In Episode 11, which was recorded live at the Morningstar Investment Conference in Chicago, Julie Segal talked to BlackRock’s Rick Rieder, who created THE buzz at the conference after his morning presentation, which he boldly called ‘What Is Money’ (and which included a prediction that AI would create a 15-hour work week.) Julie got Rick, the CIO of $3 trillion in global fixed income, to finish — at least for now — the conversation he started. The discussion ranged from the existential questions about money, market structure, and the changing nature of global investing to reimagining the 60/40 portfolio. The episode is a masterclass in long-term, contrarian thinking. Oh, and Rick gets to revisit his 2016 interview with Julie where he warned that Investors need to “stay away from the soup of the day.”

Take a listen and email me with your thoughts and ideas at [email protected].

The roadmap:
 

What is money today and tomorrow? Social media and (real) media's role in amplifying noise and shortening time horizons. Explosive growth of financial assets over the last decade. Are we still clear on what money is and what it does? (1:40)

Too Much Wealth, Too Few Assets - There are $218 trillion in net worth in the U.S. today and $530 trillion globally today. How can this money be invested? Using the credit markets to create more assets. (4:36)

Inflation and Tariffs - The short to medium term of tariffs and deglobalization. And the impact of tariffs and the world of automation. By 2050, we will be going down to a 25-hour week. (7:50)
 

What does that mean for the markets and why we are not going into a recession? (9:50)
For the first time in 20 years, we can get yield in fixed income and private credit has firmly taken its place in the fixed Income sector. Creating the balanced and stable portfolio.
 

What are my institutional clients asking me? (18:45)
Internationally, they are asking about the dollar for the first time in a long time. In the U.S., investors are looking at diversified portfolio in a very different way today.

An alternative to 60:40 (21:00)

Imagine waking up to discover that decades of data on stocks never included key industries (technology anyone?), making every major index misleading and leaving people to question everything about their equity portfolios, including how much they’ve invested, the risk. and expected long-term returns. With hedge funds, this isn’t just a thought experiment—it’s an unsettling truth. And a fix matters to both hedge funds and investors. 

In episode 10, Julie talks to Jon Caplis, CEO of PivotalPath, which was built for institutional investors to do due diligence on hedge funds. PivotalPath, which Jon founded in 2013, now serves institutions with a total of $400 billion in hedge fund investments. In today’s episode, Jon discusses how incomplete data has fed flawed benchmarks and how it all turned into a nagging problem and open secret for the industry. Jon gives his view on how it happened in the first place, why resolving the problem now is particularly important and has gained support, recent research that quantified the detrimental effects for both investors and managers, and what could happen to landmark academic studies on hedge funds that have been based on incomplete data. Take a listen and email me with your thoughts and ideas at [email protected]. 

Links: 

II Article: Everything Investors Know About Hedge Funds Is Based on Flawed Data https://www.institutionalinvestor.com/article/2d7om8w3w5brlcvefot1c/portfolio/everything-investors-know-about-hedge-funds-is-based-on-flawed-data

Study: What Do We Know About Institutional-Quality Hedge Funds? https://uncipc.org/index.php/publication/institutional-quality-hedge-funds/ 

PivotalPath Index App

https://www.pivotalpath.com

In episode 9, Julie talks to Robert Goldstein, who has been the chief operating officer of BlackRock for 10 years and who started as a ‘green package’ analyst 30 years ago in 1994. Rob, who was part of groups that built the iconic green package into Aladdin as well as BlackRock Solutions, talks in detail about what carries over from the early days of the company to inform what it does now (a lot) and why everyone claims to be a technologist in financial services now. He also discusses artificial intelligence, why he still expects to have more engineers working for the company in the future than it does now, and how AI will never be able to do a COO’s job.   

But any investor interested in why private equity, private credit, and private everything will become (almost) as transparent as public assets needs to listen to this conversation. Assumptions that managers and investors have made about private equity and similar funds are plain wrong. Rob says there’s just too much money in private markets for investors not to have the information they need to get a detailed picture — particularly of the risks — in their portfolios. “The gap between what investors could get today on the public market side of their portfolio relative to the private market side… is just too big. And that gap is going to be filled,” Rob told Julie. 

