great firms that work in healthcare services and they are used to working with these businesses, improving their governance and people and innovating and getting value and what impact

• 45:30Speaker 00

  the contribution of not just capital, but their partnership can have on the underlying company and its fundamental prospects. It's that shared appreciation of the drivers to then translate that into what the return potential of a business like this is over a course of five or seven or 10 years and trying to translate that into a base of expectations.

• 45:55Speaker 00

  For what you're offering to people and how that compares frankly against public companies, large cap stocks or the Russell 2000. And I think the education has to move across the full understanding of investments that they have in their portfolio today and the trade offs of liquidity and complexity and fees. How do you think this will play out in the 401k market? Defined contribution is 12, 13 trillion of assets. 401ks is a significant piece of that. Much of that in target date funds, qualified default options. Ultimately, we will see more partnerships between traditional asset managers and alternative asset managers that create structures like collective investment trusts to be

• 46:40Speaker 00

  put into target date funds and 401k plans that have a mix of liquid traditional investments and less liquid alternative investments. Now, private market alternatives might comprise 10, 15% of that pool. But I've always viewed that as a missed opportunity to begin with. If you're someone in your twenties or thirties and you have a multi-decade long horizon to invest your retirement assets, why should all of your assets be in 100% daily liquid instruments? It doesn't make any sense to me and it never has. At least having the opportunity to avail yourself of an illiquidity premium over a

• 47:25Speaker 00

  long duration, long duration assets that can diversify your exposures and enhance the returns of your exposures makes common sense. We will inevitably see that find its way into defined contribution in the 401k market. One of the reasons we like working with advisors generally is who better to determine the suitability of these investments than an advisor who is closest to the individual investor client and knows Whether or not those trade offs, because there's no right or wrong. So alternatives aren't better than traditional investments. They're different. They bring different trade offs in liquidity and fees and complexity.

• 48:05Speaker 00

  And knowing those trade offs to make a sensible decision around whether those trade offs work for a particular client in a particular situation. That's why we work with advisors is they're best suited to help make that determination.

• 48:19Ted Seides?

  I'm curious in this space, almost like Mag Seven in concentration. There are a small number of mostly large public alternative asset managers who have addressed this market with products and distribution. What's it like competing with them in this space?

• 48:38Speaker 00

  I have nothing but admiration for our competition. They are the best at what they do. Our focus is on private markets. Our focus is on the middle market at Future Standard. We do think that's distinct from some of these larger alternative players who are operating in the larger mega cap space. They're providing equity and credit capital to companies that 10 years ago would have been publicly traded. That is the upper middle market. Distinguishing what we do from what they do is important. We think that our offering has differentiation and brings something to the table for clients that they can access with those large players.

• 49:21Speaker 00

  But I think it's tremendous that individual investors now get access to the likes of Blackstone and KKR and Ares and Apollo. These are tremendous firms. It's a great evolution for all individual investors.

• 49:35Ted Seides?

  As you've addressed this market, you joined Franklin Square at some point in time as renamed FS. There's a theme here, now Future Standard. How have you thought about the branding exercise for all of your team to go out and distribute your product?

• 49:51Speaker 00

  It's important that we have a common brand and identity. At Future Standard, we did not set out to build a multi boutique firm. If you look at the most successful. Alternative firms and talent shops, they have a common cohesive brand and they do that for a very good reason. Despite having a series of acquisitions, we wanted to identify across a common brand and a common platform with the proposition that future is about anticipating what's next in the marketplace on behalf of our clients and standard about raising our standards and what we can deliver for our clients. And that's the identity upon which we have identified ourselves as future standard.

• 50:36Ted Seides?

  As you see this wave of money increasingly coming into the space, what risks do you have your eye on?

• 50:43Speaker 00

  I don't weigh the risks as much as the quantum of capital coming in because that question often gets asked around whether or not private markets and private credits are bubble. If you look at the sheer amount of economic activity, US GDP going from 11, 12 trillion of GDP pre great financial crisis to 30 trillion today, the number of banks and the consolidation in banks and their move away from lending to private companies and middle market companies, the rise of the number of private companies and companies staying private. All of those trends speak to more and more opportunity for that capital coming in. It's a supply demand matching.

