BONUS: Future Standard President & CIO Mike Kelly

Barry speaks with Mike Kelly. He's president and chief investment officer of Future Standard and a member of the firm's management committee. They discuss his career on Wall Street going back to him time working at Omega Advisors and Tiger Management, to his work today and how he helped to build Future Standard a $90 billion multi-strategy platform for wealth management clients. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

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

• 0:00Speaker 00

  At Brookfield, we invest in the thing behind the thing behind the next big thing. Our focus across infrastructure, energy, real estate, private equity, and credit is helping to build the backbone of the global economy. We combine deep operational expertise with disciplined long-term investing, uncovering value, and partnering alongside clients to shape tomorrow's economy today. Learn how you can own what's next at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital.

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  This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 2:04Barry Ritholtz?

  This week on the podcast, an extra special guest. Mike Kelly has an absolutely fascinating career from Omega to Tiger, currently President and Chief Investment Officer at Future Standard. Really about as knowledgeable an individual as you'll find, covering private credit, infrastructures, and the wealth channel, and what the future of what we broadly call alternatives look like. I thought this was fascinating, and I think you will also. With no further ado, my conversation with Mike Kelly. Mike Kelly, welcome to Bloomberg.

• 2:39Speaker 05

  Thanks, Barry. It's great to be here.

• 2:41Barry Ritholtz?

  So I'm fascinated by both your background and your career path, which is really, really interesting. But let's roll back a little bit. Bachelor's at Cornell, MBA from Stanford. What was the original career plan?

• 3:00Speaker 05

  So taking a step back, you know, I grew up on the border of Queens and Long Island. My dad was an NYPD cop in

• 3:07Barry Ritholtz?

  Oh, really?

• 3:08Speaker 05

  the South Bronx and Queens. Mom raised the five of us kids in a traditional Irish-American household and valued education. I knew from a pretty early part of my life that I wanted to go into investing. I'll tell you a little story. So when we turned 13 in my family, you got the big gift. And at the time, I was a nerdy kid. I was into computers. My dad would drop me off at the Queens Village Public Library, and I would, you know, learn how to program on this Apple computer. They had just got the Apple II in. And for my 13th birthday, I asked my parents for, you got up to $300.

• 3:51Speaker 05

  I got $300 of Apple stock was my request.

• 3:54Barry Ritholtz?

  Really?

• 3:55Speaker 05

  And the big day came. They gave me an envelope, was really excited. I opened it up, and it was a savings bond

• 4:04Speaker 05

  for a local bank. And my parents noted the disappointment in my face and said, you know, Michael, we're sorry, we don't know how to buy stock.

• 4:12Barry Ritholtz?

  And this is like late 80s?

• 4:14Speaker 05

  This is 83.

• 4:15Barry Ritholtz?

  83, okay.

• 4:16Speaker 05

  So I said then and there, I am going to teach myself how to do this, how to invest in these companies. And I set out, I still have it, I have the notebook over here, I actually brought it with me, about stocks and all the things that I would read about investing and investing in the stock market. And so from an early, early part of my life, I wanted to go into investing. And so throughout, you know, the years at Cornell, you know, at the time, I did some great internships, one at a boiler room, they made a movie about that.

• 4:53Barry Ritholtz?

  Yep.

• 4:54Speaker 05

  One for Steve Wynn at the Mirage, which was exciting. And then I studied in Japan, studying the banking system there for one summer. And as I was coming back, the only firm that actually would interview me was Solomon Brothers. And so I wound up fortunately getting a job at Solomon Brothers.

• 5:14Barry Ritholtz?

  What capacity?

• 5:15Speaker 05

  Yeah, in the Financial Institutions Banking Group.

• 5:17Barry Ritholtz?

  Okay. So you started as an I-banker there?

• 5:19Speaker 05

  Started as an I-banker. Loved Solomon Brothers, went up going to the 42nd floor of Seven World Trade Center, which is where Michael Lewis wrote the book, Liar's Poker. So I wound up going to the fixed income trading floor for my third year and really got bit by the bug of markets. I knew I wanted to make the transition from investment banking over to the buy side. So as I headed off to Stanford Business School, that was my mission, was to find my way into the buy side.

• 5:53Barry Ritholtz?

  So there's a sort of urban legend that you kind of cold-called your way from Solomon Brothers into an internship with hedge fund legend Lee Cooperman at Omega. Is that, first of all, is that a true story? And if it is, walk us through that call.

• 6:11Speaker 05

  Right. So I was at Stanford, and I knew I wanted to make this transition into the buy side. And in looking at the careers of what I was looking at, the greatest minds in investing, they all seemed to be relegated to this corner of the market of hedge funds and private equity firms. And we're talking about the mid 90s here, when people didn't have a lot of understanding of what these firms actually did. But it struck me as an incredibly intense and exciting career path. Many of the people were very young and seemingly making a lot of money doing it, and really

• 6:52Speaker 05

  working on some dynamic investing strategies. And so I had a directory. It was called the Van Hedge Fund Directory. It was a printed out piece of paper, like from a fax machine, and it had the names and addresses of, at the time, the top 25 hedge funds. So had, you know, Bruce Covner in there, and, you know, Paul Tudor Jones and George Soros. And so I went through this directory and literally called from a payphone these individuals.

• 7:25Barry Ritholtz?

  Come on. Hey, Druckenmiller, it's Mike Kelly. Like that, that sort of call?

• 7:29Speaker 05

  Now, the disadvantage is most people were screening their calls, their assistants were like, yeah, he'll never call you back. The advantage for me was one of those individuals, Lee Cooperman, often didn't use an assistant and answered his own phone.

• 7:46Barry Ritholtz?

  He's there at 5:00 in the morning, he's there at 8:00 at night.

• 7:49Speaker 05

  Absolutely.

• 7:50Barry Ritholtz?

  If you call outside of business hours, Lee's the only guy in the office.

• 7:53Speaker 05

  And he picks up and goes, "Lee." And that's how he starts the conversation. "Mr. Cooperman, you know, I'm a kid from the burrows like you. I just want to break into the industry. You know, I've worked at Solomon, but I've never been an investor before. I am willing to do whatever it takes. I am willing to sleep on my parents' couch and work for you for free." And he said, "I only hire PhDs."

• 8:18Barry Ritholtz?

  Really?

• 8:19Speaker 05

  And I said, "Well, I'm getting my MBA right now." And he said, "No. Poor, hungry, and driven." And I was like, "Well, I'm all three of those. I check those boxes." And he said, "Well, I'm a value investor, and I like the price. You can come work for me for free."

• 8:35Barry Ritholtz?

  No kidding? I like the price? Oh, my God.

• 8:38Speaker 05

  I show up, day one, at Omega, and Lee comes to me and says, "Let's go to breakfast." And I thought, "This is amazing."

• 8:48Barry Ritholtz?

  I'm in heaven.

• 8:49Speaker 05

  First day, and I'm going to breakfast with the legendary Lee Cooperman. So we go across the street, it's 100 Wall Street, we go across the street to an Obon Pan for breakfast, and we get to the counter, we order, and Lee turns to me and says, "You're buying."

• 9:05Speaker 05

  So here I am, day one, and I'm already, I'm already thirty dollars in the hole. Right? In my illustrious investment career. But it turned out okay. And, and that was how, that was how I got my start in, in the investment business and in particular in hedge funds and the alternative investment.

• 9:23Barry Ritholtz?

  That's unbelievable. So after Omega, you leap from Lee Cooperman to working under Julian Robertson at Tiger Management. How did that come about?

• 9:34Speaker 05

  So I had worked full-time after business school for Lee and for Omega Advisors. I received a phone call a few years later by Tiger Management. They were looking for someone in their macro, trading and analyst group. And at that time, you know, getting a call from Tiger was like getting a call from the New York Yankees. It was like the illustrious, you know, incredible firm. I was very honored and flattered, interviewed there.

• 10:01Barry Ritholtz?

  Let me interrupt you a second, just to remind listeners that the 1980s and 1990s were peak hedge fund years. They, they were masters of the universe. They put up the best numbers. They were the hardest for any investor that wanted to allocate to them. It was not easy to get into any of those funds. The world changed after the financial crisis, but that was the golden era of hedge funds, wasn't it?