Many people have long assumed that private markets would stay opaque. (Private is the operative word here.) But BlackRock has always been about portfolio transparency — for good reason. “Because…. if you don't understand the risk in a portfolio, you actually can't understand or manage the portfolio,” Rob says. Sounds pretty basic of course, until you think of BlackRock’s history in complex mortgage-backed securities, which were a new invention at the time of the firm’s founding. Naturally, not that many investors or managers understood how these securities worked, had good information on them, or knew how they could fit into their portfolios. BlackRock changed all that and structured products are now mainstream. 

Rob stresses that the same will happen in private markets, where information is fragmented, closely guarded in many cases, and not standard. As a start, BlackRock will build on its acquisition of Preqin, which has been collecting data on alternatives. To be sure, more transparency will create winners and losers, but it’s not okay for these investments to have a veil of secrecy over them. “That just isn't going to happen. That is not how anything in the year 2024 works,” he says.

If your doctor can give you the results of 12 tests on the same day during an office visit, surely investors can get an MRI on 100 percent of their portfolios, including the private equity and real estate funds they own. I think transparency of private markets is likely to be one of the biggest investment transformations of the next decade. 

In episode 8, Julie talks to Ignacio Jayanti, CEO of private equity firm Corsair Capital, which spun out of J.P. Morgan Chase in 2006. Before that, Jayanti had been on the investment team of the predecessor Corsair funds and managed the operations of the business for almost a decade.

Jayanti covers a lot of ground in this conversation, including how the model of private equity buyouts that took shape from about 2000 to 2021 depended on a growing number of potential PE acquirers for companies and a never-flagging IPO market where PE could cash in on investments. But he thinks that IPOs will remain “subdued” and that sweeping changes in the public markets since the early days of PE have added a lot of volatility and risk to this exit strategy.

Private equity firms can no longer count on selling their companies to competitors either. That bit was founded on cheap money and constant deal making, says Jayanti. Money is no longer cheap — and deals have slowed dramatically.

In particular, tune in to hear Jayanti’s view of all that dry powder — commitments from investors — that has accumulated at private equity firms. That will “reach its end of life…  some time over the next three years,” he says.

The industry must be watching and trying to forecast what investors will do at that point. They have every right to walk away from unfunded commitments. And if they do the industry will contract dramatically. “I'm just highlighting the fact that there's a very long cycle and rhythm to this market of fundraising and deployment and exiting, which has been very significantly affected to the point where there could be a period of time where the next upturn is actually quite a bit further away in terms of aggregate market size.

Ignacio touches on plenty of other topics as well, including a nuanced discussion about due diligence that you may not have heard before and the transformation that secondaries could kick off (in a good way.)

Thanks for listening. And let me know what you think, what questions I didn’t ask, and when I should have pressed for more. My email is open: [email protected].

David Hunt, president and CEO of PGIM, addresses how economies are being funded differently, what that means for investors’ portfolios, and how to foster contrarian thinking.
Listen to Julie and David discuss:

In episode 6, Julie talks to John Wright about why it’s not enough anymore to just pick the best credits. While clearly counterintuitive statement, John, who is global head of credit and a partner, does go on to explain the alpha-generating techniques that now go into managing private credit portfolios. In the hyper-competitive world that private credit has become, John says “It’s harder to differentiate solely on the basis of credit selection.”
Julie and John also discuss CLO investors and how their irrational behaviors make these markets inefficient; the long relationship between private credit and regulators; and why he’ll always choose to invest in markets that are complex and illiquid.

John also talks about the top questions he gets from allocators these days, the opportunities for private credit among more mainstream investors, and how he’s always thinking about how to attract a new generation that thinks differently to Bain Credit. Part of that is letting junior people into the rooms where decisions are being made and apprenticeships (hint, these won’t work on Zoom).

This episode is sponsored by Bain Capital Credit.

In episode 5, Julie talks to Oliver Fadly of NEPC about why he’s cautious on private credit right now after the explosive growth in the asset class over the last 15 years, why he expects much more transparency in the coming years, and why it’s hard to find managers with true track records that you can dig into to get a picture of their investment chops. Oliver and Julie discuss the good and the bad of consolidation and the increasing number of smaller private credit shops that are getting acquired by or doing joint ventures with larger asset managers.
And amid all of those deals, Oliver is watching the inevitable shift in talent. Top people are getting contracts to stay for three or five years, but what’s happening to the people below that?

