Are Investors Compensated Enough for the Illiquidity of Interval Funds?

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video1889773136: Hello, everyone, and

welcome to Zephyr's Adjusted for Risk

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podcast from the shores of Lake Tahoe.

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I am Ryan Nauman, the market

strategist here at Zephyr.

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Investing in private markets has become

very popular for retail investors as

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the benefits they bring to investment

portfolios are more widely known

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and accessibility has increased.

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But the world of private markets is vast,

complex, and brings its own unique risks.

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Well, I have on an industry expert who

can help us gain a better understanding

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of investing in private markets.

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But first, today's episode is sponsored

by the award-winning Zephyr, which

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helps investment professionals

make more informed investment

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decisions on behalf of their clients.

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All right, enough from me.

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I've already talked enough.

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Let's go ahead and bring

on the star of the show.

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I'd like to give a very warm

welcome Ch- to Joe DeGrossa.

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Joe is the CEO and founder of Access

Capital and co-author of the book

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titled The Financial Advisor's

Guide to Private Investments.

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Joe, thank you so much

for coming on the show.

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It's an honor to have you on.

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Really excited about this conversation.

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You know, can you please tell

us a little bit more about

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yourself and Access Capital?

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Sure.

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Well, first, Ryan, thanks

for having me on the show.

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I appreciate it, and, uh,

I'm very pleased to be here.

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So just in terms of my

background, I've been in the

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capital markets for 40 years now.

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I began, uh…

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In fact, I just hit my

40-year anniversary last week.

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Uh, so I- Wow … started, uh,

June 10th of 1986 for PaineWebber.

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I was a financial advisor there until '96.

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In fact, I started as a stockbroker

and left as a wealth advisor, so

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I saw a fair amount of transition

over those first 10 years.

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Um, I was very fortunate.

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One of the big institutional accounts

I, I wound up covering, a firm called

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Investcorp, um, one of their founders

left to set up a private equity shop.

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Right place, right time.

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He asked me to join him as his first

partner, and, uh, necessitated a move

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from New York to Miami, which I was

all too pleased to do at the time.

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And so I've been in the private equity

business for the fa- past 30 years.

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Done a, a number of interesting

deals, but, uh, probably the most,

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uh, exciting deal I've done is the

launch of a new company, which is,

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which is Access Capital Fantastic.

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So why did you start Access Capital?

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Well, having been on the private equity

side as a sponsor, uh, looking at it

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through a capital raising prism, uh, you

know, over the years, institutions have

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dominated, uh, the capital deployment into

private investments, whether it be private

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equity or private credit or real estate.

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And, uh, however, all that is, you

know, begun to change, and we really

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saw an acceleration of that change

over the past five to 10 years with

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the introduction, uh, of retail

investors into private investments.

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And you know what I like to say, it's,

it's really been a Tale of Two Cities.

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So, you know, for those folks who, you

know, are professionals in, in the space,

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they understand qualified purchasers,

folks with five million or more under the

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Investment Company Act of 1940, they have

unfettered access to private investments,

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whether it's, you know, classic

drawdown private equity or credit funds.

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However, you've got, um, below

that qualified purchaser level,

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um, think accredited investors,

folks one to five million.

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They've largely been disenfranchised

from the private markets because

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of the '40 Act, because the '40 Act

says, you know, if you as a sponsor

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bring in even a single non-qualified

purchaser, someone with below five

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million, you blow the exemption, the

Safe Harbor provision under the '40

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Act, and you're limited to 99 investors.

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So up until recently, there hasn't

been much of a focus on retail

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investors, particularly non-qualified

purchasers who are retail investors.

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But all that's, you know, beginning

to change, and that change is

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accelerating, and it's accelerating

through registered vehicles.

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That's really the only way that, um,

non-qualified purchasers en masse,

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in, in terms of being a large group,

can get into private investments.

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So I, I believe that, uh, those registered

vehicles are gonna be a game changer,

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particularly over the next, uh, call three

to five years Uh, with, uh, reallocation.

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Yeah, Joe, that's fantastic, and

we're gonna talk more about that,

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you know, kind of the merging or

the, of the two, uh, retail investors

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and private markets shortly.

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But you mentioned you have a

40-year journey, through the

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financial services industry.

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I love that you started as a broker and

then went to, more of a wealth planner,

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wealth advisor, so early in your career

because, r- I'd say financial planners,

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wealth managers really became really

popular in the past 10, 15 years.

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So you were ahead of the game, Joe.

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I was, uh…

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I, uh, well, you know, as they

say, better to be lucky than smart.

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I was lucky, not by design,

but, uh, really by being at the

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right place at the right time.

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And I, I was fortunate in, uh, one

of the rock stars in private equity

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took a liking to me and asked me

to join him as his first partner.

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And, uh, so I got to learn the, you

know, corporate acquisition business.

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I was his right-hand guy for

seven years, and then in 2003-

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Uh, left with another partner.

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We bought a bunch of Burger

Kings, sold them to Blackstone.

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Uh, turned around an insurance

company, sold it to GTCR, large

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private equity shop in Chicago.

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Launched a $900 million REIT.

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So I've been fortunate in that, uh, you

know, we've, we managed to be at the right

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place at the right time, uh, a few times.

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And I think, uh, you know, the next,

uh, big thing, uh, from my perspective

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is the, uh, democratization of private

investments for the retail market.