• 10:28Speaker 05

  Most definitely. And, and I think what I appreciated the most about those first few firms I worked at, Solomon, Omega Advisors, Tiger Management, there was a commonality of, of culture in that these were very intense work environments with very intellectually curious individuals who were super smart and, but liked to have fun and, and, and were a joy to be around and learn from. And so I really enjoyed, you know, the aspects of the culture of the environments in my early career and really got a lot out of it. And it really

• 11:09Speaker 05

  appealed to come kind of my personality of kind of an obsessive intense personality. So I, I really enjoyed that. But going to Tiger was incredible. A very young group of, of people who have obviously gone on to do great things in their investment careers. A really intellectually challenging place to work. But I learned a ton about, about investing from, from, you know, from Lee and from Julian and from the other individuals that I worked with and sort of shaped my sort of investment philosophy as time went on.

• 11:39Barry Ritholtz?

  I'm curious, because there are obviously such different styles. Lee is the value guy. Tiger is known as momentum and growth and just a whole, and technology and a very, very different opportunity set. What did you learn from, from each of those? How, how different were Julian's and Lee's approaches?

• 12:00Speaker 05

  Well, I think Julian and Lee, the, the inception of that both had a very value oriented approach. I think within Tiger, there was an evolution over time and an adaptation with, even with some of the Tiger Cubs of adopting a more growth oriented strategy. But it was a time when doing real intense work could uncover really great long and short opportunities. I do think, you know, years later, decades later, it became much more difficult with indexation and ETFs and, and the way the market structure changed. But back then, I would say from an investment philosophy standpoint, there was a view that every single day you

• 12:40Speaker 05

  rebuy your portfolio. It doesn't matter if you're losing money or you're in the money, you've made a double already. If you own it, think about it and re-underwrite it as if you just bought it today. And are you as excited from a long and short perspective about that opportunity in the go-forward period? And I think that discipline of re-underwriting your holdings every single day is something that's remained with me. I think secondly, I would say what I would call a variant perception, or what is called a variant perception, something that Michael Steinhardt popularized of, when you make an investment, how is your view different from the market? Because if you want to outperform the market, you can't

• 13:22Speaker 05

  just agree with the thesis that's already embedded in the price or value of an investment. And so that variant perception of how do you look at it different? You're either more bullish about that opportunity, or you think that opportunity is overdone, and so you're either selling or you're shorting or what have you. And so I think that variant perception is really, really an important aspect of the philosophy. Having investment conviction is another principle. You know, go all in, do your work, get to a high conviction thesis, but loosely hold it. Like, hold on loosely.

• 14:01Barry Ritholtz?

  Strong opinions loosely held is the expression I heard years ago.

• 14:04Speaker 05

  Right. That's exactly right. Because if you have disconfirming evidence, don't ignore it. Don't double down with your escalation of commitment. You know, re-underwrite it and ask yourself, well, maybe I have to change my mind. The greatest investors in my mind, someone like a Stanley Druckenmiller, is willing to change his mind all the time, you know, based on new information. And so I think these principles form an investment philosophy that if, if you don't know what your competitive advantage is in making an investment, whether you're a private market investor or a public market investor, you probably don't have a reason to be in that investment in the first place.

• 14:38Barry Ritholtz?

  That's exactly right. I, I love the concept of re-underwriting. So many new investors, and, and I started on a trading desk, any position you had, you had to justify every moment you owned it. Hey, this is capital. I can turn this into capital in a millisecond. Would you buy this if this was back as cash and not as a holding? Where you bought it, whether you're underwater or ahead, is totally irrelevant. Would you continue to re-underwrite that? That's a, that's a great way to describe that. I'm, I'm really impressed with that. So, so from Tiger, you go to Frontpoint Partners and helped turn it into a truly institutionalized hedge fund. Tell us a little bit about Frontpoint.

• 15:22Speaker 05

  So I got a call from the two original founders of, of Frontpoint, and they asked me to look at the business plan and to give them a critique, which I did. I thought it was fascinating. At the time, a lot of hedge funds were frankly run as, almost like family offices as a business.

• 15:39Barry Ritholtz?

  A third of the capital was the founders half the time anyway.

• 15:43Speaker 05

  Right. And, and most of the investment capital came from ultra-high net worth and family offices like Memphis Mafia and others. And so there was a view that institutions would begin to embrace alternative strategies. And for them to embrace alternative strategies, the firms they would allocate capital to would need to look like the institutional asset managers they were used to, like in the traditional mutual fund business. But a lot of hedge funds didn't look and feel that way. They were run more like family offices. And so we had a view that by forming a real institutional quality asset management firm that would house

• 16:26Speaker 05

  diversified strategies and managers who could provide absolute return strategies to these institutional clients, that that would be embraced. It would be embraced because of the excellence of the investment teams, but also by the, the, you know, world-class investment, asset management infrastructure that we would build with Frontpoint. And so that was the thesis. You know, we're going back to 2000 now, and to be invited to join a firm, and these guys were in their 50s, I was, you know, 29, 30 years old, to build a company was an exciting thing for me. At the time, I still wanted to become Paul Tudor Jones. I wanted to be a macro investor. I wanted to be an investment manager. But I thought, I'll

• 17:09Speaker 05

  start by helping these individuals help build this firm, and then I'll go back to running a fund, probably at Frontpoint. And

• 17:17Barry Ritholtz?

  Didn't you begin at Frontpoint as CIO and eventually became co-CEO?

• 17:21Speaker 05

  I was the head of manager selection and overseeing the investment teams. Then I became chief investment officer and head of the multi-strategy, and then I became co-CEO of the firm. So it was an evolution over time. And, but at the outset, you know, hiring the investment teams overseeing what they were doing, picking and selecting them was a fascinating job for me. I loved learning about different approaches, you know, market wizards, stock market wizards, all the different ways you could skin a cat with investing. So it was like a kid in a candy store. And I began to reflect on my career at that time in that everyone goes into the investment business with the mindset of, I want to become a great investor. I want to become Warren Buffett. I want to become Julian Robertson.

• 18:05Speaker 05

  I want to become Paul Tudor Jones. I was no different. That is a very crowded pond, and a lot of luck and things have to go your way to conspire to, to result that way, to become one of the top decile quartile managers out there. And I thought at the time, you know, building an asset management company like this, like I'm doing with my partners at Frontpoint, you know, I'm a young guy. I have my whole career ahead of me. And I thought, you know, actually, if I spent my career building asset management companies and managing them, that could be a pretty, you know, robust career. I could really enjoy myself. And it's a pond no one seems to be fishing in. And maybe 20 years from now, this might result in something. And so it was at that moment, you know, within Frontpoint

• 18:46Speaker 05

  that I began to move away from investing professionally in the markets and more building investment organizations and overseeing investment managers and strategies.

• 18:57Barry Ritholtz?

  So the next step along your career path, you join Oryx Asset Management as CEO?

• 19:05Speaker 05

  Right. So we'd sold Frontpoint to, to Morgan Stanley. I'd run it with my partner there for a few years. I was hired away from Oryx to be the CEO of their asset management unit. It's a Japanese holding company. They were looking to diversify their holdings into the US and into various industries, one of them being asset management. They had a lot of capital to deploy and a low cost of capital, being a Japanese holding company. And I thought I could exceed that hurdle and build something here. So it was back in 2012 and it was during the pigs crisis, you know, and thinking about where could we acquire compelling asset management.

• 19:43Barry Ritholtz?

  Let me interrupt you for the people who might not have been trading through Brexit, Grexit, whatever, the pigs crisis was Portugal, Italy, Greece, Spain, is that right?

• 19:55Speaker 05

  That's correct. That's correct. And at that time, the European Central Bank and some of the local national banks of these European countries were encouraging financial parties to divest of their non-core holdings. And so as we were thinking about, you know, where in the world could we deploy capital to acquire asset management capabilities? Europe seemed a logical place because there was a forced selling happening. And so there was a jewel in the crown of Rabo Bank's holdings, private bank in the Netherlands. And they needed to divest of Rabico, which had been around for

• 20:34Barry Ritholtz?

  Which was giant back then.