• 51:25Speaker 00

  The bigger risks revolve around this idea of management of expectations, ensuring that why investors are embracing this match up with what can be delivered. It's awareness, education and expectations management where it has the greatest surface area for risk. That's why we spend so much time on education for the advisors and their clients and thought leadership. These are less liquid opportunities and there's no guarantee you can exit if you want to exit. That lesson will be learned. There needs to be an appreciation. You are getting these characteristics of returns and diversification and access to an illiquidity premium.

• 52:09Speaker 00

  The trade-off is you may not be able to get out any moment that you want to particularly get out. That matching of expectations needs to be clear and well laid out. That's the biggest risk.

• 52:20Ted Seides?

  So in addition to making sure there's a calibration of what people understand, there's the potential very large volume of capital coming into these strategies. There's already seen it in private credit, and maybe it happens in private equity. What does that mean for the institutional owner who's there today, who sees a lot more demand than they had in the past?

• 52:41Speaker 00

  They should understand that it's here to stay. This isn't a temporal situation. The demand from private wealth will be the fastest growing source of capital into alternatives for the foreseeable future. If you're an institutional investor or allocator, you can think of it as competing with your capital. You can look at it as displacing your capital. You can think about it as an opportunity to potentially partner with that capital or use it in some advantageous way. If you think about that last category, there are institutions, and we work with a number

• 53:19Speaker 00

  of them, who will seed vehicles that will be primarily offered to private wealth channels. By doing so, they will gain economics and ownership in the revenue stream of those vehicles. There are institutions that are buying GP stakes in managers who, for the first time, are offering their strategies to private wealth. So they will take advantage of the growth of that channel on those businesses and the value of those businesses. And there are institutions that are using that as an opportunity to avail themselves of liquidity in the secondary's market. If you take endowments that are looking at selling some of their private equity and

• 54:02Speaker 00

  venture positions, the primary demand for those secondary positions are coming from evergreen private equity vehicles. If you try to continue to carve your assets away from that trend, you can do that, you can avoid. By investing earlier stage companies, you can invest direct co-investments. You can create SMAs. There are ways to carve out opportunities that private wealth capital will likely not enter directly, but we're going to see more of it. So institutional investors should learn to coexist with it.

• 54:41Ted Seides?

  What created the tipping point for a decade ago, you thought this would happen? And it's really only the last few years where we've seen the adoption really kick in on the credit side. Maybe it's starting to in private equity. Why now?

• 54:58Speaker 00

  These opportunities always take longer than one thinks. We felt the same way when we were building Frontpoint. We were wondering if this institutional trend was ever going to happen. It pays to be early, but it also requires a lot of patience. In some ways, what I would call the golden era of the market backdrop that started in 1987 when Volcker stepped down, ended in 2021 with the end of zero interest rates. And thus began a cycle of more challenging backdrops for, say, stocks and bonds together in a 6040 portfolio and for bonds generally in long duration fixed income instruments.

• 55:38Speaker 00

  That accelerated this trend of wanting to put assets into private credit, private equity vehicles. We also had a tremendous evolution in structures, in private wealth, in the platforms themselves. So the wirehouses and large RAAs and their level of sophistication and their build out of resources. The operational and regulatory complexities were being solved. The infrastructure that firms like iCapital and Case were putting in place to help facilitate these investments, all of that took time. It was a confluence of all of that coming together over the past decade to provide

• 56:22Speaker 00

  the ecosystem with the ability to seamlessly gain access directly into these investments. Those things just take time.

• 56:29Ted Seides?

  What opportunities most excite you, both on the investment side and on the business side?

• 56:36Speaker 00

  When terms of opportunities, if you're looking over the long arc, there's still tremendous opportunity in private credit. Despite recent concerns about individual credits, despite the fears that there might be a bubble forming, we are still undercapitalized in private credit to where the opportunity set is. The amount of dry powder in private equity, the number of companies that want access to lending capital. We are just scratching the surface on areas like asset-based finance, which is a multi-trillion-dollar market. We're only just beginning to offer those in private credit. There's still significant room for growth there.

• 57:17Speaker 00

  In the secondaries market, we have a $10 trillion private equity market globally. Only $200 billion of volume in private equity secondaries this year. It's 2% of the stock. In private credit, that number is $100, $120 billion, almost $2 trillion of stocks. A small amount of secondary markets will grow. We're in the very early innings of secondary markets for both fund-level investments, individual, GP-led, single-asset secondaries, pre-IPO secondaries and things of that nature. That area is another big area for growth. Outside of that, AI gets a lot of the press in terms of what that will do for the economy, for financial services and healthcare and all of these businesses.