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Yeah, I agree.

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So what has your journey taught

you about private markets,

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alternatives, but, you know, I guess

more specifically private markets?

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Yeah, well, uh, you know, up until,

as I mentioned before, up until very

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recently, it was, uh, really the,

uh, purview of just institutions.

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And, you know, I, I always felt, uh,

having worked with literally a couple

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hundred retail accounts when I was a

broker, uh, that, uh, you know, they were,

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they were really locked out of the market.

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And even when you think about, uh, defined

benefit versus defined contribution

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plans, so think of defined benefit as

those big pension funds for, you know,

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teachers or firemen and policemen,

they had a very healthy allocation to

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private investments, 25, 30%, because

decision-making was centralized with

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a, you know, investment committee.

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But folks who had defined

contribution plans, think 401ks,

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largely locked out of the market.

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And, you know, these are doctors,

lawyers who have a, you know, as good

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a level of sophistication as anyone

else, can … sp- certainly bright

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people who can be, uh, educated on the,

the benefits and, and sometimes, you

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know, cons against private investing.

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But, you know, looking at that market,

we thought it was just a matter of time

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before that market was gonna open up.

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And I think one of the most exciting

things for financial advisors in

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particular, but more importantly the

millions and millions of Americans

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who don't have access to private

investments through their 401ks,

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that market's gonna open up in a big

way, I believe beginning next year.

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So it's exciting times to come.

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Yeah, it is exciting.

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And I'm a big, uh, believer in

the democratization of investing,

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and you are exactly right.

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You know, the, the- Participants

of 401plans, you know, their, their

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offerings are very limited, right?

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So offering them other products that can

help increase the diversification of their

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portfolios is, you know, a huge benefit.

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But what else is driving this shift

from public markets to private markets?

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Is it, is it the retail investor,

financial advisor, or is it more the,

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the asset managers just being like, "Hey,

we see an opportunity in this market.

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Let's, you know, get it to them"?

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Well, I think it, it's a convergence

of a number of constituent

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groups realizing that this makes

all the sense in the world.

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So from an asset manager's point of

view, you know, the, the large, uh,

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private equity and credit shops,

you know, continue to raise capital.

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But, you know, what we call Goldilocks

managers, some great firms, literally

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hundreds of great firms that have very

good track records, they've seen the

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spigot shut off from institutions as

institutions have, have not seen the

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realizations, um, in terms of portfolio

company sales that they've come to expect.

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So the, you know, the guys in the

middle, great firms, great track

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records, great pedigree, great

experience, you know, have seen capital

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flow shut off, and so they naturally

look for other sources of capital.

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From the, um…

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So that's the supply side.

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From the demand side,

you know, a few drivers.

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First of all, people are living longer,

and the average person today, good

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news, is gonna live, you know, three

to four years longer than a person

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at a comparable age 30 years ago.

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That number's only going to, uh, expand.

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So great news, we're

all gonna live longer.

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Bad n- and that's fantastic

news if you're a qualified

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purchaser, five million or more.

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But if you're someone with a million or

two and, and, you know, instead of living

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to be 82, you're gonna be hitting close to

90, you have to think long and hard about

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whether you're gonna outlive your capital.

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And so there's a natural willingness

now to think about that natural

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trade-off with private investments,

uh, to deliver better returns.

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The trade-off is illiquidity.

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We understand that.

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But if you're thinking long term, you

know, illiquidity isn't the issue.

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It's, it's the desire

to get better returns.

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And so I think there's a, an

understanding on the part of financial

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advisors that their, their clients

need these products Yeah, I think

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that's, that's perfect, uh, Joe.

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I think that's a great way of putting

it because, and we're gonna talk

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about it more about illiquidity.

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But it feels if, one thing over the

past six months that it's taught us

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about this so-called issue with private

credit and all the headlines on private

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credit isn't so much the investment

itself, it's the fact that the retail

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investors are demanding liquidity.

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Mm.

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And I don't know if it's, like, a

miscommunication between the asset

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managers and the end investor, but is

there, is there something else people

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are not considering with the merging of

retail investors in private markets?,

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Obviously illiquidity is one,

but is there something else?

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Well, I think illiquidity is, is

probably the number one issue,

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and it's incumbent upon financial

advisors to educate their clients.

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And, you know, I remember when I

was managing people's money, uh, you

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know, for any given investor, there

was the money they needed, you know,

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immediately or in the next six months in

case they lost their job or something.

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Then there's, you know, medium-term money.

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You know, call it money for, you

know, three to five, seven years out.

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And then there's really the long-term

money for kids' education, for retirement.

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That's the pool of money that should

be deployed into private investments.

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And there's another, you know, very simple

strategy that, uh, one can do with these

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registered vehicles that you can't do with

the classic drawdown vehicles, and that

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is dollar-cost average your investments.

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And I think that's, uh, another thing that

more advisors should be talking about.

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When there is a pullback in the

market, that's typically a great

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time to deploy more capital.

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Because one thing I can tell you,

I mean, our, our country's about

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to hit its, uh, 250th anniversary,

uh, on, uh, on July 4th, and we're

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all pretty excited about that.

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And you think about the dozens of

financial crises and dislocations.

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Literally every one of them has

come and gone except for the latest

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one, and this will come and go.

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Um, and we're all gonna be looking

back, and I think a lot of investors

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will look back in five years and kick

themselves for not taking advantage of

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reallocating to private markets Yeah,

I think you're exactly right, Joe.