• 20:36Speaker 05

  $300 billion plus. And they had purchased that historically and had owned it, but it was non-core to their, to their private bank. And so we positioned ourselves as an advantageous buyer to them. We purchased at a very attractive valuation, was the largest in ORIX's history. We acquired that capability. And, you know, at the time, it was exciting to get that deal done. We had bought another stakes in other managers in the alternative space. But really, I wanted to do something more entrepreneurial again. And so I began

• 21:19Speaker 05

  to look at what is the next business within asset management like front point that I could, you know, set my career out to build. And that is how the inception of coming across what was then Franklin Square, now Future Standard came about.

• 21:34Barry Ritholtz?

  So when you joined, did you join as CIO or president? Or what was the initial role?

• 21:40Speaker 05

  Yeah. So I was introduced to Michael Forman, the founder of Franklin Square, through a headhunter friend of mine, Scott Fletcher. And I was also introduced by Bennett Goodman and Doug Osterver at GSO, Blackstone. And they had encouraged me to go meet with their partner who they had partnered with. As I was describing what I thought the next big thing in asset management would be, would be the arc of history of bringing alternatives from family offices and ultra-high net worth throughout the 80s and 90s, and then the endowment model with David Swensen. Eventually, institutions began adopting it. The one constituency that was still left out were the individual investors, you know, below ultra-high net worth and

• 22:25Speaker 05

  family offices. And so I had a view that at some point that would change. And I wanted to help effectuate that change. And that is where I was introduced to Michael Forman and his vision for what he was doing with Franklin Square and had been doing. And he had built this incredible chassis around productizing and distributing income strategies, and convinced me to join up with him as president, to go join him and, you know, be the chief investment officer, help build out the asset management capability. Now, at the time, Franklin Square was a product and distribution firm. So they were creating the wrappers and

• 23:10Speaker 05

  distributing them. But other external parties, at the time, Blackstone, were the ones subadvising and providing all of the investment acumen. And as I would describe it today, I use this analogy of Netflix. It was like seeing the red envelopes and DVDs. But Michael had created this incredible distribution engine, 100 million person mailing list type of, you know, distribution capability. And just like Netflix figured out how to digitize their business and create their own in-house TV and movie studio, you know, that was my pitch to Michael is you could eventually diversify this product base, and you could bring in-house capabilities.

• 23:51Speaker 05

  So long as the quality is still very high, you can put it through these channels and offer them to private wealth clients. And so that's what we set out to do.

• 24:02Barry Ritholtz?

  Really, really fascinating. Coming up, we continue our conversation with Mike Kelly, Chief Investment Officer and President of Future Standard, discussing how he helped build the company into a $90 billion multi-strategy platform for wealth management clients. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 24:34Speaker 00

  At Brookfield, we invest in the thing behind the thing behind the next big thing. Our focus across infrastructure, energy, real estate, private equity, and credit is helping to build the backbone of the global economy. We combine deep operational expertise with disciplined long-term investing, uncovering value, and partnering alongside clients to shape tomorrow's economy today. Learn how you can own what's next at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital.

• 25:07Speaker 01

  Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs and scattered information that you have to grind through to turn into something useful, can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro Plans.

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• 26:53Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Mike Kelly. He's President and Chief Investment Officer of Future Standard. They are an alternatives manager focused on the wealth channel running over $90 billion in client assets. You know, when you joined what was Franklin Square before it became Future Standard, FS Investments, they effectively had one credit strategy plus whatever they were reselling on behalf of other people, a little over $10 billion. You're almost 10 times the size now with a full multi-strategy platform. How did that

• 27:36Barry Ritholtz?

  evolution come about? What were the key inflection points? Was that a tough sale to get everybody in-house to accept that? Hey, we have a nice little business here, Mike. Why do you want to mess with it?

• 27:48Speaker 05

  Well, there was a nice business there. And change comes with resistance. But I think we've had a fortuitous progress of change over the last 12 years. And I would say it started out with forming multiple partnerships with various outside firms that Michael and I had relationships with, the likes of KKR and Golden Tree, Rialto in real estate, EIG, Magnetar, Wilshire, in order to create some diversified strategies that we could offer to clients with best-of-breed managers across various disciplines. And

• 28:33Speaker 05

  so that was the first stage of evolution was moving into more of a multi-manager architecture. Concurrent to that, I began to hire internal talent, which is something similar to what I had done at Frontpoint, and brought in individuals like Andrew Beckman and helped him build out his internal private credit team. We made some acquisitions as well in Chiron Asset Management, Portfolio Advisors, Post Road Group in various disciplines. And so it was a combination of, and an evolution of external partnerships, in-house hiring and talent and development and growing those, and acquisitions, sort of inorganic acquisitions

• 29:18Speaker 05

  of capabilities and managers to bring on. And I'd say, starting from this inception of packaging and distribution, we then evolved into a diversified asset manager. And then, after the series of in-house capabilities and acquisitions, we adapted the firm into what I would call a true alternative platform, you know, a platform. And I'll distinguish a platform from a diversified asset manager, because I do think they are different. Diversified Asset Manager, you have different strategies that you offer to clients, but those strategies

• 29:59Speaker 05

  don't have to interrelate at all with one another. And there may be no shared set of relationships or gleaned insights or what have you. A platform, as I would call it,

• 30:11Speaker 05

  Is more interwoven, there's more collaboration, there's shared underwriting, there's shared origination and relationships for deal flow, there's an exchange of insights and specializations, all with the intention of improving outcomes for clients. And that evolution, if you will, you know, it's easy to whiteboard that out and describe, we're going to do this. To your point, it's really hard to actually execute on that.

• 30:44Barry Ritholtz?

  So, so there's a underlying thesis in this, once this full platform is built out, hey, there is a giant wealth channel that a lot of alts are not tapping into. It's the next great frontier, high net worth, mass affluent, wants the same sort of access to strategies that they see foundations, endowments, institutions having access to. Tell us a little bit about how you see that opportunity. How large is it? How much has already been captured? Where are we in the cycle of this getting pushed out to mom and pop investors?

• 31:21Speaker 05

  So, backing up to when Michael first started Franklin Square, this is now back in 07, 08, launched the fund in January of 09, so auspicious, great timing for a credit strategy and delivering income to individual investors through the independent broker dealer channel. And, you know, if you remember that time, you had this declining yield environment and the Fed cutting rates over that course of time. And so there was a search for income, particularly for retirement accounts. And so in the early days, a lot of our offerings were income strategies, income oriented,

• 32:02Speaker 05

  whether it's middle market lending, CLOs, offering real estate lending strategies and so forth, so generating income. And I think we saw that post the great financial crisis, banks would begin to withdraw from those lending activities and cede those over to asset managers and direct lenders like ourselves, but also that private wealth and individual investors would begin to embrace these strategies to pick up income sources. And so those two trends, I think we got, we got correct. What we probably didn't foresee was the adoption curve.

• 32:45Speaker 05

  I think we probably assumed it would be more linear than it actually turned out to be. It took longer. You think about it, this is now going back, I mean Franklin Square was started almost 20 years ago. It's very topical today and we've seen a lot of flows in the last five plus years, but it has been more recent, that adoption picking up and being spoken about across the entire industry. So I do think there's been this arc of evolution and adoption, but I would tell you Barry, it's still very much in the early days, given the dynamics of private companies and their capital needs.

• 33:19Barry Ritholtz?

  So let's put that into a little context. The 2010s, you not only had zero interest rate policy, you had QE, you had Operation Twist, like the Fed did everything it could do to make cash trash and force people off the sidelines. Hence Tina, there is no alternative, became popular. In hindsight, it's kind of surprising that it took private credit as long as it did to really find a bid. Like you would think in that era of zero interest rates, hey, we're going to give you 7%, but it's variable. If the Fed raises rates, we should see a bump up in yields.

• 34:01Barry Ritholtz?

  What was it like building out into that environment as a, not just as an executor, but also as an investor, as a CEO?

• 34:09Speaker 05

  Yeah, I would say two things. One's a market backdrop issue and one's more of an operational issue. On the market backdrop issue, I define this golden era of investing as post Volcker, like 1987, up until 2021, as we're coming out of COVID. And if you look at a chart of

• 34:28Barry Ritholtz?

  Spectacular.