• 58:01Speaker 00

  The area that probably doesn't get a lot of press is longevity. And what I mean by that is the reality is our children are going to live much longer lives than our parents ever did, by decades. What is that going to mean for investment products, for insurance, for retirement plans, the complexion of asset allocation and how we design portfolios? We're just starting to think about these things. And it's changing rapidly. Kids today, right, have a life expectancy, I think, 103 years old or something to that effect. With AI, who knows how long they'll live. But we don't really design insurance and investment products encompassing that and the duration of what that's going to entail.

• 58:45Speaker 00

  That's a huge area that needs to be further explored. Digitization and tokenization of private assets will come, and it's going to provide a significant amount of opportunities in the future.

• 58:57Ted Seides?

  What excites you most about future standard over the next couple of years?

• 59:02Speaker 00

  Delivering for clients. We're in a new regime in the market backdrop. It's going to be more difficult, higher uncertainty, higher volatility, higher inflation. The old playbook is not going to work for the markets we're heading into. And helping investors, both institutional investors and individual investors navigate that and offering them investment strategies that will work well and provide the kind of income growth and diversification that they're going to need. That's what excites me.

• 59:32Ted Seides?

  All right, Mike, I want to ask you a couple of closing questions. Before we dive into that, I'm going to just share this. Our closing questions are brought to you by Oldwell Labs or OWL. OWL is the very best software I've seen for allocators to find and track managers. And I've seen a lot of them. So if you haven't seen OWL, check them out at oldwell-labs.com/ted. That's O-L-D-W-E-L-L hyphen labs dot com slash Ted. And trust me, it'll be worth the look. All right, Mike, what's your favorite hobby or activity outside of work and family?

• 1:00:06Speaker 00

  Anything fitness related, the more intense, the better. I used to enjoy triathlons. I'd say nowadays I like lifting heavy objects.

• 1:00:15Ted Seides?

  What's one thing most people don't know about you that you find interesting?

• 1:00:20Speaker 00

  I am the son of a single Irish woman who gave birth to me and put me up for adoption. She was living in the United States. She died shortly thereafter, sadly. I was adopted by two amazing parents. My dad was a World War II veteran, age of 16, an NYPD cop in a few precincts, South Bronx and Queens. He was an amazing guy. My mom raised me and my four siblings and just passed this year. I owe her and my dad everything. They gave me the gift of education. I was the first in my family to go to college. How I wound up here, but for the grace of God and some amazing parents, I'll never know.

• 1:01:04Ted Seides?

  Great. Which two people have had the biggest impact on your professional life?

• 1:01:09Speaker 00

  I have to start with Lee Cooperman. Without him, I don't think I would be here for giving me the opportunity to break into the alternative investment industry. And then I would say Gil Cafrey. Gil was the head trader at Tiger. He was my partner at Frontpoint. He's been my mentor now for, gosh, about 25-plus years. Just someone who impressed me with his integrity and how to treat others with integrity. Outside of that, there's honorable mentions Julian Robertson and Suni Harford. Anyone who gave a young me a shot deserves a place on my personal Hall of Fame. What's the best advice you've ever received?

• 1:01:52Speaker 00

  I don't know where it originated from, if it was the Bible or Bruce Lee, but something to the effect of, "So you believe, so you will achieve." My own interpretation of that is about mindset. The mind can be the greatest limiter to your own progress, but it also can be the greatest force accelerator if harnessed correctly. If you believe that you can achieve something, that growth mindset can take you very far. Great. Mike, last one. If the next five years are a chapter in your life, what's that chapter about? As you know, Ted, I have two teenage boys and our kids know each other their whole lives. For Kristen and me, it's quality time with the family, now that we'll be empty nesters

• 1:02:35Speaker 00

  here in a couple of years. In a work setting, it's more towards servant leadership. So helping others, teaching others. I've been blessed in my career, what I've been able to do. Now, I'd like to help other people achieve what they're setting out to do. Mike, thanks so much for sharing these great perspectives on the institutionalization and now democratization of alternatives. Thanks very much for having me, Ted.

• 1:03:02Ted Seides?

  Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com where you can access past shows, join our mailing list, and sign up for premium content. Have a good one and see you next time.

• 1:03:17Speaker 02

  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.