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I think we will look back

and be like, "You know what?

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That was a good opportunity."

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And it does, I believe,

go back to education.

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I believe private markets,

they're a fantastic investment

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for the right investor.

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At the same time, that same investment

could be a terrible investment

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for the wrong investor, right?

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It's all about making sure they match.

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And we all know it, Joe, making sure, you

know, the, the, the investment matches

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the investment objectives, risk tolerance,

and like you said, liquidity needs.

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So- No question … there's different ways

to gaining access to, to private markets.

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What are the different types of access

vehicles you think financial advisors

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can gain exposure to private markets?

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There's a lot of different ways.

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00:13:20,303 --> 00:13:24,563

Before it was, like you said, you

had to be accredited investor.

220

00:13:24,563 --> 00:13:27,343

Now there's more retail

products out there.

221

00:13:27,343 --> 00:13:29,983

What are some of the ways that

you're keeping a close eye on?

222

00:13:30,603 --> 00:13:33,733

Well, you know, first I'll admit

I bring a bias to the discussion

223

00:13:33,843 --> 00:13:36,303

because I've done a lot of homework

on this and I've concluded that

224

00:13:36,313 --> 00:13:38,173

interval funds are the best way to go.

225

00:13:38,543 --> 00:13:42,893

I've, uh, I've been working with drawdown

vehicles as a sponsor for many years.

226

00:13:43,343 --> 00:13:46,623

And look, one, one of the drawbacks,

uh, in fact, there's multiple

227

00:13:46,633 --> 00:13:51,083

drawbacks to, uh, you know, the

classic drawdown vehicles, which is,

228

00:13:51,103 --> 00:13:55,053

one, you're paying management fees

on undeployed capital typically.

229

00:13:55,443 --> 00:13:57,563

Uh, you have no visibility

into the portfolio.

230

00:13:57,563 --> 00:13:59,543

It's a blind pool on, on day one.

231

00:13:59,923 --> 00:14:03,393

Most importantly, the, the liquidity

profile is horrible, and I'm sure a

232

00:14:03,393 --> 00:14:07,263

lot of investors out there are reading

about secondary funds, and those

233

00:14:07,273 --> 00:14:11,213

secondary funds have been set up to

take advantage of precisely the problem

234

00:14:11,213 --> 00:14:15,323

I'm describing, that investors in

classic drawdown vehicles periodically

235

00:14:15,323 --> 00:14:18,633

need liquidity, and it doesn't exist

but for these secondary vehicles.

236

00:14:19,363 --> 00:14:22,793

Interval funds eliminate essentially

all three of those issues.

237

00:14:22,823 --> 00:14:24,983

You're not paying management

fees on undeployed capital.

238

00:14:25,483 --> 00:14:29,213

Uh, you've got visibility into an

existing portfolio, but in fairness,

239

00:14:29,583 --> 00:14:31,723

it's a dynamic, not a static portfolio.

240

00:14:31,723 --> 00:14:33,083

It's gonna change over time.

241

00:14:33,573 --> 00:14:36,133

But at least on day one you

know what you're investing in.

242

00:14:36,523 --> 00:14:41,123

But most importantly, while there's

limited liquidity, limited liquidity is

243

00:14:41,153 --> 00:14:46,983

far better than no liquidity, where if you

have to somehow, uh, generate liquidity,

244

00:14:46,993 --> 00:14:51,883

you're, you're facing a 10, 15, and

sometimes even higher percentage discount.

245

00:14:52,133 --> 00:14:55,943

So I think these new interval funds

are the future, not just for retail

246

00:14:55,943 --> 00:15:01,383

investors, by the way, but really

for institutions that can't negotiate

247

00:15:01,413 --> 00:15:03,903

better fees with, uh, with sponsors.

248

00:15:03,913 --> 00:15:04,053

Mm-hmm.

249

00:15:04,233 --> 00:15:07,293

And, uh, so if you're not in a

position to beat up sponsors, meaning

250

00:15:07,293 --> 00:15:10,603

you don't have a $250 million check

to write, I believe you're better

251

00:15:10,603 --> 00:15:11,963

off with these registered vehicles.

252

00:15:12,843 --> 00:15:13,983

Yeah, very good point.

253

00:15:13,993 --> 00:15:19,217

Do you think, interval funds, you

know, they get the- Then they're,

254

00:15:19,217 --> 00:15:20,887

they're ter- semi-liquid funds.

255

00:15:21,657 --> 00:15:26,237

Do you think they're getting kind of

a bad rap here, or there's too many

256

00:15:26,237 --> 00:15:28,177

misconceptions about interval funds?

257

00:15:28,177 --> 00:15:30,967

Because now people are saying,

"We need to change the name.

258

00:15:30,967 --> 00:15:34,467

They shouldn't be called semi-liquid

because really they're not liquid."

259

00:15:34,467 --> 00:15:38,007

Do you think that's just kind of some

misconceptions out there, and it's

260

00:15:38,017 --> 00:15:44,017

just the after effect of people not

understanding that really they are liquid?

261

00:15:44,077 --> 00:15:48,837

The rules about getting your money out

and, like I said earlier, the mismatch

262

00:15:48,867 --> 00:15:50,847

between investment and investor.

263

00:15:51,417 --> 00:15:51,847

Yeah.