• 34:29Speaker 05

  US stocks and bond prices, 60-40 made incredible sense. You had disinflationary forces, you had benign demographics, you had globalization. And it was great to set it and forget it with a 60-40 mix.

• 34:46Barry Ritholtz?

  That era was a 35-year bull market in bonds that

• 34:50Speaker 05

  Incredible.

• 34:51Barry Ritholtz?

  There are long stretches where fixed income is outperforming equity in that, in that run.

• 34:57Speaker 05

  Right, so why, why do you need an alternative? Right? If the music sounds great, you don't need alternative music.

• 35:07Barry Ritholtz?

  Right.

• 35:08Speaker 05

  When the music is all crap, Nirvana comes along, right? And so I think the, the experience that investors had was prove to me I need something else. And it hasn't really been, you know, particularly with fixed income, right? When you think about the experience of the last six years or so, where high duration fixed income has not been great at all. That's 40% of your traditional portfolio, that's just stopped working overnight. And so that catalyzed a lot more inquiry into diversified sources of private market income, private returns and so forth. The, the other issue that slowed the adoption curve is on the operational infrastructure

• 35:49Speaker 05

  side, and it's something that the likes of Lawrence at I Capital and Matt at Case have been solving for. But it was really clunky in the early days. You had, you know, double layers of fees, you had feeder funds, you had high loads.

• 36:03Barry Ritholtz?

  K1s.

• 36:04Speaker 05

  K1s, it's just not something that the individual investor and their advisors wanted to embrace, understandably, because you had to fill out by hand a sub-doc for every single investor. And so both the market backdrop changing and morphing and opening up people's minds as well as access and operational infrastructure, and we'll get to this, but education, which we're clumsily, you know, getting our way to educating the strategies, how they work, these structures, how to embrace them, how to incorporate them into portfolio, you know, that, that took time. It just took time for the whole industry to get there. And I feel like we're finally at the point where we're arriving, but as I said earlier,

• 36:49Speaker 05

  I still look at this adoption and penetration from these investors as very early.

• 36:55Barry Ritholtz?

  How much of an accelerant was 2022 with the, what was it, 550 basis points of rate hikes? If you're long duration, well, that's going to really leave a mark. What did that year do to acceptance of alternatives from that wealth channel?

• 37:14Speaker 05

  So, two things. One was positive and one was more of a challenge. The positive side of things was with the, with the backup of, of duration of the long yields, that began to challenge the traditional fixed income side of the portfolio. So if you think about the traditional fixed income portfolio, I think about fixed income risk in three ways, liquidity, credit risk and duration. And so most people had very long duration, highly liquid, low credit risk investments in treasuries and agency bonds and mortgage securities, municipal securities. That began to fail them and not provide the ballast against equities it had been, and

• 37:57Speaker 05

  it didn't provide the income because duration was working against you. So that was a positive force for let's find something else. The negative force was going from 0 to 5%. People went from not earning anything on their cash and needing to deploy it to make any money to, oh, wait a minute, I haven't made money on my cash in a long time. 5% sounds pretty good.

• 38:20Barry Ritholtz?

  Money market, 5 and change was great.

• 38:23Speaker 05

  Especially when you hadn't had that for a long time.

• 38:26Barry Ritholtz?

  Yeah, yeah.

• 38:27Speaker 05

  And so you began to see some hoarding of cash balances that only began to be deployed as the Fed started to, to cut that, those rates again.

• 38:37Barry Ritholtz?

  I would imagine the inverted yield curve around that time was problematic also. Why do I want to tie up money if liquid money market is yielding even more?

• 38:46Speaker 05

  Most definitely.

• 38:47Barry Ritholtz?

  Huh, really interesting. So, so you've described the current environment as having created a new investing imperative, focused research, flexibility to change course, conviction. Tell us about what you see as the modern investing imperative around alternatives.

• 39:09Speaker 05

  Right, so.

• 39:13Speaker 05

  We all know about the decline in the number of publicly traded companies. If we were coming out of college, it was 9,000. Today, you know, barely 4,000. Both the number of private companies and the size of private companies has exploded. And the opportunity to invest in these private companies has increased dramatically, as well as the access and the availability and those companies taking advantage of access to private equity and direct lending sources of financing. And that allows for a much broader palette for investors to build portfolios with by accessing those companies.

• 39:56Speaker 05

  And I would say, Barry, increasingly, in order to get diversification, in order to build diversification, you do have to look outside of public stocks and bonds. The stock market is becoming less and less representative of the total economy as it used to be. It's very concentrated right now in AI infrastructure and the MAG7 and the build out there. And you have, you know, myriad number of private companies of, you know, small to midsize and some larger size that provide you access to what's really driving the US economy. We call that the middle market. And the middle market are, you know, a couple hundred thousand plus companies that drive the US economy that are not publicly traded.

• 40:40Speaker 05

  We define the middle market as companies of a billion dollars of enterprise value and down, so sort of lower and core middle market. And these are businesses that, you know, frankly, are fast growing. They're fragmented ecosystem, they're hard to find, but if you can navigate and invest directly in these businesses or lend to these businesses, it's a very attractive access for investors.

• 41:02Barry Ritholtz?

  So let's talk a little bit about that. I like to step back and take the 30,000-foot view to kind of get a sense of how this evolved. My general sense was you had a lot of consolidation with big money center banks following the financial crisis, even the decade leading up to. And it felt like much of Wall Street, much of the giant banks just kept moving up market and left these huge swaths of billion-dollar companies behind. Because let's be honest, what's a billion-dollar company? It's small change to them. Is that the, what created the opening for all of this private credit, real estate financing, private debt?

• 41:47Barry Ritholtz?

  There's like this whole world that used to be traditional banks. Like, explain that transition a little bit.

• 41:53Speaker 05

  So as I spoke about earlier, I started my career at Solomon and Fig Banking. And we would talk about merging banks. And we had these old CDs that you would take with bank information and merge the banking world and pitch banks on why they should consolidate. Well, they did. Throughout the 80s, 90s, and 2000s, the banking world became much more consolidated into these four mega banks that hoovered up a number of regional banks. So that was, you know, this is a confluence of factors. That was one factor. The great financial crisis and Dodd-Frank and Reg Cap rules was another big factor of driving higher capital requirements for banks and their activities.

• 42:35Speaker 05

  You also had banks increasingly looking towards generating fee income versus making loans on their balance sheet. In other words, they wanted to be in the moving business, not the storage business, because that's what their publicly traded shareholders were valuing. And so they answered that call. And so increasingly, they began to step back from those lending activities, particularly to midsize private companies and real estate activities. And that allowed for asset management companies who, and I would estimate have, you know,

• 43:15Speaker 05

  very attractive asset liability matches within their lending activities, to step into that opportunity and provide that financing capital through closed-end funds, through BDCs, you know, through different structures to be able to lend and provide access to the individual investor to generate income off those lending activities. And so I think all of those things provided the opening. And it's been a market share shift from the banking system to the direct lending and asset management world in private lending.

• 43:48Barry Ritholtz?

  Really interesting. Last question on the evolution of Future Standard. You've served roles both as chief investment officer and CEO, co-CEO. As CIO, you think about generating returns. As a CEO, you have to think about so many, everything else but. People, infrastructure, clients, culture, systems.

• 44:13Speaker 05

  Right.

• 44:14Barry Ritholtz?

  How do you integrate that, those two very different sets of responsibilities?

• 44:19Speaker 05

  Right. So in terms of thinking about the role, overseeing the investment teams and investment strategies is a big part of what I do as chief investment officer. I like to, I'm using analogy of like, I like to be the Rick Rubin in the room of really talented professionals. Provide an environment by which they can do their best work and then get the hell out of the way. And so you have to identify the talent, you help to work and develop them, you have to work with their process, how and why they make decisions as individuals and teams of individuals. Make sure that their priorities align with our clients and the firm overall.

• 45:04Speaker 05

  Give them all the resources that they need to do their job and increasingly their more sophisticated resource requests like around AI deployment and things of that nature. And then get out of their way, allow them to do their best work. And you pointed out, you know, designing incentives, designing culture, reinforcing behavior is a big part of all of that. So that's one big part of my job, you know, also interfacing with clients, both private wealth clients and institutional clients. Strategy for the firm, internal strategy, corporate development, but also M&A and new deployment of acquisition of different strategies. Products and launching new products and new extensions of existing products is a big part of my, of my role.