Oliver also talks about portfolio finance and so-called NAV loans, which have been increasing — and why he’s pretty cautious (again that word!) about the sector and spending time trying to understand the motivation behind both the private equity firms that are taking on these loans and the credit funds that are making them.

Oliver also speaks to capital structure stress, the result of a lot of private credit deals being done at the peak when rates were near zero. These companies have now burned through a lot of cash, and while there still isn’t a huge wave of defaults, there are a lot of hard conversations to come. For investors, there may be opportunities to provide transitional capital to get a company “to the other side,” as Oliver points out.

As always, I want to hear your thoughts. Email me at [email protected] or message me on LinkedIn. Which reminds me that I have to get back to a listener, who told me I should have asked a previous guest a few more questions. He’s right and I’ll respond. Thanks for listening everyone.

Michael Levy, CEO of Crow Holdings, says the bottom third of office buildings are redevelopment projects that are a “multi-decade problem.”

In today’s episode, Julie sits down in New York to talk with Michael Levy, CEO of Crow Holdings, the private real estate developer and investment firm in Dallas. After an 18-year career at Morgan Stanley, which included restructuring the firm’s real estate business during the depths of the financial crisis and being COO of Morgan Stanley Investment Management, he moved to a red state and became the first outsider to lead the family business started by Trammell Crow 75 years ago. That’s a notoriously tough job — for obvious reasons.
Julie and Michael discussed the new reality of the office, why — when first joining Crow — Michael just listened to people for such a long time before moving their cheese, why Crow will NEVER go public, and what it means to run a company “for employees.” Employees. That was a new concept for me.
There’s a ton more. And it’s always the details that make a story. Feel free to email me at [email protected] with your thoughts on this episode and any ideas.

Rishi Ganti argues there is a meaningful alternative to investing in tradeable markets — but it’s not easy.

In this episode of the podcast, Julie Segal talks to Rishi Ganti, a veteran of J.P. Morgan and Two Sigma and co-founder of Orthogon Partners, which invests in untraded or esoteric assets. Or what might be even better described as investments that require discovery, a process Rishi calls magical  — it’s finance essentialism, bringing ideas and money together.

Julie and Rishi also talk about the seemingly endless stream of college graduates who make their way to Wall Street every year to work in markets that are designed to eliminate exactly what they came for — alpha. People choose to forget what they learned in Economics 101: the law of competition. Rishi, who chose instead to invest in untraded assets, talks about the challenges of finding these opportunities, building structures so they can be invested in, and convincing allocators of the rewards.

For more on Orthogon and the problems with modern finance, read ⁠II’s story⁠ from 2020.

Bob Elliott wants to offer ETFs that replicate the return streams of hedge funds and other alternatives to both pensions and individuals who can’t justify paying 2 and 20.
Bob Elliott is a co-founder of Unlimited, which wants to bring sophisticated hedge fund strategies to individual investors who haven’t had access to strategies that could help protect their savings from market swings or a prolonged downturn. But any asset manager that wants to offer alternative investments like hedge funds to individuals needs to deal with the cost problem: how to turn the traditional 2 and 20, meaning a 2 percent management fee plus a 20 percent incentive fee, into something reasonable.

In today’s episode, Elliott breaks down the technology that he uses to translate publicly available information on industry hedge fund returns into a general picture of positions that Unlimited can then deliver in an ETF.

But more importantly, Elliott talks about this type of innovation’s potential effect on the hedge fund industry and alternative investments in general. While he doesn’t think it’s going to happen tomorrow, Elliott does think the transparency and lower costs of replication could seriously challenge at least mediocre managers and either push them out entirely or force them to improve. As he says, individual should benefit if Unlimited can not only reprice the cost of access to hedge funds, but can out-compete marginal managers. Then the start-up's machine learning technology will be replicating a pool of higher returns.

And replicating the returns of private equity, private credit, and venture capital is even easier than hedge funds, Elliott argues. There are plenty of lookalikes of these companies in public markets, where investors can buy and sell at will and costs are a tiny fraction of the 6 to 8 percent charged by managers. But the big sticking point may be institutional investors who have become accustomed to having their holdings in private companies priced only quarterly and the return profile fiction that creates.

Listen as Elliott also discusses critics of democratization, the positive effect of transparency on portfolio construction, and the long lack of innovation in the investment industry.