264

00:15:51,887 --> 00:15:53,187

I think that's a very good point.

265

00:15:53,197 --> 00:15:58,517

First, on the, uh, you know, naming

of them as semi-liquid, that's

266

00:15:58,537 --> 00:16:00,847

clearly a, a, a misnomer, right?

267

00:16:00,937 --> 00:16:05,047

Semi implies half, uh, and

they're generally not half liquid.

268

00:16:05,487 --> 00:16:10,627

Uh, they're, they're, you know,

they're, uh, mostly illiquid, and

269

00:16:10,627 --> 00:16:12,047

investors need to understand that.

270

00:16:12,187 --> 00:16:15,827

And so, once again, this gets back

to matching an investor's time

271

00:16:15,847 --> 00:16:19,857

horizon, investment horizon, with

the assets themselves, and it's

272

00:16:19,857 --> 00:16:23,547

incumbent upon financial advisors

to clearly communicate that.

273

00:16:23,587 --> 00:16:26,327

Look, the, the reality is most

financial advisors who have been

274

00:16:26,327 --> 00:16:30,927

in the business, you know, for some

time, their advisors like them.

275

00:16:30,937 --> 00:16:31,237

Their…

276

00:16:31,327 --> 00:16:31,837

Excuse me.

277

00:16:31,837 --> 00:16:32,847

Their clients like them.

278

00:16:32,847 --> 00:16:36,787

Their clients trust them, and clients

are counting on them to do right

279

00:16:36,907 --> 00:16:39,367

by, you know, by those investors.

280

00:16:39,417 --> 00:16:42,827

And so it's really incumbent upon

financial advisors to determine

281

00:16:42,827 --> 00:16:45,157

what's appropriate, and I think,

uh, there's, there's probably

282

00:16:45,157 --> 00:16:49,637

been some missteps in terms of

misalignment of, of liquidity needs.

283

00:16:49,637 --> 00:16:52,307

And I'm sure people have their best

interests of their clients at heart,

284

00:16:52,757 --> 00:16:55,457

but they have to remember there's

dislocations in the market from

285

00:16:55,457 --> 00:16:58,387

time to time, and they have to be

prepared to have those conversations

286

00:16:58,387 --> 00:16:59,827

with clients when that does happen.

287

00:17:00,147 --> 00:17:01,207

Say, "Hey, you know what?

288

00:17:01,657 --> 00:17:03,077

Let's be a little counterintuitive.

289

00:17:03,117 --> 00:17:05,977

Let's think about, you know, putting

some more money to work in this space."

290

00:17:06,426 --> 00:17:06,487

Mm.

291

00:17:06,497 --> 00:17:09,166

And so, you know, once again, I

get back to the power of dollar

292

00:17:09,207 --> 00:17:13,307

cost averaging, which served me

extremely well as a financial advisor,

293

00:17:13,307 --> 00:17:15,277

although it was some time ago.

294

00:17:15,757 --> 00:17:16,127

Yeah.

295

00:17:16,787 --> 00:17:17,117

Yeah.

296

00:17:17,666 --> 00:17:18,087

That's very…

297

00:17:18,117 --> 00:17:21,127

Well, it's interesting you

bring up dollar cost averaging.

298

00:17:21,137 --> 00:17:21,906

It feels as if…

299

00:17:21,967 --> 00:17:25,817

I, I like it as a strategy,

especially when markets are volatile

300

00:17:25,817 --> 00:17:28,987

and, you know, maybe we see a

little pullback here and there.

301

00:17:29,887 --> 00:17:33,397

I wonder, do you often not hear

enough about it, you think,

302

00:17:33,397 --> 00:17:34,867

as an investment strategy?

303

00:17:35,267 --> 00:17:36,497

Well, you know, it's interesting.

304

00:17:36,497 --> 00:17:39,157

With those, once again, those

classic drawdown vehicles, those

305

00:17:39,187 --> 00:17:43,007

classic private equity funds or

credit funds, you don't really have

306

00:17:43,007 --> 00:17:44,617

the ability to dollar cost average.

307

00:17:44,767 --> 00:17:48,637

Uh, you know, you, you know, a firm

will have a, you know, if you like a

308

00:17:48,637 --> 00:17:53,217

particular firm and their strategy,

you know, you subscribe to their fund

309

00:17:53,267 --> 00:17:56,417

and, you know, they're, they're drawing

down capital over time, but you, you

310

00:17:56,417 --> 00:18:00,747

have no sense of, uh, or control over

the timing of that capital deployment.

311

00:18:01,037 --> 00:18:04,287

And once the fund is closed, it's

not like you can up your commitment.

312

00:18:04,727 --> 00:18:07,767

So there's just a lot more flexibility,

and I've always been a big believer

313

00:18:07,767 --> 00:18:09,107

in, in dollar cost averaging.

314

00:18:09,667 --> 00:18:09,957

Yeah.

315

00:18:10,297 --> 00:18:10,967

I have too.

316

00:18:11,057 --> 00:18:11,567

I have too.

317

00:18:11,567 --> 00:18:14,447

So we've talked a little, you

know, limitations of interval

318

00:18:14,447 --> 00:18:16,797

funds basically being illiquid.

319

00:18:17,327 --> 00:18:17,497

Mm-hmm.

320

00:18:17,507 --> 00:18:19,717

What are the benefits of interval funds?