• 45:49Speaker 05

  And then reinforcing, you know, the culture overall of what we're trying to build.

• 45:53Barry Ritholtz?

  And you mentioned earlier, you were, I'm going to say that again. Earlier, you mentioned that the firm was selling into broker-dealer networks. That seems to have evolved into more of an RIA networks, even the big shops like UBS and Morgan Stanley have kind of pivoted away from transactions more to fees. How has that transition affected who you're selling products to?

• 46:23Speaker 05

  So over the last, you know, 15-plus years, there has been an evolution and a broadening of the types of platforms that have been embracing private market strategies, alternative investment strategies. You know, there's the wirehouses, so the big four names, Morgan Stanley, UBS, Merrill Lynch, Wells Fargo. There are the large RAAs like Rockefeller and Serity that are building out their capabilities for independent advisors and growing quite tremendously. And then you have the independent broker-dealer channel, the LPLs of the world. And so there, there's an ecosystem of wealth platforms just here in the US that, you know, oversee 300,000 financial advisors and brokers in the United States.

• 47:06Speaker 05

  And all of those channels are increasingly embracing and hosting onto their platforms access to these types of strategies through various, you know, phases of development. Within those platforms, I would say there's a real spectrum of adoption. You know, when I started at what was then Franklin Square, you know, talking to a big wirehouse like Morgan Stanley, they would tell you that a very small group of their advisors were doing the vast majority of alternatives business. Now, across, you know, 15,000-plus advisors, there's a much broader and wider democratization

• 47:49Speaker 05

  of adoption of alternatives across theirs and other people's platforms. But there's still a lot of individual investors and advisors who are still at 0% allocated to something other than a stock, bond, or cash. And that evolution is, that's why I think we're still in the very early.

• 48:09Barry Ritholtz?

  Really, really interesting. Coming up, we continue our conversation with Mike Kelly, president and chief investment officer of Future Standard, discussing the state of alternatives today. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

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• 50:51Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Mike Kelly. He is President and Chief Investment Officer of Future Standard. They are a $90 billion alternative platform focusing on private credit, private equity, real estate, infrastructure, and multi-asset strategies. So it's hard not to look at private credit today and not think this is becoming a juggernaut. Is that a sign of maturity? Or is this, you know, just a lot of capital chasing, not a lot of loans?

• 51:28Speaker 05

  So I'd start by saying that there is a misconception that private credit generally is becoming a bubble. And I consider myself a student of history and calamities, and I try to think about. And if you look at the build of what we call private credit, the asset management's direct lending to private companies, matching up against, you know, various, you know, situations in the past where we had true bubbles. You had an outgrowth of capital versus the economic driver of activity. We don't have that today. If you actually add up the pockets of what we really call private credit, which is not just direct lending, but high-yield strategies, broadly syndicated loans, and bank CNI loans,

• 52:13Speaker 05

  that's private credit provision. It's grown lockstep with the economy. The economy had gone from 12, 13 billion before the Great Financial Crisis, it's 30 trillion today. And so it's grown in lockstep. It's just the market share has shifted to direct lenders and asset management, away from banks, high-yield, and broadly syndicated loans. And so the opportunity in private credit is not outgrowing the underlying opportunities. These private companies are making themselves, they're availing themselves of this private form of financing from asset management companies. And there's a lot more of these private companies demanding this capital. So there is a balance between the supply and demand of this capital for the opportunity.

• 52:56Speaker 05

  Now, having said that, in this search for yield that we talked about, there was an outgrowth of evergreen strategies and selling to the private wealth community, particularly within private credit strategies and this demand for income. And we did see an explosion and a concentration and crowdedness in particular funds and pockets of large-cap lending. That did result in, you know, very tight spreads, covenants being loosened, an increase in paying kind or pick over cash financing.

• 53:37Speaker 05

  And we also saw a concentration of lending to software companies. As rates were being cut and distributions were being cut within BDCs and private credit, we began to see that, coupled with the concerns about software exposure, begin to result in some redemptions. And that is where a lot of the headlines have been focused on private credit and negative sentiment around private credit, trying to get out of these structures when they're having difficulty doing so. I think the backdrop, though, is private credit is still a very valuable and value-enhancing component for most portfolios

• 54:22Speaker 05

  to generate income, despite some of the indigestion and negative headlines that have been developing.

• 54:27Barry Ritholtz?

  Let's talk about those redemptions, because they always crack me up. We saw this a couple of years ago with BREIT and Bcred, which is, which part of five-year lockup is confusing to you? I don't, I don't understand. And for the listener, a lot of these illiquid alternatives have a tiny gate, a 5% gate, which is really there as an accommodation when, you know, I call it the widows and orphans clause. If, you know, if, if the surgeon is hit by a bus and he leaves behind wife and kids, they perhaps shouldn't be in an illiquid alternative in those circumstances.

• 55:11Barry Ritholtz?

  But given that, let's talk a little bit about the illiquidity premium, which some people look at as a bug, but I think is a feature of the, this sort of investment. Tell us a little bit about how you think about illiquidity, and how do you communicate illiquidity or liquidity issues to potential investors?

• 55:31Speaker 05

  Well, I'd start by saying investing is all about trade-offs. There's no right or wrong, no black or white. You know, alternatives aren't better than traditional forms of investing. There's just trade-offs. And the trade-offs within private market strategies and the structures that offer them is that you have the advantages of the potential for enhanced return through an illiquidity premium, or enhanced diversification from your public holdings. The trade-off of that is, these are ill-liquid strategies. They are complex, and they are higher fees than public market strategies, ETFs and indices and things of that nature. And so you have to balance those before determining whether

• 56:13Speaker 05

  or not the trade-offs make sense for you, for your clients, for an institution, what have you. And I really mentioned the illiquid, the illiquid part of it, because these strategies are liquid. Evergreen structures as wrappers around these illiquid underlying strategies did not make an illiquid private asset class liquid. It was just an access point that provides its own advantages of continuous compounding and no capital calls and 1099s and so forth. But it didn't turn an illiquid asset class into liquid. I never understood the term semi-liquid, which implies half-liquid, which it's not. These are not half-liquid private investments.

• 56:54Speaker 05

  And so that as an, as a backdrop, you know, a lot of it comes down to managing the expectations of what the trade-offs are. Going back to the advantages, you are providing capital. And in our case at Future Standard, we're providing capital to a very fragmented ecosystem. We cherry pick, you know, a handful of the best middle-market, mid-sized private businesses, and we provide them with capital, either through equity capital or through loans that we make to these companies. These companies are not massive in size, and they can't dictate final terms. And so we can lend to them at very advantageous prices that work for them, because they're growing businesses, they need

• 57:39Speaker 05

  capital to grow, to acquire new businesses, to fund their operations. And so they're not going to negotiate to the final basis point on spread. So we can provide a very attractive form of financing to them and pass along that income to individual investors through the private wealth community. And so it works for both sides. And, you know, that form of income is, you know, does come with an expectation of higher returns than what you'll be able to replicate in the sort of mega-cap market or in the public fixed income market.

• 58:16Barry Ritholtz?

  Makes a lot of sense. Back in the day, this was thought of as an institutional product and a family office product. It began migrating downstream to ultra-high net worth and then high net worth. Now, the question is, is this going to be marketed to mass affluent, 401Ks, things like that? Who do you see as, as appropriate buyers of a variety of private credit products?

• 58:46Speaker 05

  So we'll start by saying, you know, one of the reasons at Future Standard why we like working with advisors is nobody has a better finger on the pulse of suitability than the advisor to their clients. They will know for their client base, risk preferences, liquidity preferences, you know, their ability to understand these strategies and have them incorporated into their portfolio. We say that if you're going to allocate to a private market strategy like the ones we offer, if you're not looking to allocate for at least the next four or five years or beyond, don't make the allocation. If you need the liquidity in the next few years, there is no guarantee, to our earlier

• 59:31Speaker 05

  point, that you'll be availed of that liquidity. And so the determination of suitability is at the advisor level, and I think that's where it sits. You could make the argument that this should be relegated to those with net worth or income of a certain bracket of level. The regulators have, you know, have their policies on that. But when it gets a little bit fuzzy where someone is accredited but may or may not be suitable, I think the advisor is most positioned to be able to. And we would rather have fewer but more suitable investors as our client base than more and less suitable investors as our client base. You asked a question about retirement accounts.