321

00:18:19,717 --> 00:18:23,857

And, and also, are there any other

limitations other than being illiquid,

322

00:18:23,857 --> 00:18:26,597

or should I say somewhat illiquid?

323

00:18:27,595 --> 00:18:31,705

Well, uh, you know, the, the

limitations or the, the underlying

324

00:18:31,705 --> 00:18:36,115

investments themselves are illiquid,

and it varies by strategy, right?

325

00:18:36,115 --> 00:18:41,555

So on one extreme you might have venture

capital, which is very illiquid, and

326

00:18:41,555 --> 00:18:45,575

then the other extreme, it's, you know,

it's probably a, a credit product where

327

00:18:45,575 --> 00:18:49,245

there is a fair measure of liquidity

on, on the underlying investments.

328

00:18:49,605 --> 00:18:54,785

But when I th- when I think about it,

on, on average, uh, uh, I believe, you

329

00:18:54,785 --> 00:18:58,755

know, these, these registered vehicles,

interval funds being my, my registered

330

00:18:58,755 --> 00:19:03,595

vehicle of choice, offer far more benefits

than, than, you know, negative points.

331

00:19:03,645 --> 00:19:07,965

I think they've got, uh, you know, once

again, matching assets and liabilities.

332

00:19:08,425 --> 00:19:09,545

It's a game changer.

333

00:19:09,635 --> 00:19:12,755

And, you know, the reality is, just

going back to something we talked about

334

00:19:12,755 --> 00:19:18,525

earlier, another big driver in the market

is the fact that, uh, when you think

335

00:19:18,535 --> 00:19:24,195

about the average, uh, market value

of a publicly traded company today, I

336

00:19:24,195 --> 00:19:28,445

mean, it's, it's an order of magnitude

over, over where it was 20 years ago.

337

00:19:28,845 --> 00:19:29,345

There's…

338

00:19:29,395 --> 00:19:32,985

The number of public companies

is, is almost reduced in half,

339

00:19:33,585 --> 00:19:35,085

and the big keep getting bigger.

340

00:19:35,085 --> 00:19:38,745

I mean, we've, we've seen SpaceX,

uh, you know, $2 trillion market

341

00:19:38,745 --> 00:19:41,225

cap and, and growing, I suppose.

342

00:19:41,315 --> 00:19:44,125

Uh, NVIDIA, you know, $4 trillion.

343

00:19:44,495 --> 00:19:46,505

I mean, it- these numbers

are absolutely staggering.

344

00:19:46,525 --> 00:19:50,255

So those, those smaller middle market

companies, they're, they're just

345

00:19:50,255 --> 00:19:51,495

not available in the marketplace.

346

00:19:51,495 --> 00:19:52,785

There's no research coverage for them.

347

00:19:53,075 --> 00:19:56,765

So if you want exposure, which

means better diversification in

348

00:19:56,765 --> 00:20:00,555

your portfolio, you have to think

about private investments because

349

00:20:00,565 --> 00:20:03,795

otherwise you're only getting, you

know, call it large cap investments.

350

00:20:04,845 --> 00:20:05,075

Yeah.

351

00:20:05,745 --> 00:20:07,205

That's a very good point.

352

00:20:07,205 --> 00:20:11,075

Uh, I think it's crazy, Joe, that

we have more ETFs in the space

353

00:20:11,075 --> 00:20:13,105

than we have individual equities.

354

00:20:13,475 --> 00:20:15,432

It's, it's- And the same thing,

I think we just have f- around

355

00:20:15,432 --> 00:20:18,585

4,000 publicly traded companies.

356

00:20:18,675 --> 00:20:18,985

Right.

357

00:20:18,995 --> 00:20:20,395

It, it- It's unbelievable.

358

00:20:20,405 --> 00:20:20,495

It's…

359

00:20:20,515 --> 00:20:21,915

And it continues to shrink.

360

00:20:22,595 --> 00:20:22,895

Yeah.

361

00:20:22,945 --> 00:20:24,965

And, uh, it makes it

harder, like you said.

362

00:20:24,975 --> 00:20:27,655

You're s- spot on about diversification.

363

00:20:27,655 --> 00:20:32,985

When your, your sea of investments

is limited just in the public space,

364

00:20:33,285 --> 00:20:36,585

it's hard to get true diversification

there, so it's important to get

365

00:20:36,945 --> 00:20:39,355

some, private market exposure there.

366

00:20:39,375 --> 00:20:42,755

And interval funds, uh,

interval funds allow that, you

367

00:20:42,755 --> 00:20:44,015

just have to understand them.

368

00:20:44,355 --> 00:20:45,455

Yep, for sure.

369

00:20:46,711 --> 00:20:52,431

You know, I'm big on, you know,

making sure whatever you invest in,

370

00:20:52,681 --> 00:20:55,921

that you're getting rewarded for

the amount of risk you're taking on.

371

00:20:56,011 --> 00:20:57,841

It doesn't matter what the investment is.

372

00:20:57,861 --> 00:20:58,851

It's very important.

373

00:20:58,891 --> 00:21:03,521

Do you feel, and you kind of mentioned

it, do you feel clients and investors

374

00:21:03,521 --> 00:21:08,351

are being compensated enough for

the illiquidity of private markets?

375

00:21:08,951 --> 00:21:11,721

Well, th- this is where

fund selection is key.

376

00:21:12,041 --> 00:21:14,531

Uh, so the answer is yes and no.

377

00:21:14,711 --> 00:21:17,581

Uh, for certain funds, you're

being very well rewarded,

378

00:21:17,981 --> 00:21:19,661

and for others, you are not.

379

00:21:19,921 --> 00:21:25,541

Um, and so when you think about, take

private equity, uh, as a, as an asset

380

00:21:25,541 --> 00:21:30,521

class, um, so the difference between a

mean performer, an average performer,

381

00:21:30,651 --> 00:21:34,421

and I'm talking about the sponsors

themselves, and a top quartile performer,

382

00:21:34,841 --> 00:21:36,791

you know, is 5 to 700 basis points.

383

00:21:36,861 --> 00:21:39,331

On the venture capital side,

it's 1,000 basis points.

384

00:21:39,751 --> 00:21:45,591

So you will be well rewarded for spending,

spending the time to select good quality

385

00:21:45,591 --> 00:21:51,881

managers as compared to ETFA versus ETFB

in a short-term government bond fund.

386

00:21:51,891 --> 00:21:56,531

I mean, the difference in returns

is probably 20 basis points at best.

387

00:21:57,061 --> 00:22:02,021

So it's very, very important to select

correctly when you're talking about

388

00:22:02,021 --> 00:22:05,291

private investments, and you're well

rewarded when you select properly.

389

00:22:06,259 --> 00:22:09,579

Can you go into more detail

there, J- you know, on the…

390

00:22:10,009 --> 00:22:12,919

When we were talking about ETFs or

mutual funds, it's, like, you know,

391

00:22:12,969 --> 00:22:18,179

about Sharpe ratio, standard deviation,

risk-adjusted returns, you name it.

392

00:22:18,709 --> 00:22:22,849

Are there certain metrics or things

that financial advisors should look for

393

00:22:22,859 --> 00:22:24,879

when they're trying to select correctly?

394

00:22:25,579 --> 00:22:25,989

Yeah.

395

00:22:26,029 --> 00:22:28,939

Some of the classic ratios that are

used in the public markets are a

396

00:22:28,939 --> 00:22:32,579

little bit more challenging to apply

when you're talking about private

397

00:22:32,579 --> 00:22:34,399

equity or, or even private credit.

398

00:22:34,809 --> 00:22:38,739

You know, at the end of the day, uh,

we have a pretty rigid underwriting

399

00:22:38,769 --> 00:22:42,229

process at Access Capital because

we do not manage the money.

400

00:22:42,239 --> 00:22:45,959

We partner with, we like to say,

great managers, top quartile managers.

401

00:22:46,219 --> 00:22:47,419

So we do our homework.

402

00:22:47,459 --> 00:22:51,399

We work with third-party firms

to augment and supplement the

403

00:22:51,409 --> 00:22:52,639

due diligence we're doing.

404

00:22:52,639 --> 00:22:55,579

So we, we really put our

managers through the gauntlet.

405

00:22:55,659 --> 00:22:59,199

And for us, it's kind of, kind

of interesting, um, when you

406

00:22:59,209 --> 00:23:00,489

think about these managers.

407

00:23:00,819 --> 00:23:04,019

You're betting on teams, and you,

you wanna make sure the teams have

408

00:23:04,029 --> 00:23:07,089

been around, but also you wanna

make sure they're going to be

409

00:23:07,089 --> 00:23:09,299

around for the next 10 or 20 years.

410

00:23:09,639 --> 00:23:12,239

'Cause when we partner with a, with

a manager, it's like a marriage.

411

00:23:12,259 --> 00:23:15,789

And when an investor invests, you

know, it's, it's like a marriage.

412

00:23:15,799 --> 00:23:19,929

You're gonna be tied at the hip for

some time, and therefore, you wanna make

413

00:23:19,929 --> 00:23:24,739

sure that the team that generated the

old returns are the same team that will

414

00:23:24,739 --> 00:23:26,569

be around to generate future returns.

415

00:23:27,019 --> 00:23:30,779

And there's a lot of institutional

knowledge that's embedded in

416

00:23:30,789 --> 00:23:33,539

great managers, and that's

what you're paying up for.

417

00:23:33,609 --> 00:23:38,599

Look, the reality is you're, you're paying

a premium, um, for, you know, private

418

00:23:38,599 --> 00:23:42,919

investments relative to, say, an ETF,

so you wanna get your money's worth.

419

00:23:43,059 --> 00:23:46,189

And you get your money's worth when you,

when you identify those top managers.

420

00:23:47,029 --> 00:23:47,389

Yeah.

421

00:23:47,439 --> 00:23:50,459

That's a good point, and we

often talk here at Zephyr about

422

00:23:50,459 --> 00:23:52,689

the, the quantitative side.

423

00:23:52,999 --> 00:23:57,249

But that qualitative side of doing a

manager due diligence is so important

424

00:23:57,259 --> 00:24:00,829

because, like, especially, like

you said, in the private markets

425

00:24:00,829 --> 00:24:03,059

where it is a long-term investment.

426

00:24:03,059 --> 00:24:04,339

It's not just a year.

427

00:24:04,339 --> 00:24:06,659

You're looking five years, seven years.

428

00:24:06,969 --> 00:24:12,609

You've gotta be, r- like you said,

married to that, uh, portfolio manager,

429

00:24:12,679 --> 00:24:15,689

that investment manager, because

you will be tied at the hip for a

430

00:24:15,689 --> 00:24:17,139

while, so it's a very good point.