• 1:00:12Speaker 05

  I think there's been a lot of, you know, headlines written about the big numbers that are being thrown around, you know, 12 to 15 trillion of DC 401k plans. This, in my view, should be among the least controversial of places to think about incorporating less liquid private market strategies.

• 1:00:31Barry Ritholtz?

  Because you're not tapping it for years or decades.

• 1:00:33Speaker 05

  You don't need it for decades, usually for a young person in the retirement account. I think about, you know, my little brother who's a school teacher in Queens and, you know, if he has a 30-year horizon or a 20-year horizon, why shouldn't he have some allocation incorporated in, say, a target date fund? Two long-duration investments that might pick up an illiquidity premium if he doesn't need the capital for a very long time.

• 1:01:00Barry Ritholtz?

  And that's a couple of hundred basis points over treasuries, that's the assumption.

• 1:01:04Speaker 05

  Easily. And also, let's face it, a lot of the best investors in the world are still occupied in this world we call alternatives. And so why not avail yourself of the best investment minds and teams and firms that are out there and their capability sets? And so I do think there will be incorporation of private market strategies into retirement plans, into DC 401k plans. I think it's going to be a much longer evolution than maybe some would like. It will also only be a subset of the 12 to 15 trillion out there because you have to get the plan sponsors comfortable and other constituents and players up to speed and

• 1:01:46Speaker 05

  comfortable with the risks and the fees and the liabilities and so forth. And so it's going to be a small allocation, say 15% of a target date fund, and that's going to be a subset of all of the capital out there. So in the end, you know, it's an opportunity long-term. It will be something that people can elect to have or not have. In the QDIA, it may be a qualified default. They may elect in or so forth. That will evolve over time. But I do think the headlines are getting a little bit ahead of themselves that there's this wave of trillions of dollars that are about to go into alternatives.

• 1:02:24Barry Ritholtz?

  So you mentioned 60-40 earlier. I'm kind of hearing, hey, 60-40 is going to be changing over the next decade to something that's maybe 60, 25, 15. Is that sort of a reasonable number set?

• 1:02:39Speaker 05

  So this will now get into my view on portfolios and portfolio allocation generally, which I have a view that doesn't match up with those numbers.

• 1:02:52Barry Ritholtz?

  Can I, before you say something, I always get into trouble when I say this, but hey, if you're 20, 30, 40, and you have a reasonable risk tolerance, what the hell do you need bonds for? Like, people don't like hearing that, but 60-40, how about 90-10 if you have 50-year time horizon? You just have to not mess it up at the worst possible moment. Where are you going with your pushback to 60-40?

• 1:03:21Speaker 05

  So I'm not, even though I've used the term alternatives throughout the discussion here, I don't really like it. I think there's a point in the future where we won't call these strategies alternatives.

• 1:03:35Barry Ritholtz?

  Because they're not all the same. There's a broad dispersion of risk and returns there.

• 1:03:40Speaker 05

  That's exactly right. And to use that other analogy, when everyone's wearing a Nirvana t-shirt, it's no longer alternative music, right? And let's face it, there's a much broader embrace of these strategies, although it's early. 88% of advisors surveyed have indicated that they plan to allocate capital for their clients to private market strategies. So this is not a niche embrace. This is a broad embrace, and so it's becoming more mainstream. And, you know, the reason I don't like the numbers of 60-40 versus, you know, 50, 30,

• 1:04:19Speaker 05

  20, is when you think about alternatives as just this little peg, like a trivial pursuit, you know, peg on a circle, is, it doesn't match up with how I think about portfolios. So if you think about private equity, private equity rhymes and looks a lot more from a risk standpoint like stocks than it does real estate credit.

• 1:04:44Barry Ritholtz?

  It's right there in the name.

• 1:04:46Speaker 05

  And so, yeah, right, it's equity, it's for growth. And so, and yet, we relegate private equity into a bucket with things like real estate credit, even though they do very, very different things for your portfolio. So the way I like to look at it is, there's a part of your portfolio for growth, and those are all forms of equity, from public stocks and stock indices through to private equity and private company access, through to venture capital and other forms of growth equity. You have your income portfolio, and that's your lower-risk, high-duration, high-liquidity treasuries and agency bonds, through to other forms of income like less liquid private

• 1:05:31Speaker 05

  credit, you know, in other, shorter-duration, higher credit risk investment strategies. And then you have what I think is probably an introduction of something that we haven't had to think about since the 70s, like a real asset category and commodities, base and precious metals, you know, raw land and real estate and things that, in a more inflationary world and a world where you need more diversification of sources of income, you probably need a real asset. Infrastructure would be another example of that, real asset category. And within each of those three buckets of a portfolio, you have a spectrum of illiquidity and risk profile.

• 1:06:12Speaker 05

  And so for each allocator, they will need to determine, within their growth bucket, how much liquidity they need to generate the kind of growth and how much risk they're willing to bear into private equity and venture capital to build that growth bucket. And the same thing for their fixed income bucket with degrees of credit risk, liquidity, duration, and then within their real asset bucket. And so I do believe, even though the world doesn't really look at it that way, that we will eventually get to that point and no longer talk about the term alternatives.

• 1:06:46Barry Ritholtz?

  It's going to be different types of income-producing properties and growth-producing.

• 1:06:50Speaker 05

  That's exactly right.

• 1:06:51Barry Ritholtz?

  Makes a lot of sense. You mentioned earlier, we saw a big uptick in interest rates, which suddenly is a double-edged sword. You're getting yield. We now have a new Fed chair, who seems to have surprised everybody by being a little bit hawkish in the current environment of oil prices and tariffs and hopefully the end of war. But how do you think about the role of rates and the Fed? How does that impact the yield-producing portion of the alternative portfolios?

• 1:07:29Speaker 05

  Well, as I said earlier, I do think we've exited this golden era that ended roughly five years ago into a more inflationary, deglobalized, less benign demographic backdrop. It will result in a higher resting heart rate for inflation. I'm not suggesting we're going back to the seventies by any means, but there's a dozen or so factors that will keep inflation more elevated, particularly in this deglobalized, localized world of supply chain breakdowns.

• 1:07:58Barry Ritholtz?

  The post-GFC zero rates, that's it for our lifetime. Nobody really expects to see that again.

• 1:08:05Speaker 05

  I don't expect to see that anytime soon.

• 1:08:08Barry Ritholtz?

  Barring meteor from out of space.

• 1:08:10Speaker 05

  Right.

• 1:08:11Barry Ritholtz?

  So what does that mean for the potential for various types of private credit to generate?

• 1:08:18Speaker 05

  Right. In that backdrop, you're going to have higher rate uncertainty, higher volatility, and a need to look for other forms of income, other forms of floating rate exposure, right? If rates go up, floating rate exposure pays you more. It works against you with high-duration investments. You begin to lose money on those, and so it does act as a balance to your traditional fixed income sources. You will need diversification just generally in the world, given this economic backdrop and the need for obtaining resources and how you build out a diversified portfolio. And so these types of income strategies and private equity strategies and real asset,

• 1:09:00Speaker 05

  real estate, and infrastructure strategies are, again, a broader palette to paint from in a different environment than the one in which sixty, forty was the perfect answer and a simplified answer of set it and forget it and be able to have diversified, low volatility outcomes. And so I do think the role of the Fed is trying to navigate this tug-of-war between the inflationary forces and perhaps the deflationary forces that AI may introduce to pockets of that economy. And so it's a tougher job for Kevin Warsh. And he wants

• 1:09:39Speaker 05

  to go back potentially to, you know, less disclosure, maybe more Alan Greenspan-like communication style where we have to divine the tea leaves a little bit more and try to anticipate what's going to happen. And that makes it trickier. And if you're building portfolios for the long term, incorporating these strategies in a diversified way, you will have countervailing balance within your portfolio. It won't matter if the Fed's going to raise or lower interest rates by twenty-five or fifty basis points if you've built a truly diversified portfolio.

• 1:10:13Barry Ritholtz?