431

00:24:17,439 --> 00:24:18,959

No, you're, you're ab-

you're absolutely right.

432

00:24:18,959 --> 00:24:21,709

And, you know, with, with a mutual

fund, it's almost like dating.

433

00:24:21,849 --> 00:24:22,439

If, if you decide-

434

00:24:22,439 --> 00:24:25,069

it's not working out, you

cut ties and you move on.

435

00:24:25,079 --> 00:24:26,489

You can, you can get liquidity.

436

00:24:26,889 --> 00:24:28,659

You know, in private markets,

a little bit different.

437

00:24:28,659 --> 00:24:29,869

It's, it is like a marriage.

438

00:24:29,869 --> 00:24:30,879

You're, you're, you're…

439

00:24:31,319 --> 00:24:33,199

We certainly as a firm

are tied at the hip.

440

00:24:33,529 --> 00:24:38,119

But investors, because there's, there

is illiquidity, um, you know, it takes

441

00:24:38,119 --> 00:24:41,399

a while to get out, and you got, gotta

make sure that first decision is correct.

442

00:24:41,789 --> 00:24:42,129

Yeah.

443

00:24:42,439 --> 00:24:43,239

Exactly.

444

00:24:43,249 --> 00:24:43,819

Exactly.

445

00:24:43,829 --> 00:24:44,849

Great point, Joe.

446

00:24:45,239 --> 00:24:49,519

So what type of client is a

good match for interval funds?

447

00:24:49,519 --> 00:24:50,849

You know, we've talked a lot.

448

00:24:50,869 --> 00:24:55,589

You mentioned some great points

about long-term investing, you

449

00:24:55,589 --> 00:24:59,689

know, the risk, uh, you know,

the investment objective there.

450

00:24:59,689 --> 00:25:02,999

But is there a certain type of client

that's a good match for interval funds?

451

00:25:02,999 --> 00:25:06,473

Because- Anyone can really

get access to them now.

452

00:25:06,473 --> 00:25:09,433

They've got a ticker, they're

traded publicly, like, but

453

00:25:09,473 --> 00:25:10,933

who are they really good for?

454

00:25:11,553 --> 00:25:15,283

Well, I think they're really good

for any investor who's looking

455

00:25:15,343 --> 00:25:17,723

at, for long-term returns.

456

00:25:18,163 --> 00:25:23,673

And so y- you know, we all know the, the

standard, the S&P delivers 10% compounded

457

00:25:23,673 --> 00:25:25,703

annually over the past 100 years.

458

00:25:26,133 --> 00:25:28,693

Uh, I'm not sure it's gonna do

that over the next 10 or 20.

459

00:25:28,833 --> 00:25:34,133

Uh, Goldman Sachs came out last year

talking about 3% returns compounded

460

00:25:34,133 --> 00:25:35,603

annually for the next 10 years.

461

00:25:35,713 --> 00:25:38,323

And they, they may be kicking

themselves 'cause the market's been up.

462

00:25:38,743 --> 00:25:41,763

But I, I think it strengthens the

view, doesn't weaken the view that

463

00:25:42,023 --> 00:25:45,223

the public markets may not deliver

the kind of, you know, long-term

464

00:25:45,223 --> 00:25:46,353

returns that we're used to.

465

00:25:46,763 --> 00:25:49,623

I always think of, of private

markets needing to deliver a

466

00:25:49,623 --> 00:25:51,083

premium to the public markets.

467

00:25:51,093 --> 00:25:55,543

The way I think about it is, uh, you know,

on the, on the equity side, particularly

468

00:25:55,573 --> 00:26:00,193

private equity, you know, we're looking

for, you know, 2 to 500 basis points,

469

00:26:00,493 --> 00:26:03,483

2 to 5% over and above the S&P 500.

470

00:26:03,833 --> 00:26:06,993

On the credit side, 100

to 300 basis points.

471

00:26:07,523 --> 00:26:09,153

Um, and that's net of all fees.

472

00:26:09,153 --> 00:26:10,473

That's, that's not gross.

473

00:26:10,883 --> 00:26:14,703

Um, but you think it may not sound

like a lot, particularly on the credit

474

00:26:14,703 --> 00:26:19,043

side, but the magic of compounding,

as you know and, you know, you know, a

475

00:26:19,043 --> 00:26:24,533

lot of your viewers know, over 20, 30,

40 years, that compounding effect, you

476

00:26:24,533 --> 00:26:27,763

know, could mean the difference between

a great quality of life in retirement,

477

00:26:27,933 --> 00:26:32,599

and particularly in the later years, or

a not so great quality of life Mm-hmm.

478

00:26:32,919 --> 00:26:34,409

Yeah, that's a great point.

479

00:26:34,409 --> 00:26:39,609

And regardless of what you think about

the forecasted future returns of, the S&P

480

00:26:39,799 --> 00:26:46,449

500, uh, studies show that at elevated

or lofty valuations like we're at now,

481

00:26:47,149 --> 00:26:52,519

five-year forward returns, you know,

getting double digit returns is unlikely.

482

00:26:52,539 --> 00:26:53,279

But we'll see.

483

00:26:53,369 --> 00:26:53,389

Yeah.

484

00:26:53,389 --> 00:26:53,509

Who knows?