  Makes a lot of sense. You mentioned some of the headline risk, and we've had a couple of minor blowups over the past year or so. Some people look at that as the first cockroach. I don't know if that's the right metaphor. I'm curious, what data points do you look at to just keep an eye on the health of private credit underwriting?

• 1:10:37Speaker 05

  So when you're looking at private credit underwriting, you're looking at default rates versus history. You're looking at the situations where there are defaults and what losses ensue post those defaults. You're looking at interest rate coverage ratios, so to the extent that the businesses that you're underwriting in a diversified portfolio can cover their interest payments. So you're watching all of these metrics. You'll look at the value of the collateral underlying those businesses. And I would say, there is no systemic crisis broad-based within private credit today. We're not seeing that. There are idiosyncratic

• 1:11:18Speaker 05

  stories, and when you have hundreds and hundreds of credits being underwritten, you're always going to have individual circumstances of companies that are going bad or undertaking a fraud.

• 1:11:30Barry Ritholtz?

  Normal default rate.

• 1:11:31Speaker 05

  Normal default rate. And it doesn't, by the way, just because a company defaults doesn't mean you lose money. I mean, historically, if you had a default rate of two or three percent, and you lose half your money on that, you can do the math and how much your actual losses will translate over a period of time against the income that you're generating in return. And so if you might factor in the loss of fifty or a hundred basis points of loss against the ability to generate nine or ten percent returns, you can do the math as what that, on a net basis, will return for you. Defaults today are well within historical ranges and are being well managed. Interest rate coverage ratios are well within

• 1:12:09Speaker 05

  historical ranges and are in a healthy range today. What we are seeing are pockets of weakness and pockets of vulnerability. And again, over the course of, we haven't had an economic cycle since the great financial crisis. I don't even count COVID because it wasn't an economic cycle.

• 1:12:27Barry Ritholtz?

  Even twenty twenty-two.

• 1:12:29Speaker 05

  It was barely a blip. And yet, we're always going to have some areas that are experiencing some disruption or some indigestion. Right now, you have software, which is an issue that AI is disrupting, but you have to sort through that. And healthcare services, there are some labor and reimbursement issues that have hit certain healthcare companies. Within software, no one knows. No one knows what the true impact of AI is going to be on software. My view is most companies will be fine and adapt and evolve their business models. There will be a subset of those companies that will be truly disrupted and where your

• 1:13:13Speaker 05

  collateral will not be worth very much. But again, if you look at a mega-cap or large-cap lent private credit portfolio, and you said twenty percent is allocated to software, and you thought fifteen percent of that was going to have disruption and trouble. So now you're relegating this down to about three percent of your portfolio. And even if that all went to zero and there was no collateral value and no recovery on any of those, that's going to ensue over the next three to five years, three points of loss. So assume a straight-line amortization of those losses, about a point a year or less than a point a year, off of a portfolio that generates nine percent, ten percent. So

• 1:13:56Speaker 05

  instead of nine or ten, it's eight or nine, if all of that gets disrupted as expected. In other words, this is not a catastrophe. This is a normal course of business with a pocket of sector weakness. I think that the private credit industry is still healthy. It still provides very attractive general returns. And this is all assumptions-based, and assumptions can change in the course of time.

• 1:14:17Barry Ritholtz?

  Of course.

• 1:14:17Speaker 05

  But as I look at the fundamental health of the private credit business, it's still very much intact.

• 1:14:22Barry Ritholtz?

  Really, really interesting. I have one or two more questions before we get to our favorites. And I have to ask you a thirty thousand-foot view. Step back and look at the private credit landscape, three years, five years, ten years from now. What does it look like in terms of ongoing growth? How much do you think this is going to penetrate into the wealth channels? What does the industry look like out a couple of years?

• 1:14:54Speaker 05

  So when we talk about private credit, and often when you read about private credit in the press, it seems like one monolithic category. Within private credit, there are a Baskin Robbins series of flavors that all get defined as private credit. And so you have senior credit, junior debt, MEZ. You have CLOs. You have sponsored, non-sponsored, opportunistic credit. You have asset-backed finance. You have royalties and so forth. And so there are many different forms of credit to private entities and companies that

• 1:15:35Speaker 05

  we call private credit. My expectation is those flavors will develop. They will begin to grow in size. The demands for that capital by those companies and entities will increase. We're seeing the entrance of insurance capital and an investment grade. Most of what we call private credit is non-investment grade, but there's the investment-grade demand for private capital for these companies that is exploding in size. And Mark talks about that at Apollo. And there is all of this that's developing over time. And I expect

• 1:16:14Speaker 05

  that to continue. And then on the demand side, I expect that private wealth will continue to demand income. They will continue to struggle with traditional forms of fixed income and high-duration assets, if my view on the macro world transpires, as I think it will. They will continue to need to search for income through different sources. That's both corporate income and real estate income and other forms of asset-backed income. And so those demand, that supply and demand, will continue to grow lockstep with one another. And we will have a much larger ecosystem of what we call private credit in the future.

• 1:16:56Barry Ritholtz?

  So you were a trustee at the Stanford Graduate School of Business. You're currently a trustee of the Tiger Foundation, as well as a board member at the Spotlight Foundation. Tell us a little bit about the work you do with these foundations.

• 1:17:10Speaker 05

  Yeah, so one of the things that Julian Robertson imparted on all of us at Tiger from a young age was, you give back as much as you can, as early as you can. Don't wait until, you know, you're about to die. And so I joined the Tiger Foundation, you know, probably over 20 years ago, which was Julian's foundation at Tiger Management that funds not-for-profit initiatives in New York City to fight poverty. And have been doing that now for, and Tiger Foundation's been around at least 25 years or more. And so, that's been an exciting legacy for Julian and for all of us that work together at Tiger and

• 1:17:55Speaker 05

  I'm a trustee on that and work hand in hand with the other trustees in undertaking funding those initiatives. The Spotlight Foundation was a group of Stanford Business School friends of ours. We, after we graduated, we decided to memorialize our friendship through a foundation that would fund not-for-profit entrepreneurs that were funding education initiatives, seeing how important education was in all of our lives personally, wanting to impact those people that didn't have the same advantages and opportunities that we had. And so, we

• 1:18:35Speaker 05

  fund a lot of education initiatives, particularly in less advantaged communities. And we fund the entrepreneurs, the ones who are doing earlier-stage startups that could become the next KIP, you know, charter schools of the world, or, you know, we've funded the Seattle Girl School to bring science initiatives to girls within the inner-city Seattle community. And so, that's something that, you know, is very near and dear to my heart.

• 1:19:01Barry Ritholtz?

  Sounds really interesting. All right, let's jump to our favorite questions we ask all of our guests. Starting with, tell us about your mentors who helped shape your career.

• 1:19:12Speaker 05

  Yeah, well, you know, I've had various mentors over the, over time. Certainly would put, you know, Lee and Julian in that category, not as a personal mentorship, but more as individuals I observed and admired as investors, but also, you know, you're looking at someone like Julian, how philanthropic he was and giving, and the way he treated people. I really admired that about him. There was another individual who's a mentor to me to this day, Gil Cafrey. Gil was a partner at Tiger. He was my partner at Front

• 1:19:54Speaker 05

  Point, as we built that firm. And Gil is an incredible human being. He's smart, and he has the highest integrity. He always treated everyone with respect. He was a direct individual, but, you know, or is a direct individual, but he was never emotional. He just showed you how to treat clients with respect, how to treat your coworkers with respect. And it's just somebody who mentored me personally, and who I try to emulate every day.

• 1:20:30Barry Ritholtz?

  Really, really good answer. Let's talk about books. What are some of your favorites? What are you reading currently?

• 1:20:36Speaker 05

  Book I'm reading currently, London Falling by Patrick Radden Keefe, who wrote Empire Payne and Say Nothing. He's an incredible investigative journalist, writing this wild story, a true story about a boy and a family within London in the 80s, 90s, and in the backdrop of London undergoing the changes it had. It is a fascinating piece of work. It's one of the best books I've read, and I try to read a lot in the last five years. And so, I've really enjoyed that. Best book all time, I would say Man's Search for Meaning. I read it in high school.

• 1:21:21Barry Ritholtz?

  Viktor.