485

00:26:53,509 --> 00:26:54,229

A long, long time.

486

00:26:54,389 --> 00:26:55,279

I, I agree.

487

00:26:55,689 --> 00:27:02,119

But, and so that again sh- to the point

of diversification is very important.

488

00:27:02,159 --> 00:27:04,969

Private markets gives you that

diversification, whether it's

489

00:27:04,969 --> 00:27:09,349

through interval funds or whatever

other access vehicle you might like.

490

00:27:09,349 --> 00:27:14,819

So there's been a lot of news, Joe,

particularly in private credit.

491

00:27:15,099 --> 00:27:19,569

You know, there's been some run on some

of the firms and their products and

492

00:27:20,739 --> 00:27:23,759

investors re- demanding their money back.

493

00:27:23,829 --> 00:27:28,459

How are you set up to weather the

storm for investors needing liquidity?

494

00:27:29,039 --> 00:27:31,869

Well, I think, uh, we're

similar to a lot of other firms.

495

00:27:31,949 --> 00:27:37,379

Uh, so the way interval funds work, and,

you know, there's sometimes some confusion

496

00:27:37,379 --> 00:27:40,349

out there, what's the difference between

an interval fund and a tender offer fund?

497

00:27:40,749 --> 00:27:45,109

You know, one of the core differences,

tender offer funds, uh, promise

498

00:27:45,229 --> 00:27:49,349

liquidity, but are not legally

obligated to provide that liquidity.

499

00:27:49,749 --> 00:27:52,599

So I'm sure they have the best of

intentions, but when the you know what

500

00:27:52,599 --> 00:27:56,289

hits the fan, they may not be equipped

to provide the liquidity needed.

501

00:27:56,759 --> 00:28:00,669

Interval funds, you are legally

obligated, you as the sponsor or

502

00:28:00,669 --> 00:28:05,579

advisor are legally obligated to

provide, uh, the liquidity that you

503

00:28:05,609 --> 00:28:07,609

promised in your filing with the SEC.

504

00:28:08,229 --> 00:28:11,769

So that means in our case, we keep a

certain amount of capital in reserve.

505

00:28:12,359 --> 00:28:18,519

Um, we, uh, we look to have, uh, unused

lines, lines of credit available for, you

506

00:28:18,519 --> 00:28:20,729

know, uh, the proverbial run on the bank.

507

00:28:21,009 --> 00:28:24,809

And, you know, what we say is, "It's not a

question of if, it's a question of when."

508

00:28:24,889 --> 00:28:28,539

Markets go through cycles, and we're

gonna hit a point where people are

509

00:28:28,539 --> 00:28:31,949

hitting the exits, and we wanna make

sure we've got the capital to provide,

510

00:28:31,989 --> 00:28:35,679

uh, the liquidity needed to, uh, to

meet that, uh, those redemptions.

511

00:28:36,329 --> 00:28:37,959

Yeah, very important.

512

00:28:38,899 --> 00:28:41,899

Joe, fantastic conversation.

513

00:28:42,099 --> 00:28:42,919

I enjoyed it.

514

00:28:43,119 --> 00:28:44,739

Such great insight.

515

00:28:44,769 --> 00:28:50,609

Good, and, and a balanced approach

to interval funds, private markets,

516

00:28:50,619 --> 00:28:54,079

where yes, it's important, but

you also need to know the risks.

517

00:28:54,339 --> 00:28:55,849

You gotta be balanced on it.

518

00:28:55,849 --> 00:28:58,967

You can't go- headfirst into it.

519

00:28:59,117 --> 00:29:01,757

Um, so- You're absolutely

right … I'd love your take on it.

520

00:29:02,217 --> 00:29:04,777

Well, Ryan, thanks very much

for having me on, on your show.

521

00:29:04,777 --> 00:29:08,367

I really enjoyed it, and, uh, shout

out to all your, all your viewers.

522

00:29:08,697 --> 00:29:09,227

Thank you.

523

00:29:09,227 --> 00:29:10,007

It's been an honor.

524

00:29:10,007 --> 00:29:13,627

Where can our audience get more

information about Access Capital and

525

00:29:13,627 --> 00:29:18,267

your book- Yeah … The Financial

Advisor's Guide to Private Investments?

526

00:29:18,467 --> 00:29:20,727

Well, the, the book is

available on Amazon.

527

00:29:21,007 --> 00:29:26,677

Uh, but I welcome any of your viewers to

come to our website, accesscapital.com,

528

00:29:27,097 --> 00:29:30,327

A-X-X-E-S, uh, capital.com.

529

00:29:30,787 --> 00:29:34,867

And, uh, we, we welcome the opportunity

to, uh, to meet some of your viewers.

530

00:29:35,617 --> 00:29:36,327

Awesome, Joe.

531

00:29:36,737 --> 00:29:40,637

Thank you, and thank you everyone

for listening to this episode of

532

00:29:40,637 --> 00:29:43,157

Zephyr's Adjusted for Risk podcast.

533

00:29:43,187 --> 00:29:47,547

You can watch all of our other episodes

on the Zephyr YouTube channel and Spotify.

534

00:29:47,897 --> 00:29:51,307

Also ple- please be sure to like

and subscribe to those channels

535

00:29:51,307 --> 00:29:53,427

and give us a follow on LinkedIn.

536

00:29:53,427 --> 00:29:56,277

Thank you very much, and have

a great rest of your week.

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