• 1:21:22Speaker 05

  Viktor Frankl. I read it in high school. I reread it every year. Just, it has, it's amazing that Viktor had the ability to have the mind frame he had through the horrors he faced, and how that mindset and your sort of ability to attach meaning to what goes on in your life. And you can't control what happens to you, but you can control how you respond to it. I love all things Stoicism.

• 1:21:54Barry Ritholtz?

  I was gonna say, classic Marcus.

• 1:21:55Speaker 05

  Marcus Aurelius, yeah, sure. And, and, but Viktor Frankl's writing, it's, I still have the torn pages of my high school copy with my pen marks. And I, and I reread it every year. It's, it's an amazing book.

• 1:22:10Barry Ritholtz?

  Really, really interesting. What are you streaming these days? Tell us what sort of podcasts or Netflix, Amazon Prime you're watching.

• 1:22:19Speaker 05

  So, my wife and I love documentaries. We are watching The Dark Wizard right now about Dean Potter, who was an extreme climber and extreme athlete. I love watching depictions of obsessive personalities. I think probably because I see some of that in myself. But I like watching based on people who are in other fields. So whether they're athletes or extreme athletes, or musicians, or chefs, like Hero Dreams of Sushi, The Bears coming back out, you know, Last Dance, I love Kobe Bryant and Michael Jordan. Just people who

• 1:23:04Speaker 05

  pour themselves into what they do, because I always learn something about how they think about the world and pour themselves into what they do as it applies to what I do and what I love to do. And so, you know, I love, that's one of the reasons I love watching some of these documentaries.

• 1:23:20Barry Ritholtz?

  So, I have a couple of things I have to share with you. Have you ever read the book Endurance about the Shafton Journey?

• 1:23:29Speaker 05

  Absolutely.

• 1:23:30Barry Ritholtz?

  Like, it reads like it's fiction. It's just so.

• 1:23:33Speaker 05

  One of the best.

• 1:23:34Barry Ritholtz?

  And I'm, I'm drawing a blank. I think it was called Open, Andre Agassi's.

• 1:23:39Speaker 05

  Also, one of the best sports biographies or autobiographies ever written.

• 1:23:42Barry Ritholtz?

  Just really, really interesting. And then, I have to slip over to music, because you mentioned Nirvana twice, you mentioned Rick Rubin.

• 1:23:51Speaker 05

  Yes.

• 1:23:52Barry Ritholtz?

  You're a big music fan, I assume?

• 1:23:53Speaker 05

  Yes, yes.

• 1:23:54Barry Ritholtz?

  What, what genres? What do you, what, what ponds do you fish in?

• 1:23:58Speaker 05

  When I was younger, I was really into heavy metal, I still am. But Rush and heavy metal and bands like that.

• 1:24:07Barry Ritholtz?

  Yeah.

• 1:24:08Speaker 05

  And I, and I played bass in a band. And nowadays, it's really, you know, I'll listen to Miles Davis, I'll listen to, you know, Burning Spear and reggae, I'll listen to Radiohead, I'll listen to, why, I've just finished Michael McDonald's autobiography.

• 1:24:28Barry Ritholtz?

  I know what you're, you're about to say. Did you see, it's on HBO, the Yacht Rock?

• 1:24:35Speaker 05

  Yacht documentary or something they called it?

• 1:24:38Barry Ritholtz?

  It's just a yacht rock documentary.

• 1:24:40Speaker 05

  I love yacht music, yacht rock.

• 1:24:42Barry Ritholtz?

  It was so surprisingly good. I'm a big Steely Dan fan, so I expected to hate it. And there's a brilliant line where he gets Donald Fagan on the phone, and he's just like.

• 1:24:55Speaker 05

  And he hated the fact that he called him yacht rock, and he hung up on him. But like, in the, in the Michael McDonald autobiography, he talks about Steely Dan and their process. They were super obsessive, you know. They, every note counted. They would do take after take after take. It was very sort of Beatles, Beach Boys. There were certain musicians, you know, Miles Davis probably, you know, who were just so intense about the process of creating music. And I love seeing that, and I love learning from that.

• 1:25:26Barry Ritholtz?

  So, there's a YouTube series, or it's a series that ended up on YouTube, called Classic Albums. And the making of Steely Dan Asia is insane.

• 1:25:37Speaker 05

  Okay.

• 1:25:38Barry Ritholtz?

  But they also give you a little history and show you, hey, you like My Old School? Here's the 43 different guitar solos before they, and then they didn't just take one, they patched 12 of them together.

• 1:25:50Speaker 05

  Is that right?

• 1:25:51Barry Ritholtz?

  Yeah, it's, it's pretty amazing. I think it's called Classic Albums. And you can find a bunch of other stuff, but I thought the Steely Dan stuff was, was, was really, was really interesting.

• 1:26:02Speaker 05

  Solo on Kid Charlamagne, so got you every time.

• 1:26:05Barry Ritholtz?

  And I have a couple of years on you, but I'll, I'll make you a tiny little bit jealous. I was in, I want to say high school, I saw Black Sabbath at Madison Square Garden, and this unknown band, Open for them, named Van Halen.

• 1:26:20Speaker 05

  Oh, gosh.

• 1:26:21Barry Ritholtz?

  And it was insane. I'm not exaggerating.

• 1:26:23Speaker 05

  You didn't make me jealous just then.

• 1:26:25Barry Ritholtz?

  Is this what every concert is supposed to be like? I want to say I was 14, something like that, head blown. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either alternative investments, private credit, what have you?

• 1:26:48Speaker 05

  So in my view, and I have two young sons, well, 20 and 17, and it's kind of the advice that I've given them, I believe the greatest definition or criteria of success going forward is going to be adaptation. So learn to adapt. Everything is being disrupted. Jobs are being disrupted, not replaced, they're being disrupted, careers, the world. Your ability to try and fail and get up again, you know, as the Japanese say, you know, rise eight, fall seven, you know,

• 1:27:30Speaker 05

  nanakarobi yaoki. You're actually supposed to put yourself out there and be resilient and adapt. And you're going to need to, I think, in the future. That's a really important, I think, mindset to have in the world we're entering into and is going to transpire. Obsess about what you do as much as you can. Read everything you can get your hands on. Network to what, every extent you can. Meet people. Put yourself out there and do it in person. Don't do it over Zoom. Get out there and immerse yourself in whatever it is that you're doing. And then

• 1:28:10Speaker 05

  finally, I would say, be the man or woman in the arena. You know, I think there's an over fixation on likes and the comment section. Forget the comment section. Forget the number of likes you have. Put yourself in the arena. There are always going to be weak critics sitting in the stands, throwing rocks at you. Ignore them.

• 1:28:33Barry Ritholtz?

  That's the famous quote from, uh,

• 1:28:36Speaker 05

  Theodore Roosevelt.

• 1:28:37Barry Ritholtz?

  Teddy, right? Yeah, that's right. The man in the arena. And our final question, what do you know about the world of alternative investments and private credit today might have been helpful when you were first getting started 30 or so years ago?

• 1:28:52Speaker 05

  So when I was starting out in the business, I viewed the markets as this giant puzzle that needed to be solved. And I like puzzles. So, you know, I thought, all right, I'll take all of the classes and read all of the books on cracking the code and, you know, quantitative finance and derivative math and all of these things. And yes, over the years, I've used those. But if I could go back and do it all over again, I would have taken far more psychology and philosophy classes and maybe fewer, you know, classes on building DCF models. Because as I think about my career and how it's evolved and my daily interactions and even observing

• 1:29:37Speaker 05

  the markets, it's far more driven by behavior than it is by math. At least the world I've occupied. I don't work at Rentech. But it's irrationality and incentives and behavior, for better or worse, that creates opportunities, that creates management challenges, what have you. But I would have studied more of the psychology and philosophy.

• 1:30:03Barry Ritholtz?

  Really, really interesting answer. Thank you, Mike, for being so generous with your time. We have been speaking with Mike Kelly, President and Chief Investment Officer at Future Standard. If you enjoy this conversation, well, check out any of the 649 we've done over the past 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. I would be remiss if I didn't thank our crack staff that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer. I'm Barry Ritholtz. You're listening to Masters

• 1:30:46Barry Ritholtz?

  in Business on Bloomberg Radio.

• 1:31:03Speaker 